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HSC's 15th Annual Wall Street Comes to Washington Conference

Conference Transcript
Sept. 28, 2010

Welcome and Overview

Paul Ginsburg, president, HSC bio

Panel One: Health Insurance Market Trends

Topics include the impact of health care reform; the creation of insurance exchanges; the impact of an individual mandate and increased regulation of the insurance market; the future of Medicare Advantage; Medicaid coverage expansions; insurance premium trends; employer and health plans’ focus on wellness and prevention activities; and emerging benefit designs.

• Christine Arnold, Cowen and Company, LLC bio

• Charles Boorady, M.B.A., Managing Director, Credit Suisse bio

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

• Gail Wilensky, Ph.D., Senior Fellow, Project Hope bio

• Paul Ginsburg, Ph.D., HSC President, Moderator

Panel Two: Hospital and Physician Trends

Topics include the impact of health reform; underlying health care spending trends; hospital pricing and leverage with health plans; hospital competitive strategies; hospital-physician relations; hospital capacity issues, health information technology; and integrating care delivery.

• Robert Berenson, M.D., Senior Fellow, The Urban Institute bio

• Arthur I. Henderson, M.B.A., Managing Director, Jefferies & Co. bio

• Jeff Schaub, M.B.A., Senior Director, Fitch Ratings bio

• Gary Taylor, M.B.A., Managing Director, Citigroup bio

• Paul Ginsburg, HSC President, Moderator


Paul Ginsburg: I’d like to welcome you to the 15th Annual Wall Street Comes to Washington Conference from the Center for Studying Health System Change. As you know, a lot has happened since our last conference, namely the passage a little over six months ago of national health reform legislation. And we’ll focus quite a bit on how insurers and providers will respond to the law’s implementation and what implications for people’s health care that will have.

The purpose of this conference is to give the Washington health policy community better insights into market developments that are relevant to policy. And discussing market developments and their implications for people’s health care is really the core activity of HSC. And I see this conference as an opportunity for HSC and the audience to tap a different source of information, namely equity and bond analysts on this topic. And briefly, the equity analysts advise investors about which publicly traded companies will do well and which ones will not and bond analysts advise on the likelihood of debt repayments. The good analysts develop a thorough understanding of the markets that the companies they follow operate in. They also follow public policy, I think increasingly so over time, which often has important implications for these companies.

So this conference is an opportunity for the equity and bond analysts to take a break from their day jobs of assessing the outlook for profitability or solvency of companies and bring their understanding of market forces to bear on questions that those involved in health policy have on their minds. And each of the panels includes a Washington-based health policy analyst. We’ve always chosen policy analysts who understand health care markets as well, not like the people whose day job is to do that, but pretty well. And they make valuable contributions to these sessions by tying the market developments more closely to health policy.

So our format this morning, like the previous years, we’re going to have roundtable discussion of a series of questions that have been shared with the panelists in advance. And this was such a rich year that I probably wrote up four hours worth of questions. And I hope that I choose the right ones to ask. We’re going to have two sessions, each with a separate panel: one on health insurance and one on delivery system issues from the perspective of providers of care, such as hospitals and physician organizations.

And we’ll have opportunities for audience questions and answers after each. There are question cards in your packets and please fill them out as you think of the questions. And about five minutes before the roundtable discussion is over, I’m going to ask you to pass your question cards to the aisle so that the HSC staff can accumulate them, and frankly, put the ones whose handwriting they can read on the top. (Laughter) However, you also can come to the microphones and ask a question.

Note that the analysts are not permitted by their employers to answer questions about the outlook for specific companies, so don’t ask that.

I want to thank the Robert Wood Johnson Foundation for funding this conference. And I want to say that HSC will post a transcript on its Web site by the end of the week.

And before you leave the conference, please fill out the yellow page. It’s the evaluation form. We look at them carefully and use that for future conferences.

We do have two terrific panels this year, and it’s a really good mixture of veterans of previous conferences, Wall Street Comes to Washington conferences, and some new faces here, well-known faces on Wall Street. The Wall Street analysts for the insurance panel are Christine Arnold of Cowen and Company, Charles Boorady of Credit Suisse, and Matthew Borsch of Goldman Sachs. And Gail Wilensky of Project Hope will provide the policy perspective on the first panel.

Now, Wall Street equity analysts follow for-profit hospitals, but since a large part of the hospital industry is nonprofit and raises much of its capital from bonds, the second panel is both equity analysts Gary Taylor of Citigroup and Arthur Henderson of Jefferies & Company; and a bond rating analyst, Jeff Schaub from Fitch Ratings. And Bob Berenson of the Urban Institute will provide the policy perspective on the provider panel.

So I’m going to jump right into the discussion with the first question—from the perspective of society, thinking of health insurance reform, attempting to expand insurance coverage efficiently and create conditions to bend the cost curve, what’s your assessment of what was done really well in the Affordable Care Act and what was done poorly?

And maybe I’ll just ask whoever starts to just have one of each and leave the rest for other analysts.

Gail, did you want to start?

Gail Wilensky: Yes. That’s an easy set-up question, a softball question for a policy analyst. I think the -- what it has done reasonably well -- not fully, but reasonably well -- is expand coverage. At the end of the period 2014, we should have about 94 percent of the population covered, significantly better than the current 84 percent with coverage; significant numbers through expanded Medicaid, about 16 million, and the rest primarily through the subsidized purchase of private insurance and the health insurance exchange.

The bending the cost curve has been done almost not at all. It’s closer to Massachusetts, but less honest in its rhetoric. That is focusing on getting people covered and then figuring out what to do next. There are some areas in the legislation that may have some potential effect: the value-based purchasing, value-based insurance component; value-based reimbursement for hospitals and nursing homes that is in 2011 and 2012; the encouragement of accountable care organizations starting in 2012. That’s a wait-and-see whether that is this year’s fad or a new phenomenon.

But most of the potential for slowing spending is tied to the pilots that allow for different reimbursements to occur. And it will require many steps to go from pilot to actually being in a position to impact spending, most importantly having a risk-taking head of the Center for Innovation and being willing to try risks and to be able to tolerate failure in addition. Maybe, maybe we will tax high-cost Maserati health care plans. It’s too high to have it called a Cadillac plan anymore. But we’ll see. There’s a good likelihood that that day will never come and we’ll see about the IPAB [Medicare Independent Payment Advisory Board] also surviving. I wouldn’t mind if that day doesn’t come, but we’ll see. Most of the cost curve bending is tied up in these pilots, which might provide us with some information about what to do next.

Paul Ginsburg: Yes, let me move on to Matt.

Matthew Borsch: Sure. Yes, I would agree. I think that the access/ coverage piece of reform is clearly, you know, the biggest plank and arguably, from a certain perspective, that’s part of cost containment, that you have to, in essence, get everybody or almost everybody into the system in terms of coverage as a precondition to what will perhaps be “Reform, Part 2” on the cost-containment side.

I’m kind of a believer in -- and this has, you know, become a popular notion, I think, recently, that integrated delivery systems, in particular physician-directed integrated delivery systems are the most efficient model for care. And, certainly some statistic bear out very substantial differences in cost. But there’s a disconnect between encouraging tight-network, physician-integrated delivery systems and the current employer contracting model.

And then, of course, the question is why do we buy coverage through employers? And part of that is for risk pooling. And, of course, the other big reason -- maybe the biggest -- is the employer tax subsidy. So that’s an area that health reform didn’t tackle. I think politically it would have been probably insurmountable to add that on top of what was already hugely controversial in what health reform did do. But, maybe some of that’s what’s going to be considered if we reach a Part 2 on this down the road.

Paul Ginsburg: Christine?

Christine Arnold: Well, I would go so far as to say I think that this probably bends the cost curve up for and that we’ve probably got some -- within the next 18 months -- serious things to consider. The first is that the high-risk pool is expected to peak at about 375,000 people, but because child-only coverage is going to be difficult to get because of some shortcomings in the way that the bill was constructed, you’re probably going to have a lot of sick children bombarding the high-risk pools. And that wasn’t contemplated in the funding. And experts expect high-risk pools, even without the kids, to be out of the $5 billion in 18 months.

No. 2, we’re cutting hospital payments in Medicare, which will result in a likely cost shift. Hospitals were getting 2 to 3 percent Medicare rate increases. They’re flat. And they’ll see payment cuts for various things, like hospital readmits for hospital-acquired conditions and readmits for certain other things that could reduce rates another incremental 2 percentage points.

Point No. 3, there’s a lack of an SGR [sustainable growth rate] fix. November 30, we’re going to go through the whole thing we went through a couple months ago where we need to find money to reverse a 23 percent doc cut. So docs serving Medicare beneficiaries, given the uncertainty of this issue, are likely to continue to attempt to integrate, to organize in order to take risks and that’s going to put them in a better position to potentially raise pricing on the commercial sector.

There’s $107 billion in industry taxes -- $107 billion that starts in 2014 for devices, drugs, and insurance companies that’s going to have to be passed along. And IPAB, even if it does take effect, won’t impact providers till at least 2020. So I think we’ve probably got an issue with costs looming.

Paul Ginsburg: Charles, any comments?

Charles Boorady: Thanks. Yes, I’ll just add briefly, the panelists covered them all, but to summarize I think most of us agree that this measure will increase the insured population. And you could probably give it an A for that if costs didn’t matter, but I think it gets an F on bending the cost curve up, as Christine mentioned, instead of down. We spend 17 percent of GDP on health care. France and Switzerland, the next biggest spenders, are at about 12 percent. That difference -- and they cover most of their populations, virtually all, and their outcomes are very good. But no one’s demonstrated to me that our outcomes are better except in certain unusual circumstances -- like emergency care.

But I think this is a real issue that everyone’s ignoring because we’re in stimulus mode still. The country’s printing as much money as it can. Inflation seems like a distant threat. But at some point, if inflation does pick up, this will have to get addressed quickly. There’s $750 billion per year if you close the gap from 17 percent down to 12 percent to GDP. Instead, by my predictions we’ll spend about 20 percent of GDP on health care unless we see a “Son of Reform” or “Reform, Part 2” to address cost.

And why I gave it an F is there are a lot of good ideas in there, but without teeth. And I think what’s really missing from the plan is how to put more leverage in the hand of the buyer and change the balance of power between the payer and the provider in health care. So I think that’s the root cause of inefficiencies in this industry is that most of the leverage is with the supplier and not the buyer. Where the leverage exists is in Washington and the PPACA [Patient Protection and Accountable Care Act] did very little to take Medicare payment decisions out of the influence of politics and to increase MedPAC [Medicare Payment Advisory Commission’s] or some other organization’s ability to help Medicare become a smarter payer. If Medicare paid better, it would result in benefits to private payers as well by encouraging reform of the delivery system.

Paul Ginsburg: Okay. Let me change the topic to regulation and medical loss ratios (MLRs). I read the analysts’ stuff and they’ve been focused a lot on how it’s going to affect companies and their bottom line. But, again, if you could turn your focus to -- do the medical loss ratios accomplish what they’re intended to? And what are some of the unintended things that they may very well accomplish? Or to put it differently, first, are we talking about affecting 5 to 10 percent of insurance or a large part of insurance? And in a sense, what kind of impacts might it have?

Christine Arnold: Well, the issue’s most acutely affects the individual market where we estimate first year MLRs -- just to educate everybody -- 80 percent MLR floor for individual and small group. They’re separate pools, separate entities. Eighty-five is large group. So the MLR for a first-year business is in the 55 percent range, 50 to 55, because most states except five have underwriting. So when I was between jobs and I applied for health insurance, the companies I covered turned me down. (Laughter) Yeah. And then I got a job and now I rate their stocks. (Laughter) So, yeah, it’s appalling, isn’t it?

So, they say no in all but five states. So your population’s really healthy the first year and as that underwriting wears off, the durational effect creates a really high loss ratio. And in many states you can’t exit unless you plan to get out of the book for five years. So you’re going to have a closed book of business with 100-and-something percent loss ratio that’s going to lose money in the out years. So new books of business are most at risk because of those low loss ratios early. The average individual loss ratio is 63 to 68 percent.

You know, what’s unclear is that contract reserves are going to enter into the calculation according to the NAIC recommendation. And a big outstanding question is will federal taxes be able to add to the MLRs? NAIC says yes. We think HHS [U.S. Department of Health and Human Services] will say no. We expect it to wind up in court. But no one knows for sure what HHS will do.

In small group, we’ve got an average 76 percent loss ratio, so if you add 250 to 500 basis points for quality and taxes, we’re probably okay. And we don’t think that large group is a real issue.

States that have individual MLRs, eight of them are in the 55 to 65 range, which is a long way from 80; five are at 65 to 75; and only one is over 75 percent. So it looks like the loss ratio is way out of whack with where the states think it should be. The Robert Wood Johnson Foundation says about 3- to 4 million people will likely lose coverage.

Watch the Department of Managed Health Care in California, which has the high-risk pool for California and an extremely large loss ratio. So because those entities aren’t going to be able to be combined, that was where I would think you’d see the most pressure points for companies pulling out.

Gail Wilensky: I think the problem here is that the emphasis is on the wrong syllable, is that what we used to say? What this country desperately needs is to figure out how to get the focus on outcomes and taking care of people, and this is just putting the attention in the wrong place. We have a problem with the individual and very small group market. I don’t think there’s anybody in this room that doesn’t believe that. And presumably, we’re on the path in the next couple of years to have “a fix.” Whether it’s the best fix, we can make it better if it turns out it doesn’t do what we want.

The difficulty with focusing on the MLRs -- the medical loss ratios -- is really twofold. In the first thing, you get into this big fight about what counts as medical expenses. There is great concern that the kinds of expenses that all of the health policy world has been trying to push as being instrumental to transforming the system do not count as medical expenses, may not count as medical expenses. It’s not an accident that the physicians and hospitals are pushing to have the most narrowly defined medical component so it means money to them as opposed to trying to look at quality assurance strategies, health IT, any of the other intermediaries.

But even more importantly, it really misses the issue that we need to think about: how to try to form risk groups, subsidized risk groups, for people who have been in individual insurance. Presumably, the health insurance exchanges will help that, especially if they’re not so heavily regulated as to keep out some real choice in insurance.

And then you want to start focusing on metrics so that you can provide the purchasers, individuals, or employers with some idea about what they’re actually buying. And it is frustrating because this is just pulling people off into the wrong direction with a good chance it’ll completely or significantly derail the other movement we all know needs to get made, which is to move away from siloed delivery of health care with fee for service being the dominant payer for physicians, and into however we move to integrated delivery systems.

I am all for Matt’s motto, physician-directed IDS. We’ll have to come up with 17 choices that aren’t quite like that, but maybe not too far. But focusing on medical loss ratios is absolutely the wrong place to be right now and very frustrating.

Paul Ginsburg: Just a comment before I move to the next question is that when I’ve seen some of the discussions about whether an activity, say disease management, is to improve quality -- which means that that’s okay, that’s good -- or to reduce costs. And everyone says that’s bad. It’s as if people have lost track of what Charles said in the beginning about we’re headed towards 20 percent of GDP. What’s wrong with that?

So let me jump into the first question about 2014 and beyond the insurance exchanges. And the question I want to pose is something that hadn’t occurred to me until a very short time ago.

Think of the insurance coverage that’s going to be offered on the exchanges for people who have subsidies because their incomes are less than 400 percent of poverty. What do you think that coverage is going to look like? Is that going to like commercial insurance as we know it today? Or is that going to be more like Medicaid managed care?

Charles Boorady: I would say the exchanges are one of the better parts of the bill. And I would agree with the comments that Gail and others made on the med loss ratio, which I’ve called a political fig leaf for a bad bill and a gratuitous attack on insurers that will really not result in better value for the money, which is what society really wants in health care is better value for the money. And I think the exchange will deliver better value for the money by providing transparency to the consumer and an easier decision process in choosing plans that may not apply to the population that you’re asking about.

And I think the answer to your question will vary from state to state. I think the best-case scenario is that you see a morphing of Medicaid, low-income subsidy customers, and eventually Medicare and commercial plans. Why in health care does the store -- the hospital or the clinic or the facility, if you will -- need to know my age and my wealth and who’s paying for my insurance to know what to charge me for a certain procedure or what procedure’s more advantageous for them to perform on me based on who’s paying and how much? It’s an extremely inefficient system.

So ideally, the answer to your question would be that it doesn’t matter if you’re old or young or rich or poor or covered by Medicaid or a program for children or anybody else. But there would be more uniformity in how health care is delivered regardless of who you are and then the products that you have a choice of regardless of who you are.

And, you know, so I -- that was a long-winded answer to your question, but where I think --

Paul Ginsburg: Well, I think that’s what you’d like to see. Is that where you see things headed?

Charles Boorady: I think that’s where the exchanges will take people. Imagine an exchange -- it’s where the exchanges can and should take people, and I think the answer will be different state by state. I think the federal government has the resources to be smarter than the states do about how to design an exchange that can be offered to states and expanded across multiple regions. But, ideally, people could shop through an exchange and the exchange won’t have to know who you are or how much money you earn or your age to present a set of options of coverage to you. And what would matter is what your cost is versus what the government or your employer or somebody else is paying to subsidize it.

And so for that population, what I think you may see in some states is the state come up with its own plan, target it just for that population. Other states may expand Medicaid-like offerings to that population and others may just subsidize a commercial-like offering to that population.

But the bigger picture, I think, longer term, is these exchanges can and I think will take us to a more uniform set of products and a melding of Medicare or Medicaid, commercial, low-income subsidy, and others. And a step in that direction, I’d argue, is the increase to Medicare reimbursement for procedures of the newly enrolled Medicaid, you know, populations.

Matthew Borsch: I think I would agree with the points Charles has made. The interesting thing will be to the extent that employers look at the exchanges and, over time, decide they want to get out of the game of being the health coverage purchaser. And it’s possible that many will, particularly if employers start doing that and rather than there being a negative policy response -- i.e., tightening penalties for employers dropping coverage -- the policy response is instead to, you know, perhaps welcome that move by employers. And so the exchanges become the major conduit for health care purchasing and maybe look a little bit like the current Medicare Advantage program.

When I put the proposition that way, that sounds like a conservative idea. And yet, the other structure it looks an awful lot like is the Clinton-proposed model from 20 years ago. So it kind of depends on your perspective.

Gail Wilensky: I think early on it’s going to look more like Medicaid. And the real question is going to be the one that Charles and Matt just raised, which is to what extent does it become a viable exit strategy for employers who want to get out of insurance provision?

What I would say it could look like -- this may be just reflecting my own biases -- is an FEHBP [Federal Employee Health Benefits Program] model more than a Medicare Advantage, where the variation that is offered in the health insurance exchange includes program that could have a premium differential of two- or threefold as the FEHBP does now. Early on, however, I believe it will look very much like a Medicaid offering. And the real question is whether there is any push toward a provision that was in the Senate bill early on, where individuals who were above the poverty line, instead of being on the Medicaid expansion, would have been allowed to choose to go into the health insurance exchange, which I thought was a very promising and innovative component of an earlier version of the bill.

That might help early on to lock in this Medicaid managed care offering set. But if the employers start looking to it, which I think they will unless the penalties are too high, as Matt indicated, that that could make it into a whole different offering and really be then in exchange for the purchase of middle class insurance. But you’ve got a big step to have that happen.

Paul Ginsburg: Let me play devil’s advocate on this. When you think of the early years of the exchange, the coverage looking like Medicaid, probably a risk-selection problem. And, you know, the initial instinct of employers might be, hey, I want to stay away from that because the risk pool that my employees are in is a more favorable risk pool. You know, can the exchanges get stuck and never realize their potential?

Gail Wilensky: They could because the incentives right now are so skewed in the name of consumer protection that it will be a miracle if there are not serious risk problems because people can move in and out. They do not -- they are not going to face higher insurance prices if they are uninsured for a period. I mean, it has -- people have asked me whether I think there would be a big impact if the mandate were removed, and the answer is no, because the mandate isn’t going to have much effect. It’s such a low penalty and there’s so much protection on the consumer part that this is another one of those fig leafs as though it will actually keep people having insurance.

Christine Arnold: The penalty for -- so first of all, if you’re an employer --

Paul Ginsburg: Oh, is this going to be a risk selection? Because I want to hold that.

Christine Arnold: No, it’s going to prove that most employers will likely choose to dump their people on the exchange because of economics.

Paul Ginsburg: Okay.

Christine Arnold: Okay. So the average employer contribution is $9,553 today. And your penalty if you don’t offer coverage and your people go to the exchange is the lesser of $2,000 times the number of employees, so 2,000 times the number of full-time employees. There’s no penalty if you have fewer than 50 full-time employees. And the penalty is the number of full-time employees who receive credits on the exchange multiplied by $3,000. So people on the exchange times $3,000 or total number of full-time employees times $2,000 versus today employer contribution of $9,553 according to Kaiser. Like, it’s kind of a no-brainer.

Gail Wilensky: No, well, wait a minute. These are -- so you think the employee is just going to say, oh, I don’t mind if you don’t give me that and not expect to see something else in their paycheck?

Christine Arnold: You could give them $2,000 and they’d still be ahead. And then they could get --

Gail Wilensky: That’s not going to -- right now they’re getting 10,000. Why would that be an even exchange?

Christine Arnold: Then they could get the subsidy on the exchange because the government’s going to offer a subsidy. So the --

Gail Wilensky: For Medicaid.

Paul Ginsburg: For low-income people.

Christine Arnold: Right. Anything up to 400 percent of poverty, which is $88,000 for a family of four.

Gail Wilensky: To get Medicaid, which is what we’re thinking about.

Christine Arnold: No, no, no, the subsidy applies on the exchange, unless I’m mistaken.

Gail Wilensky: But it depends on what’s in the exchange. If what we’ve just said is true, which is what you get to buy is Medicaid as opposed to the private insurance that you had before. Today, with 9-1/2 percent unemployment, a lot of employees might not have much option. We get anything like a normal employment market, I don’t -- I mean, yes, from the employer’s view that would look nice if they could do it, but I think that’s unreasonable to think.

Do employees think if they have an option of a job with health insurance or a job without health insurance at the same cash wage that those are equivalent? And the answer is no. They understand that there’s a real part of that benefit. So the question is what else do employers have to do besides pay a penalty in order to keep their employees happy if they dump them in the exchange? And a lot of it has to do with what’s in the exchange. If it were like private insurance, that might look okay. If it’s like Medicaid, middle-class workers are not going to think that was an okay exchange for their employer.

Christine Arnold: I agree the exchange matters. And if it’s too restrained a network, then that may not work. However, only half of small employers today even offer health insurance coverage. And all I’m saying is the other half, given the existence of the exchange and the economics that we just talked about, are going to be awfully tempted.

And one thing to look at is California, who’s going to -- and remember, on the exchange you have to offer at least the Silver and the Gold Plan. So there’s going to be pretty generous benefits on the exchange relative to what you can get off the exchange. So I guess it depends on, to Gail’s point, what the provider networks look like and whether or not you have access to providers.

Paul Ginsburg: Yes. And one thing to finish this discussion is that let’s not forget about the tax subsidy to health insurance. That’s still, you know, again, thinking about workers looking at total compensation. If employer-based coverage is the way to get your coverage tax subsidized, that’s still going to be a factor. So I think the vision that Charles and Matt were putting forward for the long term probably won’t happen until there’s maybe even a more significant change in tax treatment than the Cadillac tax scheduled for 2018.


Matthew Borsch: Well, just one quick point, and, you know, this has been written about from a couple of sources before. But, you know, when you look narrowly at employer incentives -- employer-employee incentives I should say -- because, right, as you said, both sides are important here -- you know, there is a little bit of a bifurcation when it comes to the employer tax subsidy. And in theory employers with high-wage workers -- both the employers and the employees have it in their interest to stick with employer-based coverage and take advantage of the tax subsidies. Whereas with low-wage workers, that incentive shifts toward the subsidies under the exchange and become more attractive and the tax subsidy becomes less of a factor.

So in theory a big employer would split into two companies: high-wage company A and low-wage company B. And low-wage company B wouldn’t offer coverage and employees would get it through the exchanges. I’m not saying that would actually happen, but that’s -- those are some of the incentives that are involved.

Paul Ginsburg: Yes, that’s a good point. And actually, you know, just these incentives, of course, even without reform, have been there for a while. And I think this is one source of company outsourcing of low-skilled functions to get the low-paid people off the health insurance plan.

So the next thing is the -- how competitive will the insurance market be under exchanges? In a sense, will exchanges make the health insurance market for small firms and individuals more competitive than it is today? And I have some follow-up questions if you want to cover them-- what kind of new entry would you expect as part of the competitiveness solution?

Charles Boorady: Again, this is all hypothetical because as we’re uncovering in this last conversation how the tax code evolves and what products are offered through the exchange and whether employers participate in the exchange will have everything to do with whether these are exchanges just for a high-risk and Medicaid pool or if they’re exchanges that all of us will have access to. It’s my view that they got as much done as they could without tinkering with too much of the tax code and without signaling that the present employer-provided system would be disrupted. But I do think that there was a policy vision that didn’t fully make it in the statute that is for greater job mobility by having people get their insurance away from their employer and just separating those two. And so, you know, I think exchanges will evolve in a way that will improve transparency and make it a more efficient system for us to buy insurance through.

You know, I think as far as new entrants go, again, that’s going to depend on exactly what products can be offered to the exchange.

On the Medicaid side, I do expect a tremendous number of new entrants just from talking to private equity firms and looking at the existing health plans who have not yet invested heavily in that market. They’re all looking at this with the outlook for commercial highly uncertain as a result of the weak job market and as a result of reform, and that’s already a very crowded business anyway. And as a result of the outlook for Medicare Advantage being highly uncertain, again, as a result of changes in the reimbursement scheme, all companies in the health insurance business are at least thinking about getting into Medicaid if they’re not in it. Those in it are thinking of allocating significantly more capital to the business and, again, private equity firms funding startups going after that. It’s very easy to rent a network from a company like a Multi-Plan and to raise capital and to go out and bid to win business. So I think that’s where we’ll see most of the new entrants.

We don’t have enough information yet to predict whether new entrants will come in to participate in the commercial business as a result of the exchange. But I’d expect that to be a very risky proposition. Today it’s easy to overpay a broker to steer business to you that you probably didn’t deserve to get. The exchange will make it a lot harder to use brokers in that way. It will require companies with good discounts with providers, you know, and an attractive brand name to be able to offer a product that somebody would wind up selecting in an exchange.

Paul Ginsburg: So Charles, when you were talking about metrics entering into Medicaid, you’re talking about literally Medicaid as opposed to subsidized private insurance on the exchange.

Charles Boorady: Yes, Medicaid managed care.

Christine Arnold: Well, I think that the competitiveness of the exchanges are going to depend on three things. The first -- and if you look at California, California’s the only one that’s about to sign legislation and has passed legislation on exchanges, so it’s kind of the only -- it’s one, but it’s our total sample size that I could find. (Laughter) They’re going to selectively contract with plans for coverage. So it’s going to look like Medicaid because not everyone can be in. And if you want to be on the exchange you have to offer all five products, which is the Gold, Silver, Bronze, Platinum, and the Under 30.

Paul Ginsburg: Catastrophic.

Christine Arnold: Yes, the catastrophic for under 30. So you have to offer all of them on the exchange. So if the exchange is excluding plans, obviously that will limited the amount of competition. It’ll lower the price, and it’ll leave the plans with little choice but to reduce the network and the things that you can’t see since the things you can see will all be kind of the same.

And then I think the second issue is, you know, how many employers do dump onto the exchange? And my view is because the penalties are so low and the subsidies are pretty low for small employers, that most of small group and all of individual is likely to wind up on the exchanges. And then the question is on the low-income, you know, large employers, but I understand that there’s debate on that.

And, then the third issue on whether there’ll be increased competition on the exchanges, I think is going to relate to the risk selection. So on versus off the exchange, I think you’re probably going to wind up with a lot of the larger national carriers not terribly competitive at the Platinum and Gold levels of benefits in order to attempt to avoid the potential for some adverse selection initially. And then they’re going to take a wait-and-see stance. But that’s my guess. No one told me that, by the way.

Matthew Borsch: Just one quick point on this that I’d add, which is, in the interim, as we approach the implementation and the exchanges, while there may be new entry on the Medicaid managed care side -- as Charles has alluded to -- given that business looks attractive, on the commercial side, particularly with some of the carriers that are heavy or in the individual market, you may see some exits -- perhaps significant exits -- as a result of the business, as Christine has pointed out, not being very workable under the minimum MLR regulations, again, for the individual product.

Gail Wilensky: I think there is not likely to be more competition, more entrants into the Medicaid market other than maybe some small initial flurry. This is a tough market to be in. There will be an attraction about having these new populations going in, but Medicaid managed care has been a tough market and I think that will continue to show as a tough market.

The states that are going to have this large expansion are going to do everything in their power to try to keep those expenditures as controlled as they can. So I will be very surprised -- I mean, you don’t now see very many companies trying to compete in Medicaid managed care. Initially, when there was a movement toward Medicaid managed care there tended to be four or five different HMO offerings in many states. And the states used that as an opportunity to ratchet down the payment levels until they frequently had one or two individual companies offering and no other takers.

My guess will be early on you’re going to have some of the same in the exchange either because they will actively, selectively contract in such a way as to entice one or two big players in to try to make up in volume and squeeze them on the price level. So I actually think there are likely to be reasons that you will see very little movement in. These are going to be tough groups to provide care for and there’s likely to be a lot of adverse selection going on.

Paul Ginsburg: Now, Charles, coming back to your first comment about all the interest in private equity investors, I thought those were smart people.

Charles Boorady: I think where Gail and I could both be right is, I know it’s a fact that capital is being deployed to try to enter the market, and where Gail and I can both be right, of course, is if people lose money trying. It’s not, you know, private equity is a small part of it.

There are, you know, billions of dollars in capital, many over-capitalized health insurers who have focused exclusively on the commercial market or exclusively on the Medicare or Medicare Advantage market. These companies are running out of growth opportunities and are concerned about the uncertainties around how the PPACA will affect their business.

And so they’re looking at putting the capital they have to use to pursue what they perceive is the only attractive growth opportunity in the industry, which is to pursue Medicaid managed care. And if Gail is right, they’ll lose a lot of money trying, but they are trying.

Paul Ginsburg: Well, you know, giving that Matt is sitting on my left, and I’ve learned a lot from him about the underwriting cycle, this sounds like a new take on the underwriting cycle.

Matthew Borsch: Yes.

Paul Ginsburg: Okay. Actually, Gail, one specific question. Now, when reform was being enacted, there was a House version with a federal exchange, and the Senate wanted state exchanges, and given the process by which reform was enacted, we got the Senate. Is that going to be really important, the fact that we have states doing the exchanges rather than a federal exchange?

Gail Wilensky: Yes; it would have been dramatically more controlled if there had been a federal exchange, although, in part, it will depend on who’s running the federal arrangement. With the current power configuration, you would have seen very, very controlled exchanges.

But, of course, the federal government runs through OPM [Office of Personnel Management] the federal employees’ health benefit, which has a very wide, diverse offering with far, far, far fewer controls than are included in the Affordable Care Act. So it isn’t necessarily the case that a federal exchange has to be very controlled. The current power structure would have made it extremely controlled. So given that, I think it is very helpful that there will be state exchanges, although, of course, states can request or can combine into multi- state exchanges, so there is some attempt or ability to get around it.

I think for where we are now, most large states don’t have any need to have a federal exchange. Some smaller ones could probably benefit, both because of the technical assistance that they need and because of the size.

We’ll see how this evolves five years from now. You know, you could see it becoming a more aggregated exchange, but, you know, New York, Florida, California, they don’t need to go any bigger than they are already.

Paul Ginsburg: That’s right. Now, we started to talk about risk selection, and certainly there were comments that there could well be adverse risk selection. When policy-makers perceive this, which happened in Massachusetts recently, what would you say are the most effective, politically feasible options to address this? Or to put it differently, how do you project the policy-makers will address when adverse selection becomes apparent?

Charles Boorady: I think the easiest way for them to do it is to encourage large employers to participate in the exchange. I’d point to some very large retailers, you know, one with over a million people on its own health benefit plan and another million probably in Medicaid or something like it, where while the exchange initially is limited to employers with 100 employees or less, that steps up over the years.

And I think there is an incentive for some very large retailers with high turnover of their employees to try to move on to the exchange. And from a policy standpoint, having large populations in these exchanges would mitigate the risk of adverse selection.

In the converse, if they don’t participate, employers big enough to self-insure or negotiate a rate, you know, will have the healthier lives, which, by definition, will drive the exchange to the point where it may be minimized to an exchange for a high-risk pool and for Medicaid lives only.

Gail Wilensky: Do what the federal government does, have people make a choice once a year. I mean it is actually quite astounding that FEHBP, which should have risk selection problems other than when it blew out one of its health care plans 10 or 15 years ago, doesn’t appear empirically to have risk selection. So what absolutely needs to be a part of the selection process is an annual selection. You can’t have people moving in and out and prevent risk selection.

Paul Ginsburg: Yes, and for the audience, that’s what Massachusetts has done. They did not raise their penalties, but they did first six month enrollment and then going to once-a-year year enrollment, that’s what they chose, given the evidence that even though they had combined their individual and small group market, the selection was still significant enough that they had to deal with it.

Gail Wilensky: And that’s really the response to, in my view, to people who have said, well, what happens if you get rid of the individual mandate, well, the answer is, if you begin to use incentives to keep people in place rather than just try to have regulations that protect the individual, but encourage bad behavior on the part of that same individual, that you can solve this by having the right incentives even if you lose the regulatory clout, which, oh, by the way, at least in terms of the penalty, was never very serious anyway.

Matthew Borsch: If I could ask a question to Gail. Are you aware of any research on whether a one-year waiting period is enough, and does it need to be a two or three year waiting period to be effective?

Gail Wilensky: Well, it’s really the work – some of the work that has been done looking at the FEHBP, that leads me to think that one year is probably enough, because the structure of the FEHBP ought to result in some risk selection among the plans, yet some of the work that has been done empirically suggested it doesn’t actually show up.

So you could – this would be -- I think a move to a year would be significant, and you could certainly extend it to a two year period. But I don’t know of anyone that has actually looked at that period of one versus two years empirically. They may have done so, but I am not aware of it.

Paul Ginsburg: Well, you know, one of the ironies is that an even more powerful tool to deal with risk selection has been in use in the Medicare program for decades. The fact that if you don’t enroll in Part B when you need to, you’ll pay more in the future for the rest of your life.

Gail Wilensky: And that is also why it is I think so odd that people don’t look to this model, which is, as you said, within nine months I think of the time you first have an opportunity and no longer have employer coverage and/or turn 65, you don’t enroll in Part B, you pay a penalty forever.

Paul Ginsburg: That’s right.

Christine Arnold: Part D is the same way.

Gail Wilensky: So you don’t need to have mandates. You get peoples’ attention.

Paul Ginsburg: Yes; benefit design, given the requirements for preventive services, maximums on cost sharing, and the specification that there should be gold, platinum, silver, et cetera, how much room is there for innovation on benefit design in the exchanges?

Christine Arnold: Well, I think there’s a ton of room. I mean I think we’re going to wind up with complexity we never imagined. This is kind of like Jurassic Park, you know what I mean, they kind of find a way, and you just – you’re not sure what you’re going to wind up with until the ride starts, which is 2014. So, you know, as we get these – so MLR floors mean we really need to know what our costs are going to be. It’s kind of like The Price is Right, you want to be as close as possible without going over, because if you go over, you can’t make it up in prior years.

So what this means is that managed care companies are probably going to try and strengthen at work first and then place the providers at risk so that they have some predictability.

And 50 percent of doctors are employed by hospitals, so the integration is already happening. And 80 percent is expected to be employed in the next couple of years. Where I’m going with this is that once you put the providers at risk, you can start motivating really specific benefits.

So, for example, okay, an essential benefit is a hip replacement, well, it’s going to be this hip, right, it’s going to be this knee, it’s going to be this –

Paul Ginsburg: When you say this knee, you mean this model of device?

Christine Arnold: Exactly, right, it’s going to be, you know, I don’t even know who makes these.

Paul Ginsburg: Not just left knees.

Christine Arnold: Right; you get a cane and a left knee. So it’s kind of like applying the formulary to the devices and to the procedures. So we could kind of wind up with that kind of a structure. Some of the companies are already talking about kind of a cafeteria plan. So, yes, we cover mammograms, here’s, you know, $1,000, go find one.

And, here’s some places that will do it for $1,000, but if you want to go to this, you know, and the same thing with things like diagnostic testing, getting your blood tested, all that kind of stuff. You know, immunizations, we’ll pay $15 at Walgreen’s, if you want to go to the pediatrician, great, you can pay for the office visit.

Paul Ginsburg: Yes, I guess the economists call that reference pricing.

Christine Arnold: Do they?

Paul Ginsburg: Yes.

Christine Arnold: We call it scheduled benefits and consumerism. So I think we’re going to wind up – and then, obviously, the narrowing of the networks makes it complicated, because I don’t get Medicare Advantage, and Charles can probably figure this out, but I have a hard time. I never know whether the benefits have increased or reduced even when I look at exactly what’s being covered, because you don’t know who they’re paying to do it.

Charles Boorady: Right; I think it’s a great question on innovation, and I think it could go the Jurassic Park direction that Christine mentioned, and it could also go the opposite direction, where the government, by defining platinum, gold, silver, bronze, catastrophic, and by not allowing a lot of initiatives to be counted as a medical expense for the purposes of meeting the minimum MLR, that it could also stifle some innovation.

But I think that’s actually not all bad. I feel like what our health care system is missing most is good value for the money. We need more innovation in our delivery system than we do innovation in the health insurance product. And I say that knowing that the insurers have a lot of opportunity to innovate, to help drive change in the delivery system. But what they lack is not innovation. They have tremendous ideas on how to offer better health care at a lower cost. They don’t have a willing partner with the facilities. A facility gets half its revenues from Medicare, more than half for Medicare and Medicaid combined. So as long as your biggest customer is paying fee for service, when a small customer like United Health or Blue Cross and Blue Shield or someone else is a minority customer to a typical hospital, knocks on the hospital door and says, good news, hospital, I can lower health care costs and improve quality outcomes, what do you think the response of that hospital is?

It’s like walking into Bloomingdales and saying, I’ve got great news, I can keep customers out of your store, you know, they don’t really receive those conversations well. So what’s really lacking among insurers is clout. They don’t have the clout that they need over the supply chain.

Health care is the only big industry in this country where the suppliers have the leverage, we, the buyers, have very little leverage over the supply chain. And Medicare Advantage is one great way to achieve that leverage. If you can take the senior population out of a fee-for-service program, put them in the same companies that are selling me insurance, then they would start to gain that leverage. And one of the biggest ironies in this reform bill is that, according to CBO [Congressional Budget Office] projections, we will have significantly fewer seniors in the Medicare Advantage plan post reform, which puts even more clout back in the hands of Medicare fee for service, which makes our delivery system problem even worse.

And so I think innovation in health insurance is great. They need the leverage over the supply chain to be able to use some of their great ideas to actually effect change in the delivery of care.

Paul Ginsburg: Let me give a closing question of this reform section, given all the political battling with Republicans promising to repeal reform or at least interrupt it by not funding it, what do you hear from – is this affecting the behavior of insurers in how they plan for reform? In a sense, are they taking this seriously?

Charles Boorady: It’s significantly increased their cost to capital. And one of the costs that CBO did not score is that everybody in the health care business has to pay a lot more money to borrow money or to raise equity capital, so the uncertainties –

Paul Ginsburg: Is that the uncertainty from reform or from the attempt to repeal a reform?

Charles Boorady: As a result of reform. So investors are demanding a much higher return on their investment to seed any health care company today unless it’s in the health IT space as a result of the enormous uncertainty due to the PPACA. The regs are still being written, so investors are on the sideline, which means if you have an idea in health care and you want to raise money for it, you have to pay a lot of money in interest or give a high expected return to an equity investor, and so that’s, you know, been a significant issue for them.

And then every major health insurer has a team of consultants and internal people just trying to struggle with the same questions that we’re talking about today.

Paul Ginsburg: Yes, so it sounds like they’re dealing with the uncertainty about the planned implementation of reform, let alone an attempt to divert it.

Charles Boorady: Yes.

Gail Wilensky: I think most companies are assuming this law will go forward. There is an enormous amount of uncertainty because it is so tied up in terms of how the regs are written. They recognize there could be additional uncertainty, although if you look at just what it would take in order to disrupt the current law in the short term, it’s very hard to imagine that happening. If you have, as much of the pundits are predicting, the House potentially switching, you still have the Senate, and even if you had both, you would have very close margins and a veto by the White House.

So most of this now is rhetorical. There is the threat that’s been raised about not funding. As I look historically, when that issue has come up in other cases, it seems to be one that is much more, again, rhetorical by nature. The actual non-funding as a political strategy seems to not happen. And we heard this from the Democrats in 2007, about the war effort, that they were not going to fund the war effort because they couldn’t get it otherwise changed, and again, that was a lot of rhetoric.

So I would be surprised if there is very much attention being given. But uncertainty is very difficult for companies. And we are now in uncertainty, you know, X times over because of all of the lack of clarity, to say nothing of what happens.

Christine Arnold: I think in 2012, I mean we all know that election matters, and in the absence of a clean sweep by the republicans, I think people are missing potentially the power that HHS has. So just a change in the White House could have a tremendous impact on how this is implemented.

Let me give you a few examples. HHS defines the essential benefits, they define what’s an unreasonable rate increase and can keep companies on or off the exchange. If a state doesn’t set up an exchange, HHS sets it up. They control Medicare and Medicaid innovation to test medical homes and bundled payments and establish basic programs as an alternative in the states to potentially have an alternative to Medicaid.

And this is a biggie, they can authorize to exempt individuals who suffered a hardship, a hardship from having to pay the penalty under reform. So I mean some Republicans just think that this penalty is a hardship, right, so –

Charles Boorady: We’re all exempt.

Christine Arnold: Christine Arnold for President.

Paul Ginsburg: Okay. Let me move on to some questions of the kind that we would ask in a normal year, because the health system is still going on, it’s doing some things not related to reform.

Gail Wilensky: $2.2 trillion worth of some things.

Paul Ginsburg: Yes, and the first question is trends in the costs that underlie health premiums. I noticed from reading your reports that there were surprises in the second quarter that costs were lower than anyone was projecting, so I wanted to get your perspective on what’s behind this, what’s the outlook for the rest of this year and next year on the cost trend, and I’ll have Matt start.

Matthew Borsch: You know, I think as you look at 2010, we have seen a noticeable slow down in health care volumes compared with last year, maybe in some areas more than noticeable, but it’s been across hospitals, medical devices, you’ve seen it in almost every area.

Now, there are clearly some sort of one-time factors, if you will, unusual things such as the lack of a flu season in the early part of this year, the severe weather disruption in the first quarter. But I think, the other piece of it is, if you go back and look historically at patterns, one thing you do see is a period of multi-year slowing in health care utilization trend following really each of the major recessions in modern history.

And, the data seems to point to, although this is not entirely consistent, seems to point to the period of slowing, starting with the end of the recession or, you know, put sort of the same way as the data lines up, the peak in the unemployment rate.

And this would be true – well, you’d see that period of multi-year slowing if you go back to the wake of the ‘80’s recession, the ‘90’s recession, the recession in the last decade, and we think this most recent slow down fits that pattern, with the implication that while, we may not see another leg down in the same magnitude in terms of volume slowing in 2011, we’re probably not going to see it rebound as you might if 2010 volume trends had been a fluke.

Charles Boorady: I have a prop for that. My colleagues at Credit Suisse and I just put out this report, I’m happy to mail out to people, making sense of the utilization downturn. I have a chart showing exactly that. Matt made a great point, that is missed by a lot of people, including those in Washington who forecast national health expenditures, because they’re forecasting a rebound, and as Matt mentioned, we may see the opposite.

But the four main factors we looked at, that was No. 1. No.2 and coupled with that is, there was a sharp rise in 2010, ironically, in the adoption of high-deductible health plans.

The Kaiser Family Health Foundation showed the adoption going to 13 percent this year, from 8 percent in each of the last two years. That’s a big jump in the adoption of the kinds of plans that would make us consume less health care in recessionary or post-recessionary times.

And then the other two factors were, as Matt mentioned, there were some one timers or unusual events like H1N1, so when you measure year growth, H1N1, you know, clearly had an impact.

And then COBRA, we looked at COBRA, which did to health care something similar to what the $8,000 subsidy did for housing, it sort of pulled forward consumption, in our view, so that as the subsidy for COBRA starts to roll off, you know, the year growth in consumption would be negatively impacted, although once you anniversary that, again, going forward, you get back to a more sustainable rate. So in the mind of investors, health care went from being defensive to looking like it’s not defensive at all. And we think it’s fairly defensive, meaning there still will be demand for health care even in the worst of economies, and that the slow down we think can be described by those four factors.

Paul Ginsburg: A question on – I’d like to turn to Matt again about the premiums and the underwriting cycle. Could you explain where we are now? And then follow up with, is reform playing a role in premium setting at this point?

Matthew Borsch: So just first is background. Many of you in the audience may be familiar with the underwriting cycle concept, but just to very quickly recap, if you go back and look at the history of profit margins in the health insurance industry, you will see a sort of regularly recurring pattern of ups and downs that actually you often find in other insurance-based industries.

Now, it’s worth pointing out that this had once been a cycle that was very regular, it was sort of every three years up, three years down prior to the advent of managed care 20 years ago, and since then, the cycle has been more elongated, less severe, less predictable in some ways, and I think actually less of a driver for the whole industry than perhaps it once was.

But we think the cycle is still there. And, in fact, if you look back recently, what you would have seen is a severe downturn in the late ‘90’s, and then an upturn in the health insurance underwriting cycle with substantial margin expansion from about 2000 to 2005, most recently a downturn from 2006 through 2009, and now today we think we’re in the positive days of a multi-year turn in the underwriting cycle.

Now, does reform make a difference? I think it, you know, it absolutely will in moderating, not quite negating, but moderating the underwriting cycle with respect to the rate review and the political rate pressure, with respect to the minimum medical loss ratio regulations.

And, of course, I think the cycle was moderating and had been for some time already, given all of the consolidation that’s occurred in the industry and the shorter lag between pricing and cost trend recognition. But I do think we are, you know, the backdrop is that we are in a positive phase of the cycle.

Paul Ginsburg: Okay. Actually, we’re going to be going about another five minutes, so as a cue to the audience, it would be a good time to start passing your questions to the aisles. And I notice then the – Charles mentioned the Kaiser Family Foundation, you know, surveys of employers and your health insurance, and in the most recent survey, for the first time in a long time, they showed a major shift of premium responsibility from employers to employees.

You know, in say the ten years leading up to this, there have been significant benefit buy downs of raising deductibles, et cetera, but the premium shares were quite stable. Now we see a very sharp shift to employees, and any comments on whether this is the start of a major new trend; Christine.

Christine Arnold: Well, if you look at the grandfathering, I think part of it depends on whether or not plans want to be grandfathered, because in 2014, if you’re not grandfathered, you have to offer the essential benefits, and we’re not sure how comprehensive those will be. In addition, if you’re not paying 60 percent of the actuarial value as an employee or the person is paying more than nine and a half percent of their income, you’re subject to the penalties. So the bottom line here is that if you want to try and stay grandfathered, you can’t really raise co-insurance percentages, you can’t raise deductibles more than inflation plus a set percentage, which eludes me, but it’s not huge. You can’t raise the deductibles the 30 to 50 percent we’ve been seeing and remain grandfathered.

So I suspect that large employers, in attempts to remain grandfathered because they have so many employees, are not going to want to be subject to these incremental benefits, you know, down the road. And some of the incremental benefits head immediately, so if you’re not grandfathered tomorrow and you renew, you’re going to have to offer the preventive care at no co-pay, which is an issue if you have high-deductible plans and didn’t pay for them before.

So long story short, you’re going to shift to increase in premiums, because you can increase premiums on employees as much as you want and stay grandfathered from some of these other strategies if you want to remain grandfathered. And I think it’s hopeless for small employers, but I think large employers are going to make that shift.

Paul Ginsburg: I think someone brought up the issue of provider leverage before, and certainly it seems as though the trend is in favor of increasing provider leverage. I wanted to ask the panel how they see this playing out, in a sense, what’s this going to lead to? Is this going to a lead to a real change in insurance products with narrower networks, et cetera, or is this going to lead to major employers asking the government to help them out on this, and not by raising Medicare rates?

Charles Boorady: I think it’s going to lead to reform part two. You know, the PPACA, as big as it is, did very little, as Gail mentioned, to address cost and delivery reform. And providers have tremendous leverage today. There are some markets, parts of California, Long Island, where providers have tremendous leverage, and that leverage has been used to raise prices to payers, and we haven’t seen meaningful delivery reform, haven’t seen better value for the money.

So at some point I think the federal government is going to have to make the tough political decisions necessary to address that issue. And it’s unfortunate that with everything else that was accomplished in the PPACA, that they couldn’t achieve more compromise in that regard. I don’t think as long as payers are as fragmented as they are, and with the Medicare Advantage population reducing payer leverag even further, that narrowing networks is going to be as effective today as it was in the early to mid-1990s.

And so this may be an issue for the FTC [Federal Trade Commission] to take up in evaluating mergers of facilities, or maybe that a political decision is made down the road, but I think we’re on a – we’re headed in an unsustainable path right now unless the delivery systems can be incentivized to provide better value for the money, and I just – I’m not seeing that happen right now.

Gail Wilensky: I think it may be a little late for the FTC to be coming in, especially if the accountable care organizations (ACOs) take off in a real way, because it sounds like they are primarily being driven by hospitals, along with their consolidation during the last decade, and along with buying up every physician practice that they can get their hands on will have them become the entity that receives the money. Going forward on an ACO, I’m not sure the FTC is going to be able to do much by the time that all happens, unless they really attempt to unroll some of what has occurred already, which is much harder to do, not impossible, but much harder to do than to prevent at the time the merger is occurring.

But it also has to be at least, in part, driven by how, when and what we decide we’re going to do in terms of reimbursing physicians. If there is a single overwhelming regret that I have with this legislation, it is that you took the single most important element of reforming the delivery system, which is how you reimburse physicians, and you’ve just kicked that can right down the road.

As somebody mentioned, 23 percent decrease as of December, but then as the actuary, as – just pointed out in his comment on the latest trustee’s release, there’s another six and a half percent in January and there’s another 2.9 percent the January after.

So basically, in the course of the next 15 or 16 months, physicians are technically facing a 30 percent reduction in fees in Medicare, which, of course, is never going to happen, but what will happen is yet to be determined, and that’s just to critical to what goes on in health care costs.

Paul Ginsburg: Gail, it struck me that there’s actually a lot of very positive physician payment changes in legislation, and I’d always characterized the SGR thing as really a budget transparency issue. Basically we’re fooling ourselves, because we know that we’re not going to allow the 23 percent decrease to go into effect, we’re going to come up with something, and the sense that a real effect is just that our budget outlook is that much worse than it seems.

Gail Wilensky: I think the – well, I certainly agree with that part, that we’re not going to allow it, and, yes, therefore, the budget outlook is worse than it seems. I would be a little more positive if we had trigger mechanisms in place with regard to the pilots.

So if we had in the legislation that pilots that improve quality and keep costs no worse than neutral or that reduce cost and are no worse than quality neutral become – get ramped up to see if they’re scaleable, and if so, become part of the Medicare program. What I worry about is that there are so many ifs that have to occur between having a creative idea as a pilot and having it become the way Medicare operates that it won’t happen. It could happen, but the likelihood of it happening is just not very high. It just could be that I’ve had too many years and become too jaundiced to looking at what happens to good ideas in the past, but that’s really where the reform of the delivery system is – it’s primarily in the ability to run pilots and to literally run with them.

But, you know, you can and you will are a long distance apart.

Paul Ginsburg: This would be a good time to turn to questions. People can get up to the microphones if they’d like. Let’s just try to have one person answer each question, unless someone else disagrees, and then come right in. Insurers are consolidating providers – oh, this is what I just asked. My praise to the person that asked the question. It was submitted before I asked it. Okay, that’s one. Are small insurers doomed, and what will the mandate do for young invincibles? Matt.

Matthew Borsch: Well, it’s not clear yet, obviously. I think small insurers could be doomed. You know, certainly in the near term, the regulations and the added costs and the difficulty of the minimum MLR regulations may favor economies of scale, may encourage carrier access, so in that sense, small insurers certainly could be squeezed.

Looking further ahead, though, to the extent we have a more retail, less employer-based purchasing model with the implementation of the exchanges and the coverage expansion, that would actually lend itself more toward a more narrow network, perhaps smaller plans organized around delivery system options such as you see on the Medicare Advantage side with some small plans there.

So maybe what we’ll see is, in the interim, fewer small plans, and then perhaps some innovative new entry after the exchanges are implemented.

Christine Arnold: I have just one thing to add. We haven’t talked about ICD 10, so RAND thinks that that’s going to cost $150 to$362 million per plan, and NOLAN thinks it’s going to cost like half a billion to $900 million per plan. So ICD 10 is an expense that’s kind of a fixed cost and required by 2013, and I think it’s more likely to doom the small health plans, the small insurers. The one thing that was included in the ICD recommendations is a credibility adjustment. So if you just don’t have that many lives, you can get anywhere from one to eight percentage points added to the loss ratio calculation, which will give you some time. So the MLR floors I think are going to preserve the smaller plans, but ICD 10 might be the problem.

Paul Ginsburg: Good point; someone asked the question, if utilization is down, why are premiums going up?

Christine Arnold: Because pricing is up.

Paul Ginsburg: Why don’t you tell them more about that? I mean –

Christine Arnold: I’m just kidding.

Paul Ginsburg: -- provider prices are up?

Christine Arnold: Yes, provider prices are up. We’ve got – we’re estimating – the sick kid thing is kind of a big deal. If we empty every children’s hospital of every sick child, and obviously, sick children should be covered, but the high risk pools we’ve already discussed don’t have the funding at $5 billion from now until 2014 to take them, so depending on whether or not you wind up with the adverse selection of the sick kid pool, we think that benefits associated with reform will increase individual costs five to ten percent if spread across, and the sick kid thing is the big issue.

You’ve also got no lifetime or annual maxes, and then the preventive care. And then for a small group, it’ll increase costs two to four percent with a negligible impact. So building in these costs to the provider, particularly hospital requested price increases, since hospitals are seeing deteriorating Medicare and Medicaid payments, is resulting in price increases.

Gail Wilensky: Two comments, the first is, use isn’t a good enough measure, it has to be use and mix. We are much more a mix than just strictly volume in terms of driving spending. The second is, of course, spending actually was lower last year. And that was the report that came out, not surprising, and the rate of increase was slower, and that would be absolute. But it slowed down, not surprising, in a major recession.

Paul Ginsburg: Good; this question is addressed to Christine. In elaborating on your comments, first that providers will not be financially impacted until 2020, I don’t think that’s exactly what you said.

Christine Arnold: Well, it’s for the IPAB.

Paul Ginsburg: Oh.

Christine Arnold: Yeah, it’s that – so we have this board that’s been kind of hamstrung because it can’t change the structure of Medicare at all and it can’t impact providers until 2020.

Gail Wilensky: Well, it can’t impact hospitals.

Christine Arnold: Hospitals, right.

Matthew Borsch: Hospitals and doctors.

Gail Wilensky: And physicians, we don’t know what’s going on with them anyway, so that is – so it can’t impact the parts that cost all the money in Medicare.

Christine Arnold: But it can form and it can come here. We should invite them next year.

Paul Ginsburg: Yes; and the second part of this question was that 80 percent of doctors being employed by hospitals in five years, I don’t know if Christine was the one that said that, but actually this would be a good thing to have anyone on the panel just talk a little bit more about what they see evolving in this movement by hospitals to employ physicians.

And the one thing I can tell you is that, from out doing site visits, this started long before health reform. This was not a response to ACOs, hire your doctor so you can be an ACO, it started before, it actually started under the fee-for-service model. You know, so one question is hospitals tried this in the early ‘90s.

Gail Wilensky: I was just going to say that. They lost their shirts when they did this.

Paul Ginsburg: They lost their shirts. What’s different now? Actually, that question is for the second panel. Let me just stop there and we’ll ask the second panel. If there were a public option and exchanges paying providers Medicare plus five percent, what market share would it get?

Gail Wilensky: Depends on who plays. I mean right now, you have physicians and hospitals that are able to make up Medicare rates in their private market, so Medicare is okay, and for physicians, they don’t take Medicaid, most hospitals take Medicaid because they’re able to shift their costs around to other payers.

If you were to actually start having physicians and hospitals live under Medicare rates, they would have to perform their businesses quite differently, and so that’s why it’s really hard to know whether or not this would become an active option. In my view, if it were around very long, it would ultimately unravel the private insurance market, because it has a power that other insurance doesn’t have with regard to pricing.

Paul Ginsburg: Yes.

Gail Wilensky: Which I think was its intent.

Paul Ginsburg: Given the time, it’s about time to stop this panel, but I’d just like to invite any of the panelists for any thoughts they have of something that’s been building in their mind as we sit here. Excuse me? Okay, I thought we covered it, but let me ask you that. You’re talking to an audience of policy makers -- what should policy makers be so concerned about, that they should be looking for, to see if they need to act?

Charles Boorady: I’d say it’s the productivity of the United States, that as long as we are spending $750 billion more every year to get similar outcomes as the second biggest spenders in the world, and it’s even a wider gap to the average country, but as long as the United States has to spend as much as we do to get very similar outcomes as other countries, you know, that’s significantly impacting our productivity as a country. That’s money that comes out of employers, it’s money that could go into infrastructure, education or other more productive use. And so I would urge them to think about how important productivity is to our country, and how meaningful 17 going to 20 percent of GDP is, it’s a really big number, and it wasn’t addressed in PPACA. PPACA is going to make it worse, I think we all on this panel agree.

Gail Wilensky: I just absolutely disagree with that thought. And I don’t disagree with the intent of saying we can and should get better efficiency in our health care, we don’t really get the value for what we’re spending, that part I agree with, and we can do better, we should do better.

But this has been an incredibly productive sector. It, in fact, is the real challenge going forward. If we want to slow down spending, and I think everybody in this room thinks we should, we’re going to have to do it with a very light touch.

There’s only been two sectors that have had employment growth in the last couple of years, and health is the biggest part of that. Massachusetts really has its back to the wall now because one out of five jobs is related to the health care sector, and when they slow things down, they better do it with a light touch or they’re going to find themselves in a very difficult position. And a lot of the kinds of productivity that we have seen in the medical-related areas has a lot of other uses, especially the information technology, some of the devices, some of the procedures.

So I look at it more that we ought to be able to spend our money more efficiency or more wisely. It has happened because incentives are so screwed up. But the notion that somehow this is having these negative effects on the productivity, that this is not productive money, I just don’t buy that. It has been an incredible source of employment, particularly in some of the lower- skilled areas, and we’re going to have to be careful how we get right balance. We can and we should, but don’t look at it as unproductive spending, it’s very productive.

Charles Boorady: Well, let me clarify. Health care is a big growth industry for the U.S. My point is, that money comes from somewhere. And if we can get this – if our country can get the same health care at $750 billion less cost, that that $750 billion can be reduced delicately, so we don’t disrupt the health care employment market too much, but that money could be put to more productive use for our economy in education, infrastructure and IT and other things that we really need. If we’re consuming more health care than we need to to get the same health outcome, then that is capital that could be put to use elsewhere.

Gail Wilensky: That’s where it goes.

Christine Arnold: I just have two issues that people should be looking at. One is, I think providers – the providers will take too much risk without enough capital, because payers are going to have to and will attempt to shift risk, and then providers, with a whole bunch of structures and ways they can get grants and money from HHS, are going to be tempted.

And second is the issue of employers going from defined benefit to defined contribution and dumping on the exchange, therefore, the subsidies, which are predicated only on 100,000 people moving from employer sponsored coverage to the exchange, the subsidies could be way over budget, and the risk selection could be skewed way worse on the exchanges than people anticipate.

Paul Ginsburg: Matt.

Matthew Borsch: My final comment, I’d just like to thank Paul Ginsburg and the Center for Studying Health System Change for sponsoring this forum. I think it’s really –

Christine Arnold: So sweet, what he said.

Matthew Borsch: I think it’s really important to try to match the market -- Wall Street -- view with the thinking in Washington, and too often they’re segregated, and so I think this is a really helpful forum and I’d like to see more of this.

Paul Ginsburg: Thank you very much, Matt. And I’d like to thank the panel for a terrific job. Okay. We’ll come back here at – how about let’s keep our break to ten minutes.


Paul Ginsburg: I introduced these panelists at the beginning of the day, and their bios are in your book. And, you know, they’re terrific people to have. Like the first panel, we have a mixture of a couple of -- or actually three veterans and a newcomer on the panel. And I’d like to begin with a general health reform question that’s relevant to providers.

And the question is what are the most significant challenges that hospitals face from health reform? And while you’re talking about that, you might also point out their most significant opportunities. And I don’t know, who would like to start first? Art. Yes.

Arthur Henderson: Sure. Paul, thank you for having me. This is quite a treat. You know, I think the near term challenges really -- the benefits of health care reform for providers really doesn’t come for a few years. What you’re left with in the interim is dealing with volumes that remain pretty weak and debt levels that aren’t necessarily changing. And we’re seeing some stabilization of bad debt but we definitely have seen an uptick. So you’re really -- there you go -- like I said, the benefits don’t come for a while. So you’re left with life as we know it. And I think after 2014, volumes hopefully will have improved and the bad debts will be a bit lower and people will have insurance. So that certainly makes life a bit different for hospitals compared to what they’ve had in the past.

Paul Ginsburg: Gary?

Gary Taylor: Well, I think a few things. I guess, you know, as Art mentioned, you’ve got great reductions in the interim. The reality is those aren’t incredibly significant. I think you have, as the last panel talked a lot about, uncertainty. And uncertainty with respect to strategic planning. How are these exchanges going to play out? What are the payment rates going to be? Are we really going to see development of ACOs? Are we going to have to take risk? Should we buy docs to do that? So there’s uncertainty.

But probably the biggest challenge I think over the next four or five years is something that didn’t get mentioned in the last panel, and that is when you went through this whole health care reform legislation process and all the industry groups were lobbying about, you know, who was going to take rate cuts and who was going to get hit with taxes. The hospital lobby was effectively trying to defer some of these cuts and taxes onto other industries and felt they came out of it pretty well. But then suddenly realized when you looked at all the taxes and regulation that were going to impact the payers, the commercial payers, it kind of hit them, Uh-oh. Wait. You know. That’s our best customer. That’s our best payer.

So I think the downstream effects of impacting profitability of the commercial payers is going to be a big struggle for hospitals to maintain their commercial rates in light of the pressure the commercial insurance companies are going to be under.

Jeff Schaub: I would second that. I think the biggest possible negative hit is what happens with the ability to cost shift. Nobody makes money on Medicaid, and relatively few hospitals are making money on Medicare. And as a result, they look to commercial payers to fund their bottom lines.

And that’s important for capital renewal. It’s important to attract, you know, the right people, the top people. And that’s a big unknown because it depends on penetration of products in the exchanges. It depends on the effect of the regulations that will affect the health insurers.

But, I think right now the biggest hurdle is planning. There are so many things that are unknown. And the planning cycle at acute care providers is five years, 10 years they’re looking out and there’s a big black hole starting 2013, 2014 and extending through 2017. So capital decisions that need to be made now, organizational decisions, affiliation decisions that really need to be made now are being made with a certain amount of contingency. Very often when I meet with hospitals they’re talking about, you know, five, six, maybe even 20 different alternative views of the future and trying to quantify and make decisions among that entire array of possible outcomes.

Paul Ginsburg: Bob?

Robert Berenson: Just picking up a couple of the points and adding one or two others. I think hospitals do anticipate that as of 2014 there will be fewer uninsured plus bad debt. That’s a good thing. But they’re concerned about a shift of people from commercial products, which on average are paying hospitals about 130 percent of Medicare, to Medicaid or to Medicaid-like plans in the exchange, which was a part of the first panel’s discussion which may pay 70 to 80 percent on average. There’s huge variations on all of these. So more coverage but at a lower rate. It’s sort of a balancing act.

I think hospitals, again, as was eluded to, or more than eluded to, discussed in the first panel, having market power in many markets -- currently, we’re in the markets now with Health System Change doing site visits and finding still that hospitals are negotiating pretty good deals, but they all expect that to change and are doing some planning around that. Somehow, whether it’s through the medical loss ratio mechanism or whatever, they are expecting that insurers will get -- will have greater resolve to resist price increases. So I think they are more than I’ve seen in the past, doing a lot on the cost control side. Cutting back on their sort of wage burden.

One of the things that seems to be a side effect of the recession is that a lot of nurses have come back into the market and the pressure on wage increases is much -- has moderated dramatically. So that is actually helping in the hospitals’ spending side.

And then finally, looking at the alternative payment models, bundled payments, readmission penalties, things like that, hospitals are beginning to work on that and I guess some are concerned -- some say it is a real opportunity to reward them for doing the right thing. Others see it more as a threat and wonder whether their business model can remain intact if, in fact, fewer people need to go into the hospital.

And then finally, I think hospitals, much more than physicians, are glomming onto this ACO concept and I think we’ll talk about it I’m sure later. But part of the rationale for employing physicians is to be, you know, integrated and be able to become an ACO even if we don’t know what one is at this moment.

Gary Taylor: One more thing. I guess an even larger risk that I think a lot of hospitals and providers are worried about is the risk of what’s next. Because when you try to reconcile what we estimate to be the real cost of this health care reform bill, closer to $2 trillion, over a decade of full implementation versus $50 to $60 trillion of unfunded liabilities, Social Security and Medicare combined, and you look at history which shows every major expansion of coverage has underestimated the costs and within some period of time resulted in rate reductions, the concern is we get this in place and then how long is it before we really lose the political will to support the spending for it. And then you have to have either real issues to change the cost curve which the previous panel said don’t really exist, or you just have flat out rate reductions or you have some combination of those two.

Arthur Henderson: And I would say that the last panel talked about Reform 2.0 where you really get cost containment measures going into effect. You’re seeing a lot of the provider community look to merge together, consolidation occur, not only to get prepared for these alternative models but also to prepare for what could potentially be compression down the road in terms of reimbursement.

Paul Ginsburg: If I could look over the whole morning, the two panels, there seems to be fairly consistent thinking that hospitals are really concerned about the shift say out of commercial toward Medicaid-like plans and some more Medicaid, whereas the other panel just didn’t see the commercial plans as really having many tools to address the issue of provider leverage. And if you add it all up, maybe one of the implications is continued movement away from the traditional commercial market into more Medicaid-like plans on the exchanges. And, you know, it’s really kind of daunting to think about the ultimate resolution and how hospitals would be paid.

Often in our site visits increasingly we’re hearing about the distinctions between what we call the have and the have-not hospitals. The have hospitals being the ones that have leverage, the ones that have lots of privately insured patients; the have-nots being the ones that don’t. Any thoughts about how things are going to play out differently for these two types of hospitals once reform is implemented?

Jeff Schaub: I think there’s two key differences that we identify. And I cover the not-for-profit sector so perhaps we can have a few more of the have-nots in the not-for-profits than on the for-profit side. But we see a clear distinction between hospitals that have resources, hospitals that have scale, hospitals that have been thinking about this for 10 years, versus smaller, stand-alone community hospitals that don’t have the resources or the infrastructure to have begun thinking about this and planning for this 10 years ago.

It’s evident in the numbers. We follow a lot of numbers -- operating profitability, cash flow, liquidity, strength of the balance sheet, debt load. There is a clear differentiation between, you know, I’ll pick a number of hospitals that do over a billion or two in revenues a year versus hospitals that are under $500 million. It’s not to say we don’t have good performers at that lower size, but clearly the systems, especially the multistate systems, have begun planning and devoting resources toward the elements that underlie health care reform -- bending the cost curve, improving quality, being transparent. Very importantly, information technology, making sure that patient information, outcome information is available, and analyzable so that outcomes can be improved and costs can be reduced.

Given the strength that we see in hospitals that have resources and the effort and results that they’ve expanded and realized, even this early in the transition through reform, I think the gap between the lower rated credits and the higher rated credits is just going to accelerate. One thing that that will drive this is consolidation. We’ll see some hospital go out of business, but I think that probably more often than not we’ll see the independent hospitals affiliate or merge with larger entities.

One of the key things that we see is the ability to develop strategies, technology, infrastructure, culture, at a corporate level, and then roll that out across multiple locations. It’s an awful lot of overhead, and if you can spread that among 10, 15, 20, 80, 100 hospitals, then you’re doing it much more effectively than a single site, stand alone community hospital can do it.

Paul Ginsburg: Now, Jeff, you prefaced this by saying that as someone whose focus is on non-profit hospitals, you see both the haves and the have-nots. But there has been a recent trend in the for-profit world of acquisitions. Of hospitals that might have been considered have-not hospitals. They have operating profits and we’ve seen one in Detroit, one in Boston. I was wondering if Art or Gary could comment on that trend -- what they see as driving it and where to go.

Gary Taylor: Well, I agree. I certainly agree with Jeff. I mean, I think we’re in for another wave of provider consolidation, you know, such as we haven’t really seen since the early ‘90s in the U.S. As a matter of fact, probably for most of the last 15 years we have been unwinding that consolidation and now we’re kind of swinging back around again. And I think -- I think scale becomes increasingly important because I think under health care reform, having expertise to do medical group management is something that hospital systems are going to have to be able to have, and small providers don’t always have that have difficulty.

And then just some comments from the other panel. You know, one of my best friends says, the U.S. hospital system is the parasitic host for the global health care supply chain. And what he means is that it is so fragmented and there is no -- we exercise no downstream power over the supply chain and scale -- if you believe in a world where reimbursement is going to continue to get ratcheted down, scale is going to be increasingly important to exercise leveraging power over that supply chain.

I think the for-profit acquisition of non-profits is continuing partially because coming through the credit crisis we came through, access to capital for the non-profits that Jeff follows, has become more difficult with all the major bond insurers essentially, all the business with banks less willing to extend lines of credit, etcetera. So the for-profits tend to be the haves and then there are also large non-profit systems which are also the haves and probably both of those haves are going to continue to consolidate the have-nots, I think.

Arthur Henderson: I would just add to the fact that being in Nashville where I’m based, I think we’ve seen activity -- acquisition activity from all the major hospitals just increase recently substantially. So my sense is that, you know, consolidation -- and I know a lot of folks that are involved in policy are concerned that as you see more consolidation on the hospital side, that costs could conceivably go higher as those hospitals have the ability to leverage more with the payers. And that’s going to be something that I think as we move into the concept of ACOs -- and we’ll talk about it in a little bit -- but the concept of having these groups have significantly more power as a result of this consolidation. So it is on everyone’s mind. It’s something that you’re definitely going to see, and of course, with the capital market starting to free up a bit more, access to capital is getting a bit better so it presents some opportunity there as well.

Robert Berenson: And to just close the loop on this, if you’re a small, independent hospital surrounded by consolidating large systems that are able to get significant price increases from plans and plans turn around and the only place they can sort of hold the line is on you, you’re in trouble. And there has been some documentation recently. One study out of Rhode Island and some others about just the difference in prices from large multihospital systems compared to small independent hospitals. So it’s another -- the small independent hospital with mission doesn’t have the capital as you guys have talked about. But also doesn’t have any leverage.

Paul Ginsburg: Which actually brings up a final thing. Bob, clearly some of these small, independent hospitals will decide they have no choice but to seek a larger partner. The question is which of these small hospitals are attractive enough to a larger partner to be acquired, and which ones will just be left to fade away? That’s more a rhetorical question. It doesn’t need an answer.

I’d like you to discuss what role the recession or the credit crunch has played and what you see as the outlook for the rest of this year and next year?

Arthur Henderson: Well, I’d just make the observation that the investment community obviously has been very surprised I think to some extent by the weakness in volumes that we’ve seen that have come out of the recession. The panel before had correctly articulated that you have seen this trend historically. So to some extent I think the defensive nature of the health care sector has been a bit called into question. But certainly from an individual perspective as people think about their own financial wherewithal and deciding to have elective procedures or not, the people have definitely made the decision in many case to wait. And we’re seeing that in the surgery center -- the outpatient surgery center locations. Pretty much the only place you’ve seen some real resilience and volumes is in areas like dialysis where if you don’t go you’re effectively dead. So it provides an incentive.

But I would say that to some extent the volume question may be around -- I mean, people have signed up for high-deductible plans. They’ve made some different choices. So the volume weakness may be here to stay for a while. And then I think certainly in the interim it’s made a lot of physicians who own surgery centers and practices, maybe rethink that model looking for partners that may play into this whole idea of consolidation as we move forward.

Robert Berenson: In addition to elective surgery, what seems to be affected in recessions are deliveries, and subsequently, pediatrics. And I believe the data supports that this time around.

And this again -- is this a typical recession or is this even a more -- will this sustain itself with more continued unemployment and sort of a pessimism amongst the public could have its impact on elective activities like deciding how big a family you’re going to have.

Jeff Schaub: We understand that volume nationally is down when you add it all up but individually for individual hospitals and health care systems it’s a little schizophrenic. We have a lot -- we rate something like 300 hospitals and hospital systems. Maybe 500 total hospitals. And we have a fair number of them were inpatient volumes are actually up. And for many of them, outpatient volume is up. Now, some of it is a shift from inpatient to outpatient. Some of it is outpatient growth because of physician practice acquisition and ambulatory services development.

But even in cases where we do see the volume is down, we’ve seen hospitals react very effectively to flex staff, adjust staff, adjust their expense base to maintain operating profitability. So it is a little troubling when we do see declines of a couple of percent year over year. But it’s, you know, it happens just as often where we see stability on an inpatient -- plus outpatient basis. And most important for us, we see a continuation of pretty strong debt service coverage coming from operating cash flow.

Gary Taylor: Maybe I’ll provide a little context because maybe not everyone in the audience follows all these utilization metrics as closely as we do. But when you look at U.S. hospital admissions, last year may be grew one, one and a half percent, when all is said and done for 2010, we’ll probably be down one percent, maybe down one and a half. And I think on the outpatient side, outpatient visits maybe grew four or five percent last year, probably still will grow two or three percent this year. Some of the medical device companies made a lot of noise over the summer about a big slow down in knee replacements, for example. So their growth slowed from seven percent year over year growth to four percent year over year growth.

So Gail on the last panel mentioned that health care has been a source of employment growth. I think the other source was the government, she didn’t mention, but those are the two sources of employment growth over the last couple of years. So while there has been a slow down, U.S. hospital spending will probably grow five or six percent this year compared to some retail industries where the revenue line might have been down 30 percent plus industrial companies 30 percent plus over the last couple of years. So it’s a very small inflection we’ve seen and we do think it’s primarily cyclical, just driven by the economy.

Paul Ginsburg: Now let’s go forward to 2014, 2015, when reform is really implemented. And the question is, is there going to be a capacity crunch in hospitals to, you know, addressed the increased demand for more people having coverage? Or do you think it will not happen?

Arthur Henderson: In the emergency room, it’s going to be crunched. I mean, I think that’s a lesson from Massachusetts for sure where ER visits are up seven, you know, eight percent year over year. And there was kind of a theory where people that don’t have insurance default to the ERs as their source of primary care. But if you give them coverage either by expanding Medicaid or through the exchange, then they’ll now go to the physician and really, no, they just -- they just go to the ER more but they feel better about it because they don’t have to try to sneak out of there without paying.

So there is going to be a crush in the ER, I think, and that’s going to be a challenge to manage depending on how the plans get structured. Primary care could be absolutely crushed, particularly if a significant percentage of physicians don’t accept Medicaid, they don’t currently, so we put 16 million people in there, who is going to see these folks? They’re probably going to end up in the ER.

Arthur Henderson: I would just echo that. The emergency departments are extremely overworked already. You’re seeing a lot of trends towards outsourcing these services from hospitals as a way to bring in more staff. And I do think that, you know, primary care physician shortage is going to be become an even bigger problem as we move forward. And as a result, I think one of the things that you’re seeing today are more attempts by the hospital companies to try and get -- employ more physicians in the short of direct employment model. But certainly those particular areas will have to bear the brunt of the number of people that will begin to have the insurance. I mean, the hospitals certainly are going to be thankful for the idea that folks aren’t running out of the ER without paying, but the capacity to handle it I going to be something that needs to be addressed.

Paul Ginsburg: One thing I can add is that, you know, there has been pretty consistent research that rates of ER use are higher for insured people than for uninsured people. This shouldn’t be a surprise. So you don’t have to come up with some fairly sophisticated explanation to anticipated what both panelists have said, that there will be a crunch in the ER.

Jeff Schaub: Let me just paint the other side of that picture a little bit, and I’m not saying there won’t be a crunch. You know, there’s going to be some volume dislocations, I guess. But, you know, a few things mitigate I think concern over lack of access. First of all, for the last 10 years the industry has been going through a building boom. Capital has been cheap. The stuff that was put up right after World War II is worn out. Populations, desirable populations have left urban centers and facilities have relocated out to the suburbs where the decent pair mixes are. So there’s a lot of new capacity that’s out there.

There are also many, many systems investing very heavily in ambulatory centers, urgent centers. It’s not just the for-profit doc in a box. It’s large health care systems setting up dozens and dozens satellite clinics around their service area.

And I guess the third thing is that the industry has Massachusetts to look to. So this should not be a surprise to them when they get a lot more people knocking on their doors wherever they might be.

Robert Berenson: And so then to sort of again close the loop, I agree with that completely. Hospitals in the last decade have renovated all their EDs. They now have observation units often in the emergency department. They’ve expanded capacity. And for various reasons there’s going to be a shortage of functioning primary care physicians. And interesting, while there’s all this talk about patient-centered medical homes and good demos going on, sort of the trend in private practice amongst primary care physicians is to not be available at night, to expect patients after dark will go to the emergency department. So there will be access but the hope for access outside of a hospital setting may not happen, although I agree the hospitals are putting up alternatives, like urgent centers.

We do -- we will have a shortage of primary care physicians. We’re in the field now as Paul mentioned earlier doing interviews with hospitals. And when I ask hospitals what the major impact of health reform is going to be, invariably within the first one or two responses is a problem of primary care physician work force. I mean, they are defining that and probably able to actually handle the problem but it’s going to be handled in a pretty inefficient way.

Paul Ginsburg: And this would be a good time to jump ahead to hospital employment of physicians. And let me begin the discussion by saying -- asking what is different today between hospital employment of physicians compared to the last wave, which was in the early 1990s? So, you know, motivation, management?

Gary Taylor: I think there’s a few things that are different. When we last saw the real wave of acquisition and employment of physicians late ‘80s, early ‘90s, it was almost an entirely defensive response by hospitals because you saw the health insurance industry consolidating. You saw new health plan options and tighter provider networks. And you saw the insurance companies out acquiring physician practices. So the hospital industry was afraid they were going to lose control over that so they were out buying physician practices. They didn’t have expertise in medical group management. They just had to do it.

And then secondly, they got into risk arrangements which I think Christine on the last panel talked about how poorly that went. If you don’t have actuarial expertise and you’re not an insurance company, you better be careful if you take risk. So what I think is driving it this time around is also some defensive behavior for sure. It’s a low-volume environment. Hospitals are trying to put their arms around their referral sources, but I also think increasingly there’s more interest in physicians being employed because of the complexity and the administrative burden of running a practice -- the fact that their inflation-adjusted incomes are flat over the last decade plus, etcetera. And also physicians have a lot of uncertainty about reform and they’re afraid of it and they’re afraid of what’s going to happen to their Medicare rates.

So all that said, I’m still nervous about hospitals buying physician groups because it is outside their core business. It is a different model. And hopefully, they’ve learned their lessons. I think the biggest one lesson that we think is being done differently this time around is that all these employment arrangements have some sort of productivity clause in them. So you don’t just get bought out and then you get to, you know, play golf at two o’clock. You can’t tee off until four or whatever. (Laughter.)

So there’s going to be physicians here that are going to be mad at me for saying that, but so I think there’s different things driving it. I think we’re a little bit better positioned to do that but I don’t know if any of the analysts will say they are entirely comfortable that this is a trend that we’re now engaged in.

Paul Ginsburg: Actually, Gary, before I go to the other analysts, can you comment more about what’s the hospital motivation today? You mentioned the distinction between the motivation before but what would you say is really motivating them today to do this?

Gary Taylor: I think the primary motivation is patient volumes have slowed and so hospitals now want to lock in those referral sources. If inpatient admissions were growing five percent a year right now, I don’t think hospitals would be buying any physician practices. Now, some of the more forward-thinking ones are going to think down the line toward ACOs and getting into an integrated system that eventually could take risk and benefit from that, but I think it’s primarily the fact that utilization has slowed and they’re trying to -- it’s kind of a competitive tactic to keep the docs referring here as opposed to sending the business somewhere else.

Jeff Schaub: You know, also control. The focus on trimming costs and standardizing the practice of medicine has intensified but it’s been around for a long time. And hospitals always tell us that it’s a lot easier to motivate behavior among your medical staff when you’re signing their paycheck. And that’s driven an awful lot of physician hires.

You also see independent staff not wanting to come into the hospital, and to have staff in-house, hospitalists, intensitivists, that can provide coverage, do rounds, and keep, you know, a primary care physician from having to run over to the hospital at seven o’clock in the morning five days a week, pretty attractive. You know, it cements or helps to cement the relationship between voluntary staff and the hospital provider.

I think the key difference though is that hospitals are being smart about making these hires and acquiring these practices. The key difference is productivity-based contracting. I think back in the last decade you had a lot of money being spent to purchase practices and put physicians on salary without an awful lot of attention being paid to whether or not those new physicians and those newly acquired practices were actually beneficial to the hospital’s operating line. That’s all changed and I think that the idea of the defensiveness that went into the acquisitions is gone. You know, to some extent I think that there is -- there’s less reluctance to terminate lower performing employed physicians than there have been. So that reduced defensiveness I think eases the ability to manage the effectiveness of the employed medical staff.

Paul Ginsburg: Bob?

Robert Berenson: Let me approach this from the point of view of physicians. The last time, you know, the peak was I guess around 15 years ago. It was, I think, well established, primary care practices that suddenly were approached -- they weren’t approaching for the most part -- approached with an opportunity to cash out at a pretty nice figure. And then become an employee and go play golf at two o’clock. And so that’s what the motivation was. I think the hospitals thought in a world of accountable health plans which was the terminology of the Clinton Health Reform that they needed lives and so they were requiring primary care physicians to have capitated lives.

Now I think what’s happening in the physician community is very different from that. It’s much more proactive rather than being approached by the hospital. Younger physicians, and this is I think in surveys as well as what we’re hearing in the field, are much more interested in shift work of regularity, of stability, are not interested in the old model of independent practice. And so very few graduate residents want to go into independent practice. And in many communities who is hiring? Hospitals are hiring. If there were multispecialty group practices, they would go there. Permanente can now pick -- have their choice of who to pick. You know, they have 10 applicants for every slot. So in many communities the hospital is hiring so that’s the place where physicians are attracted to. Whether they are skeptical about electronic health records or not, physicians sort of recognize the inevitability of needing to do it and don’t have the capital. And so you let somebody else provide the capital for you, who is your hospital.

Increasingly, as we’ve talked about earlier, if you’re -- this is as true or more true on physicians as it is in hospitals. If you are in a one- or two-person practice, in many communities you are getting the fee schedule. You are a price taker. The health plan is saying here it is and it may be at Medicare or in Miami --eighty percent of Medicare. If you are organized in some cases in a large independent practice you have leverage, but increasingly physicians understand that they can attach themselves to hospitals and get paid more. Hospitals in a number of communities that we have visited are -- the entry salaries for physicians who are employed by the hospital is significantly more than the entry salary to an independent practice. And the hospital is able to leverage with the physicians to get higher payment rates.

And I should point there are still some states that have corporate practice of medicine laws that make direct employment more difficult and there are ways around that. In some places it can be malpractice with the hospital becoming an attractive place to get coverage. So there are a lot of these things.

One more factor I would add on the hospital side. Some hospitals got into this employment business and to just make this explicit, it’s both primary care doctors but now lots more specialists as well, as opposed to the last time. They got into it because of their EMTALA [Emergency Medical Treatment and Labor Act] obligations and needing -- what evolved was a lot of physicians, especially physicians doing trauma calls asking for $2,000 or $2,500 a night for being on-call. Some hospitals figured we’re actually better off employing that physician than sort of just paying for each time the doc’s on call.

So there’s a lot of things moving in that direction. And I agree completely with what you’ve heard. All of the hospitals are now -- the lesson they’ve learned is don’t just put docs on salary. They’re all using productivity metrics for those aficionados of the RBRVS [resource-based relative-value scale] system. They’re using work RVUs [relative value units] as the basis for determining productivity. To the extent that RVUs are distorted, then that will just distort the assessment of productivity. But that’s what’s out there and that’s what the hospitals are using. In our fee-for-service world it makes a lot of sense.

Paul Ginsburg: Good. Actually, there is one other thing that Bob and I have noticed on site visits is the degree to which -- whereas there was a trend of specialty physicians setting up their own freestanding facilities, now in cardiology and in some other specialties there’s a strong movement back to the hospital, partly because the freestanding facilities haven’t been doing that well. But partly because much higher payments in a hospital-owned facility than a physician-owned facility. And I don’t know if any of the analysts have -- if it’s gotten to their radar screen, this acquisition of specialty practices?

Robert Berenson: Particularly cardiology.

Jeff Schaub: Well, I think that -- I saw that, I guess, two years ago as a function of rates for cardiology services. All of a sudden the cardiologists weren’t realizing their business plans and in a lot of cases we’re looking for somebody to bail them out. Haven’t heard much about that recently though.

Paul Ginsburg: Okay.

Gary Taylor: Well, of course, you know, the health care reform bill did finally, permanently stab the physician-ownership model in the heart by eliminating the whole hospital exemption unless you grandfather in all the existing facilities. But on a forward basis, that financial structure that we saw were specialty physicians could go out, raise money, build a hospital themselves, and have ownership of it. We’re not going to -- it’ll be illegal in the future to do that. So that seemed to have sapped a little bit of the life out of even some of the existing facilities that presumably could continue to operate as grandfathered status.

Paul Ginsburg: That’s interesting. Let me just move on to accountable care organizations since we’ve been talking about that so much. How vigorously do you see hospitals pursuing this? And you know, will this be a big deal? How are hospitals thinking in terms of that?

Arthur Henderson: I would say that there’s a lot of questions about how the accountable care organizations are going to work and think in the hospital provider mentality right now is that it might be worthwhile acquiring capabilities in different sorts of areas and then figuring it out as we move forward. So, you know, to some extent the questions about how it’s going to work out -- I know on October 5th there’s going to be a meeting in Baltimore between the FTC and CMS and providers with respect to the -- the information gathering session with respect to ACOs. But, the idea of having the capabilities and the scale in order to able to adjust things going forward seems to be what providers and hospitals are thinking about at the moment and that is that rules get formulated and the opportunity emerges, looking at how they might be able to adapt to it. But the question ends up becoming can you get everybody to kind of work together in an idea -- with the goal of being able to reduce costs enough that you save -- that the savings that you get, you get to participate in that upside. And that’s proven to be challenging in some of the examples that we have seen with the Medicare Health Support Pilot Project and things where you try to coordinate care and extract some savings. So, you know, it’s a difficult thing to know but it certainly, as you move forward towards the alternative approaches to reimbursement, I don’t think you can sit on your hands right now and hope that it all works out. I think you’ve got to kind of build capabilities across integrated service models so that when you can pull them together you can make some sense out of it.

Jeff Schaub: We see a real mix. It’s like the four stages of grief. What is it? Anger, denial, bargaining, and acceptance. Right? (Laughter.)

I think that in the industry, the jury is out on whether this ACO concept is going to have legs or not. That’s not to say that the kind of behaviors and structures and cultures that are supposed to be going in ACOs are being ignored. They’re certainly not. The best performing systems, the integrated delivery systems have been figuring out ways to improve quality, distribute information, and share the benefits of good outcomes and good cost control among, you know, all the providers that are involved.

There’s certainly more energy and attention being paid right now towards the legal structures that might facilitate the implementation of an ACO, and we have some very impressive, you know, systems that are doing quite well, have a very well thought out, articulated strategy for building out this ACO concept.

What’s kind of puzzling to me is that there’s an awful lot being written about ACOs and a lot of consulting work being done about investigating ACO development. But I don’t see a huge upside at this point, and I don’t see any downside. So, and by that I mean I don’t see a lot of risk to an ACO to not meet those savings goals. Nothing is going to be taken away. If there is a benefit beyond the baseline spend for an ACO, they’ll get part of that but I don’t see the providers being at-risk for providing Medicare services, you know, to a greater degree than whatever the baseline spend is set to be.

There will be organizations that have insurance capabilities that are positioned to accept a significant amount of risk. Maybe that’s part of Health Care Reform 2.0. But it’s unclear. And I think that uncertainty is the source of a certain amount of reservation about putting the label ACO on various parts of an organization.

But they are thinking about it. At the lower end, the standalones, the jury is still out. We have a lot of, you know, 100-bed hospitals that have 60 percent market share. They may be the only game in town that have a completely voluntary medical staff that are paying attention to quality and cost and, you know, recruiting docs and building service lines and things like that. But they’re very far away from signing their names to create an ACO.

They’re taking phone calls from larger systems that perhaps want to have them part of their ACO without becoming a formal part of the organization, and we have hospitals whose strategy centers around that. They want to be the best component of a more global ACO that’s sponsored by somebody else. So there’s a great variety in response and levels of preparedness for developing these organizations.

Paul Ginsburg: Actually, let me just pose a devil’s advocate question. You know, I could see why ACOs might be attractive to a large ---- an IPA because there’s this opportunity to reduce hospital use and be rewarded for it. But what’s the motivation for a hospital because the rewards from the ACO are likely to not measure up to the loss of volume from more efficient delivery. Is there any response to that?

Robert Berenson: I think that’s why I was going to say from a policy point of view it may be that the share -- the ACA, the Affordable Care Act, actually has a Section 3022 that’s not called accountable care organizations, it’s called the shared savings model and that is the one in which there is no downside, so this some have called this the lottery. Why not participate if by luck or by creative coding you might be able to get a bonus? That is the concern from policymakers. When I say an overreaction, I think there was a lesson from the 1900s that global capitation with hospitals as risk takers did not work out very well. Hospitals got out of it long before a lot of the physician groups. They got out of their risk taking arrangements. There are some still in Medicare Advantage arrangements where in a few cases hospitals still take risk but for the most part they don’t. From the beneficiary side if we’re talking in the Medicare context, the lesson was that people don’t want to be locked in. They want to have their freedom of choice so now we’ve developed a model, the Shared Savings Model, that has no requirements on beneficiaries to alter their -- their prerogatives are not affected at all. They have full freedom of choice and indeed in the model that’s specified in the legislation, beneficiaries don’t even know they’ve been assigned to an ACO. It’s felt that they don’t need to know because they still have freedom of choice. Some of us disagree with that judgment.

On the payment side you get an upside if you pass a threshold of savings against the target. There is no downside. At least the physician group practice sites that -- there were 10 sites that were in a demonstration and a lot of those folks even though they’re -- some of them are relatively positive about their experience, they say in a fee for service world if you’re maintenance fee for service you’re really not changing incentives very much and so we had a lot of difficulty engaging the physicians and other parts of our delivery system. In direct response it’s not clear what does change here. The hospital says I get 100 percent of the revenue today for a marginal admission or I get potentially some percentage of a savings 2 years from now after my budget is analyzed. It’s the unusual hospital that’s going to say I think we’ll put some systems in to reduce that admission. It seems to me the shared savings model which doesn’t have any downside risk at all is more appropriate for a physician organization because they can try to deflect people from the hospital. I think if we want hospital organizations in this we have to have some kind of risk and some of us use the term partial capitation, which means risk with corridors to protect against really bad luck.

This is one amongst many where the devil is in the details. If we have the shared savings payment model I’m not sure it’s going to get us very far and the legislation does have the opportunity for CMS to test other payment models. The question is whether CMS will go there or whether they will deal just with the shared savings model that’s defined in the legislation.

Paul Ginsburg: I almost wonder if this is the thing in the hospital administration culture. There’s this new thing. Of course we have a committee to study it.

Gary Taylor: There is so much left to be written in the regs. It’s hard to say how it’s going to play out. But it’s pretty hard also to envision that we perpetuate the existing fee for service model again when you look at the unfunded liabilities in the Medicare program, you look at the spending. I would suggest probably something bigger and more comprehensive than ACOs. It’s probably somewhere in our future but people have been predicting that for 30 or 40 years also.

Jeff Schaub: One of the things that may drive it, it depends on what happens with the insurance sector. If the economic model of providing health insurance changes so dramatically that insurers and providers have to come up with another idea you could see a lot more selective contracting. If you have an ACO that demonstrates superior results or at least satisfactory results at a significantly lower cost and the only way to attain that is by becoming a integrated delivery system then insurers could prefer that system especially in densely populated suburban or urban areas over signing every provider up in a market. Consumers may opt to go with that limitation of choices if their out of pocket costs are clearly different than the contemporary model and the current model.

Robert Berenson: With the caveat which came up in the first panel that an ACO is in a better position to exert market power on prices and we need some kind of solution to that issue. A lot of employers and health plans are very nervous about that aggregation of power, especially around a hospital in a community. So where Medicare gets to set a rate and if they essentially sanction an organization that they’d say you’re clinically integrated, you’re essentially able to be an ACO for us in Medicare, that same organization -- it will be very hard for the FTC then to go to that organization and say, no, you can’t negotiate with private insurers and essentially you are -- so we as part of our interviews at Health System Change we talked to some wonderful integrated delivery systems who negotiate 200 to 250 percent of Medicare even when they’re taking risk. The FTC’s got a provision that if you’re taking risk we permit you to do a lot more than if you’re not taking risk, but even so -- you could be fully capitated and still be able to exert market power. So that is really a very important policy problem, conundrum, that we’re going to have to deal with to make progress in this area.

Paul Ginsburg: This would be a good time to broaden the discussion out to hospital leverage with insurers -- your sense of what the trend has been. Do you perceive hospital leverage is growing, and then I’d ask you about the future, in a sense do people that run hospitals see this changing and what mechanism do they have in mind if they do see it changing?

Arthur Henderson: I would say that the providers are certainly wanting to get the leverage if they don’t have it, and again this gets back to the idea of consolidation, or trying to integrate delivery systems and do things that will allow them that ability when they sit down to negotiate rates every year to at least have some leg to stand on. But I think it’s pretty clear that as we move forward it’s going to be much more difficult for hospital providers to be able to negotiate the kind of rate increases that we’ve seen over the past few years. In the mean time, I think you’re seeing those hospitals look to control costs, expense management, things that they can work on internally to try and build their capabilities, but in terms of just having enough physicians, the recruitment, to drive volume, to drive scale it’s all about the local market and whether they’ll have the ability to maintain the kind of share that will enable them to have the upper hand or at least to have some ground with those payer groups when they sit down at the table every year.

Gary Taylor: I would say probably for most of the last 15 years we’ve seen the pricing pendulum swinging away from the insurance industry toward providers and I think the single most important factor behind that is benefit plan design. So as we’ve moved away from HMOs and staff model HMOs and tighter networks to a very -- in a very robust economy for a lot of that period -- very wide open panels, providers just figured out why the heck do I discount my rate if you can’t give me any volume in return, and in exchange the insurance industry turned into pass-through players where if the rates were this then they passed it on to the employers and the employers weren’t squawking that much so on and on and on we go. I do think providers are really concerned that the elements in the health care reform bill as I started out with that are going to impact the health insurance industry whether it’s the MLRs which are effectively regulating the profitability of health plans and the new provisions on coverage, et cetera, I think providers are very worried that’s going to spark a new wave of consolidation of health insurers and that could be something that at the margin, depending on market by market, could impact leverage. But the biggest fear by far is when benefit plan design swings 180 again. So when do employers wake up and say I’m sick of this and I’m not going to pass on any more costs to my employees, I’m not going to pay a 10 percent rate increase? Here’s what we’re going to do? We’re not going to have three health plans. We’re going to have one. And there are 10 hospitals in town and only three are going to be in the plan and if my employees don’t like it, too bad, and that’s going to be the plan, and health insurance company I empower you to go drop the hammer on the hospitals and the physicians and everyone that’s been raising rates. That could be an environment that physicians and hospitals would be very worried about and I don’t think we’re quite there yet, but I think a lot of providers are worried that the health care reform bill is going to push us in that direction and the longer that we stay in this recession or depression or whatever we’ve calling this, the more likely it is that employers are going to adopt that attitude. So I’d say plan design is the biggest factor that could swing this back the other way.

Paul Ginsburg: Before I ask the next question, this would be a good time for people if they have questions on their cards to pass them to the aisles where they’ll be collected. The next question is about additional hospital strategies. We’ve talked on and off over the years about service lines being expanded, service lines being cut back and I think someone on this panel mentioned earlier about satellite facilities in the suburbs. What’s your sense of the major strategies that hospitals are pursuing and how is it different now than it might have been a couple of years ago?

Arthur Henderson: I’d say my observations are they’re expanding capabilities in the ER, expanding capabilities in cardiology and these are the hospitals themselves, expanding ortho, deemphasizing OB-GYN kinds of services, closing rehab units. That seems to be trying to move more dollars to very high-end specialties where you can make more money. And then of course getting out of the areas where you’re more at risk from medical mal perspective.

Robert Berenson: I want to ask you guys who follow this closely what’s the phenomenon of free-standing emergency departments. It’s an emergency department which has full capabilities to deal with an emergency but no hospital beds. And it’s an opportunity to enter somebody else’s geographic turf without putting up a full hospital and maybe getting a referral source back to the parent. What’s going on with that particular innovation? Does anybody want to comment on that?

Jeff Schaub: Nobody is bragging about their failures in doing that to us. I would say that out of 300 hospitals we probably have a dozen or so that have had good results and particularly in a non-CON state used that initial investment to create a beachhead and expand their service area. It’s helping the numbers especially for getting more complex cases back to the mother ship. But again we’re really not seeing the downside, the situations that don’t work out.

Gary Taylor: I’d say on new services we conduct an annual survey. We ask a lot of questions about capital spending and new services and services exited. Paul, I think you’ve seen our survey we’ve done before. I wouldn’t say there’s been a lot of radical change. Art mentioned cardiology and orthopedics. It’s a big commercial pay area, it’s a big revenue procedure area so hospitals are always investing and trying to work on that. The only thing that really strikes me as new, bariatric surgery is a new phenomenon that’s also a very well-paid commercial procedure. You just don’t do a lot of them, but that’s been an area.

Then I’d say in the last 5 years radiation therapy has also been a really hot area, no pun intended, just because there have been some reimbursement cuts on the outpatient side so we’re seen a little more activity in the inpatient side but also you’ve had a product development cycle that unlike a lot of product development cycles in radiology for example where going to the next CT and the next test or MRI machine doesn’t drive incremental reimbursement, the product development cycle we saw in radiation does drive incremental reimbursement when you to from fixed beam to IMRT to IGRT, et cetera.

As we went through this little slowdown in CPAX last few years with liquidity and capital being an issue, even radiation seems to have slowed a little bit. I’m not aware of any significant new service lines that hospitals seem to be going after as game changers.

Arthur Henderson: Overall I would say the strategy that most hospitals if they can are pursing is to grow their market footprint and cement their position in the community as a way of creating their critical mass and momentum in a market as these changes come to bear. Probably to a lesser extent but maybe more interesting for the topics of this panel we have seen a pretty good uptick in hospitals dabbling in accountable care, agreeing to take on a particular company’s employees for a particular service line like all of Boeings’ hearts for example or Dart Hitch taking full risk for all of its employees and Dartmouth College’s employees to try and figure out how to make an integrated delivery system into an accountable care organization and accept a limited amount of risk, like I said, work out the kinks in a somewhat controlled experiment.

I think that what’s driving though some of the conservatism in the market especially compared to 4 or 5 years ago is the economy and the uncertainty. Folks are keeping their powder dry. They’re trying to make as much money as they can and put as much of it in the bank as they can in anticipation of some possible dislocations to come.

Paul Ginsburg: I’m going to start on the questions from the audience. I have one from Steve Trainer who wanted to ask the question himself, so if he could come up and while he’s coming up I’ll ask another question.

Steve Trainer: I’m Steve Trainer. I’m with the R.S. Trainer Company and we’re a real estate health care services company. I’d like to direct my question to Art. The numbers are not in from the 2010 census yet, but according to the 2000 census there are 77 million Baby Boomers. Two million of them have already passed on, but that’s been made up by about 5 million immigrants in that same age group. The oldest Baby Boomers are in their 60s. I think the oldest would be 64. The question is what is the impact of the Baby Boom generation on health care systems?

Arthur Henderson: That’s a huge problem and a huge opportunity and I will tell you my observations, that as we move forward I think an area of considerable opportunity is in home health and hospice and in handling this population that for the most part consumes an inordinate amount of resources. As we think about expenditures ahead in dealing with that bolus of folks coming through, the settings that can be best managed at the lowest possible costs are going to increasingly be levered more than ever. I ask this question when I go out and talk to folks who would maybe be a bit skeptical of home nursing care. I say if you had the opportunity to get care management or disease management services in your home as opposed to being in an institutionalized setting, wouldn’t you do it? Wouldn’t you want it for yourself and for others around you? The response is categorically yes but the concept I think right now is growing but it’s going to be an increasingly more important part of the delivery system, getting people out of these expensive settings and getting them in their home and getting them into places where they can be managed effectively and in an environment that they want to be in that cuts costs dramatically.

You’re seeing quite a bit of activity and acquisition activity in the hospice area but I think it’s going to move downstream to care that is less acute in nature, and anything that can be done where you don’t have to have necessarily existing capacity beyond having nurses going into the home and these are qualified registered nurses caring for people, costing $40 to $50 a day as opposed to $350 to $500 in a killed nursing facility or $1,000 to however much more in an inpatient setting just almost seems impossible to ignore and take advantage of as we move forward.

Paul Ginsburg: I’ve done a lot work in this area and want to get a perspective out. I think that the trend that Art mentions, it’s quite possible that that would have been pursued without a baby boom just given where we are. When you look at the numbers about people’s use of acute health services by age, you find that there is a real discontinuity in the mid-50s. That’s when people start really using more services. My first instinct was whatever the impact of the baby boom, we’ve been feeling it for the last 10 years. The other point I’d make is that when you just look at the numbers, the aging of the population in the United States over the next 20 to 30 years probably has an effect of about four-tenths of a percentage point per year. It’s not trivial but it’s not huge either. In a sense I think a lot of the innovations, the baby boom aging will have additional motivation to pursue some of the innovations that Art was talking about but that I think the most profound impact for the Baby Boom generation is going to be U.S. federal budget impact because of this stark shift from buying their insurance through their employer or themselves to the Medicare trust funds paying for their care.

Arthur Henderson: One thing that I wanted to also mention which I think is an interesting thing to think about and I would pose it to anyone on this panel is that there is the concern down the road that employers offload their employees into these insurance exchanges and then ultimately you start to see care get rationed. That’s the word that in the course of getting this reform bill passed that nobody wanted to talk about but inevitably it seems like that’s where we’ll end up going. There appears to be the development of this concierge medicine where if you can afford to have a private network of providers that are overseeing your care and you can afford to do it, people are starting to sign up for that and we’re starting to see some trends in that direction which will obviously be the kind of care that is fee for service the way we know it today and then there’s everyone else and everyone else has to stand in line and everyone else has to wait. I would say that that in my opinion coincides with this whole theory of the collapse of the middle class and the differentiations between those that have and those that have not that creates this almost separate private exclusive area of care that people who can afford to get into it will get into it and everyone else.

To me it looks like something that appears to be emerging here as a substitute for folks who are very worried about where this is going to go and certainly the kind of care that you would get in these private networks would be very comprehensive and very coordinated in terms of the way that people ideally look at that issue, just as an observation.

Gary Taylor: I wanted to come back to Medicare for a second because the question is so juicy so I couldn’t resist. I couldn’t agree with what Paul said more about the impact on our budgets. The math doesn’t work. It just doesn’t work. It doesn’t come close to working. When Medicare was created in 1965, 18 million people were beneficiaries, the gentleman quoted 70 million, I’m not sure what time period eventually come in who are Baby Boomers, we’re 50 million today. In 1965 the U.S. life expectance was 67 years old so this was created for 10 percent of the population for a couple years of coverage and now the average life expectance in the U.S. is 80 or somewhere in the 80s and it’s become a substantial and lengthy entitlement program. I know I’ve mentioned the unfunded liabilities probably now three times. It’s a big issue. I just saw a stat the other day that said the average person who starts Medicare today, you pay FICA tax revenues in over the life of your working career, has paid in less than $10,000 who’s starting on Medicare today. You’re going to blow through that in one admission in a heartbeat. So when you try to look at the budget consequences of what these folks are going to mean, it makes subprime look like a cake walk I think.

Robert Berenson: Let me very quickly as the person in the vanguard of the Baby Boomers, I’m born in 1946 so I’m the first year. I want to support what Art said. Baby Boomers are going to be much more demanding in terms of having controls just as they’ve spent their full years since the Vietnam War wanting control over their lives and are going to be really demanding these kinds of alternatives that keep them in their homes. I think the technology that’s developing for monitoring people in their home, for visual contact that we’ll be able to do will really change delivery and I think this will largely be in a Medicare environment. I hope save money, but we’re going to see a lot of developments in this area.

Paul Ginsburg: Our time is running out and I need to apologize to the other people who handed in questions because we only got through one. I did want to give the panelists, anyone who wants to have a final remark on the stuff we’ve discussed or haven’t discussed on the panel.

Arthur Henderson: I would say that the situation that we’re in breeds a lot of opportunity so there are challenges, but I do think that there will be innovation. We’re starting to see it. It’s coming. There will be a lot of activity. Certainly people need health care and they’re going to use the system as much as they can. So some dynamics have definitely set the stage for lots of these kinds of discussions.

Jeff Schaub: Despite the uncertainly that we talk about and the rating concerns that we have and the somewhat dire scenarios that we envision at 4 o’clock in the morning with regard to our bond ratings, I do want to underscore that we do see a lot of stability in the sector both for profit and not for profit. We need hospitals and given that and given the history of that and all the implications therein, we I think derive some of that stability from recognition that the industry can change its future. It can modify the regulations and legislations that are in place and if things get so bad that the viability of both for profits and not for profits is indeed threatened that the pendulum will come back because of the political capital that the sector has. We envision gloom and doom, but know that there are certainly a lot of checks and balances that will be at play over the next 5 to 7 years as this stuff gets implemented.

Gary Taylor: The one thing I would add is an attempt to bring a little context to this audience that may not be aware of this. When this bill passed in April or late March or whenever, with the exception of health care IT which is going to benefit from hundreds of billions of dollars of direct federal stimulus spending, every sector of health care from a stock perspective has been absolutely pummeled. So universally the street reaction to hospitals, other providers, device companies, pharma companies since this legislation passed has been dramatically negative. Most health care sectors on an equity valuation are 20-year low valuations. I don’t have a conclusion from that but I wanted to offer that to an audience that maybe isn’t sitting there looking at what the stocks are doing every day.

Arthur Henderson: It’s a good time to buy.

Paul Ginsburg: This panel has done a terrific job and I want to thank them. I also want to thank the HSC Public Affairs staff and administrative staff for arranging this conference and thank the Robert Wood Johnson Foundation for providing the funding.

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Participant Biographies


Christine Arnold - Managing Director, Cowen and Company, LLC

Christine Arnold is a managing director at Cowen & Co., LLC, where she covers the managed care and hospital industries. Previously, Arnold was a managing director at Morgan Stanley, where she started in 1999 as the senior managed care research analyst. Arnold has spent 17 years in investment research and has specialized in managed care and the hospital industry for the past 13 years. Before joining Morgan Stanley, she worked in research at Goldman Sachs; Furman Selz; Montgomery Securities; and in corporate finance at Burns Fry, a Canadian investment bank. She has ranked highly in a variety of polls, including Greenwich Associates and Forbes. Arnold earned her bachelor’s degree with a concentration in finance from Georgetown University.

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

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

Charles Boorady, M.B.A. - Managing Director, Credit Suisse

Charles Boorady is a managing director with Credit Suisse Investment Research, where he co-heads the health care research team and is the senior publishing analyst on the health benefits/managed care sector. Boorady has more than 16 years of health care investment research experience on Wall Street. Previously, he was the sector head of health care equity research at Citi and held research positions at Goldman Sachs and other investment firms, where his coverage also included health care distribution, health care information technology, pharmacy benefit managers and other health care companies. Boorady ranks among the top analysts in his field. Institutional Investor magazine has ranked Boorady in the top three annually for the last eight years and runner-up or above since 1999. Forbes ranked him among the “Dazzling Dozen” stock analysts in the U.S. based on his combined stock picks and earnings forecasts for the three years ending December 2007. Forbes/StarMine ranked Boorady number one among all analysts and all sectors in the U.S. in 2006 for his precision in estimating company earnings. He also ranked No. 1 for estimating earnings and stock picking in the health care providers and services sector. Boorady received a bachelor’s degree in engineering from Cornell University and an M.B.A. with concentrations in analytic finance and statistics from the University of Chicago, Booth School of Business.

Matthew Borsch, C.F.A. - Vice President, Goldman Sachs

Matthew Borsch is a vice president and senior investment research analyst at Goldman Sachs, covering the managed care and health care provider sectors. Before joining Goldman Sachs in February 2001, Borsch was an executive in the managed care industry for six years with Physicians Health Services, a health insurance company, and Telesis Medical Management, a physician management company. Previously, he spent seven years as a management consultant with Accenture. Borsch is also an adjunct professor at Columbia University, where he has taught graduate-level courses on the managed care industry since 1997. Borsch is a chartered financial analyst. He received two master’s degrees from Columbia University in 1994, an M.B.A. and M.P.H., and a joint B.A./B.S. in economics and mathematical sciences from The Johns Hopkins University in 1986. Borsch is ranked among the top three research analysts covering the health insurance and managed care sector under the 2007 and 2008 Greenwich Associates investor polls and runner-up under the 2008 and 2009 Institutional Investor magazine survey.

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

Paul Ginsburg, a nationally known economist and health policy expert, is president of HSC, a nonpartisan policy research organization in Washington, D.C., funded in part by the Robert Wood Johnson Foundation. Ginsburg is a noted speaker and commentator on changes taking place in the health care system. His recent research topics have included cost trends and drivers, Medicare physician and hospital payment policy, consumer-directed health care, the future of employer-based health insurance, and competition in health care. Ginsburg has been named to Modern Healthcare’s 100 Most Powerful in Health Care seven times, landing at No. 10 this year. He received the first annual Health Services Research Impact Award from AcademyHealth, the professional association for health policy researchers and analysts. He is a founding member of the National Academy of Social Insurance, a public trustee of the American Academy of Ophthalmology and served two elected terms on the board of AcademyHealth. Before founding HSC, Ginsburg was the executive director of the Physician Payment Review Commission (PPRC), created by Congress to provide nonpartisan advice about Medicare and Medicaid payment issues. Under his leadership, the PPRC developed the Medicare physician payment reform proposal that was enacted by Congress in 1989. Ginsburg previously worked for the RAND Corp. and the Congressional Budget Office. He earned his doctorate in economics from Harvard University.

Arthur I. Henderson, M.B.A. - Managing Director, Jefferies & Company

Arthur Henderson is a managing director at Jefferies & Company, where he covers the health care services sector. Henderson, who has followed the health care services sector for more than a decade, was named the No. 2 stock picker for the health care providers and services sector in the 2009 Financial Times/StarMine annual ranking and was selected as one of The Wall Street Journal’s “Best on the Street” health care services analysts in 2005. Prior to joining Jefferies in 2000, Henderson was an investment banker in the real estate and health care corporate finance groups at Prudential Securities, Inc., in the corporate finance group at Dillon, Read & Company, Inc., and in the mergers and acquisitions group at Merrill Lynch & Company, Inc. Henderson received an M.B.A. from the Tuck School at Dartmouth College and a bachelor’s degree, with distinction, from Middlebury College.

Jeff Schaub, M.B.A. - Senior Director, Fitch Ratings

Jeff Schaub is a managing director in Fitch Ratings’ public finance department, where he heads Fitch’s nonprofit health care ratings group. Based in New York, he is responsible for acute care, long-term care and senior living sectors, with analysts located in New York, Chicago and San Francisco. Since joining Fitch in 1993, Schaub has also had responsibility for various operational aspects of the department, including budgeting, surveillance and compliance, analytical and operational systems development, pricing, electronic product support and training. Prior to Fitch, Schaub was a manager in Coopers & Lybrand’s New York consulting group, performing health care financial feasibility studies throughout the greater New York area. He also worked for the Hospital Association of New York State, where he was responsible for financial modeling and analysis, as well as the health economics group’s systems and databases. Schaub received a bachelor’s degree in engineering from Clarkson University and an M.B.A. in operations management from the University at Albany, State University of New York.

Gary Taylor, M.B.A. - Managing Director, Citigroup

Gary Taylor is a senior equity research analyst and managing director at Citigroup, covering the health care facilities sector. He joined Citigroup in 2008 after covering the sector for nine years at Banc of America Securities. In addition, he worked in the sector for three years as an investment banker and two years as a hospital reimbursement consultant. Taylor has been recognized as one of the best analysts in his sector for each of the last eight years by Institutional Investor magazine (most recently ranked No. 2). Over the same period he has also regularly placed as one of the top three sector analysts in the annual Greenwich survey (most recently ranked No. 1). Taylor is a graduate of the University of Missouri, where he received his M.B.A. (Finance), a master’s in health administration and a bachelor’s degree in health sciences in 1992.

Gail Willensky, Ph.D.. - Senior Fellow, Project HOPE

Gail Wilensky is an economist and senior fellow at Project HOPE, an international health foundation. Her focus has been on strategies to reform health care, with particular emphasis in recent years on Medicare, comparative effectiveness research and military health care. Wilensky serves as a trustee of the Combined Benefits Fund of the United Mine Workers of America and the National Opinion Research Center, is on the Board of Regents of the Uniformed Services University of the Health Sciences and the Visiting Committee of the Harvard Medical and Dental Schools. She recently served as president of the Defense Health Board, a federal advisory board to the Secretary of Defense, was a commissioner on the World Health Organization’s Commission on the Social Determinants of Health and co-chaired the Department of Defense Task Force on the Future of Military Health Care. She was the administrator of the Health Care Financing Administration (now the Centers for Medicare and Medicaid Services) from 1990-92 and a deputy assistant for policy development to President George H. W. Bush in 1992. She chaired the Physician Payment Review Commission from 1995-97 and the Medicare Payment Advisory Commission from 1997-2001. She is an elected member of the Institute of Medicine and has served two terms on its governing council. She is a former chair of the board of directors of AcademyHealth, a former trustee of the American Heart Association and a current or former director of numerous other nonprofit organizations. She is also a director on several corporate boards. Wilensky testifies frequently before congressional committees, serves as an adviser to members of Congress and other elected officials, and speaks nationally and internationally. She received a bachelor’s degree in psychology and earned her doctorate in economics at the University of Michigan.



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