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Managed Care, Hospitals and Physicians

            DR. GINSBURG: Now I’ll go with my first question. The first topic I’d like to cover is the retreat from managed care, and I’d like to begin about talking--many people are concerned about some of the implications for health care cost trends of the retreat from managed care. And I want to ask the panelists about which aspects of the retreat from managed care are the most important as far as having a potential large influence on medical cost trends.
            Norm?
            MR. FIDEL: I would redefine the question first, and I’d say it’s a retreat to looser forms of managed care. I mean, we’re not going back to indemnity insurance. That continues to shrink. And managed care in its different forms continues to penetrate a larger and larger percent of the population. It’s probably close to 90 percent now, excluding Medicare and government-sponsored health plans.
            So if we look at the last four or five years, what’s been the backdrop? We’ve had until recently a booming economy. We have always the desire of individuals for more freedom and more choice. We’ve had corporate sponsors of health plans willing to absorb higher rate increases. We’ve had the background of class litigation against health plans, the patient bill of rights, which has been simmering for almost five years now.
            So if the health plans can get large rate increases and they don’t have to fight the battle, which is being lost not only in the press but, obviously, by the desire of the American people to not have less freedom but more freedom, I think their attitude is we’ll give them what they want. And it means higher costs, and so far society has been willing to absorb that.
            In fact, in the last year, with the weakening economy, the big surprise has been how little corporations have pushed back the increasing cost of health care onto employees. There are signs that that’s starting to pick up. But from what I see so far of the negotiations for ’02, there’s not going to be that much greater a push-back onto the employees to share the costs as there has been in previous years.
            So, you know, it looks like ’02 is going to be a year of even greater rate increases than ’01. And in that environment, the health plans can prosper. They can have good growth in what they desire from a financial basis, and they’re giving what the people want.
            So the real test will be, as the economy weakens, as it’s harder for corporations to absorb rising cost trends, which are now entering the double-digit area, and if these costs are pushed onto employees, whether they’ll both--employer and employees, will try to get back into lower-cost plans with lower-cost trends which are back to the HMO model rather than the PPO model, which people are gravitating to today.
            DR. GINSBURG: Roberta? And let’s stick to the present at the moment about which are the loosenings, which are the ones that are likely to be most costly.
            MS. GOODMAN: I think adding on to what Norm said, I think that the strength in the economy has been probably the predominant issue. Consumers have wanted more, and the real out-of-pocket cost sharing has gone down very substantially. Between 1993 and 1997, it declined by 28 percent. Since then, citing the factors that Norm has raised, I think that it would be likely that that cost-sharing decline has accelerated.
            As an undergraduate degree holder in economics, the marginal demand for a very low cost product with significant benefits is virtually infinite, and so I think that that’s what we’re seeing with health care. And then building on top of that, there has been the consumer desire for broad networks, which has weakened the price leverage that the managed care companies have with providers. There has been the impact of the Balanced Budget Act of 1997 that compressed hospital and other providers’ margins, and historically what we have seen is, when that happens, there is a pushback to the private sector. And since managed care is now the predominant form of coverage, managed care companies are absorbing those increases.
            There also I think has been an exhaustion of the easy savings from managed care by eliminating unnecessary tonsillectomies and adenoidectomies and excessive lengths of stay. And so I think that there have been a number of factors that have combined at the same time.
            I don’t think that the decline in the use of capitation has a long-term impact. I personally have thought for quite a number of years that capitation was a very flawed model. And I think what we see with the elimination of capitation for some of the companies that had relied on it is that there is, in fact, a step function as those market rates are put in place with those provider networks. But I really don’t think that capitation per se has been a successful cost-containment mechanism, and it certainly has not been a successful mechanism from the standpoint of consumers.
            And I think that what we’ve also experienced is that, with the reduction in hospital utilization and the growth of outpatient utilization and the shift of care to pharmaceuticals, a lot of what you’re dealing with are high-volume but low-cost-per-unit items that traditional pre-authorization processes have not been appropriate for. And so as we look at the companies that have, in fact, moved to eliminate the pre-authorization processes, they have not seen an increase in utilization over what others in the marketplace are seeing, particularly because as they looked at the experience with pre-authorization, it only affected about 3 percent of the requests in the first place and caused far more to execute on that they saved through those denials.
            DR. GINSBURG: Okay. So if I go through a checklist I have about the different aspects of loosening, you would say that the decline in authorization requirements has not been a cost factor. Decline of the use of capitation, you’re skeptical they were saving much, except that they might have for a while gotten low rates to reflect expectations of savings from capitation.
            MS. GOODMAN: The shift in cost from the plan to the provider, but the cost still existed.
            DR. GINSBURG: Sure. That’s right. What about direct access to specialists? Do you think that’s a significant cost factor?
            MS. GOODMAN: I think it may have an impact on the use of drugs and the use of some of the outpatient diagnostic and testing procedures, possibly, but I think that the underlying factor is, as Norm said, people want infinite amounts of health care.
            DR. GINSBURG: Yeah.
            MR. FIDEL: But I would add to that that if you look at medical cost trends in PPOs versus HMOs, you generally get 100 to 200 basis point higher cost trends in PPOs, and their cost in terms of premiums reflect that. So as we’re shifting from HMOs to PPOs, we’re having a mix shift within the economy towards higher trend cost plans, and so that does have an impact on overall cost trends.
            DR. GINSBURG: Yeah. Is there more to go in the retreat or the loosening of managed care? Or have we gotten about as far as we’re going to go?
            MS. GOODMAN: Personally, I think that there will be more moves. I think that a number of the companies that have still been using pre-authorization processes will have to move away from that, which means that they will have to replace the pre-authorization processes with greater analysis of practice patterns and looking for deviations from best practices and evidence-based medicine.
            I think that will require a substantial amount of investment for some of them in systems infrastructure as well as clinical expertise that they may now lack. I also think that, to the extent that companies still have extensive amounts of global capitation, they will have to move away from it. It simply does not work.
            DR. GINSBURG: Norm?
            MR. FIDEL: And, of course, you know, some mandates from the government, and not only mandates but the bill of rights, can affect how a plan operates their business. And depending on how the bill of rights ends up in terms of the ability to sue, how quickly you can sue, whether you have to exhaust external review or not, that’s going to affect how plans operate, too. And almost everything you can look at is towards increasing costs. There’s almost nothing we’re talking about that decreases costs. So if people want these things--and apparently, if you read the media, if you look at Congress, apparently people want it. I’m not so sure they really want it when they realize how much more it costs them. But this means higher costs.
            To me, the only thing that’s going to break that trend is the costs go up too high and we have to find some other way to reduce costs.
            DR. GINSBURG: That’s a good transition.
            Dennis, did you want to--
            MR. FARRELL: My only point I wanted to add is the only real retreat that at least we’ve observed from managed care is really the providers getting out of the managed care business and just in general, as I think throughout all business society, companies are recognizing that they cannot be all to everyone and are trying to actually get their house in order.
            And so for the last several years, you’ve just seen the proliferation of provider-based HMOs just evaporate and get out with the minimal loss as possible, which is probably a multiple of what they were losing on an annual basis, but at least going forward, they feel that their store is clean.
            And, in fact, I--you know, Norman’s statement that there’s no alternative, there’s not a better mousetrap now, and I would suspect that we’re sort of in a period of pause. And you can actually see it probably accelerating because the critical mass or the number of provider--insurance providers is consolidating. And so you’re going through a period now where there’s not a lot of pressure and potentially ready to come into a really innovative environment where MIS will really take hold because so many companies have been investing in it. And you’ll really see some really interesting outcomes in the next couple of years, especially in light--which I again agree with Norm, at the rate increases that they’ve been commanding and will likely be commanding, will help bolster their ability to be much more innovative and proactive in the future.
            DR. GINSBURG: Now, this is an interesting phenomenon. When you said hospitals are getting out of managed care, you really meant out of the insurance business--
            MR. FARRELL: Right.
            DR. GINSBURG: --as opposed to--they’re still contracting with managed care.
            MR. FARRELL: Right. The for-profits acted very swiftly. They recognized--and, in fact, that’s why--you know, I don’t want to get into the provider discussion. Not-for-profits lingered onto the hope and prayer that they could do it better than the people who were supposed to do this for a living and paid for that dearly. And so, in essence, we’ve now--everybody’s kind of gone back to their own knitting, and we’re just seeing much more--and it’s across American business today. I mean, you’ve seen this in every industry.
            DR. GINSBURG: It’s really striking, given Roberta’s comment, that, you know, insurers have been doing very well lately and they’re expected to do well; whereas, those hospitals that owned insurers weren’t doing well in the insurance business, which just wasn’t their thing. Although I think we have a number of examples in our sites where a number of hospitals sold their insurers not because the insurers were losing money, but because the hospitals needed the money for their other business and these were viable enterprises.
            MR. FARRELL: The only point--and Roberta touched on it--capitation was a huge, huge fiscal problem for providers. And, you know, we always looked at it from the perspective if an insurance company was giving you an opportunity so easily, you ought to look at it carefully. There’s a reason why they’re letting you take that risk on. And, in fact, it was a great business proposition for the insurance companies at the time.
            DR. GINSBURG: Yes. Good.
            If we could move on to the patients’ bill of rights, and Norm had brought up the cost implication, you know, in official Washington we know what the cost implications are because CBO said it. The provisions that everyone agrees on are: increased premiums are 2.9 percent, and if you add suing health plans, it’s 4.1 percent.
            I was wondering on Wall Street what’s the thinking and expectation.
            MS. GOODMAN: Well, I think there’s mixed views, but I think that the patient bill of rights has actually already added fairly substantially to the cost trends that we’re seeing, and I would cite two things.
            First, if you look at when health care cost trends started to accelerate, it was the month that President Clinton proposed a patient bill of rights in late 1996. I’m not so convinced that that is a coincidence.
            Secondly, the actuarial firms that do work on this had estimated that managed care had had a sentinel effect in the industry broadly in the early 1990s that reversed in the late 1990s and added at least 100 basis points to the medical cost trend. And I think that there has been a greater reluctance on the part of managed care companies to make the tough decisions.
            You look at the Daleen Fox (ph) case, which generated an $89 million punitive damages verdict against Health Net in--I believe it was late 1995. That was based on a denial of a bone marrow transplant as being experimental for breast cancer. The reality of the scientific research as published last year was that that was a clinically correct decision, but, nonetheless, health plans all over the country were paying for these procedures, not because they were medically necessary or beneficial but because they feared the negative impact in the press and the negative impact in the court of denying these procedures. And I would imagine that there are hosts of others that are of less expense and less notoriety than that.
            So I think that we’ve already seen an impact from the patient bill of rights. I believe that if you look at the data on eternal review, it would suggest that, number one, the incidence of external review is relatively low in most states that have it. One company’s data I can cite. United Health Group implemented external review for their 14-million-plus members in 1997. Since then, they’ve had fewer than 200 cases go to external review, of which they’ve won 70 percent.
            So the numbers would suggest that you would not actually see that much going. It would also suggest that the judgments that the plans reach are, by and large, the correct judgments.
            That being said, I think that the Senate bill is very heavily weighted adversely to cost, because if you look at what it does, typically when you have an outside arbitration--in the securities industry, we are all subject to arbitration. It is binding on both parties. If I go to arbitration against Merrill Lynch and I lose, I don’t have the opportunity to go to court. If Merrill Lynch loses, they don’t have the opportunity to go to court.
            The Kennedy-McCain bill would say to the patient: You can lose at every step along the way, and you can still go to court, you can still sue, and you can still go to jury, like in California that found an $89 million verdict against a company for having done what was clinically correct. And I think that is the risk that people on Wall Street are concerned about, that you can have companies, you can have plans do everything right, and still have a devastating verdict against them.
            DR. GINSBURG: Norm?
            MR. FIDEL: With all due respect to scoring for the CBO--and since we have a couple of people who have been connected with CBO up on the panel, I do strongly say "with all due respect"--it probably is the best way of looking at costs because the alternatives are not probably as accurate. But I think the financial community does not take projections from CBO to the bank because there are so many cases where those projections don’t turn out to be accurate because it’s virtually impossible to really predict these costs.
            And, you know, when CBO scored Kennedy-McCain, they didn’t expect that you’d be able to sue Medicare, and state--you know, now the plan reads in the Senate that you’d be able to sue the government for Medicare and for Medicaid and for state governments, and that’s got to add to cost, too. So it’s got to be rescored, and maybe the costs will be twice as much as thought before.
            So I’m watching testimony and comments of various congressional people on this. They talk about a few cents per month would be the increased costs of patient bill of rights for the average enrolled member. Well, let’s think about this. Let’s assume that health insurance premiums are about $500 billion a year. I don’t know if that’s accurate or not, but, you know, $1.3 trillion is the health care economy and half of that would be $650 billion. So let’s just say $500 billion.
            Well, 4 percent is how the Kennedy-McCain was scored, a 4-percent increase. So 4 percent of $500 billion is $20 billion per year. So that few cents per month translates to $20 billion per year as far as increased costs out there. And you multiply that 10 years, that’s $200 billion. And a lot of the different programs we hear Congress talking about, $200 billion adds up to a lot of difference in a lot of these programs.
            DR. GINSBURG: Good. Let me go on to what health plans, in light of the restrictions, the demands by consumers for looser managed care plans, I want to go into what are plans doing to address costs at a time when their restricting of providers is very much under fire. Roberta?
            MS. GOODMAN: Well, I think there’s a range of responses. I think that traditionally companies have all talked about the various HEDIS measures looking at diabetes, asthma, et cetera, and that continues. I think that the degree of sophistication with which the companies are doing these things is increasing, and particularly for certain companies. So I think we’ll see that as a continuing effort.
            I think the plans are also, to varying degrees and, again, with varying levels of sophistication, analyzing provider practice patterns. So looking at physicians, looking at the patient populations that they treat, and identifying those that fall outside of the norms, both on the upside and on the downside, United Health Group in particular through the programs that they have can look very specifically at patients that are complex to treat, that have multiple morbidities, and they can identify the gaps in those patients’ treatments from their providers. And it’s understandable because as you look at somebody who might have congestive heart failure, diabetes, and osteoarthritis, chances are they are seeing one physician as the primary caregiver and it would be whichever disease condition is going to be the most critical at that particular time. And that person probably is not focused on managing those other disease conditions that can then have a negative impact on the primary one for which they’re being treated. And they can identify through their systems, through the data that they have, where those gaps fall out and work with both the patient and the provider on a very specific basis for that very specific patient.
            I think that those kinds of things will continue. I think that they are heavily data-intensive. United, when I asked them a couple of weeks ago what it would cost to replicate those capabilities within any kind of reasonable period of time, given that they had been working on the systems and on the clinical program since the early 1990s, said it would cost literally hundreds of millions of dollars if anybody could actually do it.
            So I think that that’s really where things are going, and I think that the good thing about that is if we look at a lot of the data that’s been published, data from HCFA, data from John Wenberg (ph), et cetera, what we find is that there are very substantial gaps between what is done in the marketplace by practicing physicians and what we know from evidence-based medicine to be more appropriate treatment patterns.
            And I think that to the extent that managed care companies can identify those gaps and help close those gaps through identifying the practices through quality incentives such as WellPoint announced for their HMO products in California a couple of days ago, that that can have a very positive impact on costs over an extended period of time.
            That being said, I think that it really behooves government not to get in the way by putting in place legislation that would support, quote-unquote, community practice standards, because those community practice standards are not necessarily consistent with what we would know to be appropriate practices. And, again, look at the Wenberg data. There are huge variations that don’t relate to the demographics, don’t relate to epidemiology, and relate more to where physicians train during their residencies and what they learn to do in their residencies and not what we know today to be best practices and what we might know five or ten years from now to be better practices.
            DR. GINSBURG: Thanks.
            Norm?
            MR. FIDEL: Using management information systems to find out best practices makes a lot more sense than, as Roberta said, to adhere to community practices, which are based on things that may not relate to the best care. So health plans are striving to do that, but it’s a long process. It’s an expensive process. But, obviously, the use of information not only in best practices but finding out which providers are providing better care, better quality care at lower cost, you can only find this out through the use of information technology.
            But the whole idea of disease management, trying to treat the very expensive diseases which represent so much of the cost is a direction it’s going. But, again, I go back to my original comment that the backdrop right now in the USA is not towards cutting costs. It’s towards providing more care. I mean, just think about it now. Outpatient costs for the typical health plan are now growing 12 to 13 percent, whereas they were growing 4 or 5 percent three or four years ago. So what’s changed? Well, it’s very hard for a health plan to deny a CAT scan or an MRI today. And, you know, the things that have happened, it’s not worth the battle to do it. And these things increase costs.
            So the backdrop has not been towards searching for ways for lowering costs. It’s searching for ways for satisfying the customer who wants more service and is willing to pay for it.
            DR. GINSBURG: Looking for ways that they can cut costs.
            Joy?
            DR. GROSSMAN: Yes. I would say in our site visits we’ve definitely seen both sort of a return to some of the old care management techniques like increasing and stepping up concurrent review and things like that to try to manage the cost problem, and a focus on the consumer angle, that is, voluntary case management and disease management.
            But I think the point you made that those techniques are still pretty fledgling, most of the people that we spoke with didn’t really have any sense of cost effectiveness; I mean, in are cases in things like diabetes and asthma. There’s few examples where there’s been some looking at the cost-effectiveness, but in general that hasn’t really been the case.
            And I think in terms of information technology, again, we found those efforts pretty fledgling and not a lot of sense that that was going to have any payoff in the short run.
            So I guess I sort of want to ask a question about if, you know, how likely it is that they’ll be able to get providers on board and how effective it can be if they only focus on the consumer piece of it, how can they really control costs.
            MS. GOODMAN: I think what United has been doing is really a dual focus because, for example, they find a woman who’s had breast cancer and is not taking the tamoxifen, they will talk with both her and with the physician because it may be a problem that she does not understand that she needs to be taking it, it may be that the physician has not taken the time to explain it, has not really acquainted her with the seriousness of the disease, the likelihood of recurrence, et cetera, and so it really is a dual pattern.
            I found, actually, in talking with practicing physicians in my community that they actually are fairly excited about what United is doing with the care coordination and predictive modeling. They have found it to be helpful to their practices. These are people who are practicing in a more intense setting, by and large, but I think that that is--I think that that is a constructive approach.
            I think that the issue that some of the companies will face is that if they’ve had a fairly confrontational set of relationships with the physician community, that there is a higher level of distrust. If they’ve had an adversarial relationship with their membership base, again, there’s going to be a level of distrust that whatever is being said is being said because of concern about cost and not because of concern about quality.
            But I think that the companies that I would consider to be the better ones would view high-quality care as ultimately contributing to improvements in cost. I believe, in terms of looking at the data, that United has, in fact, reduced asthma admissions diabetes admissions, myocardial infarction admissions as a result of these programs. So it does seem to be working, but it is not broadly enough entrenched in the market as a whole.
            DR. GINSBURG: Actually, I want to make an observation. I think if we had been having this discussion five years ago, I’m trying to think how different it would sound because five years ago we would all have been talking about what providers were going to be doing to manage care, to affect care and that they were going to be doing it because of capitation incentives.
            And it seems as though that the providers are out of care management today, that it’s being ceded to the plans; is that correct?
            MS. GOODMAN: I think the issue with capitation, if you really take a step back from it and you say, let’s look at a capitated gatekeeper HMO model and what is it really trying to do? It says to the member, I’m going to have a $5 or $10 cost to do whatever it is that I think I need. So my demand will be virtually infinite as a result of that. And that was the purpose, to reduce barriers to access.
            And then the mechanism to control the cost is to say to the provider, here’s "X" amount of money, you figure it out. And that worked fine, as long as the dollars were big enough. But as the real dollars available shrank, physicians are not used to managing patients on a population basis, they’re used to managing them one-by-one as they come in the door.
            And the rationing that was induced by that kind of an approach I think has had some very pernicious and bad effects. I’ve actually never been a believer in capitation because I always felt that there was this issue that was inherently involved in it, and that information, greater information sharing and greater focus on best practices and weeding out the 30 percent that’s either inappropriate, ineffective or outright harmful was really what the managed care companies ought to be doing.
            MR. FARRELL: Yeah, I don’t know if I agree that providers are out of the care management business. I just think they’re in a different kind of care management business. And, in fact, what they’re doing, my belief is, they’re reeling from the years of financial losses, both for a multitude of reasons, whether it’s cutback from various policy government or cutback or the retention or denials from the managed care.
            So what they’re really doing is, again, emphasizing, and we’re seeing a great amount of emphasis on their own internal care management so that they can combat, and unfortunately it’s really combat, the insurance companies and try to improve the efficiencies for which they get paid, and the hit rate.
            There is an extraordinarily adversarial relationship going on right now which not necessarily I think is healthy for the industry, let alone the participants. But the reality is the environment that this industry is functioning in it’s, you know, eat or be eaten. So it’s just a different type of care management. It’s a care management to preserve my own assets, as opposed to care management that necessarily is emphasizing the patient first, but in fact I would strongly submit that it is emphasizing the patient in order to get appropriate compensation.
            DR. GINSBURG: Norm?
            MR. FIDEL: If we contrast five years ago to today, let’s think about this: Five years ago we were entering a period of a price war for health insurers, and premium rate increases were zero to 2 percent back then. Now they’re in the low teens. That completely changes the focus. When you’re getting zero to 2-percent rate increases, you have to focus on costs, and everything you’re doing has to be focused on that. Now, when you can get the price increases you need to cover a rising cost trend, there’s going to be less focus on cost control.
            And there are other things going on too. If we look at the last 10 to 15 years, the number of hospital beds in this country have declined about 20 percent, the number of hospital days per thousand people are down about 30 percent, hospital admissions are down about 20 percent over the last 10 or 15 years. So a lot of the excess has been taken out of the system.
            Now let’s look towards the future. The 50 years and older have been level as a percent of the population for the last 25 years. They’ve been about 26 percent of the population. Now, in the next 15 years, 50 and overs are going to grow to 34 percent of the population--from 26 percent to 34 percent. That means hospital admissions are probably going to start growing instead of declining. We’re going to be facing maybe not shortages of hospital beds, but certainly not the surplus that we’ve had in the past.
            So the cost trends are completely different, and those cost trends, you know, you just, when you have a much lower utilization of hospital beds and now demand growing, it changes the whole equation of how health plans have to deal with rising costs.
            MR. FARRELL: If I could, the distinguishing factor between five years ago and today is five years ago it was market share at all costs, and today it’s fiscal discipline for survival.
            MS. GOODMAN: I would say that’s true on both sides of the industry.
            MR. FARRELL: Absolutely.
            MS. GOODMAN: So, you know, you’ve got a greater level of business discipline and business intelligence being applied on both sides.
            MR. FARRELL: In both cases, both market share for the providers and insurers five years ago, I mean, the self-induced pain that was created is phenomenal.
            DR. GINSBURG: Why don’t we move on to the response of employers to these premium increases.
            In our recent site visits, we developed a pretty strong conclusion that the, consistent with what Norm Fidel has said, that the employer response to premium increases has been very limited, yet, although one important exception is that employers have gone for increased cost sharing for pharmaceuticals.
            I was wondering people’s sense of when this will change, when will--I mean, employers seem to be wringing their hands a lot more. At what point will they actually move to do something, and then at that point what will they be doing?
            MR. FARRELL: Well, I think an underlying component here that is really driving this is the recent economic environment that we’ve been going through and the ability to attract and retain good employees. And, in fact, benefits and coverage, in many ways, is, given the costs associated, has been a significant component to attract and retain the key employees.
            So my observations, and I’m not sure many will be different, is that there has been no reaction from employers, and in fact it’s been almost a direct pass-through, but I think it’s principally dealing with the fact that it was zero unemployment. It will likely--it probably should change in the near future now that the bloom is falling off of the rose in this arena.
            DR. GINSBURG: So, from your perspective, a lot will depend on the actual course of the economy over the next year.
            Bob?
            DR. REISCHAUER Yeah. I think there are three factors involved here, and one, and probably the most important, is the tightness of the labor market. While a lot of the discussion in the press makes it sound like we’re on the cusp of the second Great Depression, we have to remember we have a 4.5 percent unemployment rate which no tenured economist would have been predicted as possible five years ago.
            And so even considerable looseness from here, going up to, say, 5 percent/5.1 percent, unemployment, as both CBO and OMB have projected for the long term, is going to leave a labor market which is tight by the historical standards of the past 20 or 30 years.
            The second component of this, of course, is corporate profits, and the ability of corporations to pass on cost increases through higher product prices. And with what’s happening in the international economy, it appears that most American producers have very limited ability and will continue to have limited ability to do this. So they’re in a squeeze there.
            And, third, of course, is the underlying growth of costs, whether it’s increased technology or utilization driven by an empowered consumer or whatever. And so you have these three things working together. And right now the plans, the employers are sort of helpless, but I don’t think that can continue very long in the face of underlying cost increases of 17 percent. We’re going to get back into more the environment that we saw in the early ’90s, even with a relatively tight labor market. And I think more of this burden is going to be pushed off onto the employee through various devices that try and hide the effect from the worker.
            DR. GINSBURG: Norm?
            MR. FIDEL: I definitely agree, and I think the proof of the pudding is that if you look back over the last three or four years, the one area of health care where employers have pushed more cost onto the employee has been pharmaceuticals because pharmaceuticals stood out as the greatest incremental cost factor. The pharmaceutical trend was in the high teens, and until the recent year or two, everything else was in low to mid single digits.
            But now look what’s happening. The pharmaceutical trend is peaking out and may be declining, and it’s probably the only of the major four areas of health care that’s actually starting to decelerate, and part of that is because the market will slow because of all of the patent expirations, but because of the three-tiering of drug--the higher cost sharing has affected, to some extent, how the cost trend in pharmaceuticals proceeds.
            But now we have everything else accelerating. Hospital costs are moving up into the high single digits from low single digits. Physicians, which used to be flat to down, are now in the mid single digits and growing stronger. And outpatient care is now the largest single incremental cost trend facing health plans. It used to be pharmaceuticals and now outpatient care has taken over.
            So I think corporations will respond to it. They’ll that costs are going up. They attack the pharmaceutical situation, with laying more costs onto employee, and they’ll have to lay off more costs onto the employee for the general cost of health care with everything else accelerating or else how can corporations absorb 13/15-percent increases per year? We would become--it would go back to when it appeared that the U.S. was becoming uncompetitive in the world scene with rising health care costs.
            So, to me, the only solution is to put the costs onto the consumer.
            DR. GINSBURG: Yeah. Bob?
            DR. REISCHAUER In a way, the pharmaceutical issue was an easy one because employees could understand why their costs were going up. There was a villain, the pharmaceutical company with its large profits, and there were all the new pharmaceuticals that individuals were taking. And you had the feeling that, yeah, I’m paying more, but I’m getting something different. I’m getting something more that I didn’t take two/three years ago.
            And with respect to inpatient hospital treatment, new procedures, it’s much harder to educate, in a sense, the consumer to the underlying forces that are causing the employer to say: I want you to ship in a little more for this service, because it really is different from what we were giving you a couple of years ago.
            DR. GINSBURG: That’s a good perspective.
            Joy?
            DR. GROSSMAN: I think we heard from respondents, plan respondents, in particular, in our markets that they’ve already done over the past few years a fair amount of trimming around the edges of those kind of hidden benefits. So trimming things that--rehab services or other things--that you don’t necessarily notice until you need the service and have also been increasing cost-sharing component and didn’t really feel like there was a lot of room to maneuver there.
            So a number of plans, and there are no actual products that have been rolled out, I don’t think, with the exception of WellPoint, but we certainly heard, in a number of communities across the company, that plans were considering different kinds of new products. Now, we’ve heard this periodically over the years, and whether any of them will actually get rolled out is a different story, but they all involve increased cost sharing in one way or another for consumers.
            There’s products that allow for differential cost sharing, for provider networks. So you get into this tiering of different provider networks, and you let consumers choose whether they want to pay more.
            There are products that allow for cost choice trade-off at the time of enrollment. So the consumer decides up front whether they want an increased premium contribution or they want an increased cost sharing later on, and they choose that at the beginning, and the employer gives them those options up front, which is very different from the kinds of choices that employees face now.
            I guess the other product that we’ve heard I think probably more about than anything else is the retreat to narrow network products, particularly focused at small employers.
            So we have heard inklings of these things off and on across our different markets, and I guess one of the questions will be whether cost pressures will increase sufficiently that employers will start buying those products.
            MS. GOODMAN: I would add two things: One is that you have to look at health care benefits in the context of overall compensation. And if you look back over an extended period of time, what you see is that benefits have represented an increased share of overall compensation, but that for most industries compensation levels have stayed relatively stable, except for periods of recession for companies that are involved in businesses with collective bargaining arrangements.
            So I think what we probably saw during the mid-1990s, with the very minimal rates of insurance increases were that there would be more of a shift towards salary and other benefit compensation away from health care benefits. And I think what we’ll probably see happening right now is that the increase in health care costs will result in a decrease in the rate of wage compensation growth.
            Secondly, I think with the employers, that there are probably a number of factors at play. If you want to move to a new product suite that is very different, you have to look at what the impact will be on your relative ability to attract labor. So people don’t necessarily want to go first.
            But I think if you do have some major employers make some major moves and say we are going to change the benefit plans to align the economic incentives far better between the employer and the beneficiary, so that the beneficiary is going to have more exposure to their decisions to use outpatient care, more exposure to their decisions to use inpatient care, as they have had with pharmaceutical costs, and see that actually have a positive impact on cost trends, I think you’ll see others following suit. But I think that they have a very hard time going first.
            DR. GINSBURG: I want to ask, given this perspective that cost sharing, in both traditional ways and many new ways, may be an important part of the health care system once employers do respond, I was wondering will there be a response by the policy community to price or, you know, cost sharing making more of a difference in the medical care that different people can partake in?
            Bob?
            DR. BERENSON: Yes. I’ll answer that and get back. I missed my shot earlier. I wanted to make one comment also about capitation. I’ll try to relate the two.
            It has always struck me that you should be using market forces like cost sharing for high-frequency, relatively low-cost kinds of activities. Prescription drugs strikes me as a very good example of where that is appropriate. It is certainly possible to have a basic, with generic substitution on a basic formulary that covers all therapeutic classes to provide an opportunity for beneficiaries to have medication for virtually all purposes and then have an opportunity to pay more for unique circumstances or if they want the other medication.
            But I wanted to sort of make a couple of comments on capitation, also. Roberta, I agreed with partly and disagreed with in another sense. It didn’t work I think for a number of reasons, but I think it’s too bad or else we’ll have to come up with something else.
            The problems with capitation, as I see them, sort of simply were that capitation was used for providers to take risk for services not under their own control, and I think that was one lesson. That was a mistake. In many cases, the risk was unlimited, too much, it wasn’t controlled through corridors or stop loss, et cetera.
            I think one of the experiences with certainly hospital systems taking risk is, with the absence of a risk adjustment, it was very easy for, I mean, who would sign up in the hospital risk pool, people in the waiting room, people already in that system, as opposed to the other patients who or not patients, they’re not patients, and that’s the point. And so I think the absence of risk adjustment sort of doomed capitation. I think the public lost any faith in it because of the absence of disclosure about what this was all about.
            But here is the problem that I see, if we’re simply going to rely on fee-for-service mechanisms, is the ability to deal with innovation. Right now I think it’s clear that efficiency between doctor-patient relationship would be promoted, is promoted in some situations, through e-mail. There’s no race for a face-to-face encounter for many kinds of interactions between the health system and the patient. Disease management, in particular, with patients with chronic multiple diseases or single chronic disease is facilitated without that doctor-patient face-to-face encounter.
            It is very hard to conceive in a fee-for-service environment how you compensate adequately for those kinds of activities. The transaction costs of paying for an e-mail is greater than the cost of the transaction. So you have to find some new payment system if it’s not capitation because that has, you know, just doesn’t work.
            It certainly shouldn’t be the current fee-for-service system, some kind of bundled payments, some kind of--and here I do agree with Roberta, starting to profile physicians, figure out how to establish partnerships and different mechanisms to reward those who are doing it, doing the right thing.
            But I find it unfortunate that capitation didn’t work out, and I’m not convinced that it won’t be coming back. I hope we learned some of the lessons of where it failed.
            Just, again, on increased cost sharing, I would look at the CalPER’s situation, where I think they had an alternative between raising premiums 12 to 15 percent on that order or keep the premium down to 5/6 percent, but add more to co-payments. I thought that was, again, a rational decision; again, high-frequency, low-cost encounters where the cost sharing itself can be a break on utilization I think is a rational way to proceed.
            DR. GINSBURG: Did you have any comments about cost sharing and policy response?
            DR. REISCHAUER The question was whether policy makers would get involved in this fray if employers began increasing cost sharing. And I would say that policy makers have their hands full with Medicare, with Medicaid, with Patients’ Bills of Rights kinds of issues, and they’re going to stay as far away from this as possible.
            And, also, it’s very hard to really know what’s going on because if you know what’s going on in one company, you know what’s going on in one company, and every design is a little bit different.
            I would just make one comment on something that Joy said, which is that there are new ideas out there that may or may not blossom forth, and she particularly mentioned the possibility that new workers coming in to an employer might be given an option between low premiums/high cost sharing or high premiums/low cost sharing.
            I think these are the kinds of things, like defined contribution, which we’ll get into, which at first glance looked attractive, but once you really begin to explore them, you realize that you create huge risk-pool problems within your own organization, and your staff quickly divides itself into two very, very unequal groups, which then causes all sorts of problems. And so I think a lot of these will be stillborn.
            DR. GINSBURG: Yeah, actually, maybe we should cover that quickly now. We did talk about defined contributions a year ago, and it was talked about the media. In our site visits, employers didn’t talk about it very much. Sometimes benefit consultants said, "Well, yeah, the employer asked me about it, so I told them about it." But it seems it’s something that has been hyped by consultants more than a developing trend by employers.
            Is this going to fizzle out or will there be anything significant over the next few years?
            MS. GOODMAN: Personally, I think, as described by some of the consulting firms that were trying to get these projects out, it will fizzle out. I do think that employers will probably move more to benchmark the different plans that they offer and say: Here’s what we’re going to contribute. Anything you want above that, you will kick in.
            And they can do that in several different ways. They can do that in the initial premium contribution, but they can also do it through offering plans that use reference pricing to set the rates for different kinds of goods and services. WellPoint, again was talking about a product that would reference price eight categories of drugs and say: In this category, we will provide "X." You want something that costs 2X, that differential would be your responsibility.
            I think that you can extend that kind of structure to hospital services, physician services, outpatient services, et cetera. And so I think that we will possibly see employers moving to do that. But I do think that it’s going to take somebody having the courage to stand up and say I’m going to do something that my workforce may not find entirely wonderful because it does, in some way, shape or form, represent a taking away of a benefit.
            DR. GINSBURG: Norm?
            MR. FIDEL: I forgot the point I was going the make, actually.
            [Laughter.]
            MR. FIDEL: But I think defined contribution, while it may appear initially to help level or lower the cost of the corporate sponsor, for example, by limiting their contribution, I think in the end it probably would raise costs for health care for society because it would be difficult to see how you could get around the issues that if a company cannot deliver a specified number of employees in a certain plan and that choice is left up to the individual employee, that the bargaining power goes down and goes in favor of the plan, and so that would tend to raise costs.
            Also, the risk sharing is a whole issue that has implications on costs. And it just seems that the taxability issue, with some types of defined contribution, you may not be able to retain tax deductibility, although that could probably be worked out through legislation and/or the type of defined contribution. But I’m not sure that, again, I guess the point I’m trying to make is that it may limit initially the cost for the corporation, but probably would raise the cost of health care for society.
            MS. GOODMAN: I, personally, believe that the approach that the consultants were promulgating that we give you a voucher and you go out and spend it in the marketplace is an incredibly bad idea in every respect. Yes, I mean, the system that we have of linking health insurance coverage to an employer is not the system that if any of us were sitting down and designing it on a prospective basis we would do, but it is the system that we have, and it is the way in which risks are pooled.
            You give $5,000 a year to two different people. The 25-year-old male probably is going to go and spend it on a car. The 55-year-old male with diabetes is not going to be able to find insurance at any price in the individual market.
            So it is not an approach that makes any real sense in the real world, although it clearly does have some appeal for people in a highly theoretical sense.
            DR. GINSBURG: Good. I need to move on because our time is getting a little pressed. I want to talk briefly about public purchasers and how they’re responding to cost increases.
            First, let’s focus on Medicaid and the CHIP programs, given the higher outlays and weaker state revenues and more limited opportunities to use cost sharing. I was wondering, and I’m going to ask the two Bobs, the policy analysts, what they perceive as far as how states will respond to the growing cost pressures that they are facing as purchasers.
            Bob?
            DR. REISCHAUER Of course, expanding insurance coverage to low-income children and their parents is or was a very popular thing among the states, and they have gone quite some lengths in this area, not sort of fully cognizant that their revenue was going to disappear, at least their tax revenue, not their SCHIP money. There’s a lot of SCHIP money still in the pipeline.
            So, in a sense, they aren’t constrained from the federal standpoint, but they are clearly going to find that--some of the states--that they’ve bitten off more than they want to chew in this area over the next couple of years and are going to I think stop expanding, if not retrench.
            Interestingly enough, though, we have a secretary of HHS who, having been a governor and having the scar tissue of dealing with HCFA and federal policy makers, is very anxious to expand states’ ability to innovate and has gone quite far in saying that he will approve waivers of various kinds. And these waivers are all in the direction of allowing the states to expand who they’re covering through this program.
            And so I think we have an interesting situation in which economic reality has yet to be fully reflected in the actions of both state and federal policy makers.
            DR. GINSBURG: Bob? Joy?
            DR. GROSSMAN: I just wanted to talk a little bit about our site visit experience. Sort of towards the tail end we started to see some of these impacts. I think in Miami, Greenville, and Northern New Jersey are some of the areas that come to mind.
            The expansions were very successful, and they got more than they expected. And in combination with increasing costs, especially for pharmacy, we’ve seen states start to put caps on enrollment, put people on wait lists, and in the short run tried to find other sources of revenue funds like, in particular, the tobacco money. And I think, as you noted, they didn’t necessarily expect the revenue shortfalls. And as all of these things come together, they’re going to have to retreat from some of these programs that they’ve put in place.
            Interestingly, I think in the last day or so there was an announcement in Georgia that they were adding tiered co-pays for pharmacy benefits for Medicaid beneficiaries, so there may be some opportunities for cost sharing there too. &&&&&
            DR. GINSBURG: I want to say something about Medicare+Choice. I think Tom Scully, the new administrator of the Centers for Medicare and Medicaid, talks about a real, you know, his goal to substantially increase enrollments in Medicare+Choice. And I was wondering, given the decline, what will it take, as far as either changes in the marketplace or changes in policy to actually get that to happen or should that happen?
            MS. GOODMAN: Money. Lots of money.
            DR. REISCHAUER: Bribery. [Laughter.]
           
            DR. REISCHAUER: You know, right now I think the only thing that can save this component from continued decline is rapid and persistent increases in Medigap premiums because Medicare+Choice is really a "compared to what," and the "compared to what" is fee-for-service plus Medigap. And to the extent that Medigap becomes much more expensive, Medicare+Choice plans should be able to put on the market a product that is attractive. Informing people about this is another thing, but so far that doesn’t seem to be the case.
            DR. GINSBURG: I’m glad you said that. You speak next, Roberta, but I want to pose a question to you is that, you know, when plans are groaning about the fact that Medicare payment rates are going up 3 percent a year, and their costs are going a lot higher, and still they’re clinging to zero-premium products, when they’re competing with very expensive Medigap products. So why is it that you say that there has to be a lot more money.
            MS. GOODMAN: Well, the very simple answer is that there is a negative spread between premium and costs. And given that the margins in these programs are extremely low, that is not an economically viable situation.
            If you look at the population that tends to enroll in Medicare+Choice, as opposed to the population that will take a Medicare supplemental policy, they tend to be lower income. They have less disposable income. And when you do put in supplemental premiums, you will tend to see a worsening of your risk pool because a number of those people will just decide to go without a supplemental policy, and they become bad debt to hospitals and other providers because they simply don’t have the money with which to pay for it.
            The problem is that the Balanced Budget Act of 1997 put in place a cap on the premium increases in the high-cost markets. Those high-cost markets had given rise to a lot of incremental benefits. Drug benefits, some very generous drug benefits, vision, dental, minimal co-pays, et cetera. A lot of that has been peeled back. As those benefits get peeled back, the appeal of joining becomes much less because there is a tradeoff, in terms of choice that the individual has when they join the program. And so the companies have really gotten themselves into a rock and a hard place situation. And I think only action to match the premiums to the cost trends will rectify that situation, and that would be exceedingly expensive on a scored basis. So I think that that would be very difficult to do.
            DR. GINSBURG: Bob?
            DR. REISCHAUER: Just one comment. The Balanced Budget Act acts slammed appropriately sometimes, but inappropriately in other times. And the fact of the matter is that for lots of Medicare+Choice plans, their payment levels this year are higher than they would be had we kept the old system, believe it or not. And this is because there wasn’t a retroactive adjustment for the overpayment that existed back in 1997, and we have to keep in mind that fee-for-service Medicare in 1998, ’99, and 2000 grew at very, very low rates.
            In fact, in 1999, it declined, per capita aggregate spending declined by about a little over 2 percent. So under the old system you would have had a decline in payments, and we provided a 2-percent floor. So there are some other things that cut the other way, but it’s not like the Balanced Budget Act savaged these plans so far. There’s been other explanations for what’s been going on.
            MS. GOODMAN: I do think that there are some other issues, but part of the reason that the growth in Medicare spending was so modest in the post-’97 period was that the impact on hospitals, skilled nursing facilities, home health agencies, et cetera, was far more than had been projected, and there was substantial pain inflicted on the provider universe, and that did have an impact on managed care companies ultimately because there was the cost shift that took place.
            I would agree that the managed care companies themselves made some pretty bad judgment errors on this. I think that they viewed the 2 percent as being tolerable because they believed that there was a lot of excess that could be wrung out. And theoretically, in looking at the numbers, that was true. Realistically, given the changes in the public policy environment, the media environment, that was much harder to accomplish.
            So they did go into markets in which they were not going to have the critical mass. They had difficulty getting the provider contracts, et cetera. And certainly some of the regulations were more burdensome than not. But at the end of the day, it really does boil down to a negative spread issue for many of these companies in many of the markets and the difficulty of working within that.
            DR. GINSBURG: So probably the most profound BBA impact was the impact on the traditional Medicare program rather than the Medicare+Choice provisions.
            Bob?
            DR. BERENSON: Just a few comments. I agree with Roberta on that issue of zero premium. Reluctantly, many of the plans are coming off of zero premium, but their reluctance was largely because of adverse selection concerns, that those who would stay with them would be sicker.
            I would make the point, in picking up on what Norm emphasized earlier about the commercial HMO’s ability to essentially pass on premiums to employers. They can’t do that in Medicare. There’s a fixed government contribution. In some ways, this is a model of a defined contribution approach. The government contribution is fixed, it’s the beneficiaries now who have the opportunity to pay premium. And even though I agree with Bob, if you just hold up the traditional Medicare and Medigap here and the HMO, the HMO looks like a better deal, and yet the sale isn’t happening, once you move off of zero premium.
            So I actually think we should, one potential policy approach to go now--oh, yeah, let me just make the other point. On the point that Bob was emphasizing on how much are we paying plans in relationship to fee-for-service, you know, TEFRA set up that 95 percent--5 percent efficiencies. In fact, once you do all of the math, it’s now about 98 percent is what the plans are getting in relationship to fee-for-service.
            In the absence of risk adjustment, the government is actually losing a fair amount of money on the Medicare+Choice program, so that leads me to maybe we should actually, instead of reinforcing the tide of fee-for-service to determine rates for plans, maybe we should split it completely, for a couple of reasons:
            Cost shifting. I think one of the pressures on the plans in the post-’97, post-BBA era was the fact that fee-for-service rates on hospitals, in particular, were down. Margins were down. Hospitals then turn around and give less favorable contracts to HMOs. So you almost have a countercyclical thing going on, where when fee-for-service goes down, HMOs have no choice but to see increased rates, to the extent that cost shifting happens, and there is some debate.
            And the other thing we talked about a little bit earlier. Insurance companies on the commercial side are in an insurance cycle. M+C is basically in a legislative cycle of ratcheting down on payments and then give-backs. And so the plan sort of got hit with a double whammy of reduced--of the need--inability to cost shift any more onto fee-for-service, as well as the initial couple of years post-BBA of ratcheting down on the fee-for-service increase, which is how their formula, their administrative pricing formula is calculated.
            So one way of thinking about M+C would simply be to consider it its own provider group. All of the other providers, hospitals, et cetera, skilled nursing facilities, get a market-basket increase every year based on input prices, and maybe we should be thinking about something like that. In which case, the impact on prices for plans are not the wages or costs that doctors and hospitals have, but in fact what’s happening to their contracts, their per diems that they’re able to negotiate, and we actually split off from fee-for-service.
            But, ultimately, I think this Medicare+Choice issue revolves around what the purpose of the program is. And if it is primarily as a mechanism for reducing costs, I don’t think it has been successful, and it’s hard to sort of justify throwing more costs to have a program that’s not reducing costs.
            So, if it’s primarily about choice, and in particular as sort of an infrastructure for a defined contribution approach to Medicare reform, then you do have to put more money into the program to keep these programs going. So I think there’s not agreement at this point on what we’re doing with Medicare+Choice.
            DR. GINSBURG: Let me move on to, because our time is running late, hospitals and physicians. If we have time, we’ll get back to that.
            In our site visits, in our publications that you see, we reported a real shift of leverage from plans to hospitals and some specialist physicians. I want to get your sense, I know that business writers have written about this when they’re talking about prospects for hospital companies, et cetera, about how much further does this shift in negotiating lever between hospitals and plans, how much further will it go?
            Would you like to start, Dennis?
            MR. FARRELL: I think currently all the stars are aligned in the favor of hospitals being in a better position, and it pretty much comes down to two major factors; either how strong are hospitals from a market share or how much of the market they’ve been able to accumulate with their market leverage in purchasing or merging with others or how much they’re in financial dire straits. And insurance companies want to prop them up to make sure that there remains some competition.
            I’m a little bit skeptical in the generalization that hospitals are doing much better because they are just in a better position. I’m actually thinking, when we speak to many providers, they have a very, you know, they’re smiling all how well they did in their negotiations and how easy it was, and I’m only thinking, well, that means that you probably left a lot on the table.
            [Laughter.]
            MR. FARRELL: Because five years ago they were happy as pie when they only got a 15-percent cut because they started out with a 30-percent cut. So I’m not so sure how much leverage has really shifted, other than the tide has, in essence, risen for the whole industry, and we’re in this period right now that they should be doing well.
            So getting back to your question, how long will it last, it probably correlates very highly with the comments that Norman made earlier about the insurance companies. Another year or two, as long they’re getting double digits, given the political and the consumer market as it is today, that they will likely be able to garner similar results going out forward.
            There actually have been but a few I think real successes where the providers have enforced leverage on the insurance companies. I think both of them just happen to be enjoying very strong times, and they are mounting or getting ready for another arms race.
            DR. GINSBURG: If I look at some of the examples that have been in the media about hospitals winning very large increases from plans, it seems to be these are the very prestigious hospitals. I wonder if, in a sense, we’re getting an erroneous impression that perhaps Partners Health Care, in Boston, with Mass General and Brigham and Women’s, is getting a big increase because that’s the one that everyone wants to be all--and consumers want them to be in their network. But perhaps if we look to the community hospitals in Boston that were unaffiliated, they wouldn’t be doing as well.
            Do you have any sense of that?
            MR. FARRELL: Well, there’s clearly a pattern here. You see an organization like the Cleveland Clinic or Sutter or Jefferson Health, they are all of the fairly large regional systems on the not-for-profit side that have invested significantly in information systems and have been able to emphasize quality. And they’ve been able to, in many ways, take a leaf right out of the pharmaceutical book and advertise directly to consumers.
            You look at any baseball game today on television and what advertisement do you see in the outfield stands? Invariably, it’s in every market, whether it be New York, Cleveland, California, whatever, it’s a hospital system. So I would suggest, but again it’s not that small little community provider to, let alone, you know, attract professionals, let alone attract a better rate from their insurance company.
            So, clearly, it’s--one dynamic that we’ve noticed that’s taken place in the past year when we analyze, and we don’t analyze who gets upgraded or who doesn’t get downgraded, given the current environment. And when the full brunt of the Balanced Budget Act was felt, it was invariably these large academic medical centers were getting whacked very heavily. And, in fact, it was the smaller providers were doing quite well. Again, that’s a relative term. They weren’t being downgraded.
            Now we’ve reverted back to a more predictable environment, where the smaller providers, the ones that don’t have the clout from either an academic or a quality of care perspective or perceived quality of care that are now feeling the impact of the larger organizations who invariably felt the biggest brunt of the Balanced Budget Act and also the dark, deepest wounds from their own initiatives, whether it be managed care or major acquisitions, et cetera.
            DR. GINSBURG: Any reactions to what Dennis said?
            MS. GOODMAN: I would agree, and I think that the people probably come when the employers start saying: Well, wait a second. This has now become an area of very substantial concern, as we lok at the components of cost trends, just as they did with the pharmaceutical trends a few years ago.
            I think if there’s greater transparency to the beneficiaries of what the hospital services cost and by how much they’ve gone up, then I think that there will be some reaction to the rate increase environment that we’ve seen.
            But all of that being said, I think we have to remember that the hospital product is different than it was 10, 15, 20 years ago because it is a much higher technology component, much higher intensity, much more expensive labor, and at the end of the day, that is going to continue to have a higher rate of cost increase than the CPI, in all likelihood.
            MR. FARRELL: But the key that, and Roberta touched on it again, is the issue of technology and providing information that will demonstrate your value and worth. We’ve been hearing for a decade that, why don’t we build into our--the Wall Street--why doesn’t Wall Street build into its determination of whether to invest in someone or not the quality of care, and the physician outcomes, and blah, blah, blah.
            And the reality was the information was not available, and a consumer could not make a decision that says: Boy, you know, I should go to a Memorial, Sloan-Kettering and pay a lot more money up front. Yet the incident of recurrence is so much lower that the true cost of this service it’s much lower than if I went to my local community care provider. And that is truly what will be I think, in the near future, the big component driving outcome will be the information services or systems that will provide a consumer with better information in their decision process.
            DR. GINSBURG: Bob?
            DR. REISCHAUER: I think one of the issues will be whether plans get the gumption to steer patients with different complexities to different settings, either through financial incentives or through other mechanisms, I mean, freestanding surgical and outpatient settings, community hospitals, and then the teaching or high-quality hospital. And we could over the next decade see sort of an increased specialization. We’ve already seen some of it, but--
            MR. FARRELL: Which is ironic because when HMOs came out, it was everybody needs to be a generalist to get market share.
            [Laughter.]
            DR. REISCHAUER: That’s right.
            MS. GOODMAN: And there is some degree to which they do it. United does in their transplant programs, United Resource Network, which covers a large number of people. And they have seen over time survival rates that are substantially better than national averages because they are using facilities with a great deal of proficiency.
            That being said, you still have political backlash. One time when I was visiting the company they had just had a fairly nasty dispute with one of the senators in this country who was arguing on behalf of his constituent’s right to have a liver transplant at a local community hospital that had never done one, rather than going to Johns Hopkins which, of course, has done many. So there is an issue there too.
            MR. FIDEL: For a hospital to get a 6-percent rate increase, when the health plans are getting 12-percent rate increases, isn’t much different from the hospital getting a zero rate increase, when the health plan is getting a 6-percent rate increase.
            So I think, as Dennis mentioned, the pie is bigger these days, and it’s not so much that hospitals have gained that much in the bargaining, as that the pie is much bigger. But the well-positioned hospital is extracting more from the managed care plan, and it’s improved for them.
            The hospital that doesn’t have local regional presence is not really prospering today, and it’s causing a wider difference between the "haves" and the "have nots" in the hospital area. Plus, for the hospitals, of course, they’re benefitting now from all of the BBA relief packages, and there may be a third one coming up. And so, for once, hospitals are enjoying better reimbursement, from both the private side and from the government side at the same time.
            MR. FARRELL: The only correction is I’m not sure I really put as much emphasis on BBA relief to hospitals, as perhaps the rhetoric that’s being thrown around.
            MR. FIDEL: Yes, but going from a minus 2 percent.
            MR. FARRELL: I agree. Yes, absolutely.
            MR. FIDEL: From a minus 2 percent in Medicare reimbursement per stay to plus 2 percent is a big, big difference.
            MR. FARRELL: Yes.

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