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Question and Answer Session

            DR. GINSBURG: Good. I’d like to part from the agenda a little bit by having us continue our discussion of hospitals after our questions and break. But let’s go to the questions on time. If someone would like to ask a question, if they could come up to the microphone and identify themselves, and it’s really important to identify themselves because of the people just hearing the audio.
            MR. FARRELL: We know which answer to give too.
            [Laughter.]
            DR. GINSBURG: We’ll start with Julie.
            MS. ROVNER: Hi. I’m Julie Rovner, from Congress Daily.
            I want to go back to the Patients’ Bill of Rights. You mentioned that the whole debate over the Patients’ Bill of Rights has already helped boost the cost of health care of health plans. Given that, isn’t it possible that if they actually pass something, there wouldn’t be that much of an added increment to it?
            MS. GOODMAN: I think any time you pass laws that involve expensive regulations and legislative requirements, there will be increased cost. And I think the other thing that we’ve seen with health care is that when you have laws passed to expand access and expand "rights and mandates," that volumes/utilization will, in fact, go up. So I tend to think that the estimates probably do not take full account of all of the interactive effects of the provisions of this law.
            MR. FIDEL: I’ll go back to the old adage, "the devil is in the details," and I don’t think plans have priced yet for a restrictive bill of rights that would allow one to sue, whether or not you have external review completed or if external review comes out in favor of the plan that you’d still be able to sue.
            So I think, yes, it’s had an impact already, and class action litigation may have had an impact already, also. But depending on how the bill of rights come out into law, there is still a potential further increase in costs, I think.
            MR. BLOCK: I’m Greg Block from the Georgetown University Law Center. I have a question for the Wall Street folks on the panel.
            It has struck some of us who have watched the court decisions over the past year or so that they have really changed the world when it comes to liability, and this has received remarkably little attention on Wall Street and in the media. And some feel that Kennedy-McCain, for the most part, codifies what the courts have done over the last year or two rather than changes it much.
            How does Wall Street go about following what the courts do, understanding Pegram v. Herdrich, for instance, and the decision on remand from the Supreme Court in Pappas a couple of months ago, these kinds of developments?
            MS. GOODMAN: Well, typically, just speaking from a procedural standpoint, we will tend to retain outside counsel, as we have at Merrill Lynch, and I believe most, if not all, of my competitors at other firms have done so as well. And so we do have experts looking at the legal ramifications of the various decisions. I, personally, have written fairly extensively on these issues and have had extensive conversations with clients and have conducted conference calls, again with the outside legal counsel that we have retained on these issues.
            I’m an MBA, not a lawyer, so I am not allowed by my compliance people to express legal opinions, per se.
            [Laughter.]
            MS. GOODMAN: I guess analysts can express lots and lots of opinions, but legally you have some limits.
            In terms of what has happened, generally, I think that the courts have narrowed the ERISA preemption, making the distinction between decisions that relate to quantity of benefits, which would fall into the preemptive area of plan administrative decisions and decisions related to quality of care, which would not fall under ERISA preemption and would typically go back down to the state level.
            And if you look at it from a very cynical standpoint, I think what the courts are doing, to some extent, is saying, "Well, here is an example of a plan doing something that strikes as egregious and ugly, and so there should be a remedy, and so we will find a remedy for it.
            So we have seen a narrowing of the preemption in the various decisions, and I think Pappas is an example of that, but there was a relatively similar case I believe in New York that the appellate court reached a very different decision, and some of the outside counsel that I’ve spoken with have said that the Herdrich decision is too ambiguous and will ultimately require another more defined decision from the Supreme Court in the absence of federal legislation.
            Now, in terms of Kennedy-McCain, what it does is it creates a dual track, so somebody can go to the state, under state punitive damage constraints, if any, and they can do that regardless of whether the plan has actually obeyed its own terms and has complied with evidence-based medicine and what is in the peer-reviewed journal articles and then go into an emotional appeal at the jury level.
            They can also go into the federal courts. And unlike the decisions under ERISA, which provide for injunctive relief so that if the plan is denied coverage for something and it’s made an incorrect decision under plan administration, that they can be required to pay for it. Under Kennedy-McCain, there would also be unlimited damages for economic injuries and also other damages that are not currently available under the terms of ERISA. So it would, in fact, increase costs, as well as adding to the complexity of the system.
           
            MR. FIDEL: The original Kennedy-McCain said that you could change the contract that the employer had with the insured. So that even if the plan complied with what was in the contract, if some court or jury decided that, well, they shouldn’t have really agreed to that. You could maybe successfully sue the plan.
            Now that has changed through the amendments, but it shows you, again, how important the details are. Certainly, Kennedy-McCain would get rid of the ERISA shield virtually completely. Whereas, we’re nowhere near that with the court rulings that we’ve seen so far.
            DR. GINSBURG: The woman back there.
            MS. BROWN: Hi. I’m Jill Brown from Managed Care Week.
            My question is I wonder what sort of competitive marketplace impact you see from payers’ investments in MedUnite and their own web-based claims processing systems or online Internet insurance retailing.
            MR. FIDEL: I don’t think it’s a big deal. I mean, these things can go on concurrently. Companies can be involved in MedUnite, and they can also take advantage of innovations that are going on outside of MedUnite. So I think it’s just, you know, a year ago everything related to the Internet and dot-com got so much press and attention, and look at how much it’s getting today.
            So I think it was more a sort of a frenzy, and it’s all going to come out in the wash, and companies will eventually use the best methods, and some will come from MedUnite, some will come elsewhere, and everyone will be able to use those.
            DR. GINSBURG: The gentleman back there?
            MR. FROST: Yes. Hello. Brendan Frost from CCH Medicare and Medicaid Guide.
            Mr. Berenson suggested that rate determinations for Medicare+Choice should be severed completely from CVS or perhaps that should happen. My question is what’s the next practical step for the CMS to take in that direction and do you all think that’s going to happen?
            Thanks.
            DR. BERENSON: Just to clarify, right now there is a statutory requirement that has an administrative formula which directly links the increase to plans to what happens to the average U.S. PCC, the U.S. per capita cost increase for the traditional program. So it really would not be up to CMS. It would require a statutory change, and right now I’m not aware of a database that would accomplish what I’m suggesting.
            So it would be a ways off to do what I’m suggesting, and it would require legislation.
            DR. GINSBURG: Yes. Sir?
            MR. RALEIGH: Bill Raleigh from the Institute for Alternative Futures.
            We look at premium increases of double digits for the next couple of years, but what’s going to happen after that? Do you anticipate that this is going to be a long-term thing where costs are going to remain out of control, going to be a double digit or is this something that maybe after a couple of years they will come more back into align and things will get back to an even keel again?
            Do you have any sense for the aging population or whether this is kind of a forever thing or just a trend?
            MR. FIDEL: I’ll give you my opinion. I think that plans are not going to get more aggressive, meaning lowering their rate increases in a period where they don’t have confidence about what their cost increases are. And as long as cost increases are increasing, that trend is increasing, I don’t think you’re going to see a moderation in rates.
            It’s only when plans feel they are getting their arms around the cost, and they are feeling more confident that the cost trend is starting to decline that they will start getting more aggressive, and that may eventually lead to another price war in the traditional cycle. But I would predict that you’re not going to see plans really getting aggressive going out to market share when they’re worried about their cost trends are rising.
            MR. FARRELL: The only thing I would add to that is I don’t think you can necessarily rely on the traditional insurance cycle that we’ve seen in the past, principally because of the massive consolidation that has taken place in the industry. And so to rely solely on past is probably a potential for disaster.
            In fact, Norm is right on target, and you have to really see what the circumstances are. Going back to the saying "the devil is in the details here," and that’s really what’s going to drive it.
            DR. GINSBURG: Bob?
            DR. REISCHAUER: I would just say that we’re talking about plans as if they are independent actors, and what they really are is agents for employers. And plans are going to do what employers want them to do. And what we’re talking about is, in a sense, the price, but the nature of the service can change. And if employers want to pay less and plans can’t extract savings through market power or innovative practice, you will see the package that they’re selling in a sense shrink in its generosity. And so we’ve got a lot of different things in play that end up with that thing we look at, which is how much did premiums go up this year over last.
            MR. FARRELL: One of the reasons I think that would support Bob’s statement is you also don’t have as many companies entering and exiting the industry like you did many years ago. The relationship with the employer is something that will have to be lived with for the few remaining companies that are in the industry.
            MS. GOODMAN: I think there are a couple of things that would play into this also. I think what we’ve seen in the large employer market is a reduced dependence on the local-market HMOs with which they contract on a slice basis. So Merrill Lynch offers five plans, and four in Chicago, and whatever in L.A. and a shift back to the predominant self-funded products.
            I think as you have the lion’s share of the employer population moving on to one plan platform that they can then make those decisions and implement those decisions without having the employees given the opportunity to benefit shop with some other options.
            So I think that there’s probably a process that will take place over the course of the next few years as you have the consolidation back into the large self-funded plans and away from these local market HMOs. And as that happens, the employers will have greater latitude to implement some tough decisions.
            DR. GINSBURG: It seems to me Dennis is saying that he thinks that consolidation of insurers has really made such a change that I guess the implication is they will have higher margins indefinitely. I was wondering if the other panelists buy that.
            MS. GOODMAN: I think if you look at what has happened in the business, there has been a shrinkage in the number of plans operating nationally within the context of any given local market. The free cash flow that is being generated by these companies has been used not to go out and buy plans or start plans or go into new product areas like Medicaid or Medicare, but instead to pay down debt or repurchase stock. So, the capital base of the industry has, in fact, been shrinking.
            DR. GINSBURG: Joyce?
            MS. FRIEDEN: Joyce Frieden from Physicians Weekly.
            I was interested, Ms. Goodman, in what you said about capitation, how you’ve never particularly liked it, and I wondered if you could elaborate on the reasons for that and whether you agreed with Dr. Berenson that it’s not necessarily gone away for good.
            MS. GOODMAN: Well, I think if you look at what’s happened in the marketplace, there has been a move away from the global capitation, and that is the structure that I’m talking about and I think which has had some significant problems. I think when you’re talking about capitation of primary care physicians and primary care services, that’s relatively predictable. I think when you start getting into specialist services and the extension of capitation to include prescription drugs, hospice services, outpatient services, diagnostic services, et cetera, that’s been very difficult.
            And I think that the basic issue, in my mind, has been that the capitation structure does create an inherent conflict between the beneficiary who is being told it costs you nothing to access all of these services or close to nothing and the physician who’s told if this person does access these services, it’s going to cost you a substantial amount of money, and you could incur some very large losses. I do think that if you look at the early 1990’s, the capitation systems worked okay because there was enough money. But as on a real dollar basis that funding shrank relative to the underlying cost increases, the constraints became increasingly difficult. And I would say that there would be a couple of other things that feed into that: one being the focus on the patient bill of rights and the notion that anybody saying no to anybody at any time was somehow a violation of one’s rights as an American; and, secondly, the increase in consumerism both through the direct consumer advertising on TV, people going in to their doctors saying I want this, you know, and if you don’t give it to me, there’s going to be a consequence of that. And I think that the proliferation of health data on the Internet has contributed to that as well. And if you look at the--I did this in January when I looked at the number of sites related different disease conditions, and it was mind-boggling. So, anybody who wants something can always find some evidence, some piece of paper that’s going to tell them that there is something more that can be done. And so I think that the constraints that capitation has created are artificial and are not working in the current environment. They only work in the doctor knows best and there’s plenty of money in any case type of scenario.
            DR. GINSBURG: Thanks. I think it’s time for us to move on to our break. We’ll take 15 minutes and starting off at 11 o’clock sharp and get to the beginning of the next question.

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