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HSC's 12th Annual Wall Street Comes to Washington Conference

Conference Transcript
June 14, 2007

Welcome and Overview

Paul Ginsburg, president, HSC bio

Panel One: Health Insurance Market Trends

Topics include Medicare Advantage; Medicare prescription drug plans; premium trends; plan network design and provider payment strategies; and consumer-driven health care.

• Christine Arnold, Executive Director, Morgan Stanley bio

• Robert Laszewski, President, Health Policy and Strategy Associates bio

• Joshua Raskin, Senior Vice President, Lehman Brothers bio

• Douglas Simpson, Senior Director, Merrill Lynch bio

• Paul Ginsburg, HSC President, Moderator

Panel Two: Hospital, Physician and Pharmaceutical Trends

Topics include competition between hospitals and physicians; hospital pricing and competitive strategies; hospital capacity expansions; health information technology; and the pharmaceutical pipeline.

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

• Geoffrey Harris, Hedge Fund Manager bio

• Jeff Schaub, Senior Director, Fitch Ratings. bio

• Adam Feinstein, Managing Director, Lehman Brothers bio

• Paul Ginsburg, HSC President, Moderator


Paul Ginsburg: I’d like to welcome you to Twelfth Annual Wall Street Comes to Washington Conference. The purpose of this conference is to give the Washington health policy community better insights into market developments in health care that are relevant to policy. Discussing market developments and their implications for people’s health care is the core activity at HSC. Here today is an opportunity for you and us to tap a different source of information, equity and bond analysts, on this topic.

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 repayment. The good analysts develop a thorough understanding of the markets that that companies they follow operate in, and they also follow public policy which often has important implications for these companies. Some analysts work for brokerage companies and advise the clients of these firms, others work for institutional investors such as mutual funds, pensions, or hedge funds.

We have an analyst on the panel on provider issues from one of the companies that rates hospital debt to make sure that we do not miss out on the market perspectives of not-for-profit hospitals which continue to be the core of the hospital system.

This is also an opportunity for the equity and bond analysts to take a break from their day-to-day jobs of assessing the outlook for profitability or solvency of companies and bring their understanding of market forces to bear on the questions that those involved in health policy have on their minds.

We also include on each panel a Washington-based health policy analyst, and these people have made valuable contributions to these sessions by tying the market developments more closely to health policy.

The format of this meeting is the same as last year. We are going to have a series of questions that have been shared with the panelists in advance. We won’t be having presentations. There will be two sessions. We’ll have a break between each with a separate panel, the first one on health care costs and premium trends and various issues connected with health insurance including Medicare, Medicare Advantage, and Medicare prescription drug coverage. And the second panel will cover the range of provider issues, hospitals, physicians, pharmaceuticals, medical devices, et cetera. There will be an opportunity for audience questions after each panel. There are question cards in your packets. Please fill them out and give them to an HSC staff member, or you can go up to one of the microphones to ask questions. I want to note that the employers of these analysts do not permit them to answer questions about the outlook for specific companies, but in all the years, I don’t think anyone has ever asked that, maybe a lot less interest, maybe my warnings being heeded. I want to thank the Robert Wood Johnson Foundation that funds this conference and is the principal funder of HSC, and also thank the people at which is run by the Kaiser Family Foundation for webcasting this conference, and the webcast will be available 9 o’clock on Monday at And HSC will post a transcript of the conference on its website early next week. Before you leave the conference, we would appreciate if you would take a moment to fill out the evaluation, it’s on the yellow paper in your packet, and leave it at the registration table.

I want to introduce all the panelists, the ones here and the ones coming up midmorning. Both panels are excellent and they comprise panelists who have participated in this conference in the past which includes Christine Arnold of Morgan Stanley, Doug Simpson of Merrill Lynch, Geoffrey Harris now with a hedge fund, Bob Berenson of the Urban Institute, and Bob Laszewski, a health policy consultant. The last two are our policy analysts.

We also have several new analysts this year. We have both Josh Raskin and Adam Feinstein of Lehman Brothers, and Jeff Schaub from Fitch Ratings.

I am going to begin the questions this morning with one on Medicare Advantage. The first focus is the magnitude of entry by plans or reentry into the Medicare Advantage market, and I want you first to discuss private fee-for-service plans, probably the segment of Medicare Advantage that’s been getting the most attention in Congress now. Let me pose the question what is the value that they bring to the Medicare program and its enrollees and what’s their potential in the future?

Christine Arnold: Private fee-for-service plans were really created with the Balanced Budget Act and the goal was to create a product that did not have utilization controls because the idea was that doctors were being accosted by utilization controls on hospitals, precertification, prior authorization, all the things that spawned that lawsuit at the end of 1999. The goal here was broad access without any financial incentives to providers, without utilization controls. But it was really the combination of the Balanced Budget Act and BIPA and the Medicare Modernization Act that raised rates in the floor counties that really gave the private fee-for-service viability.

So what happens is that now 84 percent of membership in the private fee-for-service plans are on what’s called the floor counties and these floor counties are paid much more than a fee-for-service member would cost the federal government. MEDPAC of course estimates that the total cost is about 119 percent of fee for service. There is no financial risk for providers. There is no medical management utilization in the form of precertification or prior authorization. However, plans can do disease management, and do, they do care coordination, they have nurse help lines, and they do health risk assessments in order to capture which seniors need help and to try and get them that help.

Thirty-one percent of private fee-for-service members are in rural counties. Rural counties had previously not been served. Why? Because it’s hard to get that doctor or hospital in a small community who is a sole community provider to agree to be part of a managed-care network. Private fee-for-service plans introduced the concept of deeming. So private managed-care companies can deem hospitals and doctors which means that if you’re a doctor or a hospital and you treat a patient and you knew they had a private fee-for-service card, then you agree to be de facto in the network and you’re going to get paid what Medicare pays, and even if it’s out of network, you get paid what Medicare pays. So the private plans for the first time ever could just piggyback on the Medicare fee schedule and not have to create a network.

The issues here are that providers aren’t required to take private fee for service, and these providers can provide daily. So on a Tuesday I take Gertrude, but on Thursday I don’t. Or I’ll take her for one procedure and not another. Providers have a lot of latitude. So what we have is no specific network so there is breadth, but we have given up for the senior certainty of who is in the network day to day, encounter to encounter, and I that’s one of the issues that seniors are wrestling with and that may need some policy intervention.

There is also limited ability to affect costs to through providers and through members. You can’t penalize a member for poor behavior. For example, if you want them to call before they go to the hospital and they don’t, there is no provision for a penalty, and the same for docs in the hospitals.

So we’re seeing tremendous growth. Seventy-five percent of 2007 enrollment growth within Medicare Advantage has been private fee for service. So 75 percent of this year’s growth is in this product. It pays really well relative to some of the other Medicare products and it’s in underpenetrated markets.

Paul Ginsburg: Josh?

Joshua Raskin: I’ll just add I guess I think from a practical standpoint and you think about a private fee for service, the most attractive option for the senior now, the biggest hurdle to Medicare Advantage historically or Medicare Plus Choice, whatever you want to call it, the network requirement, the idea that a senior had to give up their ability to go to any provider they wanted in order to get the better benefits within the health plan program. So the private fee for service, as Christine mentioned, you’re basically deeming the network, so anyone who takes Medicare is constructively in the network. You don’t have to give that up as a senior and I think that’s why the level of attractiveness is there.

To the original question as to what the value is, you get better benefits. Simplistically, of you’re a senior and you enter one of these private fee-for-service plans, the average benefits are somewhere around 12 to 14 percent depending on which study you look at, 12 to 14 percent better than what the traditional fee-for-service Medicare program brings. The problem is, as Christine cited, the payments are 119 percent of what the traditional fee-for-service program pays for the average Medicare eligible. In my opinion it’s probably a topical question to ask about private fee-for-service this year because I’m not sure how many more years we’re going to be talking about it. If you think about it, it’s a product where it costs more for a health to provide the basic set of benefits if you take that 119 percent premium, and then maybe 105 to 107 percent is what the actual cost of the base benefits are, that difference being the additional benefits, it’s difficult for me to see the overall value proposition within the broader scheme of Medicare Advantage.

Douglas Simpson: I think maybe just to dovetail on the comments there, it makes sense for the senior because they’re getting some more bells and whistles within their coverage. What’s going to be interesting I think over the next maybe 1 to 3 years is to see to what extent can the private fee-for-service serve as sort of a beachhead for companies to provide more managed offerings in those communities that were historically as Christine mentioned underserved with Medicare Advantage. Is there a way to migrate from the private free for service to more of a managed offering, and I think obviously the jury is still out there and I think that will be an interesting development to watch.

Right now there is not great data on managed offerings versus unmanaged offerings in the Medicare population and I think that’s something that taxpayers are going to increasingly demand. As health care costs continue to rise, they want to make sure they’re getting the bang for the buck.

Robert Laszewski: Paul, I heard your question a little differently. When you asked what the value was I heard it as what’s the policy value. Clearly to the industry it has been very profitable, so there’s a value. To the beneficiary it’s a very convenient way to access a private plan and get extra benefits, so there’s a value. I think the overarching question especially as we head into the budget season here in Washington is what’s the value of private free for service.

I think a lot of folks are suffering from amnesia about this whole issue. In 2003 we passed something called the Medicare Modernization Act and the Medicare Modernization Act was about modernizing Medicare. It was about how are we going to solve the baby boomer problem, how are we going to bring Medicare costs under control. At the time the Republicans in the Congress who of course controlled things said the best way to control things is to bring the private market to bear to bring costs under control, the theory being that the private market can do a better job of managing costs and quality for the seniors but fundamentally bring costs under control.

So we started this experiment called private free for service which was aimed largely at bringing the managed-care concept to rural markets where in particular the managed-care companies found it difficult with the very low number of people who they could recruit to make a managed network work. So I call it a sort of prime the pump strategy. What the Republican Congress said is let’s pump some money into this program to get the insurance companies back into the business because we sort of ran them out with the 1997 Balanced Budget Act, and let’s also have some additional money in there to provide these extra benefits to make seniors interested in trying these private plans out.

The way I see it is we have this experiment going on which is an experiment to see if the private market can better manage care. Suddenly in Washington we’re having this debate about should we continue private free for service because gee golly whiz it’s a good way to give poor people extra benefits, it’s a good way to give seniors extra benefits? I don’t think that’s what the Medicare Modernization Act was really about in 2003, it was about whether we can prove the market has value.

I see us as sort of midway through that experiment and I think the real question now is, and I think fundamentally the question that Paul just asked is, where is the value? I think that we have to define value in terms of whether we’re on a track to demonstrate whether or not the private market is more efficient or not, and that’s where we have to look to value.

Paul Ginsburg: Actually, I think that’s happening how in the policy arena is we’re seeing the perils of the traditional infant to infant strategy, long used in many countries around the world in international trade, that you give an industry advantages to get up and on its feet and then what happens when they’re up and on its feet can you ever taken them away.

Robert Laszewski: It becomes a corporate welfare kind of a thing.

Paul Ginsburg: That’s right, and I think that’s what a lot of the debate this year is about.

Just one quick question to finish of the private free for service, who is in this business now? In a sense, is it the mainstream of the companies that are in Medicare Advantage, the HMO business or PPO, or are these kind of more of a fringe?

Robert Laszewski: They’re not the fringe. They are some very major players, most everyone is in it, but the vast majority of private free for service is concentrated in just a handful of companies. I think Humana has about 42 percent of it, Michigan Blue Cross has another 11 percent, and there are a couple of niche players who don’t have a lot of business, but it is a disproportionately large business for them. Everybody is in private free for service, but some people are exploiting it or concentrating in it much more than others.

Paul Ginsburg: Did you want to add something?

Joshua Raskin: You’ve seen a couple of niche players that hadn’t focused, or sort of nascent companies that have been built on some of this fee-for-service growth. And then some of the largest health insurers in the country, an Aetna for example, that has not had a presence in Medicare since the Balanced Budget Act, they are getting into it in some of the private free for service mostly around I think the retiree side of it, but it runs the gamut I think.

Paul Ginsburg: That’s right. Let me turn to numbers-wise is still the core of Medicare Advantage which is the HMOs and the PPOs. I want to ask about what do these plans look like as far as how active are they in managing care? Have they been able to do good things by integrating the Part D benefit into their benefits? Are they looking more or less like commercial HMOs and PPOs today?

Joshua Raskin: I can start with that. I think going back to maybe the value discussion that Bob was talking about, if you think about the average Medicare Advantage HMO product runs a premium that’s about 110 percent of the traditional fee-for-service program, but the good news for them is that their base offerings, the additional benefits that they’re providing are about 15 percentage points, so the base offering that they’re providing is maybe 95 percent of what the A&B (?) costs would be to the traditional program.

So I would say first to start with there is some value there. They are providing that benefit at a more reasonable cost and I think that makes sense. It’s a managed product. You actually have medical management techniques that are more effective. You can do things like preauthorization which obviously make no sense in a private fee-for-service market.

If you think about how they look vis--vis the commercial plans, I think the commercial plans are getting slimmer and slimmer. You’re seeing more cost sharing and benefit buy downs to corporate America and with the More Money Act or the MMA or whatever it’s called, everyone has been adding benefits to the Medicare Advantage plans and so I think you’re seeing more of a convergence. In certain counties especially in some of the urban areas you could think of the benefits in Medicare are as good if not better than the commercial benefits typically.

Paul Ginsburg: What about the degree of management? Are they doing more or less management than you’d expect in a commercial plan?

Christine Arnold: I think they need to do less given that their payments have enabled them to -- first of all, with the private free for service they’re limited in their ability to do it. On the HMO and PPO side, HMOs in many cases are still capitated so what they’re doing is they’re giving a percent of the premium to the doctors and hospitals and then it’s kind of incumbent on those doctors and hospitals to really manage the medical costs, and so they’ve passed on some of that medical management responsibility to those in the field who are actually managing costs.

With the PPOs, we haven’t seen huge take-up of either regional or local PPOs. In some cases it’s because it’s hard to compete with that private fee-for-service offering which does have generous benefits, which doesn’t need to develop a network, where the barriers to entry are pretty low. So we haven’t seen as much PPO take-up, but the PPOs can influence medical management, disease management, precertification, prior authorization, they just haven’t needed to in the current payment environment. I think Bob raises the good question that the key question from a policy perspective longer term is are we pursuing a private market strategy or not.

The managed-care companies that I speak to say that they can reduce medical costs 10 percent for a managed product versus an unmanaged product, but it takes 2 to 4 years. So entering new markets and experiencing this kind of growth in whatever product you have is going to take 2 to 4 years to get that 10 percent extraction of medical costs out.

Robert Laszewski: I think Christine raises a really good point in terms of the timeframe it takes to make a managed-care plan work, and I think that where there is a disconnect and where from a policy perspective I think the Congress needs to do some serious thinking is there is this debate about do we kill and get rid of private free for service. Private free for service for a lot people out there, a lot of competitors, is simply an arbitrage game and they’re screwing it up for everybody else.

I think it would be wrong to get rid of private free for service, but at the same time I think it’s important to get on a track where we use private free for service from a policy perspective for what it was intended to be in the first place and that is the ability of a managed-care organization to move into a market particularly a rural market where they don’t have a network, where it will take 2 to 4 years to get an enrollment large enough and to be able to bring some managed-care technique to bear and to make the system work. What we’ve got right now is just sort of this wide-open let’s go in and take advantage of it and I think what the Congress has got to take a serious look at is putting a timeline on private free for service, perhaps giving CMS the power to require business plans of HMOs. If you’re going to go into a market and you’re going to start with private free for service and you’re going to get a 19 percent additional set of payments, there’s a reason for that and the reason is to ramp up to a real managed-care plan, get the enrollment you need, be able to bring in the managed-care networks and structures that you have to have, but we’re going to expect that at the end of 4 years or at the end of 5 years you’re not going to be on the private fee-for-service training wheels or crutch any longer, you will have transitioned to a real managed-care plan, and you will be demonstrating that you can in fact manage costs for less money than the traditional Medicare plan, because if you can’t manage costs for less than the traditional Medicare plan, why are we doing this? So I think that it’s important to recognize it takes time, but also we have to put a time limit on what this transition strategy is.

Douglas Simpson: A lot has been said on this, but I do think that one point that is sort of interesting, the question about does this look more or less like commercial, I think just stepping back a little bit, think about what’s happened on the commercial landscape. We’ve seen a change in the responsibility put on the consumer in terms of their share of the costs, we’re incentivizing them to become smarter consumers of health care, increasing their share of out-of-pocket spending. It’s sort of interesting though, I don’t think the information has been provided to people, so we’re incentivizing them with benefit structure but then we’re really not giving them the tools to have better decisions. So it’s sort of like giving somebody $100 to go out to dinner and then not putting the prices on the menu.

I think it will be interesting in Medicare because I think you’re going to see the same parallels over time as we move from private free for service into more managed offerings over time. And to the points raised earlier, it is sort of interesting, this is a bridge where we were and where we’re ultimately going to go and at this point is maybe the bridge muddying the waters a little bit? But I think over time as this plays out, you’re going to have that same exact same issue with getting information to consumers in the Medicare population and in the commercial population and I think that that is something industry on the whole has just done a pretty poor job of.

Christine Arnold: I would like to raise one policy challenge, that as we’re looking at private free for service in the pool of people, the strategy of the managed-care companies is now we’re going to move them to PPO and then we’re going to move them to HMO, but we don’t really have a viable PPO product that works in the markets where we have private free for service. So if look at the regional PPO, you’ve got one rate, one premium for an entire state and so you’re in a situation where within that state the managed-care company can’t compete in a high-payment area say like Miami, Florida, with the local offerings that are getting paid very, very high amounts for that county, and you’re not getting paid that average for the state, and in the low-payment areas your challenge is that you’re kind of overpaid. So you’ve got a paradigm here where you don’t really have a lot of overlap, and then for the local PPOs which are regional, there is no deeming. So that provider, that doctor or that hospital who is the only one in town who was in your plan for private free for service because he was deemed in, he didn’t intend to take your network but here he is, there is no deeming provision for the local PPO. So transitioning membership from private free for service to the local PPO on a county level without some kind of deeming is going to be pretty difficult. And there is also no essential provider provision so you can’t even appeal to CMS and say this is essential, I need this provider, and the provider can say forget it, I don’t want to take you even of you pay core Medicare. So from a policy perspective, all providers probably need to accept Medicare regardless of what product if they’re getting at least paid the Medicare payment in order to have a transition to more managed plans, and we’re missing that right now.

Paul Ginsburg: Reflecting on this it seems like we’ve had a collision of policy priorities at odds. When the MMA was done in 2003, the administration very much wanted to build up PPOs, whereas the rural interests in the Senate wanted to make sure that there were products available in rural areas. Actually, I think there’s a moratorium on new local PPOs, the only new PPOs have to be regional, so in a sense one strategy has cancelled out another one.

Joshua Raskin: Just a couple sort of maybe summary points on this. At some point the crux of the debate is whether or not managed care can work in a rural area, and historically it just hasn’t happened. You’ve got the sole-provider issue where the facilities or even some of the specialists can say I don’t want to give you a discount and at the end of the day I’m the only game in town so that’s the problem. So you have to think about whether Congress has decided that it’s in the best interest to subsidize the rural areas: Do they have the right to eyeglasses and hearing aids through health plans, and the government is going to subsidize that because they live in rural areas? My sense is Congress has mandated a level of benefits and if you live in a rural area that precludes you from that opportunity it’s like museums or other sorts of publicly funded options as well. So I’m not sure I understand why the government would be sort of subsidizing the ability to get these extra benefits.

Then to the value question and then the theoretical transition plan where it sounds good, you’re a managed-care plan so you start these private fee-for-service open-ended products with your sort of unlimited network, and then over a couple of years you’re going to transition the seniors into a more managed product and if we don’t have PPOs, we’ll skip right to the HMO. What people aren’t think about is the seniors’ perspective. If a senior says I’m signing up for this private fee-for-service plan because my benefits are better, they’re going to cover my deductible or a portion of it, I’m going to less premiums, that’s a great option. If 4 years from now I transition into an HMO plan and my premiums go back up and my deductible is there again and I’m not getting all of the additional benefits, what in the world am I choosing this network product for. So I just think the biggest hurdle is going to be whether or not you can convince the seniors to stay in the plans, and if the private fee-for-service plans are spending more, if it’s 105 or even 107 percent of what Medicare spends on the A&B benefits, I don’t see how you can possibly do that longer term.

Paul Ginsburg: I’d like to talk about this all morning, but let me move onto the next topic.

Medicare prescription drugs Part D. The first question is about what is your sense of the enrollment to date? In a sense has adverse selection been a problem? What benefit designs have proved to be most attractive to beneficiaries? Who would like to start?

Douglas Simpson: I think in general the Part D program has been frankly more successful than many expected. There has been pretty significant take-up, and depending on which numbers you look at, there is anywhere from 17 and I guess at this point north of 20 million people with credible drug coverage.

We were surprised this year frankly how many people chose to do with the stand-alone Part D offering bolted onto an MA offering. It was sort of interesting, people seemed to kind of move away from the wrapped product. Over time we’ll see if that remains. I think it will dovetail with what we’re talking with the managed offerings.

I think in general, Part D has been well received because there was a huge gap within health care coverage in the country, obviously pharmaceuticals rising dramatically as a percentage of overall drug spending, people didn’t have access to drug coverage and this created an opportunity for them to secure that coverage. My own family story I’ll tell you, I put my parents on an MAPD offering and their spending went from $17,000 down to $12,000 annually. They’re on an Aetna Medicare Advantage linked offering in New Jersey. I pretty much spent 3-1/2 hours which was a great way to spend a Saturday going up and down the formulary and making sure that my father’s 38 different drugs and my mother’s 73 different drugs, I think they wake up at 7:00 a.m., take their meds and then have lunch.


Douglas Simpson: We went through the offering and selected the plan and it worked for them. Just from personal experience I’m pretty impressed with how it’s played out for them financially.

I think in general if you look at the pricing of the products, I think competition does work. It takes time, it’s going to take a couple of years, but I think now there is an incentive. You’ve got big players out there trying to weigh on drug costs so they can offer a more price-competitive product to seniors, grow their membership, and grow their profits. It’s going to take time, and I know there’s a lot of discussion about what’s the best way to get there and what’s the quickest way to get there, but if it continues to play out, we would expect that the plan should continue weigh on the manufacturers and continue to drive down those costs. And obviously they’re benefiting. This is on the heels of patent expiration which certainly bodes well for drug trends on the traditional pharma side at least for the next couple of years.

Christine Arnold: In terms of adverse selection, the only place we’ve seen real adverse selection is when the plans have attempted to fill in the donut hole which is where the seniors are supposed to be paying the cost of the drugs themselves 100 percent. Some plans have attempted to fill that and allow seniors coverage of drugs, especially branded drugs, and that has been a foolhardy strategy. It cost Humana a lot last year. So they changed the plan’s structure and fixed that issue. And then this year Sierra did the same thing and have taken a rather sizable charge for the costs associated with that that will not be covered by the risk corridor because they enhance the core benefit. So generics and the donut hole work, brands and the donut hole do not from a risk-selection perspective.

Robert Laszewski: I’ve been surprised by how profitable the Medicare portion of the business has been. I would have thought that it would have been much more difficult for the health plans to make money in the Medicare business because my opinion was the states weren’t doing an entirely bad job of managing drugs on the Medicare side. But in fact, the plans that have concentrated on the Medicare I think are even disproportionately profitable, so that’s been the big surprise for me.

I also think there’s a lesson here in that I have never been the greatest fan of the Part D program for lots of reasons, but one of the neat things about Part D is that the insurance companies come in and bid their prices each year and I think that’s worked really well. It’s been sort of a self-leveling field. The prices that the insurance companies are collecting from the government for Part D is determined by this bidding process and I think there is a lesson to learn there for Medicare Advantage. With Medicare Advantage we’ve got people playing all kinds of games, arbitraging the rates particularly in the private fee-for-service system that is not happening on the Part D side. When the Medicare Modernization Act was originally passed, I think most people saw the PPO plans, the Medicare Advantage PPO plans, as the real long-term solution, that insurance companies would come in and bid, and there have been some problems with that as Christine has pointed out. So we haven’t had insurance companies coming in and doing the Medicare PPOs and doing the competitive bidding.

If you look at Part D where we have been doing the competitive bidding, I think we have had a much more efficient market and the games playing hasn’t gone on, and I think for policymakers it’s a good lesson to take a look at the way the bidding process works in Part D and think about how we transition to that Medicare Advantage, get rid of the game playing, and concentrate on what we’re supposed to be concentrating on.

Paul Ginsburg: Did you have a comment on Part D or should I go on to the next question?

Joshua Raskin: There is one thing to sort of step back, if you think about 4 years ago, the summer of 2003 and we’re talking about there was DIMA (?) and all these names and acronyms for what this bill was going to be. No one thought that this was going to happen and the government had to give all these concessions with these big risk corridors so the plans wouldn’t lose money and make it like a no-risk plan for the first couple of years. Doug talked about the high levels of penetration, and to me it’s remarkable. I’m still thinking back on it that I was certainly in the doubter’s camp. I think everyone was saying it’s never been seen in nature and that sort of discussion, and now you’ve got 90 percent of seniors with some sort of credible drug coverage according to CMS.

The second part to think about is that the difference between the drug plans and the MA plans, just the biggest overall difference is there is a requirement that the Part D business has to be administered through a private plan. So when you think about MA, your biggest competitor is the government with only 18 or 19 percent penetration, so 80 percent plus of your competition is coming from the government itself. So the way the payment mechanisms are managed through the government, and no offense to the people here at CMS, it’s monolithic with these complicated rate formulas and it has nothing necessarily to do with what the actual cost of providing that care is at the end of the day.

The drug plans are as transparent as you can get, to the earlier point of the competitive bidding situation, you need to come in as close to your actual cost plus your admin and profit as possible so you’ve got a real private market dynamic there, and I think that’s the biggest difference between the two.

Paul Ginsburg: I would like to go on to private insurance now and talk first about what these analysts are forecasting about health care costs in the next few years. To be precise, I’m really talking about not so much the premium trends because that can be influenced by differing by-downs over time, but what about the underlying costs? Do you expect it to remain about the current rate or to go up or down say over the next year or two?

Douglas Simpson: Maybe I’ll just take a quick stab at it. National health expenditure of 6 to 7 percent seems like a reasonable growth rate, 400 to 500 points higher than GDP for the next probably 15 years. Underlying that you’ve got changes in care delivery patterns, innovation, new products, new drugs, new devices, technologies. Certainly the health care you receive today is not the same you received in 1972, so it’s not an inflationary update in the way that buying a can of peas this year from last year to this year changes. It’s very different. You buy much more advanced peas.

As we think about this, it’s sort of an interesting question because that is the dynamic and that’s going to continue. Where we sit today, we feel that the trend is relatively stable, it’s still high, but the inflection, the change in that trend is pretty minimal, it’s pretty stable at this point. The things we’re specifically focusing on, things that could kind of kick that up over the 2008, maybe 2009 time period, are really two things that we’ve spent a lot of time looking at. One is the strength of the consumer. There is demand elasticity in health care. If you gave every American $1,000, next week there would be more health care utilization. If we look at disposable income trends, wage growth, certainly the housing market, it seems to us right now that wage growth and disposable income trends have been positive but the consumer has been held back by the weakening housing market. So that is something we would keep an eye on for a potential up-tick utilization.

Then the other thing is specialty pharmaceutical products, the high-end biologics. We’re not convinced at this point that the companies in this sector have a great handle on how to manage that aspect of health spending, and frankly, I am not aware of anybody even outside the universe of our coverage who really has a handle on that. It is very difficult to manage a drug that costs $60,000 with no substitute. It’s sort of a binary decision. So when you’re a health plan and you’re trying to manage a drug that costs $90 a month and there are generic alternatives, there are a couple of different ways you can attack that problem, and if you cover $20, $70, or $50, you’re not bankrupting your patient by your decision, so it is more palatable. If the drug is $60,000, where do you set the deductible? Where do you set the co-insurance, co-pay, or whatever structure you want to use? If you set it at $100, there is no deterrent to inappropriate utilization. If you set it at $30,000, you’re effectively not covering it. There is sort of no middle ground.

There are all kinds of different problems within the system. There has been some great stuff written about it in "Health Affairs" and other trade journals. But I think that is going to be a big problem as we get into 2008 and 2009 and beyond as that issue gets applied to larger and larger dollar amounts. Right now it’s a big issue but the dollars are very small, but as those drugs grow within the pipeline, that will become a bigger issue and it’s something we would keep an eye on.

Paul Ginsburg: Josh?

Joshua Raskin: Yes, I think I would maybe take a maybe slightly different tack. I started with the fact that the health insurance companies benefit from higher levels of inflation. They don’t say that or they don’t want you to think that, but it’s true that at the end of the day, the economics are better when you’ve got higher levels of inflation, so that’s positive.

I think of medical cost inflation coming down only when the health plans are forced to do it. So if you rewind to 15 or 20 years ago and you think about the late 1980s and into the early 1990s, we saw rampant escalation in health care premiums, double-digits and then some, 15 to 20 percent in a year or two there, and then all of a sudden you get this big political backlash and something has got to happen. In this case, Hillary Clinton comes out and you’ve got this potential scare of universal coverage and the health plans say the only thing worse than low inflation is not doing the business at all, so we’ll bring the costs down and introduce HMOs. So HMOs had this huge period of proliferation and you get the cost trends down in the mid 1990s to zeroish types of numbers, really low single digits. The economy picks back up and so do medical cost trends and then we get back to this double-digit late 1990s into the early 2000s and you start hearing scares of more government interaction. It’s 2007 and 2008 and guess what, Hillary Clinton is back and so is universal health care. I’ve seen this play before or something like that, and so you’re sort of back where you are.


Joshua Raskin: My sense is that it’s sort of silly to really talk about the logistics. I personally favor Obama’s tack where you just come out in say in 4 years we’re going to have everybody covered by insurance and then don’t roll out any details or any logistics, it makes no sense because it’s never going to really happen anyway, so you’re just sort of wasting time and no one can sort of poke holes in your plan.

But the point is you put a little bit more pressure on the industry to bring down health care costs, and premiums are still going up 7 to 8 percent, and I would disagree, I don’t think that is a sustainable trend over the next 20 years. You can’t have health care unless you get more and more of that coming out of private individual out-of-pocket cost, you can’t have it becoming 25 to 30 percent of GDP at some point.

Paul Ginsburg: If I were asked that question, I would have answered it like you except I would have substituted employer for health plan in the sense that this reflects change as to how the employers respond to differences in the economy rather than the health plans, figuring that the health plans don’t have that much ability to go outside of what their customers want.

MR. RUSKIN: I guess I was thinking as a proxy for the employees and how to manage that cost trend.

Christine Arnold: I’m not sure I think managed-care companies have any control over much of anything. From my perspective I’m looking at Medicare payments, so if Medicare cuts providers and all indications we have from Washington are that the cuts will come to the Medicare Advantage program in order to fund SCHIP and the doctor fix, but if we start fiddling with the docs and the hospitals and somehow docs and hospitals are cut, that will result in the cost shift an unanticipated rise in the medical trend. That would be a problematic situation for the managed-care companies because the price cost spread is like zero right now. The pricing and the costs are exactly the same at 5-1/2 to 6 percent.

Paul Ginsburg: The trend is exactly the same.

Christine Arnold: The rates are rising 5-1/2 to 6 and the costs are rising 5-1/2 to 6. We’re teetering and what we’re seeing is last year Aetna and Signa missed, big problem, because costs and unanticipated rises and lord knows what, we still don’t know. And then this year United and WellPoint had to shut off the SG&A, like no toilet paper and Post-It notes for the first quarter and they freely admitted that they had to shut off the SG&A in order to make the first quarter because the MLRO which means that things are really tight, so I’m watching Medicare payment cuts. Buy-down activity. I think a big part of what’s happening here is that we’ve taken some of that trend which is really 8 percent on an underlying basis and every year we’re shifting 3 percent of it to the consumer. If next year we only shift 1 percent of it to the consumer, our trend will go up at the managed-care companies 2 percent. If that’s not captured in rates, that’s a problem and we’re seeing a deceleration in benefit changes for the first time in 3 both years. Both large-group and small-group benefit design changes are decelerating about 100 basis points. Why? Smaller employers are saying I’ve gotten to the end of the road. I’ve got $1,500 to $2,000 deductibles. Now what? And the premiums are pretty competitive because there’s not much top-line growth so we’re seeing the health plans pricing right at trend and so that we’re not seeing huge rate increases relative to history.

Then the real wild card for me because I follow the hospitals as well is catastrophic claims experience. Last year, the first half of the year, the reinsurers, Aetna and Kaiser and some of the other health plans, if you get them off the record will tell you they saw a spike in catastrophic claims that scared them. That’s why rates went up the second half of the year and that’s why the second half of the years looks really good for managed-care companies, and entering 2007 we saw good rates because they were scared.

I believe that people are not healthier, that we have not seen a reduction in utilization in hospitals because we’ve had this epidemic of wellness in the U.S. So I believe that we have stifled some really necessary utilization and that people are delaying and that we’ve got this bolas, this is maybe just me hoping the hospitals work some day as stocks, but there is a bolas of hospital utilization that will appear some day and we have seen a glimmer of it last year. So that’s what I’m really watching, will some of those catastrophic utilization that we maybe have deferred in delayed care because of these high deductibles come back, and so that’s my focus.

Robert Laszewski: I’m wondering why you analysts aren’t sort of putting the brakes on HMO prices especially after listening to your comments, and I agree with everything you’ve said.

From a commercial trend standpoint, trend has been falling for 4 years and I continue to talk about this thing I call the trend windfall. It’s crazy, but in our business when trend is coming down, profitability is always higher. For some goofy reason, the buyer, the employer, is always willing to pay last year’s trend number. So if last year health care costs went up 9 percent, the trend falls to 8 percent prospectively, we’re out there selling these guys 9 percent rate increases even though trend is 8, we’re picking up 1 point in windfall. This has been going on for 4 years now. Right up through 2006, all the indicators, without getting into how the claims projections work, are that trend flattened out. We’ve probably hit bottom in terms of trend. Where it is not, it’s just falling anymore, it might even be ticking up every so slightly, but we’re kind of bouncing around the bottom so we’ve lost what I call the trend windfall profitability in the HMO business and that’s been the extra profits.

Then you look at the conversation we just had about Medicare Advantage and private free for service and the consensus is that Congress is going to cut Medicare Advantage to some degree, there’s this big fight about where, when, and how and all the rest of it, but there are going to be cuts to Medicare Advantage. Medicare Advantage is extraordinarily profitable for the HMOs. Just go read the first page of Humana’s earnings press release for the last three quarters and they continue to talk about all these extra profits coming out of Medicare Advantage and private free for service and they’re continuing to push their earnings outlooks higher and higher based upon what they’ve been paid over the last year or so. So we’re coming to this sort of nexus where the trend windfall is going away, the Medicare Advantage numbers are really on the table in the Congress, and Humana as of yesterday was trading at a PE multiple of 22 which is incredible.

So it seems as though the farther you are out on the limb in terms of your pricing and your private fee-for-service strategy the higher your stock multiple. In other words, if in fact Medicare Advantage is on the table and if in fact we’re hitting bottom in trend and the trend profit windfalls are going away, why the heck are the PEs so high particularly for companies --

Paul Ginsburg: Bob, I want to steer this discussion back to policy, and you’re telling the analysts how to do their jobs.

It seems to me, and I hear a lot of this grief from providers, that insurance markets are becoming more concentrated not so much by mergers because most mergers have been a merger across markets, but just that it seems though small insurers are losing share, that the advantages of being big are more important now than they ever were and smaller insurers are fading away. We actually are going to be doing a site visit study about what the small insurers are doing to maintain their viability or are they just fading away. To the degree the market is more concentrated, is this more of a problem for the purchasers of health insurance?

Joshua Raskin: Both. We’ve been tracking a trend what we’ve been calling carrier consolidation for several where the big just simplistically get bigger and there economies of scale on health care on a regional basis. So to your point, Paul, it doesn’t really matter if you’ve got a million lives in California and then you buy a health plan in D.C. with a million lives, you don’t get better deals with the providers because you’ve got these California lives.

But what you are seeing is that the local plans get more and more leverage over the providers and their administrative costs are able to grow. Just some numbers for you, if you think about the eight largest commercial publicly traded companies, the four national plans, Aetna, Signa, United, and WellPoint, all showed membership growth in the first quarter. It aggregated over 1.2 million. If you go to the regional plans that I cover, HealthNet, Humana, Coventry, and Sierra, and just looking at the commercial populations there, all four of them showed losses in the commercial. I don’t think that is a coincidence. I think that is a trend in the market that’s getting worse and worse. They lost 280,000 lives in aggregate while the big guys are getting.

The problem is the hospitals always had more issues, and Adam Feinstein who you will hear from next has always had great anecdotes around the issues around consolidation of hospitals. Eighty-five percent of the hospitals in the country are not for profit. They’re the biggest employers in a lot of towns, you’ve had companies like Columbia I guess at the time buying two hospitals, closing one down, and they had all sorts of regulatory issues, the biggest Medicare investigation of the decade or I guess of all time at that point. So the health plans have had this advantage of being able to consolidate the membership whereas I don’t think the providers have been able to do that at the same rate.

Paul Ginsburg: Do you think the concentration impacts the providers more than the purchasers of insurance?

Joshua Raskin: I think it impacts the purchasers, but I think it starts with the cost of the actual product which is a proxy of what provider costs are and the providers suffer first.

Paul Ginsburg: Sure. Doug?

Douglas Simpson: I think it’s going to hit both sides. Obviously, what the left hand does the right hand has to do as well, and these are negotiated rates so nothing exists in a vacuum and we think that the trend in consolidation frankly is in the very early stages.

There are 1,600 health plans in the United States, there are 6,000 hospitals. If you think about other large industries, I’m not aware of an industry that’s of the size that health care that is so fragmented. A lot of the problems and the frustrations that people have with health care relate to efficiency, its complexity, everybody complains about the paperwork, the bureaucracy, and a lot of that is a function of having all these disparate groups trying to talk to one another to communicate and negotiate. Over time we think it makes a lot of sense to seek consolidate in the commercial market especially less so Medicare and I would argue even less so in the Medicaid market. In the commercial world, the bigger you are, you’ve got scale benefits, you can leverage across systems and service which matter to your constituents more than they do in the other populations because of the benefit design structure and we think that that’s kind of the natural evolution of this sector.

But for the industry to get better at managing and providing real information to people, it’s got to become a little bit less fragmented than it is right now. It’s just hard to get anything done. And when you look across financial services and standardization, it’s been much easier to accomplish in that area because of the relative concentration. There is still a very competitive market there, but there are a dozen or maybe 20 large players that really represent the market. If you think about the U.S. health care market, there are 8 publicly traded companies, there are 36 Blue companies, there are many large not-for-profit health plans, regional health plans. You’ve got the Harvard Pilgrims of the world, Tufts, Kaiser, so that is a big issue, and it just seems like it’s sort of the natural evolution of things, but there is a lot of resistance within the health care community because of issues relating to entrenched franchises and community relations and people have sort of an emotional reaction to it.

Paul Ginsburg: So you think there is some up side for consumers/purchasers as far as reduction of fragmentation as far as the ability to manage care better?

Douglas Simpson: Health care is just such an inefficient market and that hurts consumers, it hurts the cost of care. We’ve all seen the data on medical errors, information challenges within the industry, efficiency and outcomes data, and it’s just striking how much inefficiency is bred into this industry, and a lot of it has to do with the structure. You take any industry and you set it up this way with that many disparate parties and expect it to be very efficient, it’s not going to happen.

Christine Arnold: I disagree. I’m not sure that consolidating companies creates efficiency. WellPoint has 16 claims systems. That’s not efficient.

So from my perspective, here’s what I’m thinking. I maintain my view that innovation is really what we need and that consolidation does not spawn innovation. It’s these little spunky boutiquey companies that come up with the new new thing, that come up with the new health plan, and now I fear that we’ve gotten so entrenched, but I maintain my view that things are getting boring. Do you know what I mean? You don’t have some new exciting plan that I get to take public that’s doing something fun and interesting like Oxford way back in the early 1990s. Some of the stuff they tried didn’t work like these specialty networks, but, wow, they were out there and they nothing to lose, and we don’t have any of that anymore.

Employers are bummed out too. I’ve got four guys, Aetna, Signa, United, the Blues, how do I add value, so they’re scared. So I think this is a big problem for employers and I think it stifles innovation, and I am not sure we’re harvesting the benefits. I agree with Doug that we should be harvesting efficiencies, but I don’t think we’ve seen any evidence that consolidation does that and I’m not holding out much hope that it will. I think what they’re doing is each of them is now saying I’m a quarter of the market and I’m not sharing my data.

Paul Ginsburg: In addition to what you were going to say, comment on is this concentration as you’re going to come onto the policy agenda at some point?

Robert Laszewski: It is, and let me just say that I agree with Christine.

Christine Arnold: It should.

Robert Laszewski: We have an oligopoly on the health insurance side of the market. You’re right, we have fragmentation, but fragmentation is on the provider side and the frustration is getting all of these docs to want to go on a single company for example and that’s why IT is so difficult.

From a policy standpoint, let me take it back to the policy standpoint. Medicare Advantage private free for service, what does it say about an industry that is trying to protect the private fee-for-service arbitrage game in private free for service? What these guys should be doing is proving that the private market works. Instead, they’re marching the NAACP out to say give us more money, give Humana more money, so we can give poor people better benefits, and I think that’s a symptom of an oligopoly.

There may be 36 Blues plans, but go to any market and you don’t have more than 3, 4, or 5 competitors in any one. Harvard Pilgrim is an example. Wonderful people. They’re in the Boston market, it’s Mass Blue Cross, it’s Harvard Pilgrim, it’s Tufts, United Healthcare perhaps, and so it’s a relatively small market. We do not have the innovation. We’ve got an industry falling back on scale, impressing Wall Street by being able to merge and buy rather than screw health care costs down. So I think it’s a critical public policy issue because it cuts to the heart of can the private market better manage health care costs as opposed to earnings expectations.

Paul Ginsburg: Christine made a comment before that she sees buy-downs really diminishing now.

Christine Arnold: Slowing.

Paul Ginsburg: A real slowing, and it’s something I’ve always wondered about. You can see for a couple of years substantial buy-downs and it gives you no clue to when do you get to the point where people think, enough, it’s not insurance if I keep buying it down. I was wondering if any of the other analysts have any perspective on the outlook for buy-downs.

Christine Arnold: I can give you some numbers. Our large employer surveys suggest 2.3 percent buy-downs last year, 1.7 this year. And we just finished a 150 broker survey which is a small group, 7.2 percent last year, 6.7 this year. That is the first time we have seen a deceleration in buy-downs since the mid 2000s to mid 2003ish. So it’s not falling off a cliff, but for the first time I’m not seeing them ratchet it up more cost shifting incrementally more each year. So that was surprising to me.

Robert Laszewski: I think we have a turning point this week and you probably saw the "Wall Street Journal" article "Health Savings Plans Start to Falter," Vanessa Fuhrmans’s article which is an excellent article. This is just sending shockwaves through the industry. I was out in the Midwest yesterday and everybody is talking about it. All the blogs except mine are talking about, I haven’t said anything yet. I think we really did hit the turning point this week in terms of how far the consumer-driven movement which is part of the buy-downs and the cost shifting can go. I think people are finally saying we’re running out of gas there. I’ve said over the years that in the 1960s and 1970s we said we are going to control costs by moving to self-insurance, get the employer more involved. Then in the 1980s we said let’s put the provider at risk and let’s bring costs under control, and that only worked to a certain extent. Now more recently we said let’s put the consumer at risk. We ran out of people to put to risk so we put the least-sophisticated of all the players in the equation at risk and we are finding out that that has limitations. I think this article is probably the shift point as people are starting to say wait a second. So I think we are kind of at the bottom of this game we’ve been playing. You can only shift so many costs. You can only make the deductible so high.

Paul Ginsburg: Josh?

Joshua Raskin: I think the point there is if you think about it, there was sort of a leverage at play when the buy-downs really started so you had a $500 deductible and the health plan said I can save you $1,000 by just adding a $500 deductible because you change utilization patterns, et cetera. But you go from a $500 deductible to a $600 deductible and the health plan says it will save me an extra $100 this year and you say I’m not really getting much more bang for my buck there. The impact of the buy-downs has now become less I think on the utilization side.

What we’re seeing from benefit managers is those who are really concerned about trend are looking at options like consumer-directed health care and I know we’ll talk about that later, but that seems to be the more radical approach and it’s less incremental and a more sweeping change so I think it’s a tougher hurdle for the employer group.

Paul Ginsburg: Doug?

Douglas Simpson: I would agree and echo the comments. The only thing I would say on the CDHP side what we’re hearing back is that people are very interested in it but the level of take-up, there has been a lot of sizzle I guess and not a lot of substance relative to initial expectations. We’ve talked to a number of people within the not-for-profit community and among the smaller plays who have been frankly surprised by people want to talk about it, everybody wants to discuss it, but at the end of the day getting consumers involved in that has been a little more challenging than I think people perceive.

Again just to come back to this argument about information, there have been a couple of interesting pilots done in the Midwest by Aetna and WellPoint focusing on provision of care prices at the physician offices. They will take the top 20 in-office procedures and price them out across a matrix of different physicians within a community and it’s sort of interesting that it’s a pilot but just to think about what that means to an individual if you have to have a relatively simple procedure performed, you can go online, put in your benefit information and then pick the doc which has the best rate. Depending on your situation, you may for whatever reason choose to go to somebody who doesn’t have the best rate, but it is sort of interesting to think about the implications there. Again, you can incentivize people with making them pay more, but if we don’t give them more information, it really doesn’t do much good.

Paul Ginsburg: I want to turn to a phenomenon that I’ve been seeing, that a lot more management when it comes to imaging, a lot of plans going back to prior authorizations. One told me that they actually have excused some physicians from the requirement because they are not aggressive prescriber/referrers to imaging and the question is both to comment on these developments in imaging but also reflect what does this mean in the sense of where is an aspect of medical care where managed care is coming back and it’s coming back both in authorizations, it’s also coming back that some plans are saying we’re only going to contract with certain providers, some of them are using the opportunity to squeeze down on prices of providers.

The big question is you see what’s happening in imaging and then you hear about the consumer-driven, et cetera, and I was wondering what you make of it.

MR. RUSKIN: I think that the health plans historically take the analogy, I don’t know if anyone’s got kids and they’ve had to go to Chuck E. Cheese for some of these birthday parties, they’ve got this game that’s always up front, Whack-A-Mole, the mole and you sort of like hit it, and that’s sort of how the health plans look at health care costs, you get your trend report and you’ve got your 16 categories, and imaging spikes and it’s like we’ll get the mallet and we’re going to hit the mole here. So it’s like that is where the focus is currently because for the most part health care tends have come in a little bit even in areas like specialty pharmacy that were 40 to 50 trends a couple of years ago have come down to only 20 percent of something this year. But in imaging, really here has been sort of this continued rise, and I don’t know if that’s a technology focus or if it’s a unit cost issue, but I just think you’re seeing more scrutiny just simplistically because that’s the spike that we’re currently dealing with.

Paul Ginsburg: So we shouldn’t make too much of it?

Joshua Raskin: It’ll get under control. It was sort of like ER visits 4 years ago. A couple of companies saw spikes in ER visits so what did they do? They made it more expensive for the member to go to the ER than to go to the doctor. And you say wait a second, we have no co-pay at the ER? Add $50 there and make it $20 to go to the doc, and guess what? People were more rational about their usage of the ER.

Paul Ginsburg: You just don’t see it part of something that’s going to spread, but really a response to a particular problem?

Joshua Raskin: I think as a response.

Paul Ginsburg: Doug?

Douglas Simpson: On that issue though, I would point out that imaging is sort of unique in that it lends itself to management. It’s a definable, discrete event. If you had an MRI on Monday, you don’t need one on Tuesday generally speaking. It’s something that’s manageable, it’s quantifiable, it’s a picture. It just lends itself to comparison shopping and management better than some more -- when you get into surgery and what not, there are so many differentiation points, it’s much harder to make those comparisons. We think things like imaging, labs, drugs, lend themselves to managed-care plans getting more aggressive in their management and we expect that to continue. We have seen a lot year with lab management with the companies going to single source or certainly trying to play labs off of one another and we actually think that that will continue.

Christine Arnold: We surveyed a bunch of hospitals and 52 percent of the hospitals that we surveyed, CEOs and CFOs, said that they were seeing increased use of preauthorization for outpatient imaging. So it’s really hit the hospitals, but it’s not stopping hospitals from installing all this imaging. They come to us and they’re like we’re installing 64 CT whatever, slice CTs, in all of our hospitals, and Tena will tell you that it’s a 30 percent margin for imaging and they can’t wait to install new ones. And then you got LifePoint in the middle of nowhere installing rural, we’re going to be the CAT lab, we’re going to be the imaging center of nowhere. So I think this is a big problem giving what I’m seeing in terms of the capital spending by the hospitals and I think this is something that the managed-care companies are going to be battling for a while. I think precert and prior auth are the way to go, but we have also noted that precertification and prior authorization are back according to our hospital CEO and CFO survey across the board. So we’re seeing preauthorizations for outpatient procedures up, inpatient stays, concurrent view, retrospective review, putting nurses back in hospitals. I see this imaging precert/prior auth as part of a trend towards back to pre-1999 medical management by the managed-care companies because they can.

Also we’re seeing the new trend according to the CEOs and CFOs at hospitals that we talked to that managed-care plans are classifying inpatient stays as observation status instead of an inpatient stay which is kind of a back-door denial or at least a really low payment for the hospital. So I see this as part of a bigger trend.

Robert Laszewski: I think it’s the market starting to work, how effectively I think we still don’t know, but the easy profits are kind of over. We’re starting to see some margin crunch so people are going to look for the low-hanging fruit, if you will. On the provider side, this has become a boom industry so the managed-care payer has got to counter, so it’s the market working to whatever degree it’s going to work.

Paul Ginsburg: In recent interviews that I’ve done with health plan people, they’ve really told me that things have really advanced as far as their ability to manage and coordinate care. Many different plans told me that they now have real-time access to their claims data giving them the ability to recognize a patient that may need some coordination, et cetera. I want to ask the analysts who are more experienced at looking at this stuff are we on the cusp of something different as far as much greater ability -- actually, plans often mention we integrated it all, we integrated our wellness and our care coordination and our utilization management. Do you think we’re on the cusp of some real progress facilitated by information technology motivated by costs or is this just hype?

Christine Arnold: I think we’re 1 to 2 years away from something that could be kind of interesting. We’re not yet there. I still got a call from a nurse just calling to say hello and it’s part of my benefit and how are you doing, no idea what my issues are, I don’t have any, but my child had cerebral palsy and epilepsy and I never got a call from anybody being like, okay, the child has been at Boston Children’s for an EEG for 3 days, what’s going on, Ms. Arnold? So we’re not yet there, but we’ve got some initiatives to marry data with kind of the right procedures and the right processes and if we can overcome that barrier through things like the Care Focused Purchasing Initiative or some of the other data-sharing initiatives, I think we could get there. I’m not sure any one health plan can affect the outcome of care unless they’re managing the physicians. I don’t think it really works to call the consumer. I think we have to change physician practice patterns. In order to do that it has to be a concerted effort, everyone looking at the same data agreeing that doc needs help or needs to be evicted from the network or whatever. So I think it’s probably 1 to 2 years and for now I think it’s more smoke than fire.

Joshua Raskin: I would say the biggest problem in my opinion is you’re at the mercy of the providers to the health plans can invest in all of this technology, and WellPoint always gives that great example of I think this was 3 or 4 years ago they decided to have tens of millions or dollars spent on provider connectivity. So they were either going to give doctors computers in their officers, here is a free computer and they’ll load it with their software and you can electronically send claims, or one of the handheld prescription tools. So all the docs took the computers and you ask WellPoint 2 years later how did that go in California after you rolled it out and they say it went great, everyone took the computers, but we’re never going to do it again. You say why, well, the doctors took the computers home, you’re at the mercy of the providers.

There are some technologies. We have Aetna at Lehman Brothers and I just think that the example, and everyone sort of probably has a personal example, my wife and I recently had a baby and we got contacted, Lehman pays for this active health management program that gives early identifiers supposedly of health care issues and we got contacted in her 7 months of pregnancy, congrats, and all that sort of stuff, have you seen the doctor and everything like that. The trigger was like her 16-week sonogram which I guess showed up because the hospital submitted it 40 or 50 days later and by the time they contacted us she’s in her seventh month. So if you’re a high-risk pregnancy, you’ve missed it, it’s too late, there’s nothing you can do. I guess there’s more that you can do at that point but you’ve missed the key window there.

So I think to Christine’s point there is certainly movement on that front, but I don’t know, I think as long as the providers are as fragmented as they are and you’re at the mercy of these very small even if they’re not groups, individual specialists, it’s going to be tough.

Douglas Simpson: I would just add it’s sort of funny to me, we got a call for our third-born son for his Social Security number and it was about 8 months after he had been born and they didn’t have the data. But what was funny to me is 2 days after we got home, Enfamil had the infant formula at home so you wonder if maybe the infant formula companies could help the health insurers. Although they’re not so good because we still get diapers all the time, and thankfully we’re out of that.

I would just make one point. I do think on the claims system side the industry has gotten better, this is a little bit of a different tack, but we have seen cycle times, so the companies themselves do have information in a more timely fashion. That’s been one important change. And I think a lot of this stuff on HIP adoption, people have highlighted the challenges there. We just tend to be skeptical when we hear grand plans because you usually just need to temper your optimism a little bit on that.

Paul Ginsburg: Which actually brings a related thing. I also heard about everyone is doing wellness and health promotion now and I heard many responses about the large employers, they’ve just come in and told us we want this, if you can’t do this for us, we’ll go to some place else. I even heard that insurers are actually putting some tools into their fully insured products. So the question to you is, is there clear-cut short-term potential to increase the use of these activities and perhaps have an impact?

Robert Laszewski: There’s a product that is a questionnaire. The person goes through it and they identify unhealthy behaviors.

Christine Arnold: The Mayo thing.

Robert Laszewski: And then use that to decrease health care costs. No, Christine, it was Union Mutual in 1980. We were out there selling this thing in 1980 and no one would fill out the questionnaires because it said wear your seat belt. Don’t be overweight. Don’t smoke. Don’t drink, and a couple of other things that everybody already knows.

That was 1980. And so now I’m looking at all this stuff and I’m going we did that 27 years ago. There’s nothing wrong with wellness, but how many people out there don’t know to don’t smoke, don’t drink, and don’t be overweight and all the rest of it, and exercise. So it’s the new buzz word and there’s nothing wrong with it, and it’s the new buzz word.

Christine Arnold: Some employers though were taking it to the next level. For example, it used to be I got $50 for filling out the health risk assessment where everyone at Mayo thinks I’m a runway model, 6’ 5", 130, and then they don’t call me and tell me to lose weight.

Robert Laszewski: We paid $50 because when we gave it away free you wouldn’t do it, so we had to pay you $50 to do it.

Christine Arnold: And now I have a good time and I’ve lived an alternative life through it. But the incentives now are getting bigger. Like they’re actually sending nurses into the home to take the blood for portions of populations. American Healthways has a product that you can pay up for and so you can’t cheat it. You have to stay on the scale, they take your blood, they figure out whether you’re a smoker, and then you can marry that with incentives. So for example we’ve got some large employers right now who earn points. So 500 points gets you $200 off your premium every month. How do you do that? You have to fill out the health risk assessment, you have to join some of their disease management programs and actually execute on them and actually participate in the quit smoking or whatever, lower your cholesterol, walk/run, join the gym, whatever, so you actually have to do things. We’re seeing a little bit more movement toward tying the benefit design, but ERISA is a real impediment. So I have suggested to employers why don’t you just say if you’re over X in BMI then your premium is Y higher. You can’t do that apparently. You can’t discriminate against people based on their status, you can only encourage them to participate in programs and if the program doesn’t work because they don’t participate very heartily or well, there is nothing you can do. So ERISA is an impediment to these wellness programs because you can’t actually tie health status to co-pays, deductibles, or premiums.

Robert Laszewski: I think from a public policy perspective the issue here is, the baby boomer generation is a mess. It’s terrible, and we have to confront this as a country because it’s driving these health care costs. When we sit here and talk about incentives and managed care and all the rest of it, the fact of the matter is behavior is driving the majority of the costs we can control.

In the private sector we can do some things with incentives and so forth, but I think from a public policy standpoint, a leadership perspective, and a bully pulpit perspective, this is absolutely something that we’re going to have to confront over the next few years because we can’t afford this and it’s huge.

Douglas Simpson: I was just going to say we’re hearing from employers that these programs sound good, people want to offer them because they’re interesting, but again they have to give away a lot of the up-side from an economic sense to the person. So instead of $50, maybe you have to pay somebody $500 to participate in the program, so economically to the employer there is not a huge incentive. And I would just point out the obvious, that people know it’s exercise, diet, smoking. This isn’t rocket science. It’s not somebody telling you what you need to do, it’s having the will to do it and I haven’t seen data that suggests that wellness programs have really been able to overcome that obstacle.

Joshua Raskin: I would just add, the last thing, is they’re attractive to employer groups. You go and you say to your employees we’re not raising your health care costs or anything like that, we are providing you free smoking cessation, this is a great product, and the reason the employer groups like it is because they’re so cheap. The PMPMs on some of these DM products are less than a dollar in most situations. It’s cheap and it’s goodwill with your employee groups, but to everyone else’s points I’m not sure we’re seeing huge changes in behavior.

Paul Ginsburg: I’m down to my last question for this panel. This will be a good time for those who have questions they would like to ask through cards to send your cards over to the aisles. Let’s consider consumer-driven health care. Bob started talking about that with the "Wall Street Journal" article, but I just wanted to ask in general terms what your perspectives of the future of consumer-driven health care. In a sense is this going to be the dominant thing a few years from now, and what’s it going to morph, how is it going to evolve?

Douglas Simpson: We think of consumerism in pretty broad terms, sort of like fuel-efficient vehicles. You may sell your SUV and go buy a smaller SUV, you may sell that smaller SUV and go buy a Honda Accord. Not everyone is going to run out and buy a Toyota Prius, and that’s how we think about CDHP. Not everyone is going to go to an HSA, but we do expect that people will take more responsibility for health care costs over time. It’s just sort of the natural evolution. People pay less out of pocket today than they did 30 years ago. Recognizing we have seen benefit buy-downs moderate recently, we still think that’s sort of the general trend.

Christine Arnold: Everything I’ve looked at says it’s stalling out. If you look at the AHIP data, America’s Health Insurance Plans, we had a million members in these HSA type products in March 2005. In January 2006 we had 3.2 million, it tripled. And here we are in January 2007 and we have 4-1/2 million, so we only gained like 25 to 30 percent. And according to our broker’s survey when we asked brokers what’s selling, a year ago 35 percent said they were seeing more HSAs being sold, and now 32 percent are saying. So it’s kind of stalling out. We’re not seeing the acceleration in this product that we have thought. Part of it is that we’re still seeing deductibles rising but we’re reaching the point where the percent in higher deductibles is diminishing and that’s your opportunity to switch someone into that account, it didn’t happen, we went to the $1,500 or the $2,000 deductible, we didn’t buy the account, we’re not buying the account, nobody is interested in selling you the account because the broker doesn’t get much of a commission on that, so I think we’ve missed some of our opportunity to reduce the number of uninsured with individual and with small group and it’s unfortunate but it looks to me like it’s stalling.

Robert Laszewski: I think from a public policy standpoint when you look at the Democratic candidates for president and you look at the Republican candidates, the Democrats are proposing plans that look a lot like the Massachusetts health plan, the Republicans are looking like their proposals are going to look a lot like health savings accounts, individual choice, a lot of things we’ve heard from George Bush over the last few years. Here’s the thing. You’ve got out there two grand market experiments going on. One is the Massachusetts health plan, the other one is the health savings account phenomena, consumer-driven phenomena. You have the Democrats and the Republicans both essentially basing their platforms on those things. Over the next year we’re going to continue to get more and more hard data on whether Massachusetts is working or not and how well it’s working and more and more hard data on whether consumer-driven health care and health savings accounts are working or not working.

We’ve got between 8 and 10 million people in various forms of HSAs and HRAs. That’s a lot of data. We’ve got the Massachusetts experiment going on. So it’s going to be interesting as we get toward November 2008. We’re not going to be talking about the theory of health reform any longer, we’re going to be talking about strategies that there is going to be a lot of feedback before us to be able to examine.

Joshua Raskin: I would sort of add I’m a big believer that market shifts occur because they have to and so when you saw this rampant escalation in double-digit premium increases, everyone started searching for answers and the MMA passed the legislation to allow these HSAs and they’ve been funded, and then health care costs are coming down a little bit. So employer groups I think have less incentive today to make these radical changes. The cost is clearly cheaper whether it’s a self-funded or full risk environment, a consumer-directed health plan is going to be a cheaper option so therefore you would expect a bigger pick-up.

I think the slowdown in the HSAs or broadly defined consumer-directed health plan adoption rates is probably due to the fact that the cost increases that we’re seeing in the medical trend have probably come in a little bit and then you just compound that with the confusion around the product, because ultimately they go it’s too confusing, I’ll never figure it out, I don’t know how I’m going to find out the pricing quality. You say that, but when the HMOs started in the early 1990s everyone said gatekeeper, I don’t understand what you’re talking about, this will never happen. And you go back to 401(k) plans, that’s crazy, people are going to have no savings when they retire, et cetera. So I’m not sure that you can’t get over that information, I just think it’s a factor of whether there is a necessity in the market today.

Robert Laszewski: I don’t think there’s any confusion about consumer-driven versus nonconsumer-driven. It comes down to one real simple thing I learned a long time ago in the insurance business, price. If you give the consumer a much cheaper price for consumer driven, they’re going to figure out how to buy it. The problem is we haven’t given a much cheaper price. Why haven’t we given them a much cheaper price? Because it doesn’t warrant one, and there’s the fundamental problem with consumer-driven health care. When these advocates are willing to put their money where their mouth is, we’ll sell a lot of it.

And it’s interesting, the industry moves into the self-insured market first and says Mister self-insured employer, you need this, your costs are going to be lower. Well, if they’re going to be lower, why aren’t they lower on the fully insured side? That’s the problem with consumer driven. It’s real simple: give me a cheap price and we’ll sell the heck out of it.

Paul Ginsburg: Let me go on to some questions from the audience. One noted that Christine had mentioned her concerns about a lack of innovation. So the question is, which she or anyone on the panel can answer, do you see integrated delivery systems like Kaiser, or let me broaden the question to fee-for-service integrated delivery systems not just HMOs, as a future innovation or trend?

Christine Arnold: I think it’s possible, but when I talk to Kaiser what they’re wrestling with is everyone else is buying PPO and point of service and open-access plans and how are we Kaiser going to compete with that because the trend in the marketplace now is breadth of physician and hospitals and these integrated delivery systems are really struggling with the fact that they aren’t meeting that current requirement which is everybody in the breadth. The tiered hospital networks did not take off, we do not have high-performance networks yet of the best doctors and hospitals because we can’t figure out who they are, and employers resist any effort to reduce the network. So right now I see the integrated delivery systems really focused on attempting to compete with the consolidation of the industry and with the breadth of offerings that their competitors are offering and it’s distracting them but I think they do have the potential to be more innovative, I just think right now is a tough time for them.

Paul Ginsburg: Thank you. There’s a question about high costs being concentrated on people with chronic care, and this is really I think a restatement of a question I asked but better stated: What are the plans both private or Medicare doing to really manage the cost of chronically ill people for anything? In a sense, I guess it really gets down to are plans getting a lot better at managing the costs of people with chronic disease or is that not the case?

MR. : Some of it I think is just purely purchasing power. You take some of the ability, the procurement side of it away from the oncologist and you buy the drugs yourself so you can cut costs in half for some of these really high cancer patients. But some of it is best practices. There are several different types of models out there that are looking for evidence-based medicine and then trying to follow those guidelines. So I think early intervention, I think claims data analysis types of tools, I think you’re seeing some movement there. I think some of the bigger guys who have been able to invest in the technology are actually showing some decent improvements there.

Robert Laszewski: I think chronic illness is growing in intensity at a much faster rate than the managed-care industry’s ability to manage it and that is not a criticism of the managed-care industry which I think has made enormous evolutionary strides in being able to do that. It gets back to we have a chronic disease epidemic mostly driven by lifestyle and we’re never going to lick this thing just sort of chasing it with health insurance companies, and that’s I think the public policy issue.

Christine Arnold: It’s the carbs.

Douglas Simpson: The one thing I would point out that seems to be an area of opportunity for the health system would be for the managed-care companies to get smarter beyond the traditional chronic care, COPD, asthma, diabetics, congestive heart failure, but moving into really, really specialized areas, low-incidence areas, MS and such diseases. I think that’s an area that the managed-care companies would like great expertise in and there’s a need that’s unmet at this point for those populations.

Paul Ginsburg: Sir?

MR. FINKELSTEIN: My name is Joel Finkelstein. I’m a freelance reporter. My question is whenever you see politicians speaking of the candidates speaking, the one thing you always hear is the U.S. has the best health care system in the world. I know the U.S. has the most expensive health care system in the world, but I haven’t seen any data to support the idea that we have the best health care system in the world. It just makes me wonder are these people just too far removed from reality? The plans they come up with are just so overly simplistic. Is there really hope that we can find a policy solution that Washington can implement, put into play?

Paul Ginsburg: Who would like to take a crack at that?

Joshua Raskin: If you look at some of the European countries that get cited as having high-quality outcomes and there are two scenarios. One, it’s because it’s private pay and the people are wealthy enough to afford it. Or two, they got that quality of care but they waited 6 months for their physician to see them. I don’t know. It’s very difficult to compare and contrast the systems because the systems are so different.

Robert Laszewski: Whenever I go abroad at international fora, the first thing people want to do is come up and choke you and say stop trashing our system. It’s a myth. We do not have a better health care system than the Western industrialized world. There are all kinds of statistics and there are all kinds of measurements, but there is no evidence that our health care system is any better than the leading Western industrialized countries. Does that mean we should go adopt it? My sense is we’re going to have to adopt an American system because if you look at the Western European or Canadian system, they’re all very different and so there isn’t any one system that you sort of just go grab and say that’s the one. They’re all very, very, very different, and in the G-8, they’re all very, very, very good, and we are going to have to figure out what that unique American system looks like and get on with it and we’ve been trying to do that since -- I thought when President Carter was elected we were going to deal with it because health care costs were out of control and trend was 15 percent and here we are.

Paul Ginsburg: I think that was very well put and I don’t think that there are too many people in this country that have well-thought-out visions of what is a uniquely American better health system than today’s can evolve to.

A question about the risk corridors and Part D benefit widening starting in 2008. What impact will this have on the premium trend and the plan behavior such as utilization management going forward?

Christine Arnold: I think a couple of things that we didn’t talk about are going to bring the benchmarks for the Part D plan down in 2008. One of them is that we do have the plans taking on more risk so I think they’re going to probably tighten their formularies. As it is, most companies have really loose formularies, but there are a couple companies like say a Wellcare who don’t cover drugs like Nexium or Celebrex or, I’m going to pronounce this wrong, Xalatan, and some of the other drugs, so I think we’re going to see a narrowing of the formulary, benchmarks are going to come down. But the bigger issue is Medicare Advantage plans mostly have zero premium for Part D, they’re thrown in and they’re growing, and they’re thrown into the weighting within each county. Of course, in order to get low-income seniors assigned to you, you must be below the average. And there is also going to be a weighting of the bids. They are going be fifty-fifty weighted in order to get below the benchmark which means that United and Humana who are half of all Part D membership, they are going to be disproportionately weighted in determining the benchmarks, everyone else is going to be bidding against them, the other half is unweighted. But you throw in Medicare Advantage, you throw in fifty-fifty weighting when we did not have weighting of the bids in 2007, and those benchmarks are coming down.

Robert Laszewski: I’m oversimplifying, but Part D is sort of a lost leader to build Medicare Advantage and it’s going to be interesting to see what happens in terms of Part D attitudes if Medicare Advantage is not as profitable going forward and the impact that that has on people playing in the Part D market. Part D is not enormously profitable. In fact, in some places it’s not at all profitable and maybe it’s close to break even. So it’s going to be interesting to see the interrelationship between any changes to Medicare Advantage and Part D attitude.

Paul Ginsburg: Speaking of Medicare Advantage and Part D, one thing I want to follow-up on is that when the legislation was debated many people pointed out that there is just enormous potential of integration when a Medicare Advantage plan brings a Part D benefit in. Do you have any sense of whether this is panning out, whether the potential to integrate really makes a difference?

Joshua Raskin: I don’t think we have enough data. We’ve had 1 year of the program. The plans were required to submit their bids last week and they had maybe an extra quarter this year, so you’ve had sort of one cycle through and I think that’s tough.

I think the previous question it sounded like the way I heard the question was what’s the elimination of the phase-out of these risk corridors going to do to the plans.

Paul Ginsburg: Yes.

Joshua Raskin: I don’t think there’s going to be a ton of an impact at that point. It slowly starts I guess next year. You’re going to have a couple of years of data at that point and for the most part the plans have sort of figured out where their costs are. You’ve already seen levels of payables and receivables to the government related to those corridors come down a little bit and to be honest, most of them were on the payable side which means that the plans were doing a little bit better. I think Christine was right on with the pressure to bring the benchmark or the pressure on the benchmarks that will be coming down, but I don’t think that’s indicative of the elimination of these risk corridors.

Douglas Simpson: And the linkage of the pharmaceutical and the MA on the last question, I would just point out that in the commercial market we haven’t seen great data that there is a benefit on that front. If you look at some of the larger insurers with captive PBMs, when they source business on the medical side and when you look at when the customer carves out versus retains the PBM business with that carrier, there is not great data available to show that they can effect medical outcomes and claims costs on an aggregate basis, so just a rough analogy to the Medicare side.

Paul Ginsburg: Thank you. Our time is up. I would like to thank the panel for a great job this morning.


Paul Ginsburg: We’ll take a break for 15 minutes and we’ll restart at 10:45.


Paul Ginsburg: During the second panel, some of the questions are going to be on the same topics and this is going to give you the opportunity to see the perspective of providers on some of them as contrasted to the perspective of managed-care plans.

I would like to begin with one parallel question about underlying health spending trends. The first question is really to ask perspectives of those people on the panel as to the managed-care analysts saw pretty constant trends in underlying costs. How does that look from the provider side, from hospitals, physicians, medical device companies? Who would like to start?

Geoffrey Harris: I can make some comments as it relates to what I think a continued big driver or trend will be and that is largely new drug therapies, and specifically biologics and specialty pharmaceuticals that have been and probably will continue to drive trend. In contrast to other parts of the market, there are no generics currently available and although there is discussion about biosimilars and generic biologics on the market, so far there has been no real initiative there.

These drugs are very expensive, and additionally, most of the research now particularly in the areas of cancer and things like pulmonary arterial hypertension are looking at combination therapies. So if you think that the health plan has to pay $60,000 or $55,000 a year for Avastin and you think that’s bad, they’re looking at it now with Avastin and in combination with other biologics that also would cost $50,000 a year. This is happening across a number of significant disease categories so I think at least in the specialty pharmaceutical area that cost trends are going to continue to grow in excess of 20 percent a year going forward.

Paul Ginsburg: Geoff, I remember when Avastin came out some people commented that this was really the first biologic that had broad application meaning not just a tiny niche of people who could benefit from it. Do you see more Avastins coming out that apply to a larger number of people?

Geoffrey Harris: Yes, many more particularly in cancer, and again the interesting thing is that these new products are typically being looked at in combination with existing products and that’s really for three reasons. One, very often the new drugs have different mechanisms or actions so there’s legitimate scientific reasons to combine two different ones. Secondly, of course the companies have incentives to do trials with combinations because then they can sell more product as opposed to having to replace another. And third, this is a real problem, it is very difficult to do clinical trials now if you’ve got a product that works. It would be unethical to compare a new biologic for example against a placebo because we know that we have some products that offer some benefits so you’re seeing again many more combination trials, I think we’re going to see other biologics with broad applications, and there is no mechanism at least that I know of for managed-care plans or anybody frankly to control costs in this arena unless you decide that an extra month or two of life is not worth $55,000 a year, and that’s a decision for somebody else to make.

Paul Ginsburg: I want to ask Adam and Jeff what the cost trend perspective looks like from the perspective of hospitals.

Adam Feinstein: With respect to hospital spending, we have seen a slowdown in recent years after seeing a big acceleration in health care spending in the 2000 through 2003 period. So a lot of the things that the panelists were talking about earlier today in terms of more cost sharing has led to a reduction in utilization trends. So hospital spending is growing in the mid-single digits now after once again growing in the high-single digits or low-double digits back in the beginning of this decade.

In terms of our outlook there, we think it’s going to be relatively stable over the next 18 to 24 months. However, we would look for it to accelerate again at some point. It seems like utilization trends tend to be somewhat cyclical with health care being all about the incentives so when people are incentivized to overutilize the system, they do, and then they’re in a place to utilize less health care, they have found a way to get by. So I would look for some acceleration in spending.

With respect to the other piece of the puzzle here, the reimbursement side, we have had pretty stable reimbursement. It’s moderated, but the rate of the moderation in terms of the trend we’ve seen in the past couple of years hasn’t been a big change. But we’re seeing mid-single digit type of growth in terms of pricing for managed care, Medicare a little bit less than that, so once again I think you’re going to continue to see the pressure on reimbursement. It seems inevitable we’re going to have some sort of reimbursement change down the road, but I do think utilization will pick back up again.

Paul Ginsburg: Jeff?

Jeff Schaub: I echo all that on the not-for-profit side. I think the biggest single thing about spending on the not-for-profit side is especially for the investment grade hospitals and systems that we look at is that profitability is way up two to three times what it was going back 5 years ago and that is not really driven by rates at least not over the last few years. We see it more coming on the expense side and I think that the sophistication and maturation of management and the ability to implement cost-savings initiatives across the whole spectrum have done a great deal to reduce the annual inflation in hospital costs.

We see that trend continuing. I think that there is still some mileage left to go there. We are still seeing some large systems able to realize economies of scale like growing larger but also able to leverage their size by implementing incremental cost-savings initiatives across a very broad operational base. If it adds a couple of tenths of a percent to the bottom line when it’s a $10 billion system, that’s a big deal, so that’s another contributing factor.

Paul Ginsburg: Bob?

Robert Berenson: Let me just make one comment on the question which is that what we found in site visits in the last few rounds on Health System Change is that a lot of care is moving from the hospital to the ambulatory sector some of which still under the auspices of the hospital but increasingly into doctor’s offices, into physician-owned ambulatory surgery centers, imaging centers, testing facilities, and neither Medicare nor private payers as that shift happens has an ability to reduce the portion of their payments that are going to the hospital sector which have fixed costs and need to be supported. So even though there is some restraint on hospital increases, there is a significant increase going into ambulatory care and so I think that sort of pressure is increasing without an easy way for payers to respond.

Paul Ginsburg: I guess what’s going on in that sector where a lot of it is physician owned or owned by other entities other than hospitals probably doesn’t get followed that well on our panel. What I can ask the people who are in touch with hospitals on our panel is how significant an effect do hospitals perceive competition from these other entities to its outpatient departments?

Geoffrey Harris: I think it’s quite significant. I can give an anecdote of a for-profit hospital in McAllen, Texas, and this was a thriving investor-owned hospital that had very robust profitability and delivered a wide array of services to the community and a physician-owned and sponsored hospital was set up down the road and essentially took all of the high-paying patients and procedures from that hospital and that hospital went from being a highly profitable facility to one that is essentially breaking even today and it happened very quickly. I frankly have been surprised that hasn’t happened in more situations, but that’s at least one example where a physician-owned hospital has had a significant impact on the local marketplace.

Jeff Schaub: Yes, it’s a big, big deal for the sector that I cover. We see a lot of hospitals, if they’re not paying attention to what their physicians are doing and want to do, we have seen dozens of places have their outpatient surgery volumes cut in half because docs have gone out and put up buildings with bank financing or some other equity financing. Like you said, those cases that leave tend to be better payers, more profitable cases. So what we have seen over the last 5 to 8 years is tremendous interest on the part of hospitals and systems to do joint ventures with physicians with the figuring that they would rather lose half the business than all of it. So that’s a big deal.

We have also seen hospitals try and integrate their medical staffs and the folks who have potential to leave and become entrepreneurs into the hospital’s business, make it easier for them to practice there through a variety of ways. On the physician side there may be a waning of physicians that do want to go off and do it on their own because of the administrative difficulties that have increased over the last several years on running a practice.

Adam Feinstein: I just wanted to chime in here. I see this as a huge threat. We were talking before about some of the reasons for health care volumes slowing down in the last few years and everyone likes to attribute it to managed care in terms of cost shifting, but I think physician competition has been the bigger issue. Physician incomes have been going down, they’re been looking up the lost income and they’re competing more aggressively within the hospitals.

Just a couple of numbers to give you here, when you think about ambulatory surgery centers, there are almost as many ambulatory surgery centers today as there are hospitals in the U.S. so they are a huge part of the delivery of the U.S. health care system. So with 5,000 surgery centers, and that’s up from 2,500 10 years ago, so massive growth and it seems like they’re not going away since they are such a big part of the system.

With respect to specialty hospitals, there are not nearly as many. I think there is a lot of political posturing with respect to the specialty hospitals. There are only about 100, and that compares to 5,000 hospitals in the U.S., so there are not that many. However, as noted, they are in some key markets, a lot of the companies that we focus on, a lot of the fast-growing urban markets, so clearly it has been the source of competition there. I do think there will continue to be regulatory scrutiny over the specialty hospitals, however, I do think that they are going to continue to be out there, but certainly there will be that noise.

And just the last point to make on this topic, it is really interesting how things come full circle. Hospitals were letting doctors partner with them back in the mid 1990s, there was a lot of scrutiny over this so everyone stopped doing it, and now here we are again and everyone is doing it. So it’s really interesting, once again a trend that was very popular last decade is now coming back again and we had a lot of regulatory scrutiny the last time, so it will be interesting to see if the regulatory allow this to happen this time around.

Jeff Schaub: I do see less of a feeding frenzy with respect to that though with this go-round than we had in the 1990s. In the 1990s everybody was buying practices just because everybody else was buying practices and I think now what I see is a much more strategic focus whether it’s service line related or to head off entrepreneurs splitting off or to focus on a particular geography, and I think hospitals in a lot of markets are being more selective than they were 10 years ago.

Geoffrey Harris: I was just going to say I think part of that is that the purchase of practices in the 1990s proved to be in addition to drawing regulatory scrutiny was not a profitable exercise.

Jeff Schaub: And it’s still not.

Geoffrey Harris: And it’s probably still not, so there are other ways to incorporate physicians.

Paul Ginsburg: We are actually seeing an increase of employment of specialists by hospitals which is a very different thing than buying a practice and I think some of the employment contracts really to the extent that they can are simulating fee-for-service incentives.

Jeff Schaub: Absolutely. Absolutely. And the folks who started off with just a nonincentivized structure are converting over their physicians as they roll over.

Paul Ginsburg: Bob, you had a comment?

Robert Berenson: Yes, two points. One is about this employment. It is a significant phenomenon. There are a couple of causes for it. One is very frankly that a lot of physicians no longer want to take an emergency department call as a lifestyle issue, also the lack of reimbursement for uninsured patients, and have an ability often now because they do a lot of their procedures in a separate facility, and I agree it’s mostly in ASCs, it’s not about specialty hospitals, but they have no need anymore to be in the hospital at least in a number of specialties so a hospital is sitting there unable to meet their MTALA obligations and so that becomes one reason to employ physicians so they can meet that, and by the way, we now can support a service line which in a fee-for-service world is profitable. So you’re seeing actually everything conceivable going on with physician and hospital relations from overt competition to collaboration and joint venturing to employment. When one specialty group leaves the hospital to go work in their ASC or their specialty hospital, there’s another group that says, fine, we’ll come and do the ER and we’ll pick up the hospital business. All of that is going on.

The second point I wanted to make on the specialty hospital issue and I agree there is not a lot of them, but I think it illustrates sort of the craziness of health care markets. In interviews we did with health plans as they view the entry of specialty hospitals and entry of new competitors, it’s supposed to be a good thing in markets. That leads to price competition. At least some health plan people say it’s not a good thing. What winds up happening is there might be a little bit of price competition on those particular services that are in dispute, if they’re cardiac services or spine services. Then what happens is the hospital has the ability to raise their prices on other things where they have monopoly pricing power, so they make it up elsewhere and that the physicians are self-referring and inducing demands incredibly and the plans do not think they have any control over that. And I think an emerging policy issue again that was clearly here in the early 1990s is coming back, the issue of physician self-referral, and I’m not sure we have any good policy fixes for that, but I think it’s being talked about a lot more.

Paul Ginsburg: Let’s move on to the issue of hospital pricing and leverage with insurers. I had mentioned in the notes I sent out to the panelists that as someone who looks at the hospital PPI, producer price index, the component for other than Medicare and Medicaid, it seems as though rates spiked, these are transactions prices, to over 7 percent a year for a short period and they have backed off considerably from then. To the degree that the analysts think that these data are reflecting what’s actually going on, what’s their interpretation of what happened?

Adam Feinstein: In thinking it through here, we saw a big increasing in pricing in 2000 through 2004 really and what you’ll notice is managed-care pricing went up in that same time period, so we saw a huge acceleration in managed-care premium growth. You heard Josh talking earlier where he has compared notes in terms of what the hospitals are payers are saying, it seems when HMOs are getting strong rate increases they tend to pass those through to hospitals and then when they’re getting more pressure they tend to go back and squeeze the hospitals and tends to be the way the system works. So a lot of that really has to do with the slowdown we’ve seen or the moderation that has really tracked what’s happened with the managed-care premium growth, so I think that’s the direct reason that we’ve witnessed that trend.

Jeff Schaub: We were talking about this a little bit. It’s been a pretty benign payer environment for hospitals for the last few years and we haven’t seen double-digit increases, they’re 5 to 8 percent, something like that. But hospitals have been doing very, very well, and when hospitals are doing well especially on the governmental side, Medicaid and Medicare programs have been adequate if not healthy, there is less of a need to cost shift. So if hospitals are doing okay, they don’t need to go back to the commercial insurers and try and bargain to make it up on that side.

Paul Ginsburg: Actually, this confirms something that I think has always been a very relevant thing with a hospital system that’s predominantly nonprofit, they are not maximizing their revenues, they presumably have ideas about what kind of rate of return they want to earn, and when they’re up there they’re pricing more benignly when their returns have been squeezed below. Is that your sense, Jeff?

Jeff Schaub: I would say they get more panicky when they feel that their mission is in endangered. There is certainly a lot to be said for mission versus margin but just because these guys are not for profit doesn’t mean that they don’t want to have a healthy PNL and balance sheet. So they will make money wherever they can, but in many, many cases it is balanced by a sense of mission so the need to raise prices sometimes becomes only more exacerbated when there is pressure on the bottom line.

Paul Ginsburg: That’s right. The reason I said that is when Bob had brought up the example of how in some cases if hospitals have to make concessions on their outpatient department because of competition from physicians and they have these other prices that they could have raised before, but they’re not raising them until they’re motivated to because they’ve lost some revenue on that.

We hear a lot in reading analysts’ reports about hospital bad debt both from uninsured patients and from patients that have large deductibles in their consumer-driven plans. Is that still a significant issue for hospitals?

Jeff Schaub: This continues to be a growing problem. The rate of increase in uninsured admissions is outpacing that of insured admissions and that is a trend that certainly has been in place for the last several years. It looks as though as we sit here today that the rate of increase may be slowing very modestly at least for the for-profit players. There have been a lot of theories as to why this has happened, but probably the most logical explanation would be the big increase in co-pays and deductibles.

Just as an interesting aside, we may be touching on this a later too, but there has been a lot of LBO activity in the hospital arena and I think some people have wondered why that’s happened particularly in light of some of the tough fundamental trends and my guess is that some of the private equity people are betting on universal coverage to eliminate or reduce the bad debt percentages which obviously would accrue right to the bottom lines of these companies.

Adam Feinstein: Maybe to follow-up on Jeff’s comments here, we have spent more time talking about bad debt than any other topic over the last 3 years, so every single time I talk to anyone they want to talk about bad debt for the hospitals and that’s really in many ways synonymous with the hospitals just talking about bad debt. But it seems like clearly with an increase in the uninsured you see an increase in bad debt for hospitals and just by definition it is really hard for hospitals when they have uninsured patients. A lot of the stats we hear, hospitals collect about 9 to 10 cents on the dollar for an uninsured patient, where maybe they would collect about 45 cents on the dollar for a co-pay. So just to the extent you have more uninsured patients coming through, they are going to have more bad debt expense.

However, it really seems we’re at a tipping point. You can’t have the uninsured going up at this rate for too much longer before it becomes an issue where you see a lot of political backlash and that’s why we’re hearing a lot more about universal health care. I’m sure there will be more discussion about that so I won’t go into more detail now, but it does seem like we’re at the tail end of this bad debt cycle.

Paul Ginsburg: We were talking on the other panel about private fee-for-service plans and with the deeming that was explained, this of course has real relevance for hospitals and physicians about how much they are going to get paid. What’s the perspective on the workability of private fee for service from providers? I know Bob has some stuff.

Robert Berenson: We have done some interviews on our current round at Health System Change and there has also been some journalism on this topic. The sort of simple notion is that if you’re going to get paid the Medicare rates, that seems pretty reasonable especially if you’re a rural provider and you’re the only hospital around or the only doctor around, you’ll see the same patient at the Medicare rate and that sounds pretty reasonable. At least in some places there are some flies in the ointment on that one. There is an ongoing case in Florida of the Any, Any, Any plan, any doctor or any provider, any place, any time. It was marketed as sort of the equivalent to Medicare with lots more benefits. One of the practical problems are a couple of significant hospital systems in the Orlando area basically said maybe they are Medicare rates, but we don’t have a signed contract with them, we don’t have sort of recourse on terms and conditions about how we get paid, when we get paid, et cetera, and so they were not in the network, and so this Medicare look-alike was not a Medicare look-alike.

What physicians have said in some places is that they pay me nominally the Medicare fee schedule but then they have plan-specific edits and other things that they use, so essentially it’s Medicare rates but not Medicare rules and there are some places where physicians are just not playing. As Christine said, on a patient-by-patient basis you can say I’m not going to see the patient. So one of the real practical problems here is that in the absence of the network and the absence of signed contracts, the plan can’t really certify to an enrollee that, yes, this you can see the providers in the equivalent of the network, it’s not technically a network. So we need to follow this through, but the basic point I’m saying is Medicare rates are not necessarily going to assure participation by providers.

Paul Ginsburg: I have a question. Last year there were pretty well-publicized what I call showdowns between hospitals and health plans I think in Denver, St. Louis, Las Vegas, and Florida, and I guess they’ve all since been resolved, but I want to ask the panelists what that reflected. Were these isolated cases or was this in a sense either a hospital or a health plan deciding that they should be more aggressive and surprise the other party and then they had this dispute?

Adam Feinstein: Certainly we see these from time to time and everyone tries to read into some of these too much. It seems like you always these showdowns taking place but sometimes they get into the media more so than others and I think that’s what happened last year. However, what was interesting last year, and Paul didn’t mention this, but HJ was involved in most of these and if you think about happened with HJ last year, they went private so they were no longer being held to report a quarterly number being a private entity so they had more ability to fight back and take a near-term earnings head, however, it could benefit them in the long run in terms of getting higher pricing. So I think that has something to do with it at least in the Denver and Florida cases. But clearly it seems like these showdowns if you will are making way into the press more frequently and I think that’s leading to more focus.

Geoffrey Harris: I can think of one market, the Las Vegas market, which was mentioned here where this type of showdown occurred between HCA and Sierra which was the dominant plan in that market. At least from an outsider’s perspective it looks as though in the short run that the payer won and that HCA and Sierra could not come to terms on a contract and Sierra has found capacity in other providers in the market and a lot of volume now is going to Universal Health Services which is a big competitor and Catholic Healthcare West. It will be interesting to see in that market whether HCA comes back to the table with lower pricing at some point, but at least in that market even with dramatic population growth it appears that there was enough capacity amongst the other providers to absorb this Sierra patient volume.

Paul Ginsburg: Actually, an analyst had told me a similar story in Denver that United Healthcare versus -- United could not have threatened to walk a number of years ago but there was so much more capacity in the Denver market now that it was a feasible thing to do. So part of it could be the reflex of capacity expansions which we have been talking about for years.

Do you have any thoughts about what Medicare has been doing with its in-patient payment system of making real changes in the way DRGs are calculated and going to evaluating systems for a greater number of DRGs to be more refined. Is this being watched carefully in the industry, and what are their hopes or fears for it?

Jeff Schaub: The cardiac DRG proposals and reconfigurations designed to correct some perceived inequities in payment for those services is a big deal for heart hospitals, it’s a big deal for specialty hospitals that do a lot of cardiac, but the industry I think has been successful in realizing modifications to those proposals and transitioning those effects. Aside from some isolated heart hospitals, I don’t see a huge impact of what they’re doing. And whatever ends up happening with the 2007 proposed rule, hospitals will adjust. If we go to increased severity grading, hospitals will learn how to code and CMS recognizes that, so that’s included in the update factors, but hospitals will learn to live with what comes out of Medicare.

Adam Feinstein: -- the unintended consequences is a really complicated reimbursement system so it’s really hard for CMS or any entity to figure out all of the implications. There are really two pieces to what’s going on with DRG reform. First, it’s just moving to weighting DRGs based off of cost instead of charges, and that makes, the charges were fictitious numbers and it didn’t really make sense to have it so it’s a good policy in terms of moving there. However, there are always going to be some hospitals who have going to get hurt with some of these changes and some who will ultimately benefit. However, a lot of the companies we focus on have a very broad book of business I would argue so I don’t think it’s really going to have much of an impact.

The other piece here once again just moving to the severity adjusted DRGs, that could be bad for rural hospitals, we’ll have to see, in terms of how it’s ultimately implemented. One of the things that CMS proposed this year in the proposed reg that came out about a month ago was what they’re calling an across-the-board cut for coding creep. That’s the hot new buzz word we keep hearing about in all these different segments. So they’re trying to say that they’ll be more upcoding if you will as a result of some of these payment changes which are once again some of the unintended consequences so they’re trying to proactively hit the hospitals with an across-the-board cut. We don’t think it’s likely going to happen so I think when the final reg comes out you’ll see a change there, but clearly sometimes there could be some disruption from some of these changes.

Geoffrey Harris: I think overall the last several years though from an investor perspective I think the view is that the Medicare reimbursement environment has been fairly benign or even favorable and I think if were to poll the consensus out there at least again from the investor community and the for-profit world that the expectation is that the Medicare reimbursement environment will continue to be relatively favorable with cuts in the delivery system more aimed at the managed-care plans as was discussed on the previous panel.

Robert Berenson: Allow me just two quick points. One is that it happens the two major changes that you heard about, one moving from charge to cost-based reimbursement which will move some relativity from surgical and cardiac procedures to medical DRGs is one change, and the other is moving to a severity adjustment. They are offsetting to a significant extent, so think of a small rural hospital or a small urban hospital that doesn’t have fancy surgical procedures that is doing medical, they are going to benefit from that change but they also probably have a less-severe population so they’re going to lose, and at least for a lot of hospitals these are going to offset each other. And I do believe on the sort of assumptions on code improvements that CMS has made I think they have committed that if they’re wrong they’re going to make a retroactive adjustment to that. So if it does stay in the final rule, in the end I think there are reasons to believe there will be coding improvement. If there is not, I think that hospitals then are made whole at the end.

Jeff Schaub: And they’re committed a 3-1/2 percent increase for this year net of coding improvements?

Robert Berenson: What is the number?

Adam Feinstein: It’s actually a little bit under 3.

Jeff Schaub: So it’s at east healthy from at least Medicare history.

Paul Ginsburg: Let me change the topic to health information technology and what are hospitals doing internally with investments in health information technology? In a sense, how do they fit into the broader hospital strategies or what are they doing with their physicians?

Jeff Schaub: I that there’s nothing hotter right now than health care information technology because it has the capability to enable many of the policy issues and directives that we’re talking about. The two places where I have not had health information technology applied is in the hospital’s parking garages and in the visitor cafeteria, and I might be wrong on both those counts, but it is having a tremendous impact on the operations from a financial perspective and on quality outcomes in many of the hospitals that we go out and visit and that we follow.

Probably the most intense area of work and implementation and analysis right now is in physician order entry mainly to implement quality initiatives and improve quality since that is such a hot topic. Tied along with that is meds administration, scheduling, lab, really all clinical areas of the hospital have at least been looked at for implementing information technology improvements on a very, very detailed level and that all ties into the patient’s medical record and getting that out to the physicians. So it is pervasive and tons of money is being spent on this. What we see is anywhere from 15 to 30 percent of hospitals’ annual capital budgets being devoted to information technology.

Geoffrey Harris: And paralleling that, some of the best-performing stocks in health care have been some of the health care IT companies. Cerner is an example of a stock that’s done very well over the last several years. They do enterprise-wide systems.

Adam Feinstein: The issue with health care IT has always been over the years what sort of return will you get on it. Sometimes it’s hard to measure and it takes a long time. The other piece of the puzzle is just the cost. A lot of the things that we’re seeing coming out sounds great, but then in reality it’s very costly to upgrade a lot of these hospitals and one is not always sure in terms of what the return on capital is, but a lot of these things make sense and can ultimately help to improve quality but it just seems like these things always happen very slowly in the hospital industry and so we won’t look for any major change in quality or anything like that overnight.

Paul Ginsburg: I guess for a few years now the Congress has been trying to write IT legislation to promote standards and interoperability. To what extent is this holding back hospitals or other providers in pursuing IT?

Jeff Schaub: To what extent is Congress’s inaction?

Paul Ginsburg: The lack of action so far.

Jeff Schaub: I don’t think it’s holding it back at all. The hospitals have the ability to make investments in joint ventures with systems providers and companies of the like are doing it and they’re figuring out how to do it as they go along. Getting back to what we talked about a large system’s ability to develop initiatives and roll them out across a broad base, they tend to have the resources to be able to do that and so they will pilot initiatives in one hospital or one region, and especially with IT there’s a big fixed cost to developing those systems. So if you can perfect it one site and then roll it out to 25, you get tremendous leverage on your investment.

Geoffrey Harris: I was just going to say I think also to the extent that at least health care information generally has been promoted as a potential means by which health care cost trends could be reduced, I think that’s encouraged providers to invest in IT. I personally don’t think that’s going to have much impact on health care spending trends, but that I think has actually encouraged providers to invest in IT.

Adam Feinstein: One of the things that’s taking place right now is the access to capital in the marketplace. So every hospital now for the most part seems like has access to capital, for profits, not for profits, so there’s a lot of liquidity out there which has allowed a lot of hospitals to invest a lot in capital expenditures whether that’s capital expenditures for expanding beds, expanding services, or investing in IT. So if there was a time where hospitals were going to invest in anything, now is the time because we’ve never seen access to capital like what we’re seeing currently.

Robert Berenson: Let me just jump in. One specific area in the hospital where it’s not clear whether this should be under the heading IT but probably is the move in a number of hospitals to move toward electronic ICUs with new products on the market that permit sort of centralized monitoring physiologic data, clinical data, and given the sort of absence of intensivists to physically be present in every intensive care unit, the potential of a regionalized kind of oversight which has quality and cost implications or for better or for worse, but there are a number of hospitals making the investment in what is really a transformation of how critical care services are provided.

Paul Ginsburg: I have to apologize to the panel because I’ve been skipping around order-wise. I want to ask Jeff in particular to comment on some aspects, and others can join in, it’s almost as if we have two hospital industries. We have these prominent hospital systems that have great access to the capital market, their debt gets rated by Fitch Ratings and they probably do much better in negotiating with insurers because they have to be in the networks. And then you have smaller more ordinary hospitals who don’t have access to capital markets, probably are not doing as well with insurers. What is their outlook?

Jeff Schaub: For that second tier the first thing that comes to mind is merger or consolidation, looking for a big brother that has deep pockets. One of the things that I think you and I talked about prior to this was what’s happening with the Catholic systems right now and the Catholic stand-alones. I have seen three cases in the last 6 months or so where smaller Catholic hospitals or smaller Catholic systems have taken a look at their facilities, their locations, recommitted themselves of serving their local population, but looking at their balance sheet and realizing that they don’t have the wherewithal to replace their 50- or 60-year-old structures, bring their facilities up the caliber that maybe their larger competitors have and so they’ve approached national systems to I guess appeal to their sense of mission and serving their constituency to ask for some help. There are three processes like that right now that we’re keeping an eye on. The alternative is that the hospitals will shut down because ultimately they won’t be able to maintain their facilities to maintain their population.

That does not mean that the larger systems will come in a build a 250-bed replacement hospital. Very often in those markets served by those weaker hospitals it doesn’t make sense to build a replacement hospital, so we’re contemplating a reconfiguration of facilities, a rationalization of services, possibly some capital investment but not replacement. So for these lower-tiered entities, they’re looking for partners but it’s my expectation that a lot of them will not continue in the same form that they’re in today.

These are the facilities that at least have some kind of appeal to their operations. There are an awful lot of hospitals out there that nobody is going to touch whether it’s -- or Mission or anything else. Just to give you an idea, we rate about 280 hospitals. There are about 550 to 600 investment-grade rated hospitals out there and these are not for profits I’m talking about. That is maybe 10 or 15 percent of the not-for-profit acute-care hospitals that are out there in the country. Prior to working with this level of facilities, I did feasibility work in New York City for New York City’s distressed hospitals and that involved back then big money, $200 million projects, to replace inner-city bricks and mortar. The only reason why those were feasible was because the state stepped in with essentially a guarantee on the bonds so that those bonds went out with New York State’s rating and it was the only access to capital that these facilities had, and I think for that 70 to 60 percent of facilities that don’t have AA or BBB access to capital is just one of the only alternatives that they have.

Paul Ginsburg: Is this going to mean perhaps parts of the hospital system shrivel or is this a huge opportunity for investor-owned chains to acquire those that have markets?

Adam Feinstein: It’s interesting, one of the trends we’re seeing right now, Jeff noted earlier about a lot of private-equity activity in other hospital sectors, but those companies that haven’t gone private, they have taken their leverage off and what they’re doing is they’re taking advantage of what had been pretty low borrowing costs and was getting a lot of access to capital so they’re changing their capital structure. In the process they’re getting now to service their debt so we’re seeing a lot of the for-profit publicly traded hospital companies actually focusing less on acquiring hospitals and this is a change in trend, so they’re actually selling hospitals so some of the big acquirers have been net sellers of assets. I really can’t think of the publicly traded guys who have been that aggressive in doing acquisitions except for one big deal that’s going to close pretty soon, Community and Triad, but even there I’m sure you’ll get some divestitures afterwards so with that you would think that there could be opportunities to acquire but it just seems right now that’s not necessarily how they’re thinking about it in terms of strategy.

Geoffrey Harris: Although one thing that is interesting is that even hospitals that appear weaker strategically, it just seems there’s always a pool of capital to come in and give it a shot and then reinvest in the hospital. It’s been very, very interesting and a lot of that historically has come from the for-profit side, although as Adam noted, it will maybe a little bit different going forward in that the cash flows from the for-profits now may be directed a little bit more toward debt service as opposed to acquiring some of these poor nonperforming hospitals and trying to invest in them. I think I would say that we’ve been surprised that there always seems to be a pool of capital, there is always somebody there who will be willing to buy a poor performing hospital and try to turn it around. That’s why they don’t close down that often.

Paul Ginsburg: Earlier this week there was something in the "New York Times" about the very rapid growth in venture capital to medical device companies. Perhaps you cover this since you’re on the buy side and broader. Is this because there are just tremendous opportunities there or is that money doesn’t have any place better to go? And what’s the implication for health care?

Geoffrey Harris: I touched on this a little bit previously. I think it’s still extraordinarily inflationary and any company that has a breakthrough technology or breakthrough drug clearly can get funding and financing and from a policy standpoint maybe they should. But what’s interesting is that companies that have what I would consider largely me-too products with a slight edge over existing technologies, they get funding as well and it’s been profitable to bet on them from an investment perspective. I can give specific examples of a company where there may be a generic drug on the market for example that has to e dosed three times a day. I might see an initial public offering of a company that has a drug that basically does the same thing, they’re reformulated it slightly so that it can be dosed two times a day. And they go public in a market value and you know why? Because they can sell the drug that’s dosed two times a day for 10 times the pride of the drug that’s dosed three times a day and for reason, the payer system and the physicians are all in on this and will pay for this kind of "advance." As long as that system remains the same, I think there will continue to be a big flow of funds into medical technologies and pharmaceuticals even when there is very little incremental benefit. It pays today to do that.

Paul Ginsburg: Are there any other comments? How does the pharmaceutical industry see Medicare Part D at this point? What has it done for them or not done for them?

Geoffrey Harris: I’d say in general it’s been a big positive. You can see it in the prescription volume statistics. There was a big acceleration in prescription volumes in the back half of last year when Medicare Part D really started to have an impact and it’s actually continued through the first quarter and the expectation is that it will continue into the second quarter. We may see some slowing in prescription volumes in the back half of the year once the Part D effect has been annualized, but I’d say there is no question from a volume perspective that it has been a positive.

The other area where it has been a big positive, and the pharmaceutical industry doesn’t like to talk about it, is that Part D in many cases is a better payer source than Medicaid was so to the extent that you were selling a drug, let’s say an antipsychotic where a big percentage of reimbursement was coming from Medicaid and now that’s flipped over to Part D, those companies have enjoyed a big boost in pricing.

Adam Feinstein: Maybe another way to think about it and not to focus on the drug companies, but some of my colleagues focus on some of the pharmacy services companies and they have been big beneficiaries of Part D also, so the PBMs have done really well under this new Part D system, so it has been a big opportunity for them as well as some of the other pharmacy services so there has been impact throughout the channel we would argue.

Paul Ginsburg: Outside of biologics which Jeff talked about before, what is the outlook for the pipeline as far as bringing important new drugs to market? There has been so little for so many years. Do you expect that to continue?

Geoffrey Harris: I think the area where the pipelines are very robust as we’ve talked about before are in biologics, and I think in small molecules the pipelines are still relatively skinny although perhaps improving a little bit relative to what we’ve seen in the last several years. The other thing is I think due to some of the recent highly publicized safety issues, Vioxx and so forth, that the FDA has become more conservative as it relates to safety. Just yesterday as an example an FDA panel recommended rejection of Acomplia which is a new weight-loss drug being sponsored Sanofi due to some safety concerns and I think a year or several years ago the panel might have been more open to this particular product. So I think big pharmaceutical companies still face a big problem in terms of dearth of pipelines relative to the rate of patent expirations which are still going to be enormous over the next several years.

Paul Ginsburg: Thank you. We’re just about ready for questions so I want to encourage people in the audience if you have questions to write them down and pass them. I’d like to just get to a final question about deployment of private capital in health care. Maybe you’ve covered some of this already, but just broadly, what are the types of ventures in health care that are attractive to venture capital or private equity or even potentially publicly tradeds? Are they in a sense just finding little niches or are there potentially important thing that are being funded today that might have broader impacts on health care?

Adam Feinstein: Clearly, the deals we’ve seen over the last year, and there have been a lot of them, it’s been a very active deal pipeline for a lot of these financial sponsors, really big companies looking to take on more leverage, recapitalize these companies, and then ultimately they’ll become public again I’m sure in a few years, so I’m hoping so I still have a sector to cover. But with that said, it’s really not about trying to find an unmet need in the marketplace, whereas Jeff and I back in the mid 1990s you recall there were a lot of start-up health care companies that were coming out in new areas, niche areas, we’re seeing fewer of those. It really seems like most of the deals are they’re taking existing companies, leveraging them up, and then they’ll look to deleverage them in the future. It’s something we hear about, but haven’t seen that much yet, but it really is interesting. I was talking to an executive of a major health care company recently and was looking at some of the international opportunities. If you look at some of these countries, someone was telling me in Moscow there are two MRIs and one is broken, so you think about that and some of the opportunity there. So there is interest in international, but the issue is how do you go about entering that market. A lot of these markets are very difficult, a lot of political issues, so I think that’s going to take some time.

Geoffrey Harris: And we’re still seeing a lot of initial public offerings certainly as I mentioned in the biotech area, although an emerging trend is some of the biotech companies are opting to sell out to desperate pharmaceutical companies rather than pursue the public market route and so you’ve seen some companies, Pfizer, Astra-Zeneca and a lot of the big companies paying very, very big prices right now for either private biotech companies or public biotech companies again because of the dearth in their own pipelines.

Paul Ginsburg: I guess I’ll take some questions or someone can come up. The discussion about hospital bad debt was about two issues, charity care to the uninsured and bad debt for insurance cost sharing. Which is the larger burden for hospitals in terms of dollars, and are hospital CFOs able to distinguish between the two in measuring and developing remedies?

Adam Feinstein: Everything we’re seeing and hearing, it really is more that uninsured patient as opposed to once again collecting that co-pay or collecting from insurance companies. As I mentioned before, the collection rate on an uninsured patient is 8 to 10 cents on the dollar so that’s really the bigger issue. But the question is whether or not hospitals CFOs even know and I think one of the things we’ve learned over the last few years is it is really impossible for them to know their bad debt trend. It’s really one of the few costs where you’re just making a lot of estimates and then coming back and shoring up later, so we’re seeing a lot of changes in the financial reporting but clearly it is not a perfect system.

Geoffrey Harris: And just on that topic of reporting, the hospital CFO is in a little bit of a conundrum. On the one hand they want to accurately report the bad debt experience to investors, they have to do that from a regulatory standpoint, on the other hand, if it gets out in the community that uninsured payments are just automatically written off which from an historical perspective may reflect reality, in other words, they’re not collectable, then the incentive of the hospital and the incentive of the patient completely go away to pay the bill so it’s a little bit of a tricky situation. On the one hand they want to accurately reflect the reality of the situation that it’s tough to collect, on the other hand, they’d like to keep some incentive out there for the patient and for the hospital administrator to make best efforts for the patient to pay and for the hospital administrator to collect.

Jeff Schaub: If I could just add quickly, on the not-for-profit side, bad debts have actually been stable as a percentage of net revenue, but charity care has gone up dramatically and the main driver of that is increased scrutiny of not-for-profits tax-exempt status in their community benefit they’re providing. So their total services for which they receive no money back has increased and they are very careful about reporting that. Again, with bad debts, they do make a guess and chew that up when they realize their ultimate collection percentages, but on the charity care side community benefit it’s typical for a hospital to have raised its charity care eligibility from 200 percent of federal poverty guidelines up to 400 percent and again that is to be able to demonstrate to the perspectives of many constituencies its commitment to the community and its justification for its not-for-profit status.

Paul Ginsburg: I have a question for any of the panelists. Are there unique opportunities or challenges facing academic medical centers as compared to the rest of the hospital market?

Jeff Schaub: Medicaid doesn’t want to pay to educate physicians, they want to pay to take care of folks who are poor, so they’re threatened with cuts in indirect med ed and direct med education. It’s particularly acute in New York which is where I have spent a lot of time.

There are a whole host of issues related to the relationship between the medical college and the hospital that regular community hospitals or nonacademic medical centers don’t have.

Adam Feinstein: Why do the for-profits who have had affiliations -- have had a really difficult time due to some of the reasons you were just talking about, but I think they’ve really rethought the strategy there. Tenet Health Care recently has come out and talked about their issue at USC Medical Center and we’re hearing more about issues. So in terms of the for-profit world, I would be surprised to see them get more involved with some of these academic medical centers.

Jeff Schaub: But for not-for-profits, often that is a major, major strength for an academic medical center to be able to point to its faculty of researchers and its breakthroughs and that becomes a marketing thing as they reach out particularly from cities into suburbs to affiliate with community hospitals and get those more financially rewarding, more complicated referrals from the suburbs into the mother ship in the city.

Paul Ginsburg: Here’s a question asking about what are hospitals investing their capital in, inpatient, outpatient, IT, amenities, joint ventures, buying physicians, or I don’t think they do that anymore?

Jeff Schaub: The hospital construction book has been the big topic of discussion for the last 3 or 4 years, $42 billion in 2005, about $43 billion in total hospital construction in 2006. It looks like it’s leveling off. Construction companies are projecting falloffs in hospital construction, so that’s been the big deal. And we have started to see a somewhat greater weighting of expenditure to bricks and mortar away from equipment, but again I think that just demonstrates that hospitals are replacing new buildings. One of the interesting things is that there are theories out there that hospitals are replacing the big wave of hospital construction that followed World War II. After 40, 50, 60 years, you can only go so far to renovate and ultimately you have to tear it down and do something new, or follow the population shift and move out to the suburbs.

Adam Feinstein: I would just follow-up. We have seen a lot of construction in the last few years and really the for-profits started ramping up back in 2001 after some of the give-backs after BBA and then the not-for-profits started ramping it up a few years, so we’ve had a lot of cap ex.

A lot of it is going on to replace older hospitals, so what’s interesting, even though there has been all this construction, we really haven’t seen a big increase in the number of beds in the overall market so that’s been an interesting observation. Everyone is investing more in services, everyone is adding -- but other things we’ve seen cath labs, everyone has invested in cath labs in the last few years, and then outpatient. As we’ve seen more competition as we talked about earlier, a lot of hospitals now are developing surgery centers or partnering with doctors there, so those have been some of the key areas.

Paul Ginsburg: Here’s a media question from Employee Benefits News asking about what role in general should employers be playing with respect to hospital or pharmaceutical pricing strategies, but let me just broaden the question. Should employers be playing a role in these provider issues or do they need to work through health plans? I guess there’s no good answer to that.

Geoffrey Harris: I think in general it would make more sense for them to work through health plans who have expertise or some kind of intermediary that has expertise in negotiating with individual providers unless they are a dominant employer in a particular small market and there’s a dominant provider in that market, maybe they can do direct negotiation and direct contracting, but I think that has been talked about for many years and hasn’t really taken hold in the marketplace to any great degree.

Jeff Schaub: I think there’s a bigger role in just partnering with the local health care provider as a benefit, getting a part-time clinic staffed at the workplace is a popular thing. It’s good for the hospital, it’s good for the employer, it’s good for the employees. Wellness programs we’ve touched on at the end of the last session, again, very, very positive and fairly low-cost ways for employers to hospital with local providers.

Robert Berenson: I guess the only thing I would say is that in the broad policy discussions about where the health system should be going there is an increasing as you know all know view that that employer-based insurance isn’t a rational way to provide people coverage and part of I think the basis for that is that employers haven’t shown particular ability to effect the delivery system and it’s not their business, but you do hear of GE or GM or a few of the others who pay a lot of money who are still trying to have impact but for the most part I don’t think employers really have either the knowledge base, the corporate interest, or the potential impact to sort of effect the delivery system directly and obviously they are not giving up their ERISA protection related to what benefits they offer, et cetera, but I’m not sure there is a major role for employers.

Paul Ginsburg: Here’s a question about investment by hospitals in emergency departments, recognizing that emergency departments on the one hand do draw uninsured patients, but they also are a very important source of medical admissions in particular. The way I would phrase the question is in a sense how do hospital CEOs, CFOs, think about investing in emergency departments?

Adam Feinstein: It’s a good question. Every hospital has been investing in their ER. I was talking before about the cap ex boom, emergency rooms have been one of the areas where hospitals needed to modernize their operations. As Paul said, the dilemma is if you have an emergency room that’s very nice and operates very well then are you going to attract more uninsured patients and that is part of the risk. However, this is the front door to the hospital so even though there are uninsured patient who come in through the emergency, you are getting a lot of insured patients. So I think hospitals are really focused on continuing to make emergency rooms better so they continue to invest in them and continue to find ways to manage those better.

We have seen a lot of hospitals that have outsourced the management of the emergency rooms. There have been companies that focus on that where I have seen a big increase in business over the past several years, but still a key part of any hospital’s strategy is the emergency room.

Robert Berenson: Two points. One is that I think it is an urban myth that people who visit the emergency room are highly disproportionately uninsured. It’s not the case. So I agree with the comments that you need to sort of have an attractive place for insured patients to come and to be admitted. For some hospitals, 50, 60, and increasingly up to 80 percent of their admissions are coming through the ER.

The second piece is one of the things that needs watching is in fact the major move by physicians to not want to do ER call and their ability in many specialties to have an alternative place where they don’t have to follow the typical bylaws at most hospitals that to admit patients you do ER call. This is a big issue. Hospitals are working very hard to try to draw lines as to which physicians they are going to compensate for taking call or for caring for uninsured patients. I think what’s interesting is that at least on our site visits they are able to draw those lines. It has not yet become standard that all docs are getting paid by the hospital for ER call but it is increasingly a cost of business on the hospitals that all payers are going to have to pay for.

Paul Ginsburg: Another question I have is about retail and workplace clinics. We have seen them a lot in the news and to what extent are they crossing our radar screens as a potentially significant part of the delivery system and an opportunity for some investors?

Adam Feinstein: It sounds like the type of opportunity from a business point of view you hear about and say that makes a lot of sense. It will keep you away from going to the emergency, provide these retail clinics, and we can bring down the cost of health care. However, in reality this was tried before and didn’t work out.

One of the issues as one of the managed-care plans was saying recently is they see a lot of double-dipping means someone goes into one of these walk-in clinics, you bring your child there and if nothing is wrong, maybe you might just go home. However, if the walk-in clinic tells you there’s anything with the child or is uncertain about that, then you wind up going to the hospital or the doctor afterwards. So it seems like you get people going into the system twice as a result of that which makes it difficult.

However, it does make sense in terms of after hours, I think. So if you can’t get in to see your doctor, then maybe these can help, but once again it seems like something from a business point of view that makes sense but in reality it isn’t a perfect solution.

Geoffrey Harris: I would say just in agreeing with Adam that it is an idea that seems to come around every decade that someone tries to fund a doc in the box type of enterprise. I remember seeing them in the 1980s and then they didn’t work, and then they tried again in the 1990s and I don’t know if it’s being tried again now, but it just seems to be an idea that comes around every 10 years. To some extent it seems to make sense. Why not be able to go to one of these and not have to wait in line and get seen, but just for whatever reason at least in the states it has not taken off.

Paul Ginsburg: Alwyn?

MR. CASSIL: Alwyn Cassil with the Center for Studying Health System Change. I have an observation about the retail clinic phenomenon. I question whether it is a bit different this time around. At the height of the last time of docs in the box, it was at the height of tightly managed care and the insurers didn’t want their patients going to those places and they didn’t include them in the networks. This time around they’re including them in the networks and in fact some employers are incentivizing their employees to go to them. Does that make a difference?

Geoffrey Harris: Yes. I guess if there’s coverage and an incentive for the employee to go, although I still think it’s very difficult to break bonds between a patient and their physician and their hospital. I think they may feel that they’re being compromised on quality or something by being encouraged to go to -- again, the doc in the box has all these bad connotations out in the consumer world.

Robert Berenson: This is an opportunity maybe to mention one of the things that might be happening in the physician part of those whole discussion which is the discussion around creating patient-centered medical homes. The American College of Physicians, the Academy of Family Physicians and others are sort of learning from what the pediatricians had been doing in a few state Medicaid programs, the idea of actually recreating primary care as a place where you actually to go after hours and get personal care. There are at least a few demonstrations that are going to start with some corporate interest, IBM, Boeing, a few other major companies, to try to see if this model as an alternative to what seems to be docs not available. So the person after hours is either going to an ER or to these new kinds of clinics. It’s certainly years away before we would know whether there is going to be a sort of restructuring of the physician workforce around these kinds of practices but it is something that’s getting some attention now.

Paul Ginsburg: I would like to spend the last couple of minutes we have, I’m scheduled to close in 10 minutes, but I have about 30 seconds’ worth to say, just to give the panelists a chance if there is something they want to say on just something interesting on what we’re discussing, perhaps a question I sent them 2 weeks ago that they didn’t get around to answering, I just wanted to provide that opportunity. Geoff?

Geoffrey Harris: I think just from a very general perspective, the biggest issue that society or policy people have to deal with in terms of health care costs, there are two issues. One is this notion that what is an incremental benefit worth. Again, as I mentioned before, societally we have decided that paying $55,000 a year for an incremental improvement in life expectancy in certain cancer patients is a month. I’m not saying whether that’s right or wrong, but that’s the number. On top of that, there are more and more drugs of that kind coming along now. Eventually because the science is interesting they may extend life well beyond that, but I think that’s a challenge. Maybe it’s $100,000 for an incremental 1 month, so I think that’s one issue.

The other is that we’ve basically mandated in this country that, I’ll make an analogy with cars, one of the reasons why the uninsured population is so high is that in many places we’ve mandated benefits that are equivalent to a Rolls Royce and so if we had a law in this country which said that everybody had to drive a Rolls Royce than probably very few people would have cars. In this country we’re comfortable with people driving Chevys and other cars. In health care we’ve sort of mandated that everybody has to have a Rolls Royce and so not surprisingly a large percentage of the population can’t afford health insurance. So I think the politically difficult question is can we get comfortable with offering a Chevy in health care so that everybody can have health care.

Adam Feinstein: I guess an area that we’ve focused on a lot recently is this whole concept of universal health coverage and with the presidential election coming up and this being a very hot topic, I just thought I would provide a quick point of view here. Our perspective is it’s very difficult to pass anything at the federal level. It seems like something that will continue to be talked about but I would personally be very surprised if we see anything of any substance passed at the federal level. It seems like typically you have better success doing these things at the state level. The analogy I would make for you was when malpractice expense was a huge issue back in 2000 and 2001 and we heard a lot about tort reform, too difficult to pass at the federal level, so a lot of the states took ownership of the issue and as a result we saw malpractice expenses really moderate, so I think we’re going to go a similar route with this whole idea of providing insurance for the uninsured. Massachusetts is the state everyone talked about. They still have a lot of issues to work out as Jeff was saying. They’ve mandated coverage in terms of what they’re saying the plans have to ultimately provide the beneficiaries as they continue working the system is the right idea. So I just wanted to comment on that.

Secondly, the other thing that we get a lot of questions on is just this whole idea of more transparency of pricing, making more data on hospital quality available over the Internet and whether this changes the industry. I remain somewhat skeptical here and don’t think this is going to change the industry. I know the analogy people are making is the airline sector and saying you can go online and find your flights and people do that and it has driven down costs. I don’t see the hospital industry looking like the airline industry and luckily for the hospital industry as the airline industry is one of the few industries that people have a more negative view on.

Jeff Schaub: Interesting though, they are both at 72.3 percent capacity today.

Adam Feinstein: But I think in reality it is really difficult to see any major change there. I think most consumers just don’t really know how to go about picking one hospital relative to the other, they’re going to go to wherever their doctor sends them so that’s one of the difficulties in terms of some of the hospitals who have been investing a lot in quality. I don’t know if they’ll ultimately get paid for that, but clearly it is the right thing to do.

Paul Ginsburg: Jeff, do you have any comments?

Jeff Schaub: Just a quick thought on what we’re seeing lately that we think works and that is fairly small integrated delivery systems that own their physicians, employ their physicians, they own the practices in markets where they have very little competition. They own the market and they own the entire continuum of care delivery and so they are providing the medical home, coordinated care management for the population that they’re serving. They are doing very well and they’re doing better today than they were last year. I don’t know how you replicate that type of a system in areas where you do have a lot of competition. I think one of the things that facilitates these noncompetitive systems is information technology where the physicians have access to the same medical records data as the hospitals, as the rehab hospital, as the physical therapist, again from one end of care to the other.

But I do think to replicate that in competitive situations you have to have a community medical records and there are pilots going on around the country with at least some initial funding to get them going. There is some debate on who is going to pick up the carrying costs for things like that and also a debate on what part of the entity should properly take responsibility for the coordinated care management. But for a $200 million system with again 60 percent market share, things are going very well and I think it’s a good example to look at.

Paul Ginsburg: Bob?

Robert Berenson: I see from the back that we’re really out of time so I will not launch into my speech on Medicare Advantage which I might have done, so let me just finish with a couple of comments picking up on what’s been said which is skepticism about sort of demand-side changes, transparency, in fact WellPoint has presented some data that if you have transparent prices, the hospitals that are getting paid less want to raise their prices. I refer you to today’s "New York Times" said raise quality against price for -- surgery in Philadelphia and my hunch is one of the immediate responses is going to be that hospitals that are high quality and low price are going to raise their prices. So I’m skeptical about that. I’m skeptical about consumer directed. I’d say one of the real challenges is sort of understanding the role of the physician in all of this, pharma/physician relations, the rise of single specialty groups rather than with some exceptions multispecialty integrated groups, supply-induced demand and largely that is physician-induced demand. I think all of those issues are the cost drivers, the physician plays a large part and it’s all being driven I think by this fee-for-service payment system. So I think that’s really where we need to be focusing more attention. Maybe because I’m a physician I say that, but I think they’re often left out of the policy solutions.

Paul Ginsburg: Thank you. Please fill out your evaluation forms and drop them off. I want to thank the panel for doing a terrific job.


Paul Ginsburg: I also want to thank the Robert Wood Johnson Foundation for its support of the center which supports this activity, and the HSC staff that flawlessly again put this on. I do have some concerns with the Grand Hyatt Hotel about sound, but thank you very much.

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Participant Biographies

Christine Arnold - Managing Director, Morgan Stanley

Christine Arnold is a managing director at Morgan Stanley and covers the managed care industry. She joined the firm in 1999 as the senior managed care research analyst. Arnold was ranked No. 1 in the 2004 and 2003 Greenwich Survey. In 2000 and 2001, she ranked No. 2 and No. 3 in the Institutional Investor All-America Research Team Survey. Arnold has spent 14 years in investment research and has specialized exclusively in managed care for the past 10 years. Before joining Morgan Stanley, she worked in research at Goldman Sachs; Furman Selz; and Montgomery Securities; and in corporate finance at Burns Fry, a Canadian investment bank. Arnold earned her bachelor’s degree with a concentration in finance from Georgetown University.

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

Robert Berenson, M.D., is a senior 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 managed care contracting at the Health Care Financing Administration (now the Centers for Medicare and Medicaid Services.) In the Carter administration, he served as an assistant director of the Domestic Policy Staff. 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.

Adam Feinstein, C.F.A. - Managing Director, Lehman Brothers

Adam Feinstein is a managing director in equity research at Lehman Brothers, where he covers, as well as coordinates, the firm’s health care facilities research team. Feinstein was ranked first in the 2006 Institutional Investor All America Research Survey in the health care facilities category for the second consecutive year. In addition, he was ranked first in the health care facilities category in the 2006 Greenwich Associates Research Survey. Prior to his current role, he was an equity research analyst at Salomon Smith Barney where he also focused on the health care services industry. Feinstein is a chartered financial analyst and is a member of the New York Society of Security Analysts and the CFA Institute. He earned his bachelor’s degree in business management from the University of Maryland at College Park. He was recently named to the Robert H. Smith Business School Dean’s Advisory Council. His Feinstein’s Facility Weekly Insights & Observations report is estimated to be the most widely read piece of research on the health care facilities sector.

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 principally by The Robert Wood Johnson Foundation. Previously, Ginsburg was the founding 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. A highly respected researcher, Ginsburg previously has worked for the RAND Corp. and the Congressional Budget Office. He earned his doctorate in economics from Harvard University.

Geoffrey Harris, M.A. - Hedge Fund Manager

Geoffrey Harris is a principal and health care portfolio manager at a $2.5 billion hedge fund. Harris has 20 years of buy-side and sell-side analytical experience, as well as research management in health care. Previously, he was a managing director and global head of health care research at UBS, a managing director of health care research at Smith Barney and vice president of health care research at Tucker Anthony. Harris earned a master’s degree in management at M.I.T. and his undergraduate degree in economics from Oberlin College.

Robert Laszewski. - President, Health Policy and Strategy Associates, Inc.

Robert Laszewski is president of Health Policy and Strategy Associates, Inc. (HPSA), a policy and marketplace consulting firm. Before forming HPSA in 1992, Laszewski was executive vice president and chief operating officer, Group Markets, for the Liberty Mutual Insurance Group. For 10 years he also served as national adviser on health policy issues for Ernst & Young. He is North American chair of the Global Medical Forum and also chairs the forum’s work in China in partnership with the Chinese Health Ministry. He was a founding board member of the bipartisan Alliance for Health Reform, as well as a member of the Board of Overseers of the C. Everett Koop Foundation at Dartmouth and the Dartmouth Medical School. He has offered his perspective on health care reform in testimony before several committees of both the House and Senate of the U.S. Congress. Laszewski has participated extensively in the nation’s health care debate, especially on health insurance reform and the impact it will have on existing health insurance programs, the insurance industry, and the evolving role between payers and providers.

Christopher McFadden - Managing Director, Goldman Sachs & Co.

Christopher McFadden, C.F.A., is a senior equity analyst at Goldman Sachs responsible for U.S. health care services research coverage. He serves as a member of the Global Investment Research (GIR) Sounding Board. McFadden joined Goldman Sachs in 1999 as a vice president in equity research. He became a managing director in 2004 and is currently deputy business leader for the U.S. Healthcare Group. Before joining the firm, McFadden worked as a senior research analyst at Wheat First Securities (today Wachovia Securities). Prior to that, he held marketing and management positions at Xerox Corp. He serves as a board member for the Greenwich Village Center of the Children’s Aid Society. McFadden earned his undergraduate degree in political science from the University of Richmond and studied graduate economics at Virginia Commonwealth University.

Douglas Simpson, M.B.A. - Senior Director, Merrill Lynch

Doug Simpson has been a sell-side analyst for more than a decade, with experience covering managed care, healthcare services and property/casualty insurance. Simpson is the senior managed care analyst for Merrill Lynch, with which he has been associated since 1999. He previously worked as an equity analyst at Bear Stearns and J.P. Morgan. He received his bachelor’s degree from Bucknell University with a major in management and his M.B.A. from The Wharton School at the University of Pennsylvania. He was named an "up and comer" in the 2004 Institutional Investor All-America Research Team Survey and was ranked among the top 5 managed care analysts by Greenwich Associates in 2006.

Joshua R. Raskin - Senior Vice President, Lehman Brothers

Joshua Raskin is a senior vice president and senior analyst in the equity research department at Lehman Brothers covering the managed care industry. Prior to his current role at Lehman Brothers he was a research associate at Morgan Stanley Dean Witter and a senior associate in the financial services group at PricewaterhouseCoopers LLP. In the most recent Institutional Investor All-American Research Team Poll, Raskin placed second among more than 20 analysts in the managed care category. Alpha Magazine (the hedge fund-centric publication of Institutional Investor) has ranked Raskin in the top two since that publication’s origination. In the most recent Greenwich Associates poll for 2006, he placed second in the overall research franchise ranking for the Healthcare Services - Managed Care category. Raskin has been widely cited in the media, including The Wall Street Journal, The New York Times, Barrons, Forbes, Business Week, Modern Healthcare, CNBC and Bloomberg Television. He is a chartered financial analyst and is a member of the New York Society of Security Analysts. Raskin graduated with honors from Lehigh University with a bachelor’s degree in accounting.

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

Jeff Schaub is a senior director in Fitch Ratings’ public finance department. Based in Fitch’s New York office, he is responsible for acute care hospital ratings. 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. He is a member of the National Federation of Municipal Analysts, the Healthcare Financial Management Association and the Municipal Analysts Group of New York.

Douglas Simpson, M.B.A. - Senior Director, Merrill Lynch

Doug Simpson has been a sell-side analyst for more than a decade, with experience covering managed care, healthcare services and property/casualty insurance. Simpson is the senior managed care analyst for Merrill Lynch, with which he has been associated since 1999. He previously worked as an equity analyst at Bear Stearns and J.P. Morgan. He received his bachelor’s degree from Bucknell University with a major in management and his M.B.A. from The Wharton School at the University of Pennsylvania. He was named an "up and comer" in the 2004 Institutional Investor All-America Research Team Survey and was ranked among the top five managed care analysts by Greenwich Associates in 2006.


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