Center for Studying Health System Change

Paul Ginsburg: I’d like to welcome you to the 16th Annual Wall Street Comes to Washington Conference. And I’d like to thank the Peter G. Peterson Foundation for its support, it made this conference possible.

The purpose of the conference is to give the Wall Street health policy community better insights into market developments in health care systems that are relevant to policy. And discussing market developments and their implications for people’s health care is a core activity of HSC.

This conference is an opportunity to tap a different source of information -- namely, equity analysis -- on this topic. And equity analysts advise investors about which publicly-traded companies will do will, and which ones will not. And the good analysts, the ones sitting next to me on this panel, develop a thorough understanding of the markets that the companies they follow operate in. And they, and others in their companies, also follow public policy, which often has important implications for the companies they follow.

And this is an opportunity for the equity analysts to bring their understanding of market forces to bear on questions that those involved in health policy have on their minds.

We also include a Washington-based health policy analyst on the panel to help tie the market developments more closely to health policy.

And in the interest of gaining a more in-depth discussion, we changed the format of the conference this year, moving from two panels to one panel. And this panel will cover a broad range of topics focusing on both health insurers and providers, implementation of health reform, and other issues.

And our format this morning will be a roundtable discussion based on a series of questions that have been shared with the panelists in advance. And we’ll have two opportunities for questions and answers -- or questions by the audience: the first before we take a break at 10:30, and the second before we adjourn.

There are question cards in your packet, and please fill them out and give them to an HSC staff member. Or, if you’d prefer, you can go to a microphone and ask your questions.

Please note that the analysts are not permitted by their employers to answer questions about the outlook for specific companies that they follow.

Again, I’d like to thank the Peterson Foundation for sponsoring this conference.

We will post a transcript of this session on our website early next week -- or sooner, if possible. And also, before you leave the conference, I’d appreciate it if you’d fill out a yellow evaluation form and leave it at the table at the back.

Paul Ginsburg: We have a terrific panel this morning. And most are veterans of previous Wall Street Comes to Washington Conferences, and that includes Matt Borsch of Goldman Sachs, Doug Simpson of Morgan Stanley and Gary Taylor of Citigroup. And also we’re delighted to welcome for the first time Carl McDonald of Citigroup. And finally, our policy expert, Bob Berenson of the Urban Institute.

So I’m going to go right into the discussion.

And the first questions are going to be about spending trends -- recent and current. And private insurance utilization trends were lower in 2010, and so far in 2011, than had been projected.

And are there any insights into where the surprises were concentrated? Price? Utilization? Certain types of services? And your predictions for continuation.

Matt, since you’ve written a lot on this, I’d like to begin with you.

Matthew Borsch: Well, I think we’ve all written a fair amount on this topic. We have a theory that what we’ve seen for the last couple of years fits pretty strongly with the historical pattern that we can observe going back several decades. And so, specifically, this is a period of four to five years or so where demand for health services is depressed, following a recession. Maybe not too shocking an idea. But the length of that period is maybe what’s a little counterintuitive.

So if you go back to the in wake of the 1982 recession, you see that utilization demand didn’t really come back, if you will, until there was a jump in trend in 1986. So that was four years. Moving to the next decade, from the 1991 recession, it wasn’t until 1996 that trends started climbing back. Maybe it was 1995. But same type of pattern. In the wake of the 2001 recession, it was less dramatic, but you could see the trend come back in 2006 and 2007.

And we think we’re seeing a similar pattern today. And, if anything, given the severity of the recession we’ve been through, and the so far very anemic recovery, you might expect the lag to be even more pronounced.

Let me also touch on the drivers. It’s one thing to see a pattern in the data, but how do you then explain it? And first, just to mention this is not an original theory from us. It was the actuaries at Milliman who originally looked at this back in the 1990s.

But in terms of what would drive it, first of all, in the wake of recessions, you typically have purchaser and employer actions to clamp down on employee-benefit costs. And those take different forms -- or have taken forms in different recessions. In the early 1980s it was second-opinion reviews and early forms of managed care. In the early 1990s, of course, in the wake of that recession, it was the wholesale shift to HMOs. Following the 2001 recession, three-tiered co-pay plans and other new forms of cost-shifting. And with the most recent recession, it’s been accelerated cost shifting across the board, and shift to consumer-directed health plans and other actions that I’m sure we’ll talk about here.

And the one other thing that you have in a recession is a period of depressed consumer demand in the wake of a recession, along with job dynamics -- people getting new jobs, but also a weak and recovering labor market. And we think that these things also promote that long lag.

And then, finally, I’d point to the fact that you’ve also had the prospect of health reform as maybe has maybe a sentinel effect on some provider actions.

Paul Ginsburg: You know, even though I think you’ve accounted for it very well, didn’t the slowing in 2010 still surprise a lot of people?

Matthew Borsch: I think it did. There was a spike in 2009, with elevated trend. Now, some of that had to do with the Swine Flu, but I also think that there was, in 2009, in the last stage of the recession, you saw a little bit of a pattern that we’ve also seen in prior recessions, which is actually elevated trend into the recession.

And this is speculative, but a lot of people have speculated that there’s some use-it-or-lose-it dynamic with employee health benefits that happens as you go into, and maybe even through, a recession that, of course, tends to fall off.

Paul Ginsburg: Yes. Thanks.

Any other thoughts? Doug?

Doug Simpson: Sure. Okay.

One of the dynamics -- and I agree with everything Matt said -- it’s sort of interesting to think about, you do have a situation where wage growth has been anemic. And cost shifts continue to push onto the end-user. And certainly with any good or service, there is some measure of demand elasticity.

And one of things that’s -- we’ll see how this plays out over time -- but is the extent to which we’ve reached some sort of maybe a new normal, where because people are paying more out of pocket there’s a greater sensitivity, so that they self-select care and services, and determine what they deem as most appropriate. It’s do you take your -- if you have four children and the first two have a cold, do you take number three and four, or do you assume that it’s the same as what one and two had. Those types of things, at the low-acuity side of things.

But as long as health care costs continue to outpace wage growth, over time you probably are going to have some propensity for continued cost shifting onto the end-user, and leveraging that demand elasticity. And how that plays out -- and there’s a lot of questions around the information with which people have to make decisions, the transparency of cost and quality information -- we think those are going to be very interesting areas to watch over the next five to seven years.

But this dynamic, it doesn’t seem like -- there’s sort of a secular change on top of the cyclical pressures from the recession that Matt discussed. And, it’s not clear how that’s all going to play out.

Paul Ginsburg: Gary, from the provider perspective, how are you seeing these lower utilization trends?

Gary Taylor: I guess I would agree -- when you think about the issues that seem to be impacting utilization, in terms of -- and maybe just kind of accentuating some of the comments -- but 8 or 9 million people losing insurance, people without insurance obviously don’t use as much health care as people that have insurance. Consumer sentiment is important.

And maybe the one thing I would add is, we’ve talked for years about a concept of really excess utilization that exists within health care that’s motivated by our fee-for-service payment system. And most people would say, well, I can understand and incremental physician office visit, et cetera, but how can an inpatient procedure really be excess utilization?

And what you tend to find is that there’s a lot of marginal cases where if a physician is motivated -- because he doesn’t get paid if he doesn’t do a procedure, and the facility is motivated that they don’t get paid unless they allow the procedure to be done -- when the economics start to change, you see a lot of impact on that marginal utilization.

So, I think we’re dealing with consumer sentiment, and just the entire channel kind of slowing down as a function of those two things. And, really, across the provider spectrum utilization has slowed pretty dramatically. Hospital inpatient, outpatient, lab, physician office visits, surgery center visits -- are all running at least 200 to 300 basis points below what we’d call a normal trend.

Paul Ginsburg: I think I gather even though the benefit structure in Medicare hasn’t changed, that you even see slow trends in Medicare. Would you think that’s just being influenced by the overall dynamic? But are things like tight credit and -- you know, particular relevance to that population?

Carl?

Carl McDonald: Yes, I would just say for -- for Medicare spends, I wouldn’t underestimate how much impact some of the economic factors that Matt discussed impact Medicare. You can even take it one step further. If you look at the Medicaid business, which is an industry that, in almost all cases, there are no co-pays or deductibles, so there’s no cost sharing at all, utilization for Medicaid has also been down pretty dramatically -- at least for the recent past.

So, I think there is a fair amount of economic impact. There’s just something that’s more underlying between a bad economy and lower health care spending than I think most people appreciate.

And I think that probably, from a continuation perspective, will be around for the rest of this year and into 2012. But I would be very nervous thinking about that as being sort of a new normal scenario.

And I think as soon as you see the economy come back, you are going to see health care utilization start to accelerate again. There’s no question co-pays, deductibles -- cost-sharing, in general -- is a lot higher than it used to be. But, you know, to argue that it’s driven predominantly by cost-sharing, you basically have to argue that we hit some sort of a tipping point recently -- in the sense that co-pays and deductibles were high in 2009, they were high in 2010. Yes, they’re incrementally higher in 2011. But I have a hard time attributing this giant drop in utilization we’ve seen just because the deductibles rose by $50.

Paul Ginsburg: Thanks.

We had a real surprise a few weeks ago when the Kaiser Family Foundation employer survey came out and said that the premiums for 2011 were up by 9 percent, compared to a premium increase of, I think, 3 percent in 2010, and perhaps 5 or 6 percent a year increases for the previous years.

I got call from a reporter. I couldn’t explain it. I sent them to Matt Borsch. And I don’t know if they quoted him, or me.

But, Matt, I know you sent a note to your clients about that.

Matthew Borsch: Well, actually, I think I talked to The Wall Street Journal and The New York Times. And The Wall Street Journal liked what I had to say, and The New York Times didn’t.

But, I mean, really just simplistically, we were offering the observation that what the Kaiser survey had found was a very low rate of increase in premiums for 2010 -- of 3 percent, specifically, was the blended number -- and then a tripling of that to 9 percent for 2011. And, as these things go, even with a robust survey -- and certainly Kaiser is a very robust survey -- it’s still very possible to get numbers, particularly for something like premium increases, where you’re blending a lot of apples and oranges in what the increases are on, and the underlying population, that you can get some distortion.

So, combined with a number of other factors, we just theorized that they had been at the low end for 2010, and then, partly as a consequence of that, the increase looked much higher for 2011.

Now, that might sound like an attempt to sort of explain away something that we wanted to disagree with. I don’t think it really was, because it was also fitting with a view that we had from all the other surveys, which showed the rates of increase for 2010 and 2011 as being really pretty comparable, and up from 2009 generally.

Now, of course, that may seem a little counterintuitive to what we were just talking about with the slowdown in underlying medical cost trend, why were the premium increases fairly high for 2010 and 2011. Now, I think part of this has been -- and we’ll get into this in a minute -- the carriers’ recovering from what we viewed as a downturn in profit margins during the last underwriting cycle, downturn, and now coming into a new positive cycle -- as we’ve observed that over several decades -- combined with some of the dynamics in the insurance coverage, where you’ve had a bit of -- you’ve had some areas of adverse selection, with people dropping out of coverage unless they had an immediate need for services, or a near-term need for services, leaving those more likely to demand services in the insurance pool.

Paul Ginsburg: Yes.

Sure, Doug.

Doug Simpson: Just one thing, to add to what Matt was saying.

We looked at the data, and one of the things that struck us is when we looked at the coverage statistics that they list, they actually show a 1,200 basis point increase in the percentage of small firms offering coverage in 2010. And then it totally -- well, almost totally reversed, with an 1,100 basis point decrease in 2011.

So, 2010, if you read the data, you see this massive spike in coverage in small firms. You see a modest spike in the, what I’ll call the Alarger small firms, in 2010. And then it sort of comes back in 2011.

So 2009 and 2011 look very similar, and 2010 looks very different on that metric. And it’s actually one of the few periods where they note there’s a statistically different estimate year to year. And that didn’t jibe with what we’re seeing in the market.

So, just to Matt’s point, maybe there’s some smoothing, or apples and oranges, in that.

Matthew Borsch: Could I add one thing?

Paul Ginsburg: Sure.

Matthew Borsch: Just -- good point, Doug. And also, just interesting that, not surprisingly, when you saw the Kaiser figure you had people jumping out from both ends of the spectrum to draw conclusions from it. On the conservative end, saying, "Okay, well, here’s evidence of the added cost burden from Obama care." On the left side of the spectrum, it was, "Yeah, well here’s evidence that we need to crack down harder on the insurance carriers."

Paul Ginsburg: I got a lot of those questions.

Carl, did you have a comment?

Carl McDonald: Yes, I love the Kaiser survey, but the data’s just wrong this year. I mean, premium rates didn’t accelerate that much.

And I think one piece to that is that, as I understand it, at least, the data that they report is after cost-sharing. So it’s what the firms are actually paying. And so with all the increases in cost-sharing that you’re seeing, the switching to high-deductible plans, you would think that would actually depress the rate of increase, as opposed to show a major acceleration.

So that would be consistent with everything that I’ve seen. From a market perspective, it suggests that the rate of increase was pretty similar in 2011 versus 2010.

Paul Ginsburg: Yes, one comment -- of course, the Kaiser survey had enormous media coverage. I wonder how much their 2010 survey had, when they had good news? About 3 percent?

But why don’t we move on to the next topic and talk about the outlook for the future in spending trends. We’ve already had some comments about the slowdown from the recession -- whenever we have prosperity again, it might go away.

But what about other factors you think might be driving costs, say over the next five years?

Who’d like to begin?

Gary.

Gary Taylor: Well, I’ll start. And I think I’m the only panelist that only covers providers. So I don’t know if that will matter in some of the answers I give.

But, still I would go back to when you look at the provider universe, the hospitals, nursing homes, surgery centers, all types of providers, the biggest single factor in the aggregate we would like to see is employment growth. We’d like to see employment growth, benefit growth, more people with coverage.

And we’d like to see consumer sentiment improve -- again, kind of going back to my health care channel, or health care funnel, where the front end of the funnel is physician office visits. We need better consumer sentiment for people to be willing to take time off work, go to the doctor, have something diagnosed and move further down the channel.

So on a macro basis, I think those would be the two biggest factors we’d be looking for. And I don’t want to front-run your questions about technology, so maybe I’ll --

Paul Ginsburg: Oh, that’s okay.

Gary Taylor: Oh, okay.

Well, a major factor over the last decade has been some really advanced new medical technologies. And I’m not sure we’re seeing as much of that. So if you think back a few years ago, the drug-eluting stents, and bare metal stents, and massive build-out of cardiac cath labs for hospitals, it seems like the technology is a little more incremental at this point.

And I also want to talk about -- I know we’ll get into this later -- just about physician employment. But hospital employment of physicians, I think, has a great opportunity to put a lid on growth in technology costs. And I think we’ll talk about that a little more.

Paul Ginsburg: Great.

Other perspectives?

Carl McDonald: Yes, just generally, to think about spending trends -- I mean, beyond the economy. And the other thing that historically has had a major impact on health care spending has been when you’ve seen some types of major change in benefit design. So, for example, introduction of HMOs, and then later, basically, the elimination of HMOs and the introduction of PPOs.

So I think that would be the other major thing I could think of for the next couple of years, that you could see some changes that would significantly drive trends. So, as an example, one thing that you’re seeing more and more of -- still on a very limited basis -- but this idea of a limited network plans, where insurance companies will go to a hospital and say, AFor this particular product, our members will only go to your facility. They will only use physicians affiliated with your facility. You know, it’s going to be interesting to see whether that actually gets any traction in the employer market. It’s very difficult to satisfy a big employer base with such limited choice relative to products like Medicare that are much more individualized.

Paul Ginsburg: I’ve often had a thought about -- when I look at the increase in patient cost-sharing that is coming into private insurance now, and most of the research we have about how that affects use really applies to when an individual has more cost-sharing. It doesn’t really tell us what happens when everybody has more cost-sharing -- as to whether there are actually changes in the culture of using medical care that can come from that.

Bob?

Robert Berenson: Yes, I just wanted to briefly address the spending projections in the future for Medicare which, I think, is an interesting topic these days.

First, a disclaimer which I always have to do, that I’m here -- even though I’m the Vice-Chair of MedPAC, I am not here speaking for MedPAC. I’m here as an Urban Institute Researcher and adviser to the Center for Studying Health System Change.

The Trustees’ most recent estimates or projections are that Medicare spending is increasing about 6-1/2 percent. But a lot of that is -- well, there’s two -- well, let me get the other fact out first. But on a per capita basis, per beneficiary basis, it’s increasing at about 3-1/2 percent -- which is pretty close to GDP.

So what’s the difference? Two major reasons is that with the aging of the baby-boom generation -- and I’m year one of the baby-boom generation, having just turned 65 three weeks behind George W., and two weeks ahead of Bill Clinton -- we’re in the sort of vanguard of all of this. We’re now going to go from less than 1 percent annual increase in beneficiaries to approaching 3 percent a year. So there’s a reduction in the average age of Medicare beneficiaries being projected, and so that moderate spending growth to a small extent.

The major reason is that the cuts to providers in the Affordable Care Act actually have had an impact. And, you know, there may be some disagreement about how sustainable they are, whether politically or in the real world, but they certainly change the projections for Medicare spending so that as of now, the issue in Medicare spending is about beneficiary-population growth, much more so than bloated, inefficient programs, et cetera. We can come back to that later, if we want. But the projection on Medicare is more than 6 percent growth, but largely from population growth.

Paul Ginsburg: Thanks, Bob.

One thing -- I should have gotten to this when we were talking about the Kaiser survey but as Matt mentioned, many of the questions from the media were about are premium increases higher because insurers are getting ready for health reform? And I said whatever effect it’s going to have, it’s too early.

But, for 2012, 2013, is there any likelihood that the prospect of implementation of health reform in 2014 would affect premium setting in the years before?

Matt?

Matthew Borsch: Just a quick observation. We don’t know the whole story there, obviously, but we suspect that we may not see premium rate increase moderate as much as we might have in the absence of health reform, at least to some degree. This is particularly noticeable with many of the larger not-for-profit carriers who, at least anecdotally, seem to be concerned more about preserving their capital base than might have been the case in earlier years, given the uncertainty of the impact that health reform implementation will have.

And I think it also relates a little bit to some of the rate regulation that’s ramped up in intensity, to a degree, as well as perhaps the medical loss ratio regulations, just in that carriers are concerned that if they get behind on premium rate increases that they won’t be able to catch up. Because, for example, at the 10 percent threshold which -- clearly, they can go above that, but that’s the level at which there is justification, and perhaps some element of public shaming on top of that.

Paul Ginsburg: Thanks.

Yes, Bob?

Robert Berenson: I just wanted to make one other point and see if any of the other members of the panel want to comment on it.

In the round of site visits that Health System Change recently completely, most -- well, all of our interviews were in 2010 -- what we did hear on the provider side, particularly hospitals, was clearly the story about decreased demand for services. But the response from many hospitals seemed to be, with a decrease in demand, a continuing pressure on Medicare reimbursements, a real concerted effort to cut the cost structure of the hospitals -- with, in some cases, substantial reductions in staff. Coming out of a recession there was less wage pressure from key staff like nurses. And so that was under better control. And there was an intention to improve --

**Editor’s Note: At this point in the conference, a member of the audience disrupted the meeting for about five minutes and was escorted from the room.**

Gary Taylor: Actually, one of the things I wanted to -- it spurred me to think about when you had asked the question about factors that could impact medical trend going forward, and perhaps some of the unintended consequences of the health care reform is that providers are behaving very defensively.

Revenues are weaker. Patient utilization trends are weaker. And one of the things providers are doing, you’re seeing much more consolidation. You’ve probably seen some of that in your survey work. And ultimately, if you take hospitals’ increasing their market share, and particularly hospitals’ increasing their share and now starting to either acquire or employ more physicians, their pricing power -- at least on the private side of the market where that matters -- is going to increase, for sure, and probably have some future impact on trend.

And the other thing I just wanted to mention, I think as Wall Street analysts, we’re so many times thinking about the next six months or maybe, just the next 12 months. But obviously, in this context, if we step back and health care reform law is allowed to be enacted, you also have 30 million people potentially coming onto the insurance rolls. And that may not change a lot of impact on private per capita utilization, but in terms of what we spend as a country, percent of GDP on health care, et cetera, clearly takes another significant step up in 2014 if those lives are implemented.

Paul Ginsburg: Thanks.

I’d like to get into the changes in benefit design that we’re seeing now, and that we can project in the future. Carl had mentioned the limited network products.

And, what do you see as far as -- are there going to be continued benefit buy-downs? And what innovations do you think will really make it into the mainstream?

Matthew Borsch: Just a quick one -- and actually, this isn’t necessarily leading-edge at all. I just wanted to mention it, since it’s sort of out there in the public domain.

If you walk into the J.P. Morgan building in mid-town Manhattan, you’ll see, playing continuously in a video, their CEO Jamie Dimon talking to the employees about their new health care plan. And they moved the 300,000 employees, 500,000 covered lives, in -- I think they went down from six to two carriers. And really pretty much encouraged everyone to take high-deductible health plans, where that wasn’t as prevalent before. One of the big changes was moving everybody to coinsurance and away from standard copays -- the theory being that that way, the member will have more of a stake in the differential costs between different providers. And then along with that they introduced medical reimbursement accounts -- or, I think it’s really a version of health reimbursement accounts where, my understanding of the structure there, they are pre-funding a set amount for lower-wage employees, but for all the employees they can get money in their HRAs by going through a checklist of certain wellness steps and so on.

And, this is not a unique example. It seems like for 2012, there are quite a few employers who had been discussing, thinking about doing things -- whether it was because of the uncertainty around health reform and whether it would be passed or not, and what form it would take. They might have held off on that, and now they are taking action. And it seems to be more broad-based.

I just wanted to give you that one anecdote, though.

Paul Ginsburg: Thanks.

Yes -- Carl.

Carl McDonald: No, I was just going to say you’re going to see cost-sharing continue to increase for employees. Copays, deductibles are going to increase. But I think there is a fair amount of frustration at the benefit manager level, because they know in general that just shifting cost doesn’t do anything to change the trends. You’re just passing costs on to the employees.

The other thing is, with particularly the high-deductible plans, you do see a meaningful premium decrease in year one. A lot of employers have seen the experience, though: once you get out a couple of years, the rate of increase of high-deductible plans is just the same as it is for a normal insurance policy. And sometimes that’s a benefit design issue, because if the employer is funding the deductible, then the employee isn’t feeling any pain, so they’re consuming as normal. But I think a lot of times it’s the situation that -- we’ve all heard the statistic 20 percent of the people are 80 percent of the cost.

If you’re one of those 20 percent -- you’ve got diabetes, congestive heart failure, whatever the case is, some type of chronic condition -- you know every single year you’re going to blow through that deductible. You’re going to have no money left over at the end of the year.

So I think after a period of time they get to the point of saying, like, "Well, I can either consume efficiently or inefficiently, and financially it doesn’t do anything for me. I still end up at the same place at the end of every year." You know?

And so I think that’s the weakness with high deductibles is dealing with the high cost portion of the population.

And, then a separate point, one other, I think, meaningful change you’re seeing this year is that at the lower end of the large-group market -- so, think sort of 100 to 500 employees -- significant increase in self-funding, or at least interest in looking at it.

I think part of that is driven by the fact that utilization has been as low as it is. So, they see how much money the insurance companies are making that they would have kept if they had been self-funded. I think it’s also the much greater availability of stop-loss insurance, so you can protect yourself from some of the catastrophic events. But financially that is something that is beneficial for pretty much every employer to do at this point.

Paul Ginsburg: Doug?

Doug Simpson: Sure -- and I should have mentioned this at the start. But just to get the disclosures, my personal disclosures are on the website of MorganStanley.com. So just to make that statement.

But, we’ve talked a lot about cost-shifting and benefit design changes. And I agree a lot with what Carl just said.

I mean, you get to a point where some of these things, the traditional tools, you have to think differently about them. And it’s not clear where this is ultimately going to go. But we think you’re going to have to see some greater alignment of care, costs and incentives.

And I’ll just give you two real-world examples. My father is stubborn as all get-out. He has diabetes, and he loves hard candy. And he eats it, and keeps a little stash under his workshop. And for what seems like a hundred years we’ve been telling him, "Dad, you can’t eat hard candy." He says, "No problem." We take the candy away, and he fills it back up.

So last year, he got rid of the candy himself. My sisters and I said, A\"What’s going on here?" And his insulin costs went up to, I think it was $20, $30 a week. And that’s his greens fee to play golf. So, you know, all of us nagging him for years and years -- he didn’t really care. And a little bit of change, and we saw behavior change on his part. And that’s one example.

And one that’s a little more sort of dramatic, my brother-in-law, unfortunately we lost him a couple years ago to GI cancer. And he was having a very tough time and spending just -- they were spending tons and tons of money for end-of-life care. He was a young guy, a couple young kids.

So, long story short, he ultimately elected to go into hospice himself, because he just felt like this was sort of a losing game. Quality of life was very poor. They were spending tons of money, and he made that very difficult decision. But at the end, it was a better decision for the family. The outcome was better and everything.

So it’s not just, hey, let’s shift cost. It’s let’s think about sort of better for the whole system.

But those are just some examples that didn’t map back to a deductible, but where you can see that if people are aware of the costs and the clinical outcomes, maybe they could make decisions -- or have the opportunity, at least, to make some decisions, where they could be a more efficient user of the system. And, again, those are just a little bit different than the traditional deductible discussion.

Paul Ginsburg: Yes, thanks.

Carl, you brought up the growth of self-insurance. And, certainly it’s been a longstanding trend. Some people are anticipating a real acceleration when health reform is implemented because the incentives of doing that will be great.

Other than saving the employer some money, does it have broader implications on health care financing delivery system?

One specific question I had, which you probably can answer very quickly, is, when insurers are seeking to contract with providers in innovative ways -- accountable care organizations, bundled payment -- do they need to get the buy-in of each self-insured client about paying in a different way?

So, in a sense, can self-insurance actually retard that potential trend?

Carl McDonald: Yes. I think on the first point, in terms of- other than a financial benefit, probably not. I mean, I guess you could bring up the point that when you look at fully insured trends versus self-funded trends, pretty much every single year the self-funded trends are lower than the fully-insured trends. It’s not by a huge amount, but they’re almost always consistently lower.

And I don’t know what necessarily the rationale is for that. I mean, I think you could make the argument that it’s entirely self-selecting. That if you’re a technology company and your average age is 25, it makes a lot of sense to self-fund versus if you’re a coal mining company and your average age is 55, it’s probably better to be fully insured.

So it could be self-selecting. It could be that once employers are actually paying the bills and seeing what the real costs are, it gives them a greater incentive to make some of the effective changes that lower the trend.

But I mean, aside from that I don’t think there’s much of a difference.

And to the second question, I think the answer is yes. And I think it certainly does detract from some of the things that you can do in terms of innovative methodologies.

Paul Ginsburg: Sure.

Gary, from the provider perspective, cost-sharing and bad debt. Do you have a sense of how providers are handling that? What they’re experiencing? What they’re handling?

Gary Taylor: Well, the impact on getting health care providers’ utilization, it’s hard to parse out. I mean, a lot of the studies that have been done over the last 20, 30 years show -- as you would imagine -- that price elasticity of demand for health care services is very low. So people will give up entertainment and a lot of other things before they give up their hard candy, or whatever it may be.

But certainly it appears that the incremental cost-shifting, certainly in a recessionary environment, is having some impact on the channel and total demand. The impact of cost-sharing on providers also creates a financial burden, because a lot of the providers would say the insurance companies aren’t very surgical about this, or haven’t researched it well. So if they just increase a copay on a hospital stay, all that’s done is shift the burden to the hospital of collecting an amount of money that’s going to be harder to collect. And effectively, it’s been a payment cut, disguised as a co-pay. And that often gets negotiated as part of a negotiation between providers and payers.

But hospitals have a harder time collecting those dollars from individuals than they would if they were being directly paid from the insurance companies. So a lot of providers view copays, deductibles, as essentially rate cuts.

And a lot of that turns into bad debt. Although, honestly, a lot of the bad debt discussion, in my view, has been driven by accounting practices and revenue recognition policies that are actually really starting to come under control. And there’s actually a new accounting rule that takes effect next year that I think, cosmetically, is going to reduce some of the bad debt that the for-profit companies are reporting. And also it’s going to reduce some of the dollar amounts of bad debt in charity that the non-profits report. And that’s a very prominent feature of their lobbying in Washington, is pointing to these dollars. And they’re actually sort of phantom gross dollars that are going to come down a fair amount because of the accounting change.

So the bad debt issue that was so large and prominent, at least in investors’ thinking, for these companies a few years ago is kind of diminished. And it’s because the accounting has been cleaned up.

Paul Ginsburg: Thanks.

I want to talk about plan and provider leverage and ask the panelists both for their comments on -- you know, in HSC site visits, we’ve seen a trend of growing provider leverage over recent years that seems to be continuing. And I’d like to ask for your comments on that.

And, also your thoughts about scenarios of what happens in 2014, when the payer mix changes substantially.

And who would like to start off?

Carl?

Carl McDonald: Yes, I mean, I guess the first point would be, at the end of the day, I could really care less whose insurance card I carry around in my wallet. I care very much if I can’t get into the academic medical center that specializes in whatever disease I end up with.

So, I think, at the end of the day, hospitals always have the negotiating leverage.

And, I think what you’ve seen repeatedly over the years is whenever a managed care company tries to kick out a hospital, the first thing the hospital does is they send a letter to all the members that have visited that hospital for the last three years and say, AAs of this date you will no longer have coverage at this facility. Please make other arrangements.

Employees get the letter. They read it. They say I don’t know exactly what this means, but it doesn’t look good. They call their benefit manager, who gets inundated with calls. The benefit manager then calls up the insurance company and says, AWhat are you doing? I want my phone to stop ringing. Fix this. You know, and that’s generally what’s happened.

So I think the only way that plans can have significant leverage over providers is when employers are willing to back them up.

And, so you can see certain examples of this. Milwaukee would be one market where you’ve seen this happen. If the employers are willing to put up with all the complaints from the employees, you can actually see some meaningful changes in some of the leverage dynamics.

And if you think about the evolution -- I mean, I think one thing to keep an eye on is, Gary mentioned the trend of increasing physician employment by hospitals. Today when a managed care company contracts, they contract with a hospital, and then a totally separate discussion, contract with the physician.

I think one thing that you may start to see more of is a managed care company tries to kick out a hospital, and the hospital says, "Well, that’s fine. You can do that. But you should know we employee x-percent of the specialists in this particular area. And so if you’re not going to let us be in the network, you can’t have access to those physicians, either. And so it could be a way for them to try to get even more leverage than they have already, over the plans."

Doug Simpson: I think, just adding to that, one of the dynamics that will be interesting to watch is the extent to which the plans and the payers can leverage the information they have at the hospital level, in terms of cost and quality data with the end-user. We are already hearing from a number of plans that they’ve had some success in going back to employers and saying, "Well, you would like to have XYZ hospital in your network, understandably, because your employees like the brand and the care that’s delivered. It costs X percent more than the option down the road. And they can present cost differentials between carriers, and they can go back to the employer and effectively present a scenario analysis where we can build network A or network B. Network A has the brand-name facilities that your employees want. Network B does not. And the cost differential is X."

Now, to the extent that employees are picking up more of the cost, they’re going to care more about what that underlying cost is. To the extent that the employers are feeling more pressure, they’re going to care more.

It’s easier said than done. To Carl’s point, it’s very hard to pull out a whole hospital system. So we would expect these types of things to be more surgical in nature.

But as you look at a network, you can sort of go through and pick out the high-cost outliers, and then make a determination whether or not those really add value to that end-user, that customer -- employer and employee. But you have to have the information to make those kind of arguments.

We are hearing more about that in the market. We’re hearing more interest in narrow networks. So there’s a communication.

If you just throw them out and don’t explain why, and don’t explain the cost savings, that seems to be a pretty tough fight to win. Because, hey, I’d rather have access to every hospital in my market. Where I live -- depending on how far you want to drive -- there’s between four and six hospitals. I’d love to have all four or six. But to the extent I can take my premium down 20 percent and keep three of them -- I’d be interested in that.

So it seems like those types of things we’re hearing more about. And we suspect, once we get to 2014, you’re probably going to see more emphasis on narrow network offerings, as people try to drive care costs down.

And the data is mixed, but generally speaking, when people are more engaged and more focused on what the costs and clinical benefits are, they tend to be better purchasers.

Paul Ginsburg: Yes.

Matthew Borsch: Just one quick observation, which is you’re really sort of seeing two things happen at the same time with provider consolidation across many markets, which fits with an accountable care organization model which promises to lower costs, but on the other hand also fits with greater market power for those same systems, in terms of rate negotiation.

And at this stage it’s not clear which of those dynamics is going to win out yet.

Paul Ginsburg: Gary -- yes.

Gary Taylor: I see Bob wants to make a comment, so I’ll make a quick comment.

Just to put some numbers around this, hospitals in general -- and I cover a lot of providers, but I keep talking about hospitals, because they represent about 40 percent of all health care spending. So it’s the biggest provider group I cover.

But hospitals, through the recession, are raising their prices to the commercial payers, commonly 4, 5 and 6 percent. There’s not many industries in a recession that have the ability to raise their prices at all, I guess, unless you’re, you know, Apple, which can charge more for each new edition of the iPhone or iPad.

So extraordinary pricing power. And you go back at -- probably if you look at the last 30 years, 1991 or 1992, hospitals’ pricing for commercial was going up zero or slightly down year over year.

And what the major difference was, if you go back into early 1990s, you had kind of this real HMO concept, and hospitals were very afraid that if they weren’t in the insurance network, they were going to lose access to those patients and those patient volumes. And we’ve seen a complete reversal of that now.

And to Carl’s point, it’s really to the employers to empower the insurance companies, to say go out and beat up the providers, and get us good pricing by only contracting with a select few hospitals and other providers. And the employers have been completely unwilling to do that for probably 10 years, and instead have just tried to do it more and more with buy-downs and cost-shifting to employees as a way to address their health care costs, as opposed to going out and empowering the insurance industry to really beat up providers.

And the other comment I wanted to make was, this trend where we’ve seen -- another thing that was very similar to that time where hospitals and insurance companies were competing against each other to acquire physician practices, to try to have control over the networks and over providers and steerage of patients, and we’ve seen the hospitals in the last few years getting very, very active in terms of employing physicians again. And it surprised me, and it is surprising me, how slow the insurance industry is moving this time. I think there has been a little bit of insurance companies’ acquiring practices or employing docs, but the hospitals are far ahead.

And, again, I think it’s going to have significant implications for rate trend and cost trend down the line if you continue to see this amount of provider consolidation.

Paul Ginsburg: Sure, Bob.

Robert Berenson: It’s nice to hear that what we learned and heard in our interviews during our 12 site visits, it’s consistent with what these folks have just been telling you. And I just want to emphasize a few points from the last round of site visits.

One is that to confirm that most hospitals are getting significant price increases. In fact, we heard even high single digits in many cases, not even mid-single digits, two to three times rates of inflation. But they sort of anticipate that that’s going to change. I mean, the line was, "We are getting this. We are in a position to keep getting it. But ’health reform’" -- in quotes -- is going to change this." They are anticipating employers’ getting more sort of backbone to support the insurers, which they have not shown in a number of years.

Second, there’s sort of a policy shorthand that refers to the whole phenomenon -- especially around hospitals -- as consolidation in the market. And clearly, there’s a clear correlation between hospital consolidation and the ability to get price increases.

But there’s an implication that there’s a major role, perhaps, for anti-trust policy to prevent hospital mergers, things like that. It’s more complicated than that.

In some cases -- as Carl emphasized -- it can be a single hospital, not even with an inordinate number of beds in the community, that simply is a must-have hospital. You can’t have a network without it. It can be a teaching hospital, in many cases, or other important hospital.

And the second phenomenon -- which I think Gary alluded to -- is the phenomenon of multi-hospital systems crossing geographic areas. It’s not that they have market domination within any given market area which is the subject of anti-trust scrutiny, but they may have 15 or 25 or more hospitals across many geographic areas, and are able to negotiate as a unit. And they are able to do better for each hospital than those hospitals would be doing on their own.

There’s really not a lot of anti-trust theory that would take on that phenomenon, and it’s already happened. There are multi-hospital systems. I mean, in this area, we basically have three hospital systems at this point: MedStar, Hopkins, and Inova. And there aren’t -- there’s just a couple of independent hospitals.

So that has happened, and that supports the hospital, the provider side, without an obvious policy solution.

And then, third, I would just say docs are trying to get into this game also. If you’re a small practice negotiating with a health plan, you basically aren’t negotiating with a health plan. You are a price-taker, you’re accepting the fee schedule that can be at Medicare levels or even below Medicare levels.

So docs are doing two things. They are getting employed by hospitals. But they’re also, in some communities, anyway, forming much larger single-specialty medical groups, so that they can bring together a significant number of docs to actually negotiate with a health plan, rather than be a price-taker.

So all of that is going on.

Paul Ginsburg: Thanks.

This is a good time to move on to hospital employment of physician, which came up in the leverage discussion. Actually, it’s coming up in a lot of discussions. And that means we ought to be talking about it.

And I’d like to ask the panelists for their perspectives on what are the key motivators on the part of the hospitals? And then what are going to be the implications in a broad number of areas?

So -- Gary, do you want to start with filling in with what you haven’t said yet?

Gary Taylor: Sure. And maybe I’ll try to put some numbers around this as well, because I think that’s helpful.

I’ve seen in The Wall Street Journal -- I’ve seen in some other articles -- suggesting that as many as 60 to 70 percent of all physicians are employed by hospitals. And we think that number is very wrong and is confused.

It may be true that 60 to 70 percent of new medical school graduates are going into an employment arrangement, as opposed to kind of a historic, you know, fee-for-service entrepreneurial, practice-based environment. But we think, probably the number of physicians that are actually in employment models with a hospital or other provider are perhaps in the 15 to 20 percent range. But my view is that number has probably tripled in the last five years. So it has accelerated very sharply.

And the biggest place we’re seeing that is hospitals’ going out and employment physicians. It’s a little different than it was, I guess, almost 20 years ago now, when I was talking about before. There’s less acquisition of practices, less acquiring and paying physicians good will for actually buying their practice, and more just pure employment arrangements. So it’s being done a little differently.

But I think there’s two things driving it. One is, there’s a defensive strategy. Because we are in a recession, patient volumes, inpatient admissions, outpatient visits have slowed. And so hospitals are wanting to go out and put their arms around their referral sources and essentially lock in referral sources. So you can imagine, if you actually employ the physician, you’re going to end up getting the bulk of their admissions and outpatient business.

And I theorize that if we were in an environment where inpatient admissions were growing 2 or 3 percent a year instead of flat-lining at zero, we’d probably see less of this activity.

The other reason, I think, is an offensive reason. And it’s really being driven by the uncertainty around health care reform. And not so much health care reform from the standpoint of 30 million people are going to get coverage and, yes, we know providers are going to take some reimbursement cuts to help finance that coverage, but more from the standpoint of the health care reform law has these pilot projects for bundled payment and value-based purchasing, and ACOs -- accountable care organizations -- and it really, really has the industry, particularly the non-profit hospitals, which are 85 percent of the industry, very, very spooked that the fee-for-service payment model is going to go away.

We do a big annual non-profit hospital conference every spring at Citigroup, where we have some of the largest non-profit systems in the U.S. And they are all actively moving for the day that they have to take much more payment risk, as opposed to a fee-for-service model where you do some procedure on someone and you get paid for doing that procedure.

And I don’t think any of them are entirely sure what that new environment is, but they believe they’re going to get paid less, they’re going to have to do better quality, and they’re going to be more at risk for the payment that they receive. And their feeling is, "We have to have control of medical groups. We have to have control and integration of the physicians to be able to operate in that kind of environment. If we’re taking more payment risk, we can’t have the physicians just out here independently doing whatever. They need to be part of us." And that’s a driving factor.

Paul Ginsburg: Thanks, Gary?

Matt?

Matthew Borsch: Just to add on to that. I mean, I think this sort of fits into the theme here, is we don’t quite know where this is going.

I think that the hospital systems have, not surprisingly, multiple motivations in acquiring physician practices. You know, one is the age-old, if you will, motivation to fill hospital beds, which is understandable -- not necessarily cost-reducing, per se.

And he other is to meet the needs of health reform, and to put themselves at the center of a world where accountable care organizations, integrated delivery systems may become the norm. And in that world, understandably, they want to be more the center of the universe, and not just a downstream vendor to perhaps large physician organizations that might, instead, be calling the shots.

And on that front, I would say I think -- and I don’t know as much as maybe some people here at the table do -- but I think if you look at the Southern California market, for example, you will see the physician groups -- multi-specialty and primary-care driven large physician groups -- more predominant there in terms of leading, with the hospitals’ tending to be a little more downstream. And a lot of hospitals don’t want to see the world evolve that way.

Paul Ginsburg: Thanks, Matt.

Any other comments?

Robert Berenson: Just a few. I think there are a couple of other catalysts for physician employment.

The docs themselves, newer docs, are -- everybody seems to be agreeing -- not as interested in going into an independent practice, having unpredictable hours. So they’re looking for employment much more. And except where you’ve got a community with multi-speciality group practices, which are not all that common, the hospital is the logical place.

So, to some extent, the docs are knocking on the door, much more than they ever have before. Even mid-career docs are looking, because of the uncertainties of private practice, are much more amenable to becoming employed. In some peripheral things -- it could be to get liability insurance, which the hospital can provide. Hospitals are interested in meeting their EMTALA obligations for ER staffing, and sometimes that has required wanting to hire a doctor rather than paying $1,500 or $3,000 a night for call.

So there’s a number of factors around physician behavior that in some cases is just making it a lot easier for hospitals to decide Alet’s employ.

The second thing I’d say is that there is still this phenomenon of provider-based payment, where the hospital -- for outpatient services, where the same service provided in a physician’s office, Medicare and largely emulated by private insurers, pay a lot less for the same service in a doctor’s office than when there’s a separate facility fee going to the hospital. And there are some profit centers, especially in cardiology and some imaging services, that may or may not be there in the next few years as Medicare tries to ratchet down -- and others.

And then I guess the final observation I’d make is that the hospitals are trying -- have learned from their mistakes of the 1990s, when they were buying practices and put a lot of docs on salary, and converted it -- sort of entrepreneurial docs who had an incentive to see lots of patients and generate lots of services into some relatively less hard-working -- let’s put it that way -- docs who were more than happy to check out at three and go do something else.

So they’ve learned their lesson. They’re not putting docs on salary anymore. They actually are largely going to pay based on work RVUs generated. That’s part of the RBRVS payment system. It’s a productivity-based payment, a fee-for-service productivity-based payment system which the hospitals and the docs have agreed gives them better incentives for generating work.

But if, in a world of bundled payment and ACOs, the goal is to actually undue volume-based incentives, that somehow the hospital is going to turn a switch and convert what they are now doing in fee-for-service to something different. So it’s possible that they can make that transition once they’re into those arrangements, but it is interesting that -- they will make the challenge that much harder by now incentivizing productivity, to then unincentivize productivity.

Paul Ginsburg: Thanks, Bob.

Yes -- Carl?

Carl McDonald: Well, this is jumping with just the insurance perspective, and I think why the insurance industry has been sort of slow to anything with this physician employment trend.

I think in most cases it really doesn’t make sense. You know, if you’re a commercial insurer, you’re dealing with these large employers -- so, Citigroup is an example, 100,000 employees. I have no idea how many doctors Citigroup employees see, but has to be in the tens of thousands. And so for Aetna, who’s our insurer, to really have a sort of true employed-physician arrangement, it would require too many doctors to make it really reasonable.

And, I think the second thing is, the insurance industry has a history of, you know, United decides they need a bigger presence in New York, they go buy Oxford. One deal and it’s done. They need a better presence in the mid-Atlantic? They buy MidAtlantic Medical. One deal and it’s done.

With physicians, there’s no big physician company out there that they could buy to really get a foothold. It literally would be signing up doctor group by doctor group. And I think that’s something the bigger plans just don’t feel like they’re equipped to do.

I think the exception to this would be Medicare. I think in Medicare for some of the insurers there, it would make more sense to get into the physician business. And you’re seen some of that with some of the deals that Humana’s done, buying Concentra. You know, WellPoint’s recent acquisition of CareMore. You know, there, the number of physicians that you need is considerably smaller, and I think you can do a couple of deals and make it a lot more worthwhile.

Paul Ginsburg: Thanks. Good.

The next question is about hospital construction plans. And, certainly, our site visits suggested that hospital construction plans were impacted by the recession.

And I want to ask the panelists, what’s the outlook going forward? Is there a lot of beefing up to get ready for health reform? Or concern about ACOs and bundled payment reducing the needs for resources and limiting construction plans?

I don’t know -- if you’d like to start, Gary?

Gary Taylor: Well, certainly, the financial crisis and recession had a very material, if somewhat temporary, impact on hospital construction spending. We do a survey that we’ve published every year for the last decade. And I think, kind of heading into 2008, looking back seven or eight years, the compound annual growth rate on hospital capital spending was 16 or 17 percent a year of annual growth. That slowed, and by 2009 was actually down about 10 percent. In 2010 we saw about a 10, 11 percent bounce. And our forecast in 2011 was kind of in the 6 to 7 percent range.

So I guess I would say very, very robust growth for a decade, stopped abruptly, and has now kind of reached a new normal level of slightly more modest growth.

But in all honesty, I think the whole debt-ceiling debate that began this July I think is going to have a lot of impact on what our survey says for 2012, because it’s just created a tremendous amount of uncertainty with respect to providers about what new reimbursement cuts that they could be facing.

And at end of the day, uncertainty leads to inefficient capital allocation decisions. So things that probably should be built are probably not going to be built. And I think hospitals are going to be more hesitant with spending, even into 2012, as we see what the outcome is of this deficit-reduction process.

I think, clearly, there needs to be a lot of capital put to work to prepare for 30 million people having health coverage and additional demands on the system. But, of course, depending on what the Supreme Court rules, depending on who wins the White House in 2012, there’s uncertainty about whether that bolus of activity is even going to take place.

So I think uncertainty is absolutely the key word that’s having some depressing effect on capital spending and construction trends.

Paul Ginsburg: And, actually, what are hospitals building, and where are they building it today? Anything striking to you?

Gary Taylor: We are seeing -- where we are seeing activity -- I mean, it’s certainly possible any one-off hospital could be building an entirely new replacement campus just, you know -- depending.

But broadly speaking, there’s less of that activity. The emergency department is one key area where there continues to be overcrowding. As people have lost insurance, ERs become the primary care of both first and last resort, essentially. The experience in Massachusetts with health care reform and universal coverage is that they saw massive acceleration and uses of the ER.

So hospitals that are reacting to this recession, and thinking forward about reform are adding in the ER.

Otherwise, we’re seeing just probably more ancillary space. So, square footage for outpatient procedures. And for all these physicians that they’re now employing, hospitals like to get those guys located on campus, because that does the most to ensure that those inpatient admissions are going to flow through the door. So there’s a lot of ancillary square footage -- whether that would just be for physician office space, imaging, outpatient procedures, et cetera.

Inpatient capacity is probably the least common area where you’re seeing, you know, expansion broadly.

Paul Ginsburg: Thanks.

Bob?

Robert Berenson: One interesting development that we saw in this round of site visits was the development of free-standing emergency departments as a way of permitting a hospital that may be located in a city to expand into more affluent suburban areas without having to put up a whole hospital. And that was certainly the situation in Seattle, where Swedish was going to put up three or four freestanding ED’s, with the expectation -- with the ability, not the expectation -- the ability to get a patient perhaps needing to get to the cath lab for a stent placement downtown in 20, 30 minutes -- 20 minutes, maybe -- and as a way of competing, without the same capital requirements.

I don’t know how broadly that phenomenon is happening, but it’s sort of the technology has improved to the point where that’s a possible sort of -- it affects the competition across hospitals, that kind of new technology.

Paul Ginsburg: Thanks.

Gary Taylor: Paul, can I just add one point? Sorry --

Paul Ginsburg: Actually, just before you do it, we’re going to move to questions soon. So if you have any questions, please write them down and pass them over.

Gary Taylor: Just a quick comment. I’m sorry. It’s so obvious to me I forgot to mention it.

But, certainly, health care IT far and away has accelerated up the list in terms of priorities for hospital capital spending. And that is one area where absolutely not seeing any restraint of late. Of course a big part of that is because as part of the stimulus law that was passed in 1909, you know, there’s billions dollars of federal subsidies for hospitals that put electronic medical records in place.

So where that used to be number five or six on the priority list in our annual survey, the last two or three years health care IT spending has jumped to the top of the list.

And we’ve done some interim work around has the recession. Has the debt-ceiling debate, has that had any impact on your decision to move forward with those health care IT dollars? And generally, the answer is no. Hospitals are going to continue to spend there.

Paul Ginsburg: Yes -- so there’s a large enough component of capital spending that it really can compete with the bricks-and-mortar. Good.

And, Doug.

Doug Simpson: Just maybe a little bit afield from the hospital specifically, but we definitely agree on the IT side. Also, infrastructure spending for hospitals -- I mean, paint, wallpaper, generators, heaters, AC. They may take an opportunity to upgrade that, given the uncertainty around what happens post-2014.

It’s sort of interesting to think about the next couple years, where some investments may be made. You have all these, roughly 30 million, people that could be coming into the system. We’ve got physicians, who are facing ever-rising secondary education costs, and their graduation present is a larger med-mal bill. So, physicians are feeling the squeeze. It’s going to be interesting to see that middle layer -- do we see the evolution of more clinic-based care? What types of physician-extenders do we see within the system? Just dovetailing with the conversation about physician employment at the hospital level.

I have some younger people on my team, and they use the clinics more than I do. I have four little kids, and I feel like we’re at some kind of a clinic every weekend because it’s easy, it’s more of a retail model. The one we go to is stuck between a sub shop and a Gymboree. Great cross-marketing there.

But, those models where you go in and it’s a higher through-put retail type setting. It’s interesting to think about how this could evolve. And when I think about the care-usage patterns for my parents, down to me, down to my team, and down to my kids, it definitely, as you move further down to the younger groups, they’re more familiar with a retail-based care model.

This is not something that will happen overnight. But we deal with one -- one contact we have is a small employer in the Midwest. They’re doing this on their own. They have a site clinic at each location, and I think they have roughly 10 factories. And they are actually going to move to a plan where their employees purchase their own individual coverage, but get their primary care delivered at the facility site.

So it’s a factory, it’s a blue-collar environment. If, in the event they had a workplace injury, they could go to that person. But in the event that their child got a cold, they would also come into the workplace and have access to free primary care on site.

So that physician channel remains very much in flux, looking out over the next five to 10 years.

Paul Ginsburg: Good.

Now, Gary mentioned the potential bottleneck, with expansion of coverage under health reform, in ED capacity.

Are there other bottlenecks that people are paying attention to? Or maybe that they’re aware of but they can’t do anything about, like primary care?

Bob?

Robert Berenson: Primary care. (Laughs.)

No, just to -- we just asked a free-floating question to everybody we talked to on the site visits, what are sort of the barriers to caring for the new 30 million who will get insurance? And almost everybody talked about the primary care supply. And the anticipation that it won’t be sufficient and will continue to put pressure on the EDs, and will call for new models of care that don’t assume primary care.

So that, almost universally, was mentioned in the site visits.

Paul Ginsburg: Thanks.

I don’t know if people have any questions, but you’re welcome to come up to the microphone. And I don’t know, I guess there are some cards we need to collect.

SPEAKER: And I’m happy to collect cards.

MS. CORMENY: Hi. My name is Sara Cormeny.

My question is about insurance companies, and cost-cutting at insurance companies.

And I’m curious -- what, with the rising costs of premiums and everything else that’s going up in the health care costs, what other measures inside insurance companies, other than looking at medical costs and utilization costs that hospitals and providers, to some extent, control -- what other measures are they looking at to cut costs and get their medical loss ratios and rate review in line?

Thank you.

Paul Ginsburg: I sense you are specifically concerned about their administrative costs.

MS. CORMENY: Exactly -- administrative costs, agent costs. Like whatever is lumped into administrative costs.

Thanks.

Paul Ginsburg: Sure. Okay.

Carl? And then Doug?

Carl McDonald: Yes, I mean, I would say the single biggest thing is cutting broker commissions. I think -- I mean, you’re seeing some things in terms of employment levels, but that’s relatively modest. It really is broker commissions. I can give you some specifics around it.

At least in the individual business, you know, brokers used to get 20 percent of the premium as a commission in the first year. Now that’s generally down to 10 percent. I think as we get into an exchange type of scenario, that’s going to become a lot closer to zero percent.

And you’ve seen the same type changes, reductions in small-group markets, as well. So that’s been the biggest driver.

Doug Simpson: And on the clinical side, over time, certainly one of the things that would be hugely helpful -- but this is not a near-term thing that they’re going to be able to solve -- are the regional and even local market care cost disparities. So if you’re paying $4,000 for a gall bladder surgery at Hospital A, and you’re paying $10,000 six miles away, that’s something you’d like to go through and get to least costly but clinically equivalent option across the country.

And there are such incredible disparities. And it sort of all comes out in the wash at the -- you know, the bottom line has generally been to view it historically.

But certainly there’s an opportunity to go through and identify the most cost-effective, clinically equivalent options by market. It’s easier said than done, but that’s something that, over time, we would expect more focus on.

Paul Ginsburg: Okay.

Yes, sir?

DR. RAVEN: David Raven, a physician.

I’d like to have further discussion about primary care. Clearly, increased use of primary care can decrease health care costs. A lot of resistance to forcing patients, however, to go through primary care to get referrals. And we have the problem of a paucity of primary care people-power, and hospitals concerned, as they consolidate with physicians, the focus seems to be very much on -- focusing on specialist physicians, rather than primary care who could, theoretically, contain costs more.

So I’d like a little discussion as to your understanding as to hospital thinking, as they consolidate through things like bundled payments, and ways that insurance companies might increase, or encourage, the use of primary care as compared to specialty practices?

Paul Ginsburg: Okay.

Any volunteers to take that? Carl?

Carl McDonald: I would say, from the insurance perspective,the one interesting thing I’ve seen -- and I haven’t spent a lot of time on this, so if somebody here knows more about it, feel free to jump in.

But CareFirst has done some interesting things with primary care reimbursement. And,the basic idea is that they’re going to pay the primary care doctors significantly more than they had been paying them. And they want them to spend the time on the chronic patients. So instead of seeing 40 people in a day, they want them to see eight or 10 people in a day, and really spend some time with them.

You know, it’s relatively new. I don’t think it’s been around for very long, so I don’t think they’ve got a lot in terms of results. But, that’s one example of something that insurance companies are doing.

And I think the challenge is, it’s one of the only ones that I can give you. It doesn’t seem like there’s a heck of a lot that I’m seeing out there that plans are really doing at this point in primary care. They say it’s an issue, but nobody really has a good solution.

Robert Berenson: Well, there is a lot of interest, and some growing activity in the patient-centered medical home, which is centered around primary care re-engineering. And, indeed, there’s a lot of demos in addition to CareFirst, which is active in this area. Michigan Blue Cross is very active. A number of the other national players have sort of targeted demos of medical homes. And some are putting real money on the table -- not too many, but some are.

Interestingly, we really don’t know what the return on this investment is at this point. There have been a few published, very positive findings, but they’re coming out of large multi-specialty group practices, like Group Health of Puget Sound, like Geisinger. So, places that would be generally recognized as medical homes are becoming better medical homes.

Group Health actually -- it was pretty compelling what they’ve published. In one of their clinics, they reduced the panel size of the primary care docs from 2,300 to 1,850, gave them two patients an hour rather than three or four patients an hour, provided some other professionals to be part of the team, and found very positive findings in terms of reduced -- well, the first thing they found was increased professional satisfaction with their daily existence. The docs didn’t feel like hamsters on a treadmill any more -- or less so.

But by year two, they were also finding decreased ER utilization. And this is in a group that already was basically capitated and had every incentive in the world to try to reduce hospital use.

It is much less clear what the findings, what the results will be to try to re-engineer small practices around primary care. The TransforMed sort of work, which is sort of an offshoot of the American Academy of Family Practice, has documented a lot of growing pains with this.

So one of the policy issues that exists and clearly comes up all the time is do we simply throw money at primary care so that more physicians will choose primary care? Or do we expect something for the additional money, like offsetting savings, like demonstrated improved quality. And that is part of the discussion that is happening.

But I guess the final point to make is, in many places there simply aren’t sufficient primary care physician. And it’s interesting also that nurse practitioners and physician assistants are increasingly going into specialties.

So there is a real problem. There was -- the ACA did have a workforce commission. It’s not going to get funded, it’s not going to happen -- best as I can tell. So we sort of have a dearth of sort of policy-making around this issue of shortages of primary care.

Paul Ginsburg: Yes, thank you.

Bob, one thing I was struck by is that we were talking about primary care being a potentially huge bottleneck. But many of the medical home demonstrations, like that one you mentioned at Group Health, focusing on improving physician satisfaction as well as taking better care of the patients, they seem to use more primary care physicians per patients.

And I wonder if we’re going to have to have a turn in direction in demonstrations of medical homes into those that perhaps can economize on primary care physician use by substituting nurses, educators, et cetera?

Robert Berenson: And another thing that’s going to increase the shortage, in addition to a place like Group Health needing to attract more docs -- and I bet they’ll get them because it’s a good place to work -- is the phenomenon of concierge care.

It’s still relatively marginal, but a lot of physicians in mid-career are dropping out. And so instead of seeing an average, or having a panel size of 2,000 or 2,500, they now have a panel size of 600, are practicing much -- are much happier in their practice, are probably doing a very good job, but essentially are dropping out, in a sense, of the workforce. And so that creates even a greater shortage for those who can’t afford to pay the money to go to have a concierge doctor.

It’s still a phenomenon largely -- and probably will be -- of relatively affluent areas. But in those areas, it certainly is significant. And a lot of physician friends of mine are just close to throwing in the towel, or have thrown in the towel, on being in networks and taking every new Medicare patient.

Paul Ginsburg: Thanks. And this brings out a final question before our break.

SPEAKER: (Inaudible.)

Paul Ginsburg: Oh, go ahead, John.

MR. IGELHART: I’m John Igelhart.

Hospitals, it seems to me, have been much more aggressive in trying to deal with the changes that are going on in the system. And even health insurers are having maybe mostly internal discussions about what businesses are they in, and what businesses may they get into.

And my question really revolves around physicians -- who seem to be much less active in trying to figure out where they’re going, other than becoming employees of hospitals. And I’m wondering -- am I missing something in terms of the physician enterprise?

I think, at least from a Washington perspective, I think most of the organizations that advocate on behalf of the profession and the individual doctors are pretty much status quo, in terms of their positions today.

A classic example, I suppose -- last week, MedPAC’s recommendation of offsetting the repeal of the SGR by whacking physicians and other providers, the profession unanimously united against that.

What do you see -- speaking broadly -- about physicians and medical groups and the like? Where are they moving? And how fast?

Paul Ginsburg: Okay -- Matt?

Matthew Borsch: Well, I definitely don’t have the answer. But I would just say I would agree with you that it is a little surprising that physicians haven’t been more dynamic in the current environment and, you know, don’t seem to be doing as much as, say, you saw them doing, I think, in the 1990s, when there was a lot more physician organization, attempts at -- sometimes in partnership with new companies that sprouted up -- becoming delegated physician groups.

And I don’t have a great explanation for why they haven’t been more active in the process of change.

Paul Ginsburg: Yes. Any other thoughts?

Yes -- Doug.

Doug Simpson: I have a couple friends who are physicians. One’s an anesthesiologist and one’s a dermatologist. One’s just a family doctor.

And, they’re so busy trying to do what they’re doing, 24 hours a day, providing care. And they’re sort of operating under the reimbursement mechanism that’s in place, and doing what they do on a clinical basis.

But I think at least the ones I’m friends with don’t really want to spend most of their time, frankly, thinking about reimbursement. They want to think about delivering care, and they’ll operate under whatever that mechanism is.

You know, it’s very -- I mean, look, we have a system today where you’ve got, generally, a lot of open access care plans. We talked about networking before, how it’s tough to narrow networks because there are implications. But you do have a fee-for-service, volume-based system

So you put those two together, that’s sort of a recipe for ever-rising care cost trends. And that’s what we have right now.

And, anytime you push on one piece of the system it’s going to create controversy one way or another. If you narrow the network, it lowers costs, but then people get upset about access -- understandably. So there’s all these different touch points.

But, the physicians I know generally feel like there’s a lot of change coming. There’s some concern, obviously, about -- you’ve got the scheduled doc payments cuts. They feel like the ground is shifting, and they’re just trying to do what they do, provide the best care they can provide. And, by the way, they’re seeing greater medical malpractice liability.

So, I mean, there’s just a lot of pressures on them. And, frankly, I know a lot of physicians right now that aren’t really excited about their children necessarily becoming physicians, because of all those challenges.

Robert Berenson: I would just offer -- one, I agree, the physicians are feeling quite beleaguered right now, and that may be not the environment to sort of get positive, affirmative solutions.

But the other -- I mean, having spent some of my past in the rooms of those kinds of associations, trying to hammer out policy -- I’m not the first person to say this. You put 10 doctors in a room and you get 12 opinions about what to do.

Doctors -- there’s really no consensus out there. I mean, we just had a doctor who’s a firm single-payer person, and thinks private insurance should be abandoned. That’s not just a fringe. There’s probably 15, 20 percent of doctors would go that direction.

There’s the docs who don’t want insurance companies for another reason. They want real markets, and individual choice, and feel that any payer is coming in between.

And then you have all sorts of views in the middle.

And it’s just real hard, I think, to get consensus, especially when you’re really spending most of your time putting out fires.

Paul Ginsburg: Thanks.

This would be a good time for us to take our break. Now let’s resume in say, 10:50 -- about 15 minutes.

(Recess)

Paul Ginsburg: I would like you to take your seats to begin the second part of the session. And I want to turn to a number of issues related to health reform. And the first is what is in the law about the individual mandates and guaranteed issue without medical underwriting. And the question is assuming the individual mandate is upheld, discuss the likely degree of adverse selection in insurance markets and how markets adjust to that. Carl.

Carl McDonald: Sure. My perspective is that I think we’re going to have a significant amount of adverse selection in 2014. And I think the -- we have a mandate, but it’s a mandate in name only. I think it’s so weak at this point that I just don’t think it’s going to compel a large portion of the young, healthy population to buy insurance. So if you’re 28 years old in ’14 and you’re relatively healthy, your choice in many cases is going to be pay a $95 fine for the year or pay several thousand dollars a year for health insurance that you’re not going to use because you’re young and healthy. And if you do get sick, you can go to the insurance company, and they have to give you insurance, and they can’t charge you more for it. You may have to wait a little while to get into an open enrollment period, but for that segment of the population, purely from a financial perspective, it just doesn’t make sense to go out and buy insurance with the structure that’s going to be set up.

And so I think what’s concerning for the industry is that of these 16 million people that are theoretically going to get insurance through the exchanges in 2014, you’re almost guaranteed you’re going to get the million sickest people because it’s going to be a lot more cost effective than anything that they can find today. I think it’s a very open question whether you’re going to get that million healthiest people or not.

Paul Ginsburg: Yeah. Matt.

Matthew Borsch: Just to -- I think, Carl, you may unfortunately be right although in Massachusetts -- and there may be some here on the panel or in audience that are following this more closely -- but in Massachusetts they’ve had a surprisingly strong uptake despite the fact that they have a fairly modest penalty there. Now clearly Massachusetts is in the middle of a big cost problem right now, which they’re trying to resolve or mitigate I should say, and it may be that adverse selection is a bigger piece of that than I’m aware of, but 98 percent coverage and obviously that started I think from 94 percent or 93 percent so it’s not -- it was already a highly covered state. But arguably the mandate there, which is I think the penalty is just as weak as the proposed or the scheduled federal penalty. So we might be surprised that with that type of penalty or something that replaces it in the event the Supreme Court strikes that down such as, for example, here’s your chance to buy coverage now and if you don’t you’ll either pay a lot more down the road or you won’t get another chance for four years or something like that to really give people a strong incentive to buy it when they can.

Paul Ginsburg: Yeah. Are there any other thoughts about things that could be done to reduce adverse selection? Carl?

Carl McDonald: Yeah, I think the -- so what was in the exchange legislation or at least regulation in terms of open enrollment periods I think is significant. I mean my fear was that at least initially in 2014 you’re going to have some type of continuous open enrollment period just as people got used to the law until you literally could jump on and off as you needed coverage. So that wasn’t -- that piece of the initial exchange regulation. But I think things that would be a lot more effective are one you could obviously increase the penalty, but in this political environment, that isn’t going to happen. I think other things would be some type of premium penalty. So if you remember the Part D benefit back in 2006, what they said to seniors is buy this or don’t buy it, we don’t care, but every month you don’t buy it, we’re going to increase your premium by 2 percent. And I think even more effective would be if they were to say to individuals in 2014, same type of idea. Totally your choice whether you want to buy this or not, but if you don’t buy now when you do, the insurer has the ability to underwrite you. And if you’ve gotten sick in the process, you’re going to pay a lot more for your health insurance than you are today. I think those type of things would be significantly more effective than just having this very, very modest penalty. On the Massachusetts example, I think the two big differences -- you pointed one of them out, which is the level of uninsured was very, very small. The components in terms of the people that didn’t have insurance in Massachusetts, a lot of those people were able to get subsidies on the exchange up until they weren’t having to pay for it. I think the other situation in Massachusetts was the condition for employers where -- or for individuals that you needed to not have insurance for six months previously to be eligible for those subsidies. So I think those were some key factors.

Paul Ginsburg: Thanks. I want to turn to insurance exchanges and ask about what are major insurers thinking about how they’re going to participate. Is it attractive to them? And to what extent are the uncertainties of the constitutional challenges affecting their planning? Matt?

Matthew Borsch: It seems like not surprisingly almost all insurers are planning for this in one way or another. For amongst the big companies, for example, you have Aetna and CIGNA who are much less active today, just have a fairly small business presence in the individual and small-group segments as opposed to two other even bigger companies, UnitedHealth and WellPoint -- WellPoint, of course, operating 14 Blue Cross companies, which are much bigger in terms of their presence in market share there. But companies like Aetna and CIGNA are preparing for it. They’re not necessarily sharing with us all of their activities and expenditures in that regard, but from the beginning and even before that the challenge to the mandate became clear. They seemed to want to be ready to move into the exchanges if it looks like it’s going to work and it’s a good idea, but they’re not 100 percent committed to it both because of the uncertainty around it and also because they’re not sure from a business standpoint if it’ll, in fact, be profitable. I think they’re assuming that it will be, but they don’t know yet.

Paul Ginsburg: Thanks. Doug?

Doug Simpson: I think there’s just so much uncertainty at this point in terms of the details, how these things are ultimately going to play out, that it’s hard to have too specific a path right now. I mean, we’re talking about what could happen with the Supreme Court and the nuances around exchanges. I mean, broadly if we just step back, we’re going to have to get to a place or we’re getting to a place where costs are going to be increasingly important, price points are going to be increasingly important both for employers and employees, and that’s not going to change regardless of how the Supreme Court rules. We’re sort of on this inevitable march to greater and greater focus on care costs. You are going to see, we think, more investment in brand. And we’ve started to see that in the last twelve months on the part of United, CIGNA and Aetna specifically, trying to compete with the strength of the brand on the Blue side. And we think that those activities will continue.

And then just one dynamic to think about as we look to 2014 -- it’s unclear how prepared people may be for the fact that you have an excise tax coming through on this industry, which is going to drive higher premium escalation in 2014. You know, we talked about the adverse selection dynamic. If you have a narrowing of the adjusted community rating spread, roughly 3:1 versus the 6 to 7:1 you see in many markets now, that can be beneficial for people at the higher end of the acuity spectrum, but certainly -- I think about my nephews in their early 20s, very healthy, I mean their premiums are going to be so far in excess of the mandate that really it’s not clear there’s any incentive there for them to participate in a system of substance. So the average person that participates in that individual market -- and again, a lot of wood to chop between here and there with how these get structured -- but I think we have to be prepared that premiums are going to go up pretty markedly in 2014 because of all these things coming together. It will be interesting to see what the ramifications of those increases will be at the political level, but if nothing changes right now, you can sort of see how the cards are stacked and how that’s going to play out.

Paul Ginsburg: Thanks. Speaking of plans on the exchanges, some consultants have come forward and said that they’re likely to more closely resemble Medicaid Managed Care plans than employer-based commercial plans. Carl, do you have a perspective on what the products will look like?

Carl McDonald: Well, I think from a margin perspective, they’re going to resemble Medicaid Managed Care plans as opposed to commercial plans. I think it is going to be a much lower profitability opportunity for them because of primarily the standardization of the products. So for the first time when you’re shopping for an individual responder policy, the prices are going to be comparable. And so I think it is going to put a lot of pressure on the pricing.

I mean, in terms of the product design itself, it will be like Medicaid in a sense. The federal government will tell you what the essential benefits are that you have to cover. And I think there is going to be a very significant emphasis on price. So I think from that perspective, it will look like Medicaid.

In terms of the types of products, I think it’s going to depend on the insurer in the sense that if you’re United and you have a scale from a medical cost perspective as well as from an administrative cost perspective, you can have a more broad-based product offering, something that has a network that looks like it does today. If you’re a company that doesn’t have that national scale and doesn’t have the local arrangements because the price I think is going to be such a big factor, I think there you are going to have to go with more limited-type networks, something that’s different and a lot less expensive than sort of the traditional product on the exchange.

But in terms of the earlier question, the big insurers, they don’t have a choice but to participate in the exchange. They’re all going to be there. And I think the thing to think about is this is an industry that has no enrollment growth whatsoever. There’s no volume growth. The market that they have today is shrinking every single year because of those nonrisk-to-risk conversions. This is the only significant opportunity for any type of member growth that this industry has. And I think the view that the companies have is that yeah, it may not be a very profitable opportunity in the first couple of years. You do have some protection because there’s some reinsurance essentially that’s in the regulation that limits the losses the plans can incur. But I think the view from the industry is maybe it doesn’t work initially, but they’ll figure it out. Sort of like Massachusetts, they initially started with a very low penalty. They increased that penalty very dramatically. Massachusetts initially had continuous open enrollment; there are now open enrollment periods. So I think that’s the view that a lot of the bigger companies take. Yeah, we may lose some money in the first year, but if this is going to be a viable market, they’ll fix it. Otherwise we can get out at that point.

Paul Ginsburg: Thanks. Matt?

Matthew Borsch: Just the one thing I would say there is if, in fact, we get into a situation where the Supreme Court strikes down the individual mandate and health reform moves forward without the mandate, it’s not as clear where the carriers are going to fall out in terms of participation if that turns out to be the outcome.

Carl McDonald: I would just say what are you actually losing though if the Supreme Court rules it unconstitutional? I just think the mandate is so weak at this point that you’re going to have -- your starting point is adverse selection. And so getting rid of the mandate maybe makes it incrementally worse, but I just don’t really think you’re really giving up all that much if the mandate goes away.

Paul Ginsburg: Well, in order to do serious things to reduce adverse selection, there need -- is that something dependent on change in legislation or is that within the current discretion of exchanges?

Carl McDonald: Well, I guess we’ll see.

Paul Ginsburg: Okay, yeah.

Carl McDonald: I mean the open enrollment periods that’s part of the legislation so I think HHS has the authority to do that. They’ve done it. In terms of some of the other things that I mentioned like premium penalties, there’s nothing in the legislation that I’ve seen that specifically says that. So HHS can try, but it’s not entirely clear that they’ve got the authority to do that.

Matthew Borsch: And if I could just add on to that, the problem with policy -- the political problem that we could face is if, let’s say next June, the Supreme Court comes out with a decision like the 11th Circuit did, striking down just the mandate and allowing the rest of the reform law to go forward, the administration is very likely to go to Congress and say look, we need something to replace the mandate -- say late enrollment penalties, waiting periods, things like that that can’t be done administratively and need an act of Congress. And, obviously, you can see where that then becomes an extremely difficult piece of legislation for Congress to pass given the current political split, and that may or may not happen before next November’s election.

Doug Simpson: And, Paul, maybe just to build on that, I mean so we’re talking about the mandate which is one piece of it. But I think if you just think about the overall scale of the health reform bill and you think about past pieces of healthcare legislation, you tend to subsequent to their passage, you have some tweaks, some legislation which comes out to address things around the edges. And certainly as we get beyond the election, I think most people view the election will be something of a referendum on the economy and there’s some fiscal policy implications of that. And then you think about the doc fix, which we discussed earlier. Maybe we get a patch. Maybe that kind of comes back in 2013. But it’s certainly reasonable to expect that as we get out to 2013, there is some sort of corrective legislation around health reform, and that may be one piece of it.

Paul Ginsburg: Yeah, thanks. Do you think the exchanges have the potential to reduce the administrative distribution costs of insurance or are they more likely to increase it?

Matthew Borsch: On the face of it, the exchanges would seem to have a structure that could significantly reduce administrative costs by, at the extreme end, having products that can be shopped through web-based purchase, and you would in theory be able to vastly reduce the sales and commission expense that health plans have today. That becomes more and more viable to the extent you have a larger population in the exchanges and, of course, assuming that they’re working. One can imagine at the extreme end of the spectrum if employers were to drop coverage en masse, you would have something that maybe looks a lot like the original -- I’m not saying this will happen, but it looks a lot like the original Clinton health reform plan from 20 years ago.

Paul Ginsburg: Thanks. I’d like move on to Medicaid managed care. And I gather we’re seeing very strong growth apparently driven by state budget problems today. How much do you believe that state Medicaid programs save from the managed care models as opposed to the fee for service?

Carl McDonald: From a medical cost perspective, pretty much all of the recent RFPs have required plans to show 15 to 20 percent savings from Medicaid managed care. Now on a net basis, because the Medicaid plans have higher SG&A levels and they want to earn profit margin, the net savings from a state’s perspective typically works out something closer to 5 to 10 percent. But as a specific example, I don’t know if it was Louisiana or Kentucky, but the plans were complaining about how much the state was requiring from a savings perspective, and the state was very blunt in saying if you don’t save this much, it doesn’t make any sense for us to give you the business. So you have to save this much for it to make any sense to push into managed care.

Paul Ginsburg: Yeah. Are there -- how is the nature of the managed care changing in a sense? Has it been pretty stable or is it evolving as far as what the designs are in these plans?

Carl McDonald: I’d say it’s generally fairly stable. I mean, you’ve had a couple of instances where states are focusing more on quality metrics so historically in Medicaid the bulk of the enrollment gets auto-assigned and most states will just say we’re going to assign it proportionately to the number of plans in the market. Wisconsin is one that has moved to a system where plans that have higher quality scores get a disproportionate amount of the open enrollment. So you’ve seen some modifications like that; otherwise I haven’t really seen a heck of a lot of major differences.

Paul Ginsburg: Okay. And are there concerns that both expansions and the shift to use of Managed Care and then the expanded Medicaid programs and reform, will that really -- is there a constraint on the capacity of the Medicaid Managed Care industry to meet those demands?

Carl McDonald: I think absolutely. I think if you look back to 2005, which was a period where the Medicaid managed care industry had a significant amount of growth in the earlier years. You had some of the bigger legacy states that had just moved into managed care. And some of the publicly traded companies had done a number of acquisitions in those years. And there were some pretty significant earnings misses in 2005 that I think were in large part driven by the fact that the companies had become so big so quickly and didn’t have the infrastructure to actually manage it. I think the industry should be a little bit better prepared this time around in the sense that this expansion in 2014 isn’t going to catch anybody up by surprise. Everybody knows it’s coming. You can plan for it. But every time you move into a new state with Managed Care, you’ve got to hire a CEO for that market. And so as it gets further and further out and more and more states are in managed care, your pool of candidates is getting smaller and smaller in terms of who actually has experience running a Medicaid managed care company. And then you’ve got all the IT and HR aspects of it, too. So I think it is something that you plan to spend a significant amount of time on because even for the biggest companies in the group -- Amerigroup is an example -- they could very legitimately triple their revenue between now and 2015. So that’s sort of the magnitude of the growth that they’re looking at.

Paul Ginsburg: Yes, but I gather no states are going to be left at the altar that no one’s bidding on.

Carl McDonald: Yes, I doubt that. I mean, I think there’s always going to be enough interest. certainly companies like Aetna, Coventry, CIGNA potentially, that really don’t have much of a Medicaid business today that would like to be there.

Paul Ginsburg: Yes, good. I have a question about investment opportunities in hospitals serving lower- income people. And we’ve seen covered by the media a lot how Vanguard, the hospital company, acquired the Detroit Medical Center with a commitment to expand it; and how Cerberus, the private equity company, acquired Caritas Christi in Boston. Is this -- I just wanted to ask, particularly Gary, what’s your take on what’s going on? Is this in a sense a bid on expanded coverage under reform or is this something that’s really independent, of the opportunities of companies that were starved for capital, but otherwise have the ability to run at a profit?

Gary Taylor: I think it’s more the latter. You know it is interesting that these for-profit companies have acquired very large, urban, inner city-type hospitals that have been struggling and doing very poorly. But I don’t believe it’s any improved investment outlook about the opportunity to serve lower income populations. I think it’s really being driven by the inability of those systems to generate enough profits to invest in the facilities, to spend capital, and attract the kind of payer mix that they would like to attract, namely the insured people. So I like to put numbers around things just to give you a sense. So for a typical hospital we would say operating margin on a Medicaid patient population, you’re going to lose 20 to 30 percent if that’s all you had. If you had a Medicare population, you’re going to lose 5 to 10 percent. And then you’re going to make 20, 30, 40 percent margin on your commercial insured patients, and that’s what makes the whole ship float. And so what we see in some of these big markets is as you’ve seen out-migration of the insureds into the suburbs, payer mix gets worse, profitability gets worse, ability to invest in capital gets worse, and ratings get downgraded, et cetera, et cetera, and they have a hard time making a go of it. So we’ve seen two very public instances where a for-profit has come in and it has basically made the bet that if they invest the capital -- they have a lot of access to being either public or private organizations with access to corporate debt markets -- if they invest the capital, they can re-attract some of those insured patients back into the facilities and do much better from a profit perspective. If healthcare reform actually happens and if 30 million people actually get coverage, then that’s icing on the cake. But I think the bet is really being made that capital will allow them to improve the payer mix and people that might be living in the city of Detroit, but have insurance going out to the suburbs to get care, would now be willing to come back in if they spent $50 million building a new medical office building and their doctor was located there, you know, et cetera, et cetera.

Paul Ginsburg: Yes, thanks. Could the -- I have some questions about Medicare Advantage. And beginning to start off about -- what’s your – under current policies -- you know, what’s your projection of the growth in Medicare Advantage, which accounts for about 25 percent of the Medicare population today? What’s it going to be in 2020?

Matthew Borsch: So this is a big question, and clearly you’ve got sharply different views in some cases that on one end you have -- I don’t know that this is still a projection -- but the CMS actuary projecting that Medicare Advantage enrollment will decline by 40 percent over the next four years or so as a result of the lower reimbursement benchmarks for MA plans under the health reform law.

On the other hand, there are others and a little bit more in this camp that think that if the MA plans can manage under the lower reimbursement and still offer an attractive value proposition relative to traditional Medicare, you’ll see the program grow substantially. Maybe we’ll be looking at 40 or 50 percent penetration by the time we get to the end of this decade. Now that may also depend on whether or not there are policy changes that might put MA in an even stronger position relative to traditional Medicare, for example, making it more the default program for seniors turning 65. Having said that, there is some evidence to suggest a third or 40 percent or so of the leading edge of the Baby Boom population is choosing Medicare Advantage because more and more you have a cohort which does not have retiree-provided supplemental coverage; is in a group that, of course, mostly middle income; finding traditional Medicare alone not very viable; and the price of indemnity Medigap supplemental coverage increasingly not a good value proposition. And so MA becomes more and more attractive as a result, and eventually -- Bob, you may be in the vanguard of the Baby Boomers, but I was born in 1964 so I’m in the caboose and maybe we’ll see a majority of people in MA by the time we get to the end of the next decade.

Robert Berenson: I’d love to join you in the caboose, but unfortunately -- I would just add one additional factor to your bullish case for MA, which is that our generation -- those of -- the new enrollees, the age ins -- are much more used to networks and had to negotiate and navigate those kinds of choices. And at least some think that will make the MA product -- I mean, that seems to be one of the concerns that seniors have had about joining MA is giving up the freedom of choice, not knowing what this product is, just being more accustomed to the lack of -- no loss of any prerogatives that go along with traditional Medicare. Whether that changes -- now I understand that the actuary’s office at CMS actually is looking at that issue and has their Technical Advisory Committee looking at whether the sort of new cohort of seniors coming on will just make different choices given their experiences in the last two decades working with managed care plans. But I sort of -- my instinct is with you in that it’s also been fostered by a couple of my peers at the same age group who are selecting managed care Advantage plans because it just looks like it’s something that they’re used to, and it’s a better deal right now. And whether it will be in four years or not is a different story that clearly will have an offsetting effect on the choice. But I guess what I’m agreeing -- it’s not clear where this is going to go. It’s not inevitable as some would say that we’ll see the same thing we saw at the beginning of this century when there was a major decrease when the funding cuts from the -- the payment cuts from the Balanced Budget Act occurred. I have the scars of that event. I’m not sure we’re going to see quite the same thing this time.

Paul Ginsburg: Yeah. Doug, did you have something?

Doug Simpson: Yeah, I think just in general a lot of the stuff we’ve been talking about, I’d echo a lot of that. But then we also have been talking about care cost coordination, and I think whether it’s states looking at TANF populations, potentially rolling in ABD and the higher cost solutions, a lot of discussion around the duals and the appropriate way to manage them, and then with coordinated care under Medicare managed care it feels directionally like right now that’s where the momentum is and there’s a recognition we need to be going down that path. Obviously with payment convergence, some of the controversy there has less teeth because the rates are much more in line. But the general idea, I think, is very important about the notion that 65 year olds today just know these products. There’s much more familiarity with them. And you see that in your own family if you talk to people at that age end of the spectrum versus older seniors, there’s a very different receptivity to that product. And we would argue that that would continue to portend increased penetration of that offering.

Paul Ginsburg: Thanks. And, Carl, you had something?

Carl McDonald: This is a -- so the context of your question was if, assuming current payment policies continue, I mean I think in that situation by 2020 you’re looking at 20 million seniors being enrolled in Medicare Advantage and that’s relative to 12 million today. So figure sort of 750,000 a year give or take for the next 9 years, which is a slight uptick versus what we’ve seen for the past couple of years, but well below I think the million plus people we’re going to see enroll in 2012. I think the other piece to that is I think it’s inevitable that dual eligibles end up in some type of managed program. We can debate whether that’s a Medicare Advantage plan or whether that’s done through more of a state Medicaid-type arrangement, but that’s 9 million people there that I think are going to be in some type of a managed program.

Paul Ginsburg: Yes, that’s good. How is the product evolving in Medicare managed care -- Medicare Advantage? You know, there are changes and a degree of care management, provider networks or other attributes that are notable.

Matthew Borsch: Well, just one thing to point to, it’s been interesting that the transition from the non-network private fee-for-service Medicare plans, which grew enrollment very rapidly in 2006, ’07, ’08, that as the new regulations kicked in that you had to have a network accepting some excluded rural areas. A surprisingly large -- at least from my standpoint -- a surprisingly large number of seniors did, in fact, migrate into the network PPO products as opposed to dropping back to traditional Medicare Plus Medigap, which was thought to maybe be the closer option to what they were using and preferring.

Paul Ginsburg: Thanks. Doug?

Doug Simpson: I think also the retail nature of what we’re seeing is interesting, some of the co-branding with retailers and affinity groups. It definitely points to more of a retail environment. We think we’ll see that in the commercial sector as well. But some of the co-branded offerings have sold quite well, and the people that have been out in front on that have done well. And we expect to see continued expansion along those lines over the next couple of years.

Paul Ginsburg: Good. A question about -- a follow-up question about provider contracting in Medicare Advantage plans. You know, Bob and I in the course of site visits were -- we didn’t have a lot of questions on it, but we certainly did pick up that -- I gather it’s the norm that contracted hospital or physician payment rates tend to be lower in Medicare Advantage plans than they are in commercial and rural-based plans. And what’s behind that?

Doug Simpson: Well, I think that observation is right. I mean, generally most of these are getting priced right off the Medicare fee schedule. So if you’re a hospital, it’s kind of hard to argue that that person that would have paid X yesterday, you should now get paid X+ something because they’re now part of an MA plan. And I guess we haven’t -- I haven’t experienced any providers that have been ingenious enough to come up with kind of a novel way to negotiate some leverage into that. So that’s my thought.

Paul Ginsburg: Can’t they just say I want 120 percent of Medicare?

Doug Simpson: Somebody else want to jump in?

Gary Taylor: I guess they can, but it isn’t done. Someone else might have a better response.

Paul Ginsburg: Yeah.

Doug Simpson: Well, the one thing about Medicare is you have an MA person, if they’re not MA they’re going to be fee for service. So there’s sort of a benchmark. I’ll use a different word, a baseline, that you can point to and say I’m paying you $100. The alternative is $99.99 or whatever. I mean, there is a tie-in.

Paul Ginsburg: Yes, it sends an expectation that if you are not in a Medicare Advantage plan’s network, that a lot of the beneficiaries that would have enrolled in that plan will be in fee for service, and you’ll get them at Medicare rates.

Doug Simpson: Yes, I mean just frankly if you paid commercial rates under an MA program given the way the bids are structured, it just -- the numbers wouldn’t work so it’s not really a viable option.

Paul Ginsburg: Okay.

Robert Berenson: And I guess the question is if, in fact, the projections are right that we go to 20 million, whether that dynamic changes when it’s a larger share of hospital business, I mean to the extent that hospitals do cost shift onto commercial payers, there’s fewer commercial -- I mean, if we have people moving into exchanges, people moving into Medicaid, a lot of aging into Medicare, and they’re going into Medicare Advantage which is at Medicare rates, it’s hard to know who’s left to cost shift to and whether that affects this negotiating environment, I guess, is the question if, in fact, this becomes a larger share of the Medicare population.

Paul Ginsburg: Yes, actually I thought you were going to go and say something else about the larger the share of Medicare beneficiaries that are in Medicare Advantage, the less of a chance that the person who doesn’t go to you because you’re not in the network goes to another Medicare Advantage plan and doesn’t show up in your institution at all.

Robert Berenson: There is a theory that when -- I was actually surprised. This is generally not known in the policy community actually, that Medicare Advantage plans and hospitals contract at Medicare rates, and so I think this is interesting. I’ve asked a couple of people who are in the inside of health insurers why that is. One answer was that it has to do with the different customer. It’s not a large employer who has at least until now required choice of all providers so that there’s sort of no leverage for the plan to have a legitimate threat to exclude that provider from the network. In Medicare it’s individual choice, and you can have a product that doesn’t include all providers. And so there is, I think, more of an acceptance by the hospitals to not sort of make those demands because of some concern about being excluded from the network, that there’s a more legitimate possibility of being excluded from the network with this environment rather than when a large employer is choosing. I don’t know if that’s right, but at least that’s one theory that I have heard.

Paul Ginsburg: Sure. Carl?

Carl McDonald: Gary made the point earlier that increased cost sharing is sort of an indirect cut to hospital reimbursement since they have to go out and collect it. They’re not going to get all of it. In some ways Medicare Advantage, I would think, is almost the same thing in the sense that if you presume if someone comes in, you submit a claim, you get paid, it’s done. In managed care, you submit a claim, it gets rejected. You’ve got to resubmit it, and it gets rejected again. And you’ve got to resubmit it. You know, lots of questions, lots of hassle. It takes a lot longer to get paid. So maybe not with the giants -- the Humanas and the Uniteds -- that are a big chunk of your Medicare business. I have been surprised that some of the second tier, third tier, Medicare plans haven’t had more difficulty contracting because hospitals could say you’re paying us fee-for-service rates. But after all the hassle factor in not getting paid, it’s really only 95 percent, and you’re just not that big. You don’t matter to us. And you really haven’t seen that to this point.

Paul Ginsburg: Yes, good. I’ve got a question about health insurer diversification. And we see instances of health plans acquiring physician organizations or in Pittsburgh a hospital system. You also see evidence of some insurer contracting essentially to be the back office of a large integrated delivery system, helping with IT, et cetera. What do you see as the future of insurers diversifying and playing a role in the delivery system?

Carl McDonald: I would say I think it’s almost entirely driven by health reform and the general environment. So I think if managed care plans had their way, they would not at all be involved in provider delivery. So I think they’re getting forced into it as opposed to choosing to be in it. And as you mentioned, you’ve sort of got the two strategies: You can either become a provider, either physician or hospital, or alternatively you can try to invest in healthcare IT to provide -- you know, give services to providers. I think the IT strategy is interesting from a fundamental perspective. My concern is the properties are just so expensive these days. You know, companies paying half a billion dollars for an IT company that has $50 million in revenue. So how you ever get that earning an adequate return -- I just struggle with how you get from here to there.

I think on the provider side, again it makes more sense in a retail-type environment so Medicare as we head into two exchanges, but I’d be very surprised to see a lot of insurers buying hospitals. So you’ve got the example in Western Pennsylvania, but I think that was sort of a one-op situation where West Penn is struggling financially. UPMC won’t contract with Highmark, and so Highmark is left in a situation of saying one hospital’s going under. The other hospital won’t contract with us. We don’t have any other hospitals. So in a way we almost have to do this deal not because we want to, but we’re just sort of forced into it.

Paul Ginsburg: Yes, Doug?

Doug Simpson: I think that all makes sense. It would surprise us to see large-scale consolidation by the payers of the upper end of the acuity spectrum in the in-patient setting. We could see more clinic-type deals, more access, more leverage within the primary care setting, which would go sort of hand in glove with the narrow network strategy, trying to drive lower cost solutions.

On the horizontal side, if we think about the different payer class buckets, right, you’ve got Medicare, Medicaid, commercial, individual small group/large group. You’ve got risk, non-risk. It’s very -- I mean there are a lot of cross winds as we look out over the next 5 years. There are questions about what the exchanges look like? How effective are they? There are questions about employer commitment, longer term, to offering coverage. So trying to tease out the likely growth trajectories among those different buckets is challenging. We think there will be a greater interest on the part of the plans to play in more of those buckets because you’re probably going to -- if you think about workplace longevity and job switching in the U.S. economy today versus 30 years ago, it points to more switching between those different buckets of health insurance to the extent that the employer remains engaged. To the extent that we see continued unemployment and a choppy job environment, you could certainly make the argument that individuals will ping-pong back and forth between Medicaid and the commercial market more than they have in the past. To the extent that the exchanges rise up, you’re going to see a greater focus on individual. So it seems in the interests of the plans as they’re building out the infrastructure, trying to invest in brand, to have the broadest footprint possible so they can get their G&A on a per-member basis down and then can be more cost effective. Just to throw a number out, a system conversion can cost, say in round numbers, $30 million. If I had 30 million members, that’s a buck a member. If I have half a million members, that’s $60 a members. That’s just one example.

But increasingly we think that scale will matter, and it will make sense to play in these different buckets. We think of the analogy that if water moves out of one bucket into another, you’re not as impacted as if you don’t have all the buckets in place. So we think that will be sort of the natural migration over the next call it 5 years.

Paul Ginsburg: Thanks. A question about the future of employer-based health insurance. Now there was quite a lot of media coverage when the McKinsey Survey came out about employers’ likelihood of dropping coverage, which was a real contrast to work by CBO and others and the experience of it in Massachusetts. And I’m just going to ask you what perspectives you might have on the future?

Gary Taylor: I mean, on the employer-sponsored side, very much an open question. If we start at the small end of the market, you’re very likely to see what we’ve seen, frankly, the last 5 to 10 years, which is a continued shift away from risk products into non-risk products where it makes sense, where you can get a low enough attachment point on a stop-loss policy, that the dollars and cents work in your favor. That has been the trend. We think that that will continue.

At the other end of the market is where it gets kind of interesting to think about the Fortune 1000. And given the employment base that we’re talking about there, each decision is meaningful. And it seems like over time you could certainly argue the economics would be in favor of those employers moving away from offering health care coverage, maybe moving to an environment where they -- somewhat analogous to what happened to pensions, migrating to 401k. You move from a defined benefit to a defined contribution. The employer instead of paying for my health insurance says I’m going to give you $5,000. You either go purchase it on your own or you go purchase it through some I’ll say internal exchange that we’ve established where you have a number of different options that you can pick from.

It’s cost effective for them to do that, particularly for lower wage employees where there’s a subsidy in place. So that makes sense. It doesn’t feel like people are going to want to be the first ones to do it, so this probably isn’t a 2014 event. This will be, we think, an evolution over the next I’d say 10 to 15 years. But given the more dynamic nature of the employer-employee relationship in the last 20 years, that old model doesn’t make as much sense as it did back in the ‘60s -- ’50s, ‘60s, and ‘70s. So we think that that will probably change. And it will be interesting because if one employer does it, you have to think that there will be a number of followers pretty quickly thereafter.

And we may get to a situation where employers today generally argue that they need to offer robust coverage to attract talent. You may get to a position where they say well, I can’t afford to offer that robust coverage from a competitive standpoint. My wage costs are too high. For low-wage employees, that healthcare offering is a huge piece of SW&B. We have one small firm that we deal with that on January 2nd of 2014, they are going to move to get rid of health coverage, give that money back to their employees, some portion of it. They have about 4,000 or 5,000 employees, and they estimate they can save about $7 million a year by doing that. And even if they give that $7 million back in the form of higher salaries with which people can purchase their own insurance, they’ve taken a key part of their SW&B down. So right now, roughly 25 percent of their salaries, wages, and benefits is growing at 10 percent annually. If they can get that down to 2 percent annually, that’s meaningful. So those decisions, we think, will increasingly be made, but nobody’s really going to talk about that until they’re ready to do it.

Paul Ginsburg: Thanks. Carl?

Carl McDonald: I would say the largest employers in the country are not dropping coverage. I’ll give you the Citigroup example, which is we won’t drop coverage until Morgan, Merrill and Goldman all do it first. And part of it is --

Doug Simpson: We’re waiting for you!

Carl McDonald: Yes, undoubtedly. Part of it is, as Doug mentioned, we want to be a competitive employer. More of it is we’d just rather see them take the bullet in the press as opposed to us. But I mean that’s really semantics more than anything else. The real reason why we don’t drop coverage is it only makes sense to do it right now because the employer penalty is $2,000 per employee. So Citigroup sends about $10,000 a year per employee on healthcare coverage. What the benefit managers worked out is pay the $2,000 penalty. We’d have to pay employees about $6,000 a year in increased salaries so they can go buy their own insurance. So on a net basis we’d be saving about $2,000 per employee by dropping coverage or $200 million a year. So it’s a significant amount of money, but again, it only makes sense because that penalty is $2,000. And the fear is that if we drop coverage and everybody else drops coverage, the amount of subsidies that the government would be paying on the exchange would be enormous relative to what the projections were. You know, the projections for health reform were covering 32 million uninsured people. It was not paying part of Citigroup’s healthcare bill. And so from that perspective, the fear is do you really want to go through the disruption, push all these people onto the exchange, and then two years later have to pull them all back in because instead of a $2,000 penalty, it’s now a $10,000 penalty. And it’s not really hard to see how from a Congressional perspective that could get started. You think about a bad employer in an industry. Citigroup is an example. We make the announcement that we’re dropping coverage, and somebody in Congress says wait a second. This company that we just bailed out, we just saved their lives a few years ago, is now trying to take advantage of this loophole to make us pay their healthcare costs? No way. And yeah, I think it would be fairly easy to see that work its way through to a much bigger penalty.

Now, I would agree with Doug on the small employer perspective. If you’re a small employer and there’s no penalty at all, I don’t know why you would continue to offer healthcare coverage. As Doug mentioned, you say to the employees -- it’s good if you’ve got a low-income workforce -- we’re going to put you onto the exchange, but we’re going to pay you more money. Because you’re lower income, you’re going to get a lot of subsidies on the exchange. Your insurance is not going to cost you that much out of pocket. On a net basis, you’re going to have the same coverage next year you do this year, and you’re going to be making more money. You know, it works out great for everybody except the government that has to provide all the subsidies. So I think you will see significant shifts.

You mentioned Massachusetts and the fact that they haven’t seen that much employer dropping, but there are some key differences. One is, as I mentioned, to get subsidies on the exchange in Massachusetts, you can’t have had insurance for the prior six months. So employers would have to drop coverage. The employees would then be uninsured for six months before they could get subsidies. The other difference in Massachusetts is that penalties start for employers with more than 11 employees. So the penalties are incurred at a much smaller group size than what you have at a federal level.

Paul Ginsburg: Thanks. Got a question about -- for Gary -- about Medicare provider payment reform pilots. What types of provider organizations do you see as most likely to participate in the Medicare pilots for Accountable Care Organizations or funneled payments?

Gary Taylor: Yeah, I feel like I’m down here on my little island by myself now.

Doug Simpson: I can come sit down there if you want.

Gary Taylor: Yes. You know, I think there are some very progressive organizations that are a very long way down the curve of clinical integration between hospitals, physicians, subacute providers, et cetera, et cetera. You think about Mayo or Geisinger or Cleveland Clinic, you know, things along those lines or Intermountain Healthcare, et cetera, who would seem to be pretty well positioned already to participate in some of these structures with their ACO or value-based purchasing or episode of care bundles. And I’ll defer to Bob a little bit, I think, on this, but for some of those big non-profits, they’ve come out -- a lot of them have come out very strongly and said we will not participate in the ACO concept. The for-profit providers that I follow would absolutely have no interest in participating in an ACO right now, and some of it is because of some technical issues in the way the regs are written and when you have to designate who’s part of an ACO or not. But the biggest one is just that if you’re a hospital and you generate $100 million a year of Medicare revenue and you find a way to save 20 percent of that -- so $20 million. So now you have $80 million of Medicare revenue and the government’s going to let you keep $5 million of that or $10 million of that. Well you’re at $85 million or $90 million but you used to get $100 million, so the financial incentive just does not exist for hospitals in general to participate in that. I think some large, multi-specialty physician groups in some markets might be positioned to operate as an ACO and then sort of carve out the hospital or other provider risks, but we see -- particularly the for-profits -- we see extraordinarily limited appetite in any of that menu of options that were part of healthcare reform.

Paul Ginsburg: Yeah. Bob?

Robert Berenson: I pretty much agree with what Gary has just said. Part of the issue is sort of the cold shower that the proposed regulations, the shared savings ACOs had. There were a number of organizations who did apply to become pioneer ACOs, but under the innovation center those tend to be organizations that have experience with risk taking and are doing it with commercial plans. So it wasn’t as big a leap for them to want to do it, and many of those organizations do not have a hospital as a core part of the organization. It is interesting this -- I’ll give you the finding and then speculate -- that in the physician group practice demonstration with ten organizations, the one that had big success on reducing spending and getting savings was the one organization that did not have a hospital as part of it. That was Marshfield. With an NF1 it’s hard to draw conclusions, but at least some people think that it is a lot easier for basically a physician organization to do what’s necessary to keep people away from the ER and the hospital than a hospital organization for the reasons that Gary mentioned.

To me the one sort of factor that could change the dynamic, obviously I assume CMS is taking to heart a lot of the negative comments that came in about the fact that there was not enough upside for all of the new obligations that organizations would have to assume. But the other factor is whether there’s going to be continuing and, indeed, maybe increasing pressure on regular Medicare payment rates for physicians and hospitals, in which case, I mean what we’ve seen in the past is an ability to go to Congress and make sure that sort of the cuts which are really reduced in the update factor -- for the market basket update factor -- are sort of compromised and acceptable. If that under budget constraints, deficit reduction constraints, if those -- if they’re not as successful and there’s real downside pressure on payment rates, more organizations may decide that rather than be in this big pool of all the providers in the country getting whacked, why don’t we go and get out of that by becoming -- by having our fate determined by our own performance. I don’t think that’s going to happen in a year or two. I see the ACO play out over about a 5 to 10 year both on design as well as sort of the context in which ACOs would develop. It’s possible that organizations, hospitals that today see no financial case for doing this may conceivably change their mind. But I agree with Gary basically, that today it doesn’t seem to be in the interest of most hospitals to move in this direction.

Paul Ginsburg: Yes, actually let me move over -- I understand that there is a fair amount of activity of contracting between private insurers and delivery systems on whether it’s ACO-like or bundled payment contracting. Do you have any perspectives of -- any of you -- as to how extensive that is or is it just some isolated, leading-edge demonstrations?

Carl McDonald: There’s a lot of talk and a lot of individual contracting things being set up, but my big problem with it is ACOs’ bundled payments or whatever you want to call it. It seems mostly like a variation of capitation. I mean, a few new tweaks to it, but I mean that’s essentially what it is. And my contention is that most physicians and the vast majority of hospitals are just not equipped to accept capitation. If you’re going to do it effectively, you need actuaries. You need some forecasted medical trend. You’ve got to be sure you’re getting paid enough for the services that you’re providing. And I think the provider community today just doesn’t really have those capabilities. You basically have to transfer all of that underwriting and actuarial expertise from managed care companies to the providers. Otherwise you’re just hoping that managed care companies are paying you enough that you’re going to be able to survive. And it hasn’t happened recently, but you go back a little while and it’s not uncommon to see provider groups and hospitals going out of business because they just weren’t paid enough. And so I think that’s the biggest obstacle right now to really making this more effective in a commercial world.

Paul Ginsburg: Yeah.

Doug Simpson: Paul, one of the things we hear when we talk to not-for-profits and others that may be candidates or may be kicking the tires on this, we hear routinely that it’s not really the way the regs are written, it’s ultimately the conversation between the leadership at the plan level and the facility level. And so in addition to all the stuff that Carl’s talking about, which is the hard quantitative side of it, there’s the qualitative side where there has to be an underlying, underpinning of trust and we’re in this together dynamic and an environment where you’re seeing increasingly contentious commercial negotiations between the two parties. It’s just a tough -- that’s a tough aspect of this whole debate.

Paul Ginsburg: Yes.

Robert Berenson: And my one final point is that to me one of the few differences between this ACO or ACO-like approach and the couple of decades of delegated capitation as in California is in Medicare there’s no limitation on patient choice. So can you take risk and yet the beneficiary isn’t blocked in in any way. On the commercial side it’s typically these ACO-like contracts are being written on PPO platforms, so at least there’s some potential for steerage into the preferred network. But one of the issues is can you combine capitation with full freedom of choice for the patient, and that we haven’t tried before.

Paul Ginsburg: Thanks. I’ve got a few more questions. We’ll go to the audience for questions, too. I wanted to just ask since I have skipped some questions that I sent to the panelists before, if there’s any answer that you are particularly eager to make and it didn’t come up, I just wanted to give you the opportunity to make it now.

Gary Taylor: Well, it isn’t exactly an answer, but one thing I wanted to share anyway because I kind of feel like part of the value in doing this each year is that helping policymakers or people that advise policymakers or talk to policymakers understand the implications that the current policies are having and how that’s sort of reverberating through the capital markets. So to give you an example, really since July, since this debt ceiling debate took over and we’ve made commitments to reduce entitlement spending, et cetera, publicly traded hospital stocks are down probably 40 percent on average, nursing home stocks are down 70 and 80 percent on average. So what the market is saying and the collective wisdom of the market right now is that investing in a healthcare provider or certain types of healthcare providers is extraordinarily risky because of the policy changes, primarily reimbursement cuts that are going to potentially come out of Congress. So I want to make sure that everyone here kind of understands the market is very, very afraid of what’s going to happen in just the next few months or next year with respect to provider stocks.

And I guess comments from the one young lady this morning, notwithstanding there is an important role that Wall Street plays, with respect to financing healthcare in the United States. There are some sectors where 80 percent of the nursing homes in the U.S. are for-profit. It’s just the way it is. We forged a private-public partnership. In the hospital industry, 85 percent are non-profit, but the bulk of all the capital spending is financed in the municipal bond market. So even in the case of non-profit providers, there is still an important financing function. And right now that financing function is scared out of its wits about what’s going to come out of Congress in terms of reimbursement cuts over the next several months.

Paul Ginsburg: Thanks, Gary.

Carl McDonald: I guess the only thing I would say is it’s, at least from my perspective, it seems like a lot of the policy discussions in D.C. -- and this is a little harsh -- are basically a waste of time in the sense that as we go through this deficit reduction, it seems like everybody is focused on either we’ve got to cut providers or we have to cut beneficiaries and that’s it, end of story. And yes certainly doing that can potentially save money, but it doesn’t fix the problem. And in many cases it’s not sustainable in the sense of sure, you can cut what you pay a physician, but the physician is just going to see more people. They’re going to make the same amount of money they did last year. They’re just going to get there a different way. And so I think for there to be a solution that is sustainable and is going to work, you’ve got to figure out a way to use the existing pool of money and make it more efficient and do it in a way that you aren’t cutting beneficiaries and you aren’t cutting what you pay providers. And so like one of the sort of obvious ones would be dual eligibles. I think that’s a situation where having more management of that population, you could generate an enormous amount of savings and do it in a way that beneficiaries continue to get what they’re getting today, providers continue to get paid what they are being paid, and the federal government ends up spending a lot less money on it. I think those are I think where the bulk of the policy effort should be as opposed to just narrowly we’re just going to cut a provider or cut a benefit.

Robert Berenson: But if I could suggest -- I mean if you’re actually going to reduce spending, revenues have to go down for somebody. So I think we’re doing -- that would be the right way to do it, but presumably you would have fewer hospital days and that’s going to affect revenues for hospitals.

Paul Ginsburg: Yes. There’s an interesting perspective about how the policy environment is affecting the delivery system now. Just the fact that what we’re in now is a months-long period of uncertainty that there are going to be cuts. And also the fact that whatever steps are taken are probably going to have to be taken fairly quickly, which takes -- I think a promising area that you pointed out of dual eligibles is probably off the table because are we really there now to know what the policy should be about dual eligibles to be able to put it into a bill that’s going to pass Congress by the end of the year. So I’m really glad you brought those issues up.

Doug, did you have something you wanted to bring up?

Doug Simpson: I just think sort of recognition that -- I mean, everybody wants the best healthcare they can get for them and their families and everybody wants to spend the least they can for it. But there has to be some recognition that part of the way you may get some of these efficiencies may at least initially be less comfortable. And we’re talking about things like narrower networks, bringing some of the tools in the industry to bear with respect to comparative pricing, comparative economics of both clinical benefit and the cost of the underlying service. So there’s certainly with everybody -- myself included -- trepidation over changing the way you access your healthcare system, but I think we also have to recognize that the current system right now the way it’s funded ultimately is not sustainable so something’s got to give. But it just seems like when there’s a legitimate path to an improvement, there’s controversy always around that. So I don’t know that we’ll ever get away from that, but there are going to have to be changes coming down the pike.

Paul Ginsburg: Well, these responses were so useful that let me apologize to the audience for not having time for their questions. I think it’s time for me to thank our sponsor, the Peterson Foundation, and the HSC staff, Alwyn Cassil in particular, for setting up this conference and thank the panelists for a terrific job done.

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Participant Biographies

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

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

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

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

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. Ginsburg is a noted speaker and commentator on changes taking place in the health care system. His recent research topics have included cost trends and drivers, Medicare physician and hospital payment policy, consumer-directed health care, the future of employer-based health insurance, and competition in health care. Ginsburg has been named to Modern Healthcare’s 100 Most Powerful in Health Care eight times. He received the first annual Health Services Research Impact Award from AcademyHealth, the professional association for health policy researchers and analysts. He is a founding member of the National Academy of Social Insurance, a public trustee of the American Academy of Ophthalmology and served two elected terms on the board of AcademyHealth. Before founding HSC, Ginsburg was the executive director of the Physician Payment Review Commission (PPRC), created by Congress to provide nonpartisan advice about Medicare and Medicaid payment issues. Under his leadership, the PPRC developed the Medicare physician payment reform proposal that was enacted by Congress in 1989. Ginsburg previously worked for the RAND Corp. and the Congressional Budget Office. He earned his doctorate in economics from Harvard University.

Carl McDonald, C.F.A. - Director and Senior Analyst, Citi Investment Services

Carl McDonald is a director and senior analyst covering the managed care industry, having joined Citi Investment Research and Analysis in June 2010. He has followed the managed care industry for more than a decade, previously with Oppenheimer & Co., CIBC World Markets, Morgan Stanley, Banc of America and Credit Suisse First Boston. He was named the runner-up analyst in the managed care sector in Institutional Investor’s 2010 All America Research survey, was the second-ranking managed care analyst in the 2011 Greenwich Associates survey and was the number one earnings estimator in the health care providers and services industry, according to the 2011 Financial Times/Starmine analysis. McDonald received bachelor’s degrees in economics and American studies from Brandeis University. He is a chartered financial analyst and a member of the CFA Institute and the Boston Society of Security Analysts.

Doug Simpson, M.B.A. - Executive Director, Morgan Stanley

Doug Simpson is an executive director who joined Morgan Stanley in 2009 to cover managed care and health care services. He has been a sell-side equity analyst since 1996 and has been highly ranked by Greenwich Associates and The Wall Street Journal. He previously worked at Merrill Lynch from 1999-2008, where he covered managed care and healthcare services (including health care technology). Prior to that, he worked at Bear Stearns and J.P. Morgan. Simpson received a bachelor’s degree from Bucknell University and his M.B.A. from The Wharton School at the University of Pennsylvania.

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

Gary Taylor is a senior equity research analyst and managing director at Citigroup, covering the health care facilities sector. He joined Citigroup in 2008 after covering the sector for nine years at Banc of America Securities. In addition, he worked in the sector for three years as an investment banker and two years as a hospital reimbursement consultant. Taylor has been recognized as one of the best analysts in his sector for the last decade by Institutional Investor magazine. Over the same period he has also regularly placed as one of the top three sector analysts in the annual Greenwich survey. Taylor is a graduate of the University of Missouri, where he received his M.B.A. (Finance), a master’s in health administration and a bachelor’s degree in health sciences.

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Participant Biographies

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

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

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

Carl McDonald, C.F.A. - Director and Senior Analyst, Citi Investment Services

Doug Simpson, M.B.A. - Executive Director, Morgan Stanley

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

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