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HSC's 17th Annual Wall Street Comes to Washington Conference

Conference Transcript
Dec. 19, 2012


Welcome and Overview

Paul Ginsburg, president, HSC bio

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

• Scott Fidel, Director and Senior Equity Research Analyst, Deutsche Bank bio

• Lisa Goldstein, M.P.A., Associate Managing Director, Moody’s Investors Service bio

• Carl McDonald, C.F.A., Director and Senior Analyst, Citi Investment Research bio

• Sheryl Skolnick, Ph.D., Managing Director and Co-Head of Research, CRT Capital Group, LLC bio

P R O C E E D I N G S

Paul Ginsburg: I’d like to welcome you to the 17th Annual Wall Street Comes to Washington conference and thank the Peter G. Peterson Foundation for its support in making this conference possible.

The purpose of this conference is to give the Washington health policy community better insights into market developments in health care that are relevant to policy. And we’ll be discussing market developments and their implication for people’s health care. That’s a core activity of HSC, and at this meeting, it’s a way for us at HSC to tap a different source of information: Equity and bond analysts. Equity analysts advise investors about which publicly traded companies will do well and which ones will not; and bond analysts advise on the likelihood of debt repayments. And the really good analysts develop a thorough understanding of the markets that the companies they follow operate in. And that’s what we’re looking for here. They also follow public policy, increasingly I would say, and that often has important implications for these companies. And today’s meeting is really an opportunity for the equity and bond analysts to take a break from their day jobs of assessing the outlook for profitability or solvency of companies and bring their understanding of market forces to bear on questions that those involved in health policy have on their minds. We also have included a Washington based health policy analyst on the panel, who helps tie market developments more closely to health policy.

Now, the format of this meeting is a roundtable discussion. I’ve shared the questions with the panelists in advance so they had time to think about them. And we’ll have two opportunities for questions from the audience the first before we take a break at 10:30 and the second before we adjourn at noon and there are question cards in your packet. Please write down your questions as you think of them. We’ll collect them a bit in advance of when we’ll have Q&A.; And one thing to note is that these analysts are not permitted by their employers to answer questions about the outlook for specific companies. I’m pleased to say nobody’s ever asked them.

Again, I want to thank the Peterson Foundation for its support. HSC will post a transcript on its website early next week, and before you leave the conference, please fill out your evaluations.

The panel is just dynamite this morning. Some are veterans from previous Wall Street Comes to Washington conferences, and this includes Carl McDonald of Citi Investment Research. Bob Berenson, from the Urban Institute, is our policy expert. And we’re delighted to welcome three new panelists, Scott Fidel of Deutsche Bank, and Scott is a second generation participant. I know many of the audience have been coming for years, and you remember his father, Norm Fidel, serving on the panel many times years back.

And our other first time panelists are Lisa Goldstein of Moody’s and Sheryl Skolnick of the CRT Capital Group.

One thing I want to mention, the way I’ve organized the questions, is that we have two analysts that cover health insurers, managed care; and we have two that cover providers, mostly hospitals. And some of the questions will be relevant for either the managed care analysts or the provider analysts. Many of them will have both provider and plan perspectives, and I’ve deliberately tried to schedule them early to get everyone into discussion right away.

So, I want to begin with a series of questions on innovative contracting between Medicare, Medicaid, private health plans and providers; and first I want to ask about the provider perspective, and I’m talking accountable care organizations (ACOs), global payments, episode bundles those types of innovative contracting, and first thing is how interested are providers in contracting like this and what’s driving their interests.

Sheryl Skolnick: Good morning, everyone. It’s been very interesting to watch the provider community evolve with respect to their appetite for new kinds of arrangements, new kinds of contracts, new kinds of risk undertaking. Until the election, I’d say that there was probably about 60 percent of the community that was sort of sticking to its guns that it really doubted that health reform would ever happen, and therefore there was no need to embrace rapid change or change at all with respect to their relationships with payers and with other providers, both competitors as well as along with a continuum of vertical integration. And the one exception to that of course is physicians, and I’ll get to that in a second.

What we’ve seen since the election is a mad dash and near panic on the part of the not for profit community, in particular, to rush into consulting relationships with folks who can help assess and advise them on whether or not their system is ready to undertake the kind of risk bearing relationships that an ACO would demand of them and the responsibility associated with whether they’re ready to take on risk with managed care companies.

In addition to my coverage of the provider community, the for profit providers, I also cover one health plan, United. If you’re going to cover, you might as well have the biggest and most complex if that’s how you want to do it. (Laughter)

It’s been very interesting to chat with the folks from Optum, which is in part their consulting arm, about what these trends are, and they certainly have noticed this very significant increase in activity. The specific things that folks are interested in, of course, with respect to a health plan, is can we take risk. The hospitals want to grab some of that profit margin, or at least the cash flows that they see accruing at the health plan level, but they also understand that with Medicare incentives toward ACOs, perhaps not the structure but the notion of an ACO a la Medicare is really gaining a lot of traction.

We’re seeing hospitals, first of all, acquire physician practices again. One hopes that they will not have the same outcome, but if anybody ever tells you it’s going to be different this time, run far away. I really don’t believe it’s different this time.

The structures and we’ll get to that in a little bit more detail in one of the other questions are there at least to provide some level, some notion of integrated decision making and behaviors between providers and physicians, which in my view is the absolutely first step in a series of necessary but not sufficient conditions to start taking risk at the hospital level. But the hospitals, to some extent, don’t have much choice. Whether it’s a notion of underpayment, whether it’s a notion of being asked to control behaviors after discharge through readmission, reimbursement policy, hospitals are taking risk. And they are responsible for the behavior of their patients and their physicians, and so they’re beginning to understand that they might as well agree.

Specifically, we are seeing some hospital systems now very eagerly rushing I think it’s rushing to form health plans, either preferred provider or independent practice association(IPA) type arrangements; or the PHO, the physician hospital organization, is enjoying some resurgence depending upon the local market structures of the hospitals and the doctors, and depending upon where they think they can best establish a risk bearing organization given their relationships with physician. So, we’re seeing virtually every kind of plan, every letter of the alphabet being used, and every kind of structure that allows the hospital to both take and share risk being assessed and in some cases being implemented.

It really reminds me of back to the future of what we saw in the 1990s of taking capitated risk then evolving into PHOs and PPOs and IPAs and HMOs, and I think the quest is ultimately to become more Kaiser like at the local level in each of these markets. Only Kaiser has a little bit of a head start and perhaps a unique market opportunity.

Among the for profit hospitals, we’re seeing only baby steps. There’s a very significant difference between what we see at the not for profit level, which is this mad dash to do something at any cost, but at the for profit level we’re not seeing such a rush to change. And I think that’s an interesting situation. I’m not sure it’s necessarily the wrong answer. There is still a lot we don’t know about what the structure of contracts will be under reform, the structure of networks, the structure of the actual benefits that are offered; and I think the for profits basically believe we have contracts with managed care. These are existing contracts. They’re evergreen contracts, and until someone tells us that these contracts are going to change or need to change, we’re going to assume we’re going to assume we’re going to get a 5 percent rate increase and we’re going to bill fee for service or at risk, depending upon the existing contract terms. So, there’s no need to change. But we are clearly seeing them engaging more with the physicians. The physician integration for better or for worse is almost an unstoppable force right now in preparation for being able to control at least some element of utilization going forward, and that will be the key.

One exception is Detroit Medical Center, which is owned by Vanguard Health Systems. It’s one of the pioneer ACOs. They are very much engaged in the pioneer ACO process. They’re beginning to look at ACOs and other at risk structures in their San Antonio market as well. They seem to be among the publicly traded companies, the one exception to the rule. There are private programs among the others, but none of them have embraced as much as Vanguard. So, it’s very much a wait and see attitude. Buy, control, hold the physicians as much as you can, and then let’s see how much more at risk we have to go.

Paul Ginsburg: Okay. Lisa, is there a perspective you’d like to comment on?

Lisa Goldstein: Sure. I think well, first of all thank you for inviting Moody’s to be a part of the panel today. I cover the not for profit hospital sector, so that’s my area of expertise or understanding, and I think I certainly agree with much of what Sheryl said and will have the chance to amplify on many of those topics.

I think the No. 1driver to all of these innovative contracting constructs is well before the health care reform law was ever passed, and you don’t need a super shiny, translucent crystal ball to know that Medicare cuts are coming. It’s been on the table for years now, the rate of the Medicare growth as a percentage of the GDP. So, before the concept and then the passage of the health care reform law, hospitals across the country have been waiting for, already experienced in 1998, Medicare cuts. Now, it’s simply more formalized in a four corner 2000 page document. At the same time, we’ve got the federal deficit and we’ve got this thing called the fiscal cliff that’s coming at us. So, whatever the vehicle is, Medicare cuts have been on the forefront, I think, of many not for profit hospital management teams’ minds that have been driving a lot of the strategies.

But it also goes well beyond Medicare. We’ve done an analysis over the years that looks at annual revenue growth, probably a key indicator to look at how the industry is doing, and we saw two years ago a real low point: Percent year over year revenue growth just top line revenue, top line sales, if you will, like any for profit business would look at. And we realized the number showed us the discussions with about 500 health systems across the country. It’s not just Medicare. Medicaid state budgets probably all but one, North Dakota are under tremendous fiscal strain, and usually the cuts come either to public education or to Medicaid, the two largest budget items for any state.

And it’s not just Medicaid. We’re seeing revenue pressures from the private payers, the commercial Blue Crosses, United, Aetnas of the world also, and in most markets still giving rate increases but lower rate increases, no more double digit annual rate increases.

We’re now anecdotally at the single mid level range for increases. A few markets are reporting actual rate reductions. So, instead of a 2 percent increase, you’ll take a 3 percent decrease, a negative rate adjustment. So, it’s all payers. And then with the economy, again with the recession two years before health care reform, we saw many folks unemployment go up, they lose their health care insurance, then their COBRA runs out. So, top line revenue pressures also coming from the self pay/no pay patient higher co pays, high deductibles, people who want to pay their bills but just can’t pay their bills.

So, I think a lot of this is beyond federal legislation. The economy and the growth in Medicare over the years have been some of the key drivers for all of the movement that we’re seeing in all of the consideration for changes that many not for profits are considering.

Paul Ginsburg: Thanks. Sheryl, you had mentioned before how the hospitals were hiring consultants to see how ready they are, and what’s your sense about the level of activity and the readiness in the sense that there are many organizations plunging into this that turn out not to be ready?

Sheryl Skolnick: Yes, I think that you captured the answer with your question. Some organizations have been thinking about this and have been innovative in their approach or have been resigned in their approach that they have to brush off old business plans and understand how to take risk again. But for the most part, there is, I would say, certainly among the for profits, a little bit more sophistication in terms of their understanding of how ready they are or how much more work they need to do. Then I’ve seen some in discussions with the not for profits and particularly the consultants serving the not for profit community.

I couldn’t agree more about the notion of, you know, how constrained hospitals are. We’ve had a thesis called "Starvation in the Land of Plenty" lots of old people, no money to pay for them or its corollary, "Starvation in the Land of Famine" lots of old people, no volume because they’re all not as sick at 65 as they used to be. And the recession hasn’t helped demand in any payer category Medicare or Medicaid or commercial. So, the hospitals are looking at this at a time when their beds are essentially emptier than they thought they would be. And that’s creating even additional pressures to try to create risk bearing entities that can capture volume in exchange for price in order to fill the beds. And, again, we’ve seen this play out before, and sometimes it ends well and sometimes it doesn’t. But, for the most part, I’m distressed by the lack of innovation at the for profit level, particularly at some of the larger companies. They, of all of the hospitals out there, on the one hand, have better assessed their capabilities but do not appear, by and large, to be moving in new and unexpected directions.

Paul Ginsburg: Thanks. How does that look on the nonprofit side, Lisa?

Lisa Goldstein: Sure. I think there is a fair amount of innovation. There is a mad dash to the consultant’s world, and I think there’s tremendous consideration of change now. Many are considering mergers. There have been some big mergers announced last week, for example, the Baylor Health Care System in Dallas looking to merge with Scott & White in Temple, Texas, too big and everything’s big in Texas, but this is really big a merger to consider. So, there are a lot of discussions out there, a lot of chatter. We understand amongst the not for profits to get ready for whatever it is that’s coming as the regulation becomes more and more clarified and the terms are better defined by Washington.

So, I think there’s been an effort to get ready. There are some large not for profit systems that are probably more ready than others. I would name Geisinger in Pennsylvania; Intermountain in Utah; Mayo in Rochester, Minnesota; and perhaps the Cleveland Clinic in Cleveland, because they’ve been at it for years. They’ve been doing this, Mayo, for a hundred years. They have a physician delivery clinic model; they have a hospital model; and certainly for Geisinger and Intermountain, they have the health plan model.

The other common factor running through those four why are those four ready and others aren’t? It’s basically that there’s minimal to no competition in their markets. They don’t have to be concerned about what the hospital, for profit or not for profit, is doing down the street, whereas in most urban markets they’re very crowded with lots of hospitals and maybe at this point too many beds.

Paul Ginsburg: Yes. Let me give you a skeptical response. Couldn’t you say that those leading systems are just seeing this as an opportunity to finally be rewarded for the efficiency that they’ve developed over many years. But that doesn’t tell us about more ordinary systems? How far away are they from actually making progress?

Lisa Goldstein: Yes, I think when we meet with hospitals and health systems, they tell us they’re super ready. There’s a little bit of spin when you meet with a rating agency, as you might imagine.

Paul Ginsburg: Yes.

Lisa Goldstein: I think one indication, if you’re looking at a well, which system is ready and which hospital system is not. One of the barometers we look for is their IT system. You know, that’s going to be key. Understanding your data, your cost data, your revenues per adjusted admission trend, expenses per adjusted admission trend. Do they have the information technology system to really get a hold of their costs, their charges, their efficiency, their quality; and there’s a tremendous amount of money, millions of dollars, that hospitals are spending for best in breed IT or brand new, all consuming, one platform models. It’s certainly not right time now to build new patient towers. So, IT seems to be an indication of whether or not they’re going to have the tools to be ready for this new world.

Sheryl Skolnick: And if I could just add

Paul Ginsburg: Sure.

Sheryl Skolnick: that’s a dramatic change from just a few short years ago

Lisa Goldstein: Yes.

Sheryl Skolnick: where getting any especially the not for profit boards, I think, to authorize that kind of spending level on IT, and I think, you know, it’s assisted clearly by the mandate that you’d better put it in or else.

Lisa Goldstein: Right.

Sheryl Skolnick: But, you know, that usually works. (Laughter) If you threaten people with lower payments, it usually gets them to comply. But, there is also I think now an overarching strategic understanding of the importance, and I’m glad you mentioned that, because the one thing that we see is that the for profits are pretty good at understanding all of the little tiny metrics that go into making for a successful, profitable or positive pre-cash flow quarter.

Lisa Goldstein: Mm hmm.

Sheryl Skolnick: But that still sometimes is not enough. The financial metrics are not enough. It’s the integration of the financial and clinical

Lisa Goldstein: Right.

Sheryl Skolnick: along with being able to influence behavior in the facility in a compliance appropriate way, so no mandating certain admission criteria, et cetera, but that aren’t clinically appropriate but rather, you know, building and in this kind of a compliance environment that could be a little bit challenging. But it’s getting that melding of that data. That’s the Holy Grail, that not everyone’s there yet but a number of them are.

Lisa Goldstein: And if I may add to that, Sheryl, it’s a bold move, because in part many of the systems, if not the hospital industry has still not developed a formula to measure the ROI, return on investment, from these giant IT expenditures. We’re talking hundreds of millions of dollars.

If I may, I took my daughter to a doctor’s appointment in New York City that’s where I live and in his office there was a computer monitor, and it said, "Welcome to Epic." Epic is the name of one of the major IT vendors out there. And then it said, "Do no press the number 8 key." (Laughter) And I thought for the millions of dollars involved, why can you not press the number 8 key? That’s anecdotal, off the record. I should have said that. But it’s just a huge, huge expenditure, and hospitals that have done it already just swear by it, but finding that elusive ROI is a real issue.

Paul Ginsburg: Good. Well, let me move across to the plan perspective and

Robert Berenson: I’d just like to make a couple comments.

Paul Ginsburg: Sure, Bob.

Robert Berenson: Let me just I agree with virtually everything that’s been said. I just wanted to point to what I think is the disconnect, to some extent, between the current policy reality and the aspirational policy. So, you know, the term "risk based" was used a lot, and that’s certainly the way payers want to go. At least Medicare has a vision of ACOs and ultimately their risk. But currently what I think makes life a little more interesting and difficult for hospitals is that current payment system rewards what called we call provider based payment where the same service provided in their doctor’s office is paid at about half of what it’s paid in an outpatient department. So, that is a major reason for cardiologists, essentially, leaving independent practice and becoming hospital employees, because an echocardiogram is worth twice as much when it’s done as an outpatient service. So, that is a fee for service revenue generator that helps sustain the hospital in the short term.

To try to avoid the problems of the late ’90s, when hospitals bought up doctors’ practices and the doctors were put on salary and went fishing, to exaggerate a little (laughter), virtually all hospitals that we’ve talked to in our site visits have basically said "We’ve learned the lessons of the past; we’re now going to be compensating physicians through assessing their work productivity as measured by work RVUs used in the Medicare Fee Schedule. A fee for service productivity metric, shared savings, at least the first three years of shared savings, is essentially a fee for service payment mechanism, which looks to moving to two sided risk. But it remains, and this is a point Paul has made in some of his writing, it remains voluntary to the hospital. So, I think we’re not ready as policymakers to sort of declare when it is we’re going to pull the switch and sort of change these payment incentives. But I think it’s difficult, at least, for hospitals to figure out what business they’re in are they in the fee for service, keeping beds full business? Rewarding doctors for volume? Or are they going to be in the risk bearing business. And I think that needs to be sort of worked through.

I don’t know how hospitals that are sort of in the short term rewarding their docs who they’re increasingly employing through fee for service. Incentives are going to pull the switch themselves and say we now are changings. So, I think there will be a business in trying to help integrated systems figure out more creative compensation systems. I would refer people to the September Health Affairs issue that had a very interesting presentation of the Geisinger model, which actually was very sophisticated in that it used work RVUs to make sure their docs were working, that they, you know, they had to hit a threshold of productivity But ultimately used other metrics, which are more consistent with being an accountable care organization or an IDS or whatever we want to call it rather than this just generating fee for service volume.

Paul Ginsburg: Thanks, Bob. So, I want to turn to turn to how the health plans see this development from their perspective. Are they enthusiastic about it? Are they finding willing provider partners to work with? And would one of you like to start?

Carl McDonald: Sure. Yes, I would say from the managed care perspective, a huge amount of interest in doing this. I mean, think about the managed care business model. They take in a fixed premium every single month, you know, a hundred dollars let’s say. The variability the don’t know whether medical expenses are going to be 75 or 105, so if you’re paying hospitals a fixed amount and they’re taking on all the risk, you basically eliminate the volatility for managed care companies. They make money, basically, for being in the middle of it all. That’s a pretty attractive business model from their perspective. So, definitely lots of interest in forcing more risk onto providers.

You know, there are three roadblocks that I’ll highlight for you. One, as has been touched on, is hospital provider groups by and large do not have the ability to take on risk, right? If you want to be a successful risk taking provider, you need to take all of the actuarial underwriting capabilities that managed care companies have built over the last 20 plus years and transfer that into the hospital on top of all the IT investments that have been discussed. And so to build that capability from the ground up with very little experience, it takes a lot of money and it takes a lot of time. I think that’s something that a lot of provider groups underestimate to begin with, and then, you know, as they get into it, you know, realized how big of a task that is.

A second thing that hasn’t been touched on is by definition a lot of these arrangements are limited networks, right? And there’s a reason why HMOs have all but disappeared, and it’s that people don’t like to be restricted. To put it in personal terms, would you be willing to give up your primary care doctor for a 10 percent reduction in your premium? For most people the answer would be, "Absolutely not."

And I mean, to think about some statistics, this is from Aetna a year ago. To get a 15 percent improvement in the premium, their calculation was you had to be willing to give up 75 percent of the provider network. That’s just much too large for, I think, consumers to be willing to make that choice.

And then, last point, I would say at least in the commercial ACO model one of the challenges is that I think hospitals, many of them, rightly view the whole thing as basically a mirage, in the sense that Aetna we’ll use again as the example goes to a hospital and says we want to enter into a commercial ACO with you, but we need to take our payment rates down 10 percent from what we’re paying you today. So, that’s minus 10 from the hospital. The target would be in an ACO where we’re going to have some utilization savings here. So, you know, let’s assume a target of 10 percent savings in terms of less inpatient volumes. So, if you’re the hospital, you’re now down 20 percent. The tradeoff is, as I said, there’s going to be some efficiency improvements, so you can make some up there, but the real opportunity is because you guys are now the low cost system in the area, you’re going to pick up so much more volume. That’s going to be the offset. The challenge is that if ACOs really work, everybody’s going to do an ACO. And the result is there isn’t going to be any volume. Like, the pool is the pool; it’s not getting any bigger other than the health reform aspect. So, that hope that you can offset utilization savings plus the lower payment rates of higher volumes I think is a hard calculation for hospitals to wrap their heads around.

Paul Ginsburg: Yes, go ahead, Scott.

Scott Fidel: I would agree with what Carl said. I would add, you know, I think what’s interesting after hearing the hospital and provider discussion is that on the managed care side I think that we’re seeing more activity levels amongst the for profit larger national companies and a bit less activity amongst some of the nonprofit managed care companies, particularly the Blue Cross Blue Shield plans. I think part of that also reflects that these plans just don’t have as much resources, as they’re also dealing with significant business model adjustments for the ACA. I think that we’re also seeing some different approaches, as Carl referenced, in the Medicare versus commercial markets. In the Medicare market we are, I think, seeing a much more aggressive approach toward closer integration and crossing along the lines of ownership of assets. So, you know, you look at some of the Medicare managed care companies, and they are in the process of acquiring either physician practices or medical services organizations. So, you are actually seeing more direct integration of their assets between the health plan on the provider side whereas on the commercial side I would say that this is much more of a soft environment in terms of how far these partnerships are going on the ACO side.

Paul Ginsburg: Thanks. Actually, one question I should ask is we’ve been talking a lot about hospitals negotiating, but, you know, in the second round of Medicare shared savings ACOs I think in a majority of those contracts the ACO was a physician organization. And you mentioned that there’s been some managed care acquisition of physician practice. Any thoughts about are we going to have many organizations that are led by physicians? And what difference will this make in the marketplace?

Scott Fidel: Well, I would just add an anecdote for one of the larger recent announcements of a combination where Humana acquired a pretty large medical service organization that also had managed care assets. I got an e mail from the CEO last night of the organization that was acquired telling me that tomorrow’s his last day with Humana and he’s going to be moving onto his next venture. So, I think right there in terms of the leadership front, we see which direction that moved on.

You know, the second thing I would highlight is clearly there is feedback around that most of the activity levels so far have been on the physician side, and clearly the ACO structures and the ACA help support that, but there has been more resistance and I think less momentum in terms of seeing major partnerships between major managed care organizations and major hospital systems. So, one of the conversations that have been coming up recently is how you see these major national MCOs partnering more with these nonprofit hospital systems. And we’re really yet to see these for profit major systems sort of engage in these activities.

Paul Ginsburg: Thanks. Yes, go ahead, Sheryl.

Sheryl Skolnick: I’ll just make one comment here. You know, part of what’s Scott’s saying behind the scenes from the hospital’s perspective but also a little bit from the managed care company perspective is the dialog between hospitals and managed care companies is rarely friendly, to say the least, okay? These are natural enemies. Hospitals are not particularly well respected from many managed care perspectives, because they’re the source of excess utilization. They’re expensive, high cost places to get treated. The physician, however, is the health plan’s friend. If the physician can be aligned in incentive and interest with the health plan as opposed to being aligned in incentive and interest with the hospital, that’s a major victory for the health plan, and their desire to improve quality and lower cost and see the patient treated in the appropriate setting.

So, this natural tension is being fought over in terms of the ownership of the physician or the control over the physician behavior, which becomes, in my view, the critical element and, really, the critical battleground of these kinds of risk based or future organizations and structures of development. Who gets control over the physician will likely determine how much utilization there ultimately is.

Paul Ginsburg: I’m glad you brought that up. To conclude this discussion of contracting, think five years from now. Let’s say we’re talking about the beginning of 2018. Any sense of what proportion of the lives or the dollars will be governed by some type of ACO global budgeting contracts?

Scott Fidel: Well, I could give just one figure that actually United Health Group recently shared with us, and currently they estimate that around $18 billion of their network spend is in these integrated care or ACO like arrangements, and their goal is to move that up to around $50 billion over the next three to five years. So, you know, when you look at that, it’s sort of a two to three times type of growth rate, and that would be a significant proportion of their overall medical spend and a very significant portion of the network based spend.

Paul Ginsburg: Thanks. Other perspectives on that? Okay.

Lisa Goldstein: I think it may depend on what the private employers do. McKenzie had put out a study that they estimated 30 percent of private employers, large employers that provide health care for their employees, will move to one of these exchanges, another form of a covered life in an ACO like model. So, part of it’s going to depend on what the private sector does.

Paul Ginsburg: Thanks.

Robert Berenson: I have just one other comment before you move on, just to make the point, which I typically make at this meeting, which is that a well functioning ACO, even the ones who are the prototypes, the ones who have a geographic monopoly, are doing great stuff but have market power and can be very efficient but not necessarily pass on efficiencies to purchasers and consumers. So, we could have a very successful ACO rollout, and I still think we’ve got to somehow deal with pricing increasing the idea that in some markets we will have competing ACOs, I think that’s right. In other markets we will have dominant ACOs with market power, and we have to figure out how to deal with that.

SPEAKER: Can I just make another observation here?

Paul Ginsburg: Sure.

Sheryl Skolnick: So, we’re sitting back and listening to all this, and it’s very helpful to listen to colleagues and policy analysts talk about these issues that we deal with on a micro level every day. I think we need to be very careful not to just rearrange the pieces on the chessboard here, because what I’m hearing is the risk exists. The risk of insurance of insuring for health care exists. Today it’s being borne largely by either the self insured employer or the health plan through. They now are going to shift it off to the hospitals or the doctors or some combination thereof without giving them any ability to consolidate their market power, because that seems to be the key to success, that if you’re a dominant monopoly in a market you know you can take risk, because you’re going to get all the volume and you’re going to be able to control the utilization along the continuum of care.

So, I think we just need to make sure here that we’re not just reallocating the risk from an organization that’s set up purely to take risk, i.e., an insurance company, to one that is, as Paul said, you know, not prepared nor has it proven to be well suited to take the risk. I think that could end up being a highly inefficient outcome with some significant risk of unexpected adverse consequences. I’m very worried about shifting risk to providers, and I’m very worried about the appearance of shifting risk to providers or saying we’re doing it when these folks can’t control their population and can’t control behaviors after the patients come out of the hospital. So, this could end up being a very big policy error. It could be a very big operational error, a very big strategy error. So, I think this is part of the reason why you see the for profit hospitals taking it rather slowly, because they’ve got it good right now. They’re basically getting paid for what they do and not having to recreate the wheel of taking risk, and that might be the right approach.

Paul Ginsburg: Yes. Actually, this brings up a question I was going to ask Lisa before about bond rating. Does the presence of these contracts actually make the organization riskier or is this just dominated by environment that they’re living in?

Lisa Goldstein: Right. Most of these contracts are still in their infancy, it’s very, very hard to gauge what the financial impact will be when there’s an announcement of a not for profit health system partnering with one of the major health insurance companies. They’re usually about 10 minutes into it. There’s a lot of fanfare with the announcement, but there’s a lot of work still to be mapped out, ironed out behind the scenes before it’s a go live. So, it’s a little early to tell; however, once again Sheryl makes a good point. We saw this before. We saw it in the private health care insurance market. Now it’s the government. It was called capitation 15 years ago. The risk was passed over to the hospitals, the hospitals were paid, if you understand capitation, on a per member/per month. The hospitals were basically capitated, but they were still incented to fill the beds, while the physicians who were admitting the patients were basically on capitation. It’s better not to admit the patient there was this horrible disconnect of payment streams, a misalignment of payment streams, and (inaudible) what happened. It was a disaster, a financial disaster for the not for profit hospitals. Many got burned, bond ratings were lowered, because the number of lives that they took under these capitated arrangements was tremendous.

So, have they learned those lessons? Now they’re going to tell us we did learn lessons; we can do it better this time because we have the skill set, lessons learned, and we have the data. We have the data, the IT this time. So, right now we’re in a wait and see mode, because right now it’s too early to tell.

Sheryl Skolnick: It’s one thing to have data; it’s another thing to understand what it tells you (inaudible), and they’re not there yet.

Lisa Goldstein: Right.

Paul Ginsburg: Yes, I guess a lot of it all depends on the nature of the contracts in a sense.

Lisa Goldstein: Right.

Paul Ginsburg: You know, how much of the risk that the providers are taking is risk that they can control.

Lisa Goldstein: Mm hmm.

Paul Ginsburg: First is the ultimate risk of who’s going to get sick and who won’t that they can’t control.

Lisa Goldstein: Right. Right. And right now it’s the readmissions that they’re trying to control. It’s a baby step forward where the patients are basically given a 30 day warranty that they’re going to be fine for the next 30 days. But we’re just into this now to see how it’s all going to work out.

Paul Ginsburg: Good. Actually, Bob got us onto the issue that I have questions about, which is health plan and provider leverage, and let me just ask the first question: What are the trends? In a sense, certainly the work that Bob and I have done, which is a couple of years old now you know, we showed the trend was toward overall increasing provider leverage. Is that continuing or has it turned around?

Sheryl Skolnick: You mean leverage as in leverage in negotiation or leverage

Paul Ginsburg: Yes, leverage as far a

Sheryl Skolnick: Or just in balance sheet leverage that you said I would deal with?

Paul Ginsburg: Oh, no, not this is leverage and negotiation, getting higher rates.

Scott Fidel: I’ll start with a comment just on that. I guess if we’re coming from managed care organizations paying hospital 7 to 9 percent increases ago and now we’re at 5 to 7 percent, you know, that is incremental progress, although, clearly when you look at what’s happened with medical cost inflation overall, the rate increases, the price increases that the hospitals are getting are actually still the largest driver of cost trends, particularly as we’ve seen utilization trends in the inpatient setting dip into the negative territory now for several years but you continue to see mid single digit rate increases out in the market place.

Sheryl Skolnick: So, we go through cycles in hospital and health plan relationships, I would say, but at the core of it, it never really changes. What you see is he who has more toys in the sandbox at the end of the game always wins. So, if you control the significant assets in the market, be it the hospital or the membership or the employer relationships, whatever is key to dominating a market, you will win at the negotiating table. In some markets, that’s the hospital; in other markets, it’s the health plan. If you’re in Alabama and you’re a hospital, you have nothing to say at the negotiating table other than thank you. (Laughter)

Lisa Goldstein: Mm hmm.

Sheryl Skolnick: If you’re a dominant system in a local market, a must have, high quality provider in a local market, you will have better rates, and this is no different than it’s ever been in my experience. What I will say, however, is that the health plans have rediscovered how to manage care as opposed to how to manage cost; although, they haven’t always done a brilliant job of managing the cost either, but they’ve tried. And so what we’re beginning to see is health plans influencing the site of care more and more, which is separate and apart from the contract that you have as a hospital with the health plan. So, my point is it’s not just the contract; it’s what the health plan does once they get the contract with you and then actually manage these lives. And there’s quite a significant move. A non trivial part, although hard to measure precisely how much, of the increase in utilization of outpatient services is being driven by health plans encouraging consumers through price transparency and through other tools to choose a lower cost setting other than an inpatient bed. And so even if you get good rates and feel like you have good leverage at the negotiating table, your productivity on that contract, your yield as a hospital could be very, very different depending upon what else the health plan does once it gets the patient on it member rolls.

Robert Berenson: Could I ask Sheryl a question? I just wanted to follow up on your Alabama example.

In markets where you have a dominant plan without a lot of competition that’s sort of the definition of a dominant plan I understand they have leverage, they have control over the negotiations, but do they need to actually get low rates, or do they just need to have the most favorable rates? In other words, they need to do better than their would be competitions, but they don’t need to actually exert their market power. Or is that na?ve?

Sheryl Skolnick: Well, whether or not they need to, they appear to.

Robert Berenson: Do they?

Sheryl Skolnick: Yes, and it may well be that while they in some of these states, you know, there is a limit on how much their premiums can go up. So, sometimes there is an external factor or regulation that prevents them from being able to simply pass on higher rates.

Robert Berenson: So, in those states rates are flat or even negative?

Sheryl Skolnick: Well, they can be flat, they can be down. I mean, we also go in cycles in terms of hospitals just the problem in a state like Alabama is if you’re a major system you can’t opt out. If you’re a minor system you can’t opt out of that particular contract, because they’re the dominant health plan. On the other hand, in other states and we are beginning to see provider pushback in terms of contract terminations, and there’s one, actually, in the Tampa market that’s gotten pretty nasty, and while there aren’t that many markets in which you’re seeing hospital and health plan negotiations fail, the numbers appear to be increasing. It’s getting a little testier.

Scott Fidel: Paul, if I could just add, too. One other thought on leverage is that clearly where we always are in the regulatory cycle, that has a lot to do with the correlation of where we are in the economic cycle in terms of where society is in terms of desire for more access or concern about cost.

So, if we think about, you know, five or six years ago, seven years ago when the economy was going very strong and there was desire for more access, you saw a lot of the regulatory pressures more focused on the managed care business. And an example would be the investigations that Governor Cuomo did in New York against managed care companies and their out of network claims systems. And in that environment, that’s a difficult one for the managed care companies to negotiate with the providers. If we look out now over the last couple of years, I think we’ve seen some shifting in that regulatory focus toward more of the hospital systems and providers.

So, whether it’s Community Health in some of the investigations of their admissions practices or the 60 Minutes piece just recently on Health Management Associates, we’re clearly now seeing more alignment, a focus on admissions practices, and I think MCOs are able to piggyback on top of that in terms of some of their negotiations.

Paul Ginsburg: Thanks, Scott. Sheryl made a point about these what I’ve called showdowns or breakdowns in negotiations between providers and plans, I’ve always thought that this is a signal that the marketplace is changing in the sense that the relative leverage between plans in hospitals is changing. And for the player in the market to find that out, there have to be some battles, like in Tampa. So, in a sense, this implies that perhaps the situation is changing.

Now, Scott, you mentioned that rate increases are smaller. I don’t know if you ascribe that to lowering rates of cost or change in the leverage situation.

Scott Fidel: I’d say a bit of both.

Paul Ginsburg: Bit of both.

Scott Fidel: Absolutely.

Paul Ginsburg: Okay, good. Let me move onto network innovations. We see a lot of announcements of narrow network plans. I know Carl kind of threw some cold water on them before, but in a sense you do. In our work, we’ve seen it more and more commonly in the small group market, and there’s an expectation that in exchanges there will be a lot more of that. Any of you see the world moving toward greater use of narrow-network plans? I mean, not necessarily as narrow as they were in the 1990s but narrow meaning either the very highest priced provider is not in the network or narrow meaning that like it was just a little bit narrower than the norm.

Carl McDonald: Yes, I guess we’ve certainly seen an increase in the offerings of narrow networks, I would say, but among employers, not a lot of take up. I guess an example would be if Aetna comes to Citi Group and tries to sell us a narrow-product network, it’s not going to happen, because a 100,000 people that work at Citi you know, I don’t know how many doctors Citi Group employees see every single year, but it’s a lot. You know, there’s no way our benefit manager is going to be willing to trade that access almost regardless of what the price differential is.

That being said, if you go to a small employer that currently isn’t offering insurance to their employees and say to that small employer, “I’ve got this narrow-network product. It’s only got one hospital and two doctors, but it’s 30 percent cheaper than anything you’ve seen before and isn’t that better than nothing?" In that type of situation I think there has been some take up. And as Paul mentioned on the exchanges, I think you are going to see a much greater prevalence of narrow-network type arrangements. So, you think about exchanges, I think the idea right now is that low cost is going to win. So, if you’re a Blue Cross plan, you might have the lowest unit cost, or if you’re United and you can spread everything over the gigantic base that is United, you can win on an administrative perspective.

But what if you’re a local or regional health plan or a national company that doesn’t have scale in a particular market? One of the ways that you can try to achieve low cost is to go and form an exclusive relationship for the exchange. So, you go to this hospital and say for this particular product that we’re going to sell on the exchange you are the only hospital that people are going to be able to go see, and if I as an individual consumer am thinking about buying a policy on the exchange and my doctor happens to be in that network, well, I don’t care that I can’t go see anybody else, because my doctor is in that network, and if it’s 30 percent cheaper, you know, maybe that is a good alternative for me.

So, I think you can see an increase. It just doesn’t really match up well with the current employer based system.

Paul Ginsburg: Thanks. You know I this is relevant there was an article in the Wall Street Journal on Saturday that increasing development of insurance products by hospitals sometimes as joint venture with health plans, sometimes as a private- label version, but the whole notion, which of course we saw a lot in the mid 1990s, was that the network in these plans would be the hospital and its affiliated physicians and other providers, and so any thought about the potential for development of products around major hospital systems?

Scott Fidel: I would just start with, as you mentioned, this did not end well in the late 1990s, and it created a lot of disruption on the provider side and then on the managed care side as well. And I think that what we learned from that point was when you just saw the provider owned plans which, you know, we saw then seven or eight years of consolidation amongst managed care companies acquiring those plans and the providers were just offering these plans on their own, they couldn’t move away from that underlying desire for cross subsidization. And, you know, it’s still for providers. It’s about, you know, often driving volumes and their core business, which is providing care. And you saw in the pricing that providers were putting on their health insurance plans where they were willing to offer more aggressive rates with the theory that they could make that up on the volume side and in the health insurance business, underpricing cost trends. Whether you’re an MCO or a provider, that is not a sustainable strategy.

So, you know, as we see now the next wave of this occurring around these new policy changes and new market changes, we have to remember the history around how this ended in the ’90s and early 2000s.

Sheryl Skolnick: So, can I maybe give an example of a market.

Paul Ginsburg: Sure.

Sheryl Skolnick: If you look at Denver, there’s a very, very highly regarded, respected health system there, which is the Health One system. Back in 2006 they had a showdown with United. They won. And why did they win? Because they are perceived by members, by employers, by patients as having the high quality, must have, must-go to network.

Now, if you’re in that market, you know you’re going to get that volume anyway, because people want to come to your hospital. There aren’t a lot of opportunities and options that are outside that network that are viewed as being reasonable substitutes. So, you know, from what Carl was saying, you’d have to offer some pretty steep discounts on those you know, if you wanted to set up a competing on those health plan products and you wouldn’t have the best ob gyns, you wouldn’t have the perceived best physicians as part of that, because they don’t have as many privileges at those other hospitals.

So, if I’m sitting there and I’m Health One, why on earth do I want to invest in an actuarial structure, a business that I’m not in, I’m going to get the volume anyway. So, I think if you’re the dominant system in a market where you’re vertically integrated, you’re horizontally dense, it just doesn’t really make that much sense to take on a risk. You’re already the narrow network in the market. It’s not going to change. So, where you have high concentration, you’re going to give a different answer, a different solution than where the concentration of ownership or of quality is less.

Paul Ginsburg: Yes, another point is that it might depend on the marketplace, and I’ve heard so many example of systems looking at Medicare ACOs, and if they think that they’re already relatively efficient, I’m thinking of why I shouldn’t go into the Medicare Advantage business. This way I can capture that efficiency. But are they thinking along those lines that you’ve talked to?

Sheryl Skolnick: There is a desire, as I mentioned, I wouldn’t say to capture the efficiency. I’d say it differently, as I said, first of all to capture the margin or the cash flows that accrue to the health plans. There’s really a lot of cash flow envy that goes on.

But, this tension between you know, once a hospital and a health plan are part of the same entity, it goes back to the old Humana days. Ultimately there’s a lack of willingness to treat the hospital asset as the cost center that it needs to be and therefore to drive its costs and utilization down to those efficient levels that make the health plan, an entire entity, have the adequate return. But it’s the only way it works. You have to stop looking at the hospital as a profit center and look at it as just simply one of many different alternatives for treating the patients in your care. And it’s very, very hard for those organizations to do. We haven’t had that cultural change yet.

Paul Ginsburg: Yes. Now, nobody’s brought up the tiered-network products, which as I understand them these are not enrollment products, but it’s just that once you’re enrolled in a plan you have incentives to use one provider versus another. Is there much activity as far as those products and if not, why not.

Carl McDonald: Yes, I mean, there was a flurry several years ago. There’s been less so now. And I think the primary reason is that when you’re tiering providers, I mean, you can say you’re doing it for whatever reason you want, but you’re tiering based on price, all right? It’s, like, whoever offers the lowest price is in the best tier and you can wrap some quality things around it for appearance purposes. But, you know, that’s effectively what the insurance companies had been doing. So, there are some instances where there is as tiered network that’s effective.

United is an example for transplant cases. If you’re going to get a transplant, there’s a certain group of high quality providers that they want you to go to and, you know, make it financially such that you really can’t go anywhere else. Aetna has what they call an Aexcel network for certain specialties that’s gotten a little bit of traction. But, you don’t see as much interest in that as, you know, at least that initial flurry several years ago.

Scott Fidel: And I would just add to that we haven’t seen nearly the level of success with tiered-provider networks as we’ve seen with tiered-pharmacy networks, and I think it comes down to, as Carl referenced, it’s with the tiered-provider networks. A lot of the variation reflects the health plan’s judgment. So, you go on to a United Health site and they might have a star next to the provider that they feel has better quality.

But then when it comes down to it, price is often a major function, whereas with the pharmacy benefit, there are clear delineations in an understanding of what drives a tiering between whether it’s a generic or branded drug or simply whether it’s on formulary or not.

So, for the consumer, there’s a lot more transparency, I think, and belief in what drives the tiering as valid relative to a lot more subjectivity around tiered-provider networks.

Paul Ginsburg: And don’t you have the issue of the hospital system that is a must have and can get high rates as also a system that can resist being put in a disfavored tier?

Robert Berenson: I mean, the plan might want it to happen. They want to do it, but they can’t through their contract negotiations.

Sheryl Skolnick: Yes, the employer may not allow that because they want to satisfy their employees, and there is an element of that.

The one thing that I’ll note here is that where I am seeing some interesting I’ll call it "interventional" but the right word might be "interference" techniques being done by some of the managed care plans. If you have a very high cost case an oncology case, a transplant case they’re beginning to become more active in recommending what physicians you should see and how you should approach your care. So, for example, they’re trying it out as a pilot at United where if you’re in a community setting and you’re diagnosed with a complicated cancer, as soon as that claim begins to hit the claims database, there is a nurse and sometimes even a medical director physician on the phone with the member saying okay, we’d like you to get a second opinion at Sloan Kettering or the local preferred cancer center. That’s kind of the ultimate in tiering. It’s direct intervention with the patient and the patient’s physician relationship. And there may be some backlash with that. You know, I might not take kindly to getting a call from United, big bad United, my health plan, saying, by the way, we don’t like your doctor, we want you to go to our doctor. So, they have to handle that very gently, and it’s a nuanced kind of approach. But so far, most of the patients are saying, "Wow, that’s great. You know, you’re telling me I should go get a second opinion at the best cancer center in the world or the best cancer center near me and you’ll pay for it." And so there is beginning to be what I’ll call the ultimate tiering at that one patient at a time level.

Lisa Goldstein: This is exactly what Walmart just announced, which was monumental. They selected five health systems across the country. Walmart is the largest retailer, one of the largest employers in the country a million plus. They have said if you need a transplant, spine neuro, and three or four other diagnoses, they have drawn the line in the sand with a local hospital, a regional hospital health system to provide this, and they have said to the employee, we will fly you and a family member. We will house you in a hotel or whatever for you to go have your transplant at Mayo, your spine surgery at Scott & White, five systems were named. If they’re successful, I mean, they are basically banking or gambling on the fact that there’s too much health care being provided, too many surgeries that are unnecessary. They take these five providers based on quality outcomes and, I assume, to some degree cost. They put pen to paper and said even with flying our employee maybe across the country with a family member, caregiver, putting them up in a hotel for maybe a week or so, it’s still cheaper to Walmart, less expensive, than to allow the employees to go to their local hospital or regional hospital down the street or down the road. Boeing has done this. Lowes has done this. And if these are indeed successful and Walmart can show that their health costs have come down, we could see this across the country, another kind of twist on this tiering concept. It was really phenomenal what the announcement was.

Paul Ginsburg: Yeah, well, Lisa, let me pursue that, because there have been centers of excellence approaches for 20 years.

Sheryl Skolnick: Mm hmm.

Paul Ginsburg: And usually what you would hear they were voluntary, that they employers got very little take up. This offer to go and fly to Houston to go to the best heart center in the country not much take up. Is Walmart saying that we won’t pay for it if you don’t go to these providers, if you stay in your local areas? Or is this more of what we’ve seen for 15 year?

Sheryl Skolnick: Yes, I don’t know if they’ve drawn that line in the sand you can’t go to your local hospital. But they’re offering basically almost a free ride to go to one of these national centers of excellence. So, we’ll have to wait and see. If they say we will not pay at your local hospital, people will go, you know, if they need that transplant.

Paul Ginsburg: Yes, because unless they’re doing that, it’s really nothing maybe they just have a better nose for publicity.

Lisa Goldstein: I think the stakes are different though, because all of the big companies, small companies are bemoaning the fact of the rising health care costs, premiums going up or self insurance. So, there may be some teeth to it this time.

Paul Ginsburg: Okay.

Lisa Goldstein: It was pretty monumental.

Robert Berenson: And there’s, I think, there’s tension with the ACO strategy, because the ACO wants to keep everything in its own network, and so that really needs to I mean, I see those two strategies colliding.

Paul Ginsburg: That’s a good point. But one thing I wanted to pick up about the ACO strategy is nobody’s mentioned bundled payments, and has nobody mentioned it because they just don’t see that as very important, maybe it’ll be fine for hips and knees but not too far otherwise? Anyway, what are your thoughts as to why it hasn’t come up yet in this discussion?

Sheryl Skolnick: I almost mentioned it. (Laughter) Maybe I should stop talking.

Paul Ginsburg: Sorry.

Sheryl Skolnick: No, no, no. I mean, I just so, you know, bundled payments was one of my favorite things to come out of the first Obama budget, because I had a wonderful time discussing the key issues of moral hazards with Wall Street.

You’re making the hospital responsible for structure, assuming that there is a downstream continuum of care that’s already in place. And you’re assuming that the hospital is going to be able to control behavior either contractually or through what I like to call virtually or physically through ownership of these physical assets, not to mention the labor and the decision and behavior of all of the clinicians that surround the patient along this continuum of care not to mention the fact that you could globally capitate a hospital and you’re globally capitating the head instead of the tail or the tail instead of the head, rather, because it’s not the hospital that should be at risk for these payments in that sense. If you really want to do a bundled payment, I think you want to start with making the physician responsible for the continuum of health care needs of the patient and do it that way. It gets into a whole host of other issues, as we’ve seen in the great California global capitation experiment that we talked about that has failed. But the whole notion of bundling the payments requires hospitals to either contract with other providers, control their behavior, and/or acquire other providers to be able to minimize the risk that they will become insolvent under a bundled payment scheme, because they cannot control that moral hazard, making them responsible for uncontrollable behaviors. And the most uncontrollable behavior is that of the patient. If the patient goes outside the network that’s bundled, you’re in trouble.

Lisa Goldstein: Mm hmm.

Sheryl Skolnick: It’s the same issue with the retroactive assignment of the patient to the original ACOs.

Lisa Goldstein: Mm hmm.

Sheryl Skolnick: I mean, what rational provider would ever agree to that?

Lisa Goldstein: Mm hmm.

Paul Ginsburg: Yes.

Sheryl Skolnick: And the same issue is here.

Robert Berenson: Sheryl, I’v got a little bit of a different take on the problem. I think I agree there’s a problem. You know, the concept of a bundled payment with the docs, at least the ones that are involved -- the docs in the hospital. I’m not talking about the post acute care facility now say, for hips and knees and there’s actually a Medicare demo going on that, and it seems that there’s some positive results after some difficult starts at the hospitals and the surgeons actually start talking to each other, and the one specific thing they’ve achieved is gain sharing. In other words, the physicians, the surgeon, or the cardiologist or the cardiac surgeons all agree that, yes, we can live with a single vendor’s product. We don’t each have to have our own stent, one from Boston Scientific and one from Medtronic’s. So, they actually have, now, leverage in those negotiations and are reporting savings in the 5 percent range on that piece of it. Medicare is taking a small percentage off the top and getting a discount.

What concerns me about it is the report from Hillcrest Hospital in Tulsa, and Hillcrest Hospital’s happy because they have a 30 percent increase in volume. So, the question is: Is this redistribution of volume from all the other hospitals in Tulsa with the docs now referring their patients here because they’re now part of a you know, they get a little piece of the action as a shared savings? Or have you now put the docs and the hospitals together into a service line business venture so that you’re actually getting even greater incentives in volume. Essentially it is rewarding volume still. It is not like global payment or capitation, which is population based. It is efficiency within a provided service, but the question is: Are you getting more of those? And so hips and knees, which would seem to be the easy place to start, are also procedures where there’s pretty good documentation of unnecessary overuse of the intervention in the first place.

So, I think this will be an empirical test of what happens. It’ll be nice to know whether the total number of cases in the Tulsa if population increased or whether it was just a redistribution, which has its strengths and weaknesses, if but we can talk about that, too.

Sheryl Skolnick: Yes, my comments were mostly along the continuum of the sites of the care, not the specific disease states. So, I can imagine that if you bundled the payments for the acute and post acute continuum, with very few exceptions most of the post acute continuum would disappear.

Paul Ginsburg: Yes. Actually, let me combine these two to say that I think that some of the lowest hanging fruit is, as Bob mentioned, choice of the implants, because you can save money there. But I think, you know, as I’m starting to see some data on variation in spending by episode, the big variation comes in the post acute components. So, in a sense, that’s the really big upside. And the issue Sheryl mentioned that’s very important is that how well positioned is the hospital today or the physician today or perhaps down the road to control that post acute spending?

I would like to pause for a second and ask you, for those people who have questions that would like to submit them by card, this would be a good time to write them down and passing them in. I want to ask about the outlook for spending trends. And I know we’ve had a few years of very low spending trends, and I want to pose a question to the panel: Is that likely to continue or not?

Carl McDonald: Yes, I mean, in my perspective low spending trends will continue as long as the economy is bad. (Laughter) As soon as the economy picks up, I think we’re going to see health care utilization pick up. I think that’s been the single biggest driver of the lower utilization that we’ve seen in the last couple of years. I mean, certainly there have been changes in delivery models. We’ve talked about co pays and deductibles are higher now than they were. So, I think on the margin those things have contributed, too, but, you know, by far the biggest driver I think has been the economy.

The example that I would give you is for two things I mean, one on the co pay deductible argument. Yes, co pays and deductibles are higher now than they used to be. But they were also high last year, and they were high the year before that.

So, to argue that it’s all driven by cost sharing, you’d basically have to make the argument that we had some sort of a tipping point a couple of year ago where deductibles had gotten so high that people said you know, I’m just not getting killed anymore.

And then the other point I would make is think about the government business, you know, Medicaid as an example. There is no cost sharing Medicaid, right? And yet utilization is still down there, admittedly not as much as you’ve seen in the commercial business, but, you know, both Medicare and Medicaid, which you would think would be less sensitive to some of these cost sharing dynamics, you still see lower volumes there.

Paul Ginsburg: Yes, Carl, I ask you know, in Medicare and Medicaid you’d also expect a smaller role for the economy, but you still see it as slowing there?

Carl McDonald: Yes, so I think a couple of things I think about Medicaid. One of the biggest expenses plans have in Medicaid is cost of birth. It can be anywhere from 25 to 35 percent of medical costs in any given period. When the economy gets bad, people have fewer children, and that goes across the entire income spectrum. So, I think that’s how you can link Medicaid to an economic impact. And then if you think about the Medicare benefit, not all of the services that are given have 20 percent coinsurance, but many of them do. So, if your retirement assets are down and everything else is going on that’s bad in the world, it’s harder to spend that kind of money, you know, even in the Medicare population.

Robert Berenson: Except that 90 percent of Medicare beneficiaries have pretty much first dollar coverage to fill in all the cost sharing. So, that’s been something of the the question is: Why do we see even people who have first dollar coverage, why are they reducing their use?

Scott Fidel: I would just add, looking out over the next couple of years, and I would strongly agree that I think that the prior few years has been clearly driven by the economy, which has suppressed all the key underlying themes that have lower utilization. I think, looking forward and if we assume that the economic environment remains relatively similar to what we’ve seen the last couple of years, this is going to be a great test of the cyclical versus the structural, you know, cyclical being the economy and what drives that and is that more powerful than the structural, which is the ACA. And, you know, we can all debate whether the ACA is going to bend up or bend down the cross curve, and there are a number of pilot programs that do aim at bending down the cost curve. But there’s also going to be very significant changes in the structure of the system, and we’re going to be bringing on a lot of individuals that have a lot of pent up demand besides for things like guaranteed issue and community rating and other health insurance market reforms that in the past have increased underlying costs. So, you know, that’s going to be, I think the real interesting dynamic, particularly in 2014 and ’15 if we assume that the economy is going to be at a relatively stable level.

Paul Ginsburg: Yes, good. Go ahead, Sheryl.

Sheryl Skolnick: One of the things that have happened that could well be the case here is that patients could simply be healthier. I mean, we spent the better part of the last 10 or 15 years trying to actually improve the health of the population with some significant and I say the last 10 or 15 years, because one could argue that the statins are keeping a lot of heart attacks out of the hospital, that interventional cardiology and stenting could be also having an impact. But, generally speaking, I would argue, looking at my 83 year old mother she’s in a lot better shape than my grandmother was in her late 70s. And I think we all might want to recognize that.

One other little statistic that may be interesting for you: Medicare Advantage net revenue per adjusted admission for HCA is about 10 percent lower. Medicare Advantage net revenue per adjusted admission is about 10 percent lower than their Medicare net revenue per adjusted admission. You say oh, sure, the managed care plans have lower rate increases. No, they’re getting 5 to 7 percent on their Medicare Advantage rate increases. They’re getting, you know, whatever market basket minus rate they’re getting this year for Medicare. So, it’s not the pricing. It’s the acuting. And a Medicare Advantage plan does a better job of keeping people healthier, presumable from a hospital perspective, from HCA perspective keeping the people healthy or just simply keeping them out of the hospital even if they’re not healthier redirecting their care.

So, there are these other things, and it might just be that we’re all a little bit healthier, and that coupled with the wealth effect, the psychological effect of oh, I want to rein in spending, I can’t sell my house, I can’t move, I can’t this, I can’t that everyone’s affected by that psychology.

What we noticed among the Medicare utilization by the way, the same is true for Medicaid. There’s about a 10 percent difference in net revenue per adjusted admission. And I think that we’re sort of reining ourselves in a little bit. It took longer for us to see the reduction in utilization in the Medicare pool than it did in the commercial pool after the recession happened.

Scott Fidel: I would just add to that, too, I think it’s interesting, you know, you look at the last couple of years, and traditionally we’ve seen in the commercial market, as you see in this pressure on revenues in the Medicare market, the cost shifting to the commercial market, which could lead to an acceleration in pricing or unit cost for commercial payers and plans. And, clearly, there has been revenue pressure in the Medicare and Medicaid environments, and we have not seen an acceleration in the last couple of years of the unit cost in the commercial market. I do think it reflects just how powerful the economic downturn has been. Again, I’ll be interested to see whether that dynamic remains in place come 2014, as we do have Medicaid expansion coming online and clearly a very significant factor for providers in terms of the lower rates they receive from Medicaid patients.

Paul Ginsburg: Okay, well, let me put our discussion of spending trends on hold, because I’ve got questions, and let me just start asking them.

If insurers prevail in shifting risk to providers -- acknowledged as an irrational strategy, what value do large for profit I would think not for profit insurers also bring to the health care system?

Scott Fidel: I would just add one point: They’re the ones that have the capital. When you look at how much capital insurers have built up, it’s significant. It’s hundreds of billions of dollars of reserves that they have on their balance sheets to just sort of eliminate that element, and they’re the ones that have developed, again, the investments in the technology and the systems. Claims processing, for example, while mundane, you know, when we’ve seen a lot of disruption amongst health insurers, traditionally there have been systems issues or under investment in systems that’s played a big role in that. So, I would just highlight the capital and the technology that the insurance industry has already spent 20, 30 years building up.

Paul Ginsburg: Okay.

Sheryl Skolnick: Yes, so if I can just make a comment about the reserves, just to follow up on that. One of the interesting things that’s happened is as insurance companies go on to these exchanges, and as they develop ways of shifting risk down to the providers in some way, shape, or form, they free up some of those reserves. So, right now, that money is untouchable. But one could envision a future in which health plans are actually taking a whole lot less risk than they used to.

Okay, what are they going to do with that capital? Where is that money going to go? This is real cash money. So, what it may do, and what you may see, is that some of the plans that are more on the edge in terms of their required reserves may in fact seek to offload more risk to the providers, because the less risk they take, the more solvent they become. So, we could see a very interesting development.

Lisa Goldstein: And then the question becomes: As hospitals take risks, they may not be an insurance company, but as they take risk under all these models, will the hospitals have to put aside reserves , i.e., liquidity, and this is going to be a state by state determination but something as an analyst we’re looking very closely at.

Paul Ginsburg: Thank you. Let me move on to other questions. What if any movements are you seeing in reference pricing products and the adoption of consumer-facing price transparency tools by plans?

Carl McDonald: I would say not very much. (Laughter) And there have been some selected employers that have tried reference based pricing, Safeway being probably the most prominent example. Yes, I think they’ve had some success. So, just for background, basically what the idea is, Safeway says to the employees, "If you’re going to go get your appendix out you get $500, here’s a list of four hospitals in the area that will do it for $500 or less. If you do it for less, you get to keep the difference or some variation of that. If you want to go to this other where it costs $2500, feel free but you’re going to pay the difference. So, that’s the basic model behind the reference pricing. But it really hasn’t expanded that much, and I think a lot of it is much more administratively complex than just saying to a health insurance company, "Here, you’re going to handle this for us."

Paul Ginsburg: Okay, question is for Lisa.

Lisa Goldstein: Oh, boy.

Paul Ginsburg: Compensation between nonprofit systems has always raised eyebrows about the community benefit and tax exempt status of these systems. However, as this compensation intensifies amidst acquisition and consolidation, do you foresee systems putting their tax exempt status at risk or losing their claim to community benefits? Also, in states with a certificate-of-need in process, how do you see this impacting consolidations, acquisitions?

Lisa Goldstein: Can I just

Paul Ginsburg: Sure.

Lisa Goldstein: Good questions. Who asked? No, it’s anonymous, that’s okay. (Laughter)

Let me take the last one first. In states with certificate of need, or CON, which regulates hospital growth, with the CON in process how do you see this impacting M&A;? In states with CON and there are different degrees of CON in the 35 states, I believe, that still have CON, you have to get approval -- it’s one of the approval checklists for most M&A; hospital to hospital mergers or acquisitions. You also have to get the state AG approval. You’ll likely have to get FTC antitrust approval as well. So, it’s not necessarily going to be a limiting factor for M&A; strategy. Usually if the FTC says no, then the AG says, then the CON board says no. So, they kind of follow the directives from the feds to the state down to the CON board.

Good question about tax exempt status. This continues to be basically a perennial issue of not for profits justifying their tax exempt status. How can they be tax exempt when they make the margins that they make and they keep the reserves that they have? Are they providing enough community benefits? So, it continues to be at risk. Just announced last week Allegheny County, which is Pittsburgh in Pennsylvania, is doing a review of all of the not for profits, including universities. I am continually amazed that the tax exempt watchdogs go after hospitals first and not these very wealthy not for profit universities and colleges with billions of dollars of endowments and really no type of charity care one could say that they provide. But, nonetheless, the focus spotlight continues to be mainly on hospitals. We don’t see this abating any time soon, and it’s really up to the industry to find a unified voice and a unified way to measure community benefit. The Catholic hospitals have actually come together and have agreed to a plan as to how they define it. But, really, the whole not for profit industry needs to find a uniform formula to adhere to community benefit and then promote and explain to the policymakers and the watchdogs why it is that they are deserving of the tax exempt status. So, it just continues to be an issue over and over again. And I don’t recall anyone losing their tax exempt status. I have seen certain not for profits in years past pay what’s called a PILOT, a payment in lieu of taxes, to their local municipality, kind of a goodwill gesture. Some have been required, some have done it voluntarily as a way to say we’re here for you, local municipality, we know you’re under stress. Here’s an annual fee to help you with your own revenue situation. So, it likely will not go away, but we do not see a whole scale removal of the tax exempt status.

Paul Ginsburg: Thank you. Let me do one more question, and then we’ll take a break and perhaps later in the morning return to some other questions.

Most of us will grow old and become frail. We’ll spend about half of lifetime costs in that part of life. At least for that phase of life, we have yet set up the economics well. We overspend on medical intervention and underspend on social supports, and it seems like we should dramatically change the rules of the game for this population. Social supports in medical intervention should become a package or at least a shared market. That market should encourage geographic concentration to capitalize on efficiencies in home services. The priorities should grow from negotiated health plans. Is this is a plausible direction for change?

Scott Fidel: Yes, but I would say limited segment of the market, but to eligible and all of the care integration programs that you’ve heard talked about in various states. That’s one of the primary focuses, the idea that you give a set amount of money to a health plan and you say to them do whatever you need to do to keep this person out of the nursing home. So, today you’ve got a situation where people end up in nursing homes for a variety of reasons, but there’s no Medicare code for I built a ramp to this person’s house so they can continue to get into it and don’t have to go to a nursing home. If you’re a managed care company, it’s your pool of money. If you think it makes sense to build that ramp so that they don’t have to go to the nursing home, then you do it. You can make some money off of that. So, it’s a small segment of the population, but that’s certainly one example of how moving in I think the direction that question was asking.

I would just add to that, you know, when you look at sort of the frail elderly and the costs that they drive, which are very significant it’s the end of life care that’s the most significant, I’ll admit, and the amount of costs that are sustained in the last six months of life, and, you know, when you compare the U.S. health care system and the cost structure to other countries, clearly that is where you see a significant variation and much higher level of cost in the U.S. system. But, again, you know, that comes down to what we want as a society. You know, in the United States there has always been a pronounced effort toward providing the best possible care and not holding back to sustain life, whether it’s for a short period of time and where you’ve seen some more stringent approaches taken in other countries, and I think that is one of the big variances that we see in terms of the relative health care costs in the U.S. versus a number of other societies.

Sheryl Skolnick: I’ll just add to that. You know, this whole notion of the supportive in the community and the social services will go to nutrition, housekeeping, grocery shopping, and ramps you know, the physical plant, the oversight, what goes on in the home. It’s a great notion. It clearly works. Evercare did it for years in Texas until the reimbursement rules went against them and they had to basically stop. So, if we created a system of payments that is not medical treatment based but is, instead, based on keeping the patient healthier in total, that’s, I think, how you get there. The one challenge here and why it’s not a panacea from just a patient and let’s be careful with taxpayer dollars perspective, is that care delivered in the home is a completely unmanaged, unsupervised, and at this point still unsupervisable benefit. And I cover the home health care companies as well, and it pains me to see how much advantage can be taken of the reimbursement rules because of a lack of oversight and supervision here. And, you know, we’ll just remember that home health care under Medicare is still the only benefit without a co pay, so you don’t even have the patient’s family and the bank account on your side, reducing or limiting or self rationing the amount of services in the home. So, you know, there are all kinds of things.

As we start to talk about home based care, there’s this Wild West aspect of care delivery, the lack of management and oversight that would take a utopian kind of yes, this is exactly what we need to be doing for our parents and grandparents and ourselves and make it into yet another bastion of how do we fleece the taxpayer.

SPEAKER: That’s a cheery note to end on.

Paul Ginsburg: Yes. This is really good. Let’s take 15 minutes. It’s 10:35 now. We’ll reconvene at 10:50 for the second half of our discussion.

(Recess)

Paul Ginsburg: Okay, I’d like to resume our discussion on the outlook for spending trends. And one question thing we didn’t get to is looking forward at technology are there any technological developments that you would expect would have notable increasing or decreasing effects on the trends? Or if I can interpret the silence is it because usually you can’t tell? As far as I think the role of technology has been very difficult to summarize.

Sheryl Skolnick: The one area that I know that the health plans, and maybe you want to comment on this

Paul Ginsburg: Sure.

Sheryl Skolnick: is the specialty pharma.

Paul Ginsburg: Yes.

Sheryl Skolnick: The specialty pharma area with the new drug developments. And that’s where (inaudible), is of all the elements of the cost trend with related to drug spend, the specialty pharmaceuticals has been an area of very significant concern. There’s also an issue in the hospital space in the robotics and the robotic surgeries. So between Maco and Davinci and some of the other technologies that are out there, one wonders whether or not the patients may feel like they’re getting a better service in that it feels less invasive, it feels more high tech, the doctors tend to like it very much. For the hospitals that tradeoff of the robotic surgery versus a traditional surgery is not necessarily a good economic tradeoff.

If you’re doing a lot more robotics, you’re getting the volumes but you’re certainly not getting the margins that you use to and that’s a concern from a hospital perspective. There’s also the notion of perhaps monitoring the utilization to make sure that it’s clinically appropriate those services are being delivered. But it’s very hard and it’s embarrassing that I’m not more aware of what new technologies are coming down the pipe. Quite frankly to say, okay, what are hospitals going to have to spend money on, what’s the system going to be asked to pay for, and what’s the return on that going to be? Quite frankly as a for-profit hospital analyst, we’re almost reactive to that. The last time we were proactive was the drug eluting stents and that was 10 years ago.

Lisa Goldstein: I think another when you mentioned robotics, the proton beam which is a big robotic are basically that shoots nuclear medicine. It magically, unbelievably skips over the good tissue and goes right for the bad tissue where the tumor is. There’s probably 10 centers in the country and it seems like some of the big not-for-profit systems are now lining up to get their own proton beam gantry to their system. The costs are very, very high, very expensive technology, and there was just an article in Modern Healthcare the jury’s still out as to whether or not the treatment particularly for prostate cancer, is any better than linear accelerator kind of, typical nuclear technology radiation to treat these.

Scott Fidel: I would just add, I think you might actually one success story would be around from the the cost side would be around radiology and diagnostic imaging. You know, as we looked back a couple of years ago, the highest rate of trends that we were seeing were especially pharmacy, but also around radiology and diagnostic imaging and we saw 15 to 20 percent annual increases in that subset. And then you look over the last 24 months and I think a combination of some policy initiatives that came out of D.C., deployment of classic managed care techniques like developing specialized radiology networks to try to draw volume to reduce costs, and then I think a big wallop of the economy and some of the cost shifting elements that were put on consumers around radiology and diagnostic imaging systems brought those trends down to where now we’re seeing those trends much more in the mid single digits I think across the market. So a rare success story there in terms of driving down costs of a high cost driver.

Sheryl Skolnick: For the economists in the room, one of the other impacts on the diagnostic imaging, when the Deficit Reduction Act dramatically reduced payments for contiguous body part scans so that some of the some of the machines that once were cash cows became cash drains. And actually, we’ve seen very significant exit of capacity, we’ve seen bankruptcy of companies in that space, and as a result of that I think the phenomenon if you build it they will come. Well, there’s a lot fewer of them that are around than there used to be and most of them that were around were acquired by hospitals.

So now you have the remnant of that is the utilization of the scanning equipment in the hospital at much higher cost than in the community setting. So there we go again. But there is absolutely a business school case study to be done there on a combination of both health plan and Medicare payment policy coming together to really change the competitive dynamics of the business.

Robert Berenson: Yes, I’m glad you mentioned that because there has been sort of a spatial understanding that if Medicare reduces payment rates say in the Medicare fee schedule, docs just react by increasing the volume and partially offsetting the savings. Well, that’s not how it worked for the advanced imaging. If the easy profits are taken away, then you don’t go out and purchase the machine. And so I think in fact, the more sophisticated, the analyses that are beginning to come in suggest that there’s no clear story about what happens when Medicare changes it’s payment rates. Sometimes you stimulate increased volumes, sometimes you decrease volume. You need to be more nuanced about it. But I agree, it would be a great business school case.

Paul Ginsburg: Great. I’d like to ask some questions about insurance exchanges under the Affordable Care Act. And the first one is, do you expect Blue Cross Blue Shield plans and major national insurers to participate in the exchanges?

Scott Fidel: I’ll start that one. I’m sure Carl has comments on that as well. Yes, I think that we are going to see pretty active participation in the exchanges. For the Blue Cross Blue Shield plans this is an absolute requirement. When you look at where the Blues conduct most of their business, it is in the commercial market and a lot of their surplus and membership has traditionally been driven by the individual in small group market. In terms of profitability, you’re less so on the individual market in the last few years. So the Blues really have no choice. They have to participate in the exchanges. I was struck though, just want to pass an anecdote I mentioned this, I think a little bit earlier.

But I was recently talking with the senior executive at one of the nonprofit Blues plans who runs up their product in marketing development and he really instilled in me how much the pressure in terms of the sheer magnitude of the ACA is putting on the executive resources and infrastructure of some of these smaller Blues plans who by nature have traditionally been more cautious organizations. These have not been market leaders, so as they’re looking at putting together their executive teams to deal with things like the Medicaid expansion and the exchanges, he would say how they would convene one meeting with this group of executives and then they would start up the next meeting and it was the same group of executives.

So there is a disconnect there between and then when you talk to let’s say, a United Health group with their vast resources, capabilities across every single part of the continuum, and you see more of an offensive minded nature, because frankly, they can silo out each of these different areas of regulation and to different teams that are highly specialized in it. So again, national plans will be there and then these Blues, they have no choice. They’ll be there.

Carl McDonald: And I would say, yes with the caveat which is so the answer’s yes in the sense that broadly speaking, the health insurance industry hasn’t grown in a decade. It’s the same size now, maybe a little bit smaller than it was. This is the first opportunity that the industry has with real membership growth in a long time. So the idea that some of these big companies can say, we’re just not going to participate in the exchange at all, that’s a hard thing to walk away from, particularly if it actually turns out that the exchanges work and you can make some money on it and then you’ve just avoided one of the more significant growth opportunities for the industry.

The only hesitation is that 2014 doesn’t have to be a land grab in the sense that whoever wins in 2014 isn’t necessarily the winner in 2016. There’s virtually no switching costs from a consumer perspective, so if I go on Orbitz to fly to D.C. and I fly Delta, the next time I need to fly to D.C, am I going to fly Delta? Well, maybe. But if United has a flight that’s $200 cheaper, then I’m flying United. And so that’s the potential risk with the exchange is that you can be a big winner in 2014 and then if you price differently the next year, all that membership could go away. So the implication of that is that from a health plan perspective, I get the sense they don’t feel the need to go out and win every last member necessarily in 2014.

They want to be on the exchanges, they want to get some membership, but they don’t necessarily want to price in a way that’s going to mean that they’re going to lose a tremendous amount of money because there’s no guarantee you can make that up in the second or third years.

Paul Ginsburg: Good. And what about plans that have not been major players in the individual market and presuming the exchange is going to be mostly individuals, is there lack of individual experience stopping them or are they very eager to get into that?

Carl McDonald: Yes, generally the answer is, yes, they’re eager to get into it. So I guess Cigna would be one example of a company that has historically not played in the individual market to any significant degree. They’ve entered the market the last couple of years, but still don’t have a very large presence. But they certainly have a full exchange initiative to try to become bigger in that market. So I think some of the plans are more cognizant than others of the challenges and limitations of not having that individual experience and trying to get into the market, but (inaudible) I think the answer is, yes, their lack of experience isn’t stopping anybody.

Scott Fidel: I would just add too, I think that we will see some interesting cast of characters emerge to participate in the exchanges. Clearly, a lot of it is going to come down to a further analysis of the three R’s, the risk adjustment, reinsurance, and risk corridors programs and whether that provides the same type of underwriting margin protections that we’ve seen risk adjustment in Medicare Advantage provide. Just one anecdote recently was at a presentation by Optum Health, which is the services and technology group of United Health Group and they talked about how they’re currently working with a national multiline insurer who has an interest in getting into the health insurance business via the exchanges.

I also think one element that is still not even sort of formed yet is that I think there will be a capital cycle around the exchanges, again, if it’s proven to be a viable business where you will have new entrants that will be financed likely by experienced managed care executives, not the financing, but the operation who don’t have legacy baggage to protect and they can develop their business model based on the profitability and return profiles of the exchanges which to all accounts is expected to be a lower profit margin business than the commercial business currently. So the comparisons there would be to the Medicaid managed care market into the Medicare managed care market where in both of those areas we’ve seen the emergence of pure plays who have become an important component of the marketplace.

Paul Ginsburg: Thank you.

Sheryl Skolnick: So one of the things, for example, to your point on Cigna not being a completely dedicated (inaudible) sometimes it’s a disadvantage and occasionally it maybe makes you think a little bit differently about it, I’ll put it in very simple terms. When I look at the exchanges that currently take place, you have Massachusetts and you have Medicare Advantage. So if you just bought HealthSpring and your Cigna, if you’re smart you’re going to leverage the experience with Medicare Advantage even though you’re not in the individual business. It may not be perfect experience, but at least it’s some experience.

And the way I kind of look at this is that the health plans are being given 30 million lives over time on a significantly tarnished but nevertheless still silver platter if they play it right. And part of the playing it right I think is almost a more active strategy of you really don’t want to be the dominant plan in any market in the first year because nobody really knows what the risk profile of these potential patients are. So let somebody else grab that land and make that mistake and under price the cost trend and then sit back, learn from those mistakes, and be dominant in the out years. That’s a very different approach than with part D which is also another exchange-based product.

So for example, what United did in part D under Bill McGuire was make a very aggressive stand that they were going to be big in this major expansion of benefit. It was seen as one of the largest expansion of their businesses that they’d ever seen. They went out, they bought PacifiCare, they bought a number of other plans in order to get ready for it, and then they aggressively went after that business. Now it worked okay. It doesn’t always work okay. (Inaudible) had some hiccups; others have had hiccups including United from here and there. But I think this approach to this experiment is going to be under Steve Hemsley for example, is going to be a lot more conservative and a lot more measured.

And I wouldn’t be a bit surprised to see the whole continuum of reactions between the plans that are sort of desperate to keep market share versus the plans that are desperate to have a new business to get into (inaudible) those companies who have had the experience who say, you know, we’ll be there but our plan is to be sustainably there, not just there the first year and then figure out that it’s a disaster and not go back in.

Paul Ginsburg: Thank you. What about Medicaid managed care plans kind of moving up markets into the exchanges? Do you expect to see much of that?

Scott Fidel: I’ll start with that one. On the Medicaid managed care, yes. There is particularly with thinking about these Medicaid pure plays, they’re very much an intention to participate in the exchanges and I think that raises an interesting point that the exchanges themselves I don’t think really are going to be one composite marketplace. Just like the commercial marketplace, it’s going to end up being segmented into different parts where you’d have a certain part of the exchange that would be more conducive to some of the traditional commercial carriers. Clearly, the lower income spectrum of the exchange is where there’s more churn which would entail essentially the subsidized component of the exchanges is where the Medicaid companies will play.

And one interesting dynamic is that when you think about Medicaid and the fact that there’s more churn in the Medicaid market in terms of people being eligible for Medicaid and then having higher income levels. So traditionally every month, around three to five percent of a Medicaid managed care company’s enrollment churns back out of Medicaid. So there’s a lot of movement there so the Medicaid managed care companies hoped that they’d be able to capture or retain that membership as they moved up into the exchanges with subsidies. But for the Medicaid MCO’s there’s a lot of risks and new business model adjustments that will need to occur.

For example, there’s never really been marketing and distribution to any meaningful extent in Medicaid managed care and there will be in the exchanges. There also really aren’t things like pricing and underwriting to a large degree in Medicaid managed care nearly to the extent there will be in the exchanges. So these are not things that traditionally are built overnight.

Carl McDonald: And obviously I agree Medicaid plans want to be on the exchanges, but right now they’re a little bit delusional in the sense that they think they’re going to pay Medicaid rates to hospitals on the exchanges and hospitals have about zero interest in that. So there’s going to need to be some type of renegotiation of those contracts. Medicaid plans will have to broaden their networks relative to where they operate today. You also have the issue of the way the exchange rules are written right now, you can’t just offer a bronze plan on the exchange, which is what the Medicaid companies would really be targeting.

You also have to offer some higher tier products. So now Medicaid plans could potentially be in the business of enrolling more middle class customers which is not necessarily what they would like to do. And then from a system level, I think there’s a great desire on the part of regulators to not have a situation where you have a woman who’s on an exchange product in her second trimester of pregnancy and suddenly she loses her job and now she’s on to a Medicaid plan, having to drop the provider that she’s been seeing for the first seven months of pregnancy, going to a Medicaid plan, and pick up a new provider. That’s the ideal how you actually make that work in practice is extremely complex.

And so I think that’s why there’s the desire to have some Medicaid plans that go across the spectrum to try ease those transitions. But really, really difficult to make that work out administratively and from assistance perspective.

Paul Ginsburg: I have a follow up question and as I’ve been listening to your responses, I think I know the answer. What about not-for-profit Medicaid managed care plans, particularly those formed by safety net providers? It sounds like this can be particularly difficult for them?

Scott Fidel: I would think so. There’s again, sort of the speed to market issue in responsiveness level, inertia essentially that I mentioned with some of the nonprofit Blues who are much more familiar with this product segment and then there’s resources in terms of infrastructure and capital, and capital is something we should talk about several times today. All of these areas are something that nonprofit Medicaid managed care organizations lack. But frankly when you look at the market share of nonprofit Medicaid managed care organizations, it’s relatively small. So they’re just not a major player in the landscape either.

Carl McDonald: Yes, one of the things to think about too, is the health insurance industry tax. Right now if you’re 80 percent of your revenue comes from Medicare or Medicaid; you’re exempt from that industry tax.

Paul Ginsburg: Oh.

Carl McDonald: So if you go onto the commercial business and that becomes a substantial piece, then suddenly now you’re paying the industry tax across your entire book of business. So that would be a limited factor in terms of how big they could potentially grow.

Paul Ginsburg: Oh, yes. That’s huge.

Scott Fidel: And that’s just for the nonprofits in Medicare and Medicaid.

Paul Ginsburg: I see. Yes. You know, one of you had mentioned something about pricing. And what kind of rates do you envision being negotiated between health plans and hospitals or physicians for products on the exchange? I mean, will they have a separate negotiation and have a different payment schedule for their exchange product versus their commercial products?

Carl McDonald: Yes, so it is going to be a separate contract and I think ultimately that rate is going to fall between commercial and Medicare, probably closer to commercial than Medicare. I’ve heard from a couple of Blue Cross plans that right now what they’re doing is sending out contracts to providers that say, we’re going to pay you Medicare rates on the exchange really just to see if anybody will sign it. And they actually have gotten a couple of responses, but not many. And then basically try to negotiate off of that Medicare rate, but they make that the starting point of the negotiation. But I think ultimately it probably settles closer to commercial.

Sheryl Skolnick: So you’re mouth to God’s ears and if he’s right then all the hospital stocks are going to benefit from that whether they be for profits on the public exchanges or the fund holders are going to be very happy on the not for profit side. The hospital community as I mentioned earlier, is of the opinion and many of them have amazingly enough, contracts that are signed that are through the end of 2014. It’s pretty stunning the health plans would agree to pay these kinds of rates on all business done with the hospitals through 2014, but that’s the hospital’s position that we have a contract, the contract’s in good standing, we’re going to continue to perform under the contract, we expect to be paid under its terms until some negotiation takes place.

For most of the for-profit companies, they’re playing it pretty close to the vest. They don’t really need to negotiate their contracts on Wall Street. They need to negotiate their contracts in private. So I think that’s why many of them are saying, we have contracts. As far as we’re concerned, we’re going to perform under those contracts and if there’s a negotiation, there’ll be a negotiation. But at this point we don’t see any need for it. The Delta, the difference between the commercial managed care rate for a certain diagnosis and a Medicare managed care rate or a Medicare fee-for-service rate could be 30 percent for some of these hospital companies, maybe even more.

If this were to be a closer to commercial based insurance product, which I find very hard to believe, but if you’re right and it would be great if you are, if that were to be the case then all of the concerns about the future of hospital companies would be greatly alleviated.

Scott Fidel: I would just add that I’ve heard the same feedback, so I agree with what Carl’s saying. But I do struggle to understand how an exchange product will be affordable at close to commercial rates. When you think about benefit design and what’s required under essential health benefits, the average benefit structure in the exchanges is going to be richer than what we have in the existing individual and small group market. An average right now while DHB’s require under 60 percent actuarial value, the average in the market right now is closer to 50 percent.

So benefits are going to have to move up. And then I think about marketing and distribution costs which I thought might be an area where you can really see lower costs on the exchanges, brokers are not going to have nearly the type of leverage in the exchanges that they would have outside of the exchanges, but then CMS comes along and announces that there’s going to be a 3.5 percent user fee in the exchanges, the federal exchanges, and that’s about how much I thought maybe you would get on reductions and marketing and distribution.

So that’s now off the table. So in order to then factor in obviously community rating and guaranteed issue, to me would have to come on the medical costs, it would have to come on the unit costs, the negotiated rates with the providers, and if it’s close to commercial I just don’t see how the exchange products are going to be affordable.

Lisa Goldstein: And from the not-fo- profit side, what we are hearing is that the hospitals are hopeful that the exchanges will pay them at Medicaid rates. They’re hoping for something equivalent to Medicaid rates which is usually well below Medicare rates which is usually well below commercial rates, hence the cost shifting that’s happened. So it would be great if it were approaching commercial, but we are not expecting that.

Paul Ginsburg: Yeah, I mean certainly there are some concrete reasons to expect rates to be much lower than commercial. One is that your marketplace of insurance buyers have fixed contributions. You know, they’re low and moderate income; people presumably very sensitive to premiums. This is where I think we may very well see a lot more narrow-network products with this population. And the other thing is that it’s going to be much more competitive and well I guess it’s the same way of saying a much more competitive insurance markets.

Sheryl Skolnick: Yes, let’s not forget that for the subsidized, especially significantly subsidized individuals, they become very price indifferent to the premium so up to the amount of subsidy. So that’s one of the things that’s going to make it more affordable for them, but I think the for profits and the not for profits need to have a conversation about where they start this negotiation because if the not for profits seize on Medicare as a floor, that’s going to create a whole problem in the industry. So the old antitrust economist in me says, no, no, no, they’re not allowed to collude but the hospital analyst on Wall Street says, yeah, yeah, yeah, go ahead guys. You better get your act and your messaging together.

Paul Ginsburg: Well I hope one of the outcomes of this meeting won’t be to encourage this negotiation.

Scott Fidel: Well I just wanted to add one more thing on the exchanges and costs. And I think one important element that we should all be thinking about too, is that clearly the three R’s, again I’ve mentioned this a few times is a critical element of the structure that would make these exchanges viable. One thing to remember though about the three R’s for the 2014 to 2016 period, they’re financed by an assessment on health insurance plans both fully insured and self funded. The vast majority of that that financing thus comes from the group health insurance market including self funded employers.

And the initial installment of this is around $12 billion in 2014, $10 billion goes into the market, $2 billion goes to treasury. So there is again, a sort of cross subsidization of the exchanges that’s occurring initially where the group market is subsidizing these exchanges and there is a question of whether beyond 2016 that stays in place or once again, if this is just another classic cost shifting where that group market which has already taken cost shifting from Medicare and Medicaid is now also going to be responsible for subsidizing the exchanges as well.

Paul Ginsburg: The CEO of Aetna recently predicted very large increases in rates for individuals and small groups starting in 2014 when the community rating, essential benefits, and other aspects of the Affordable Care Act are implemented. What are your predictions as to what type of rate shock people will see?

Carl McDonald: I would say, I think he’s right. I mean, I think you’re looking at for the individual market somewhere between 20 and 30 percent average individual rate increases in 2014. Again, that assumes that you’re paying something in the vicinity of commercial. In a way I would think about that is assuming your base individual pricing today goes up 5 percent a year, when you layer in the 3.5 percent exchange fee that Scott referenced, the health insurance industry tax which is 2.5 percent, the reinsurance charge which is 2 percent, you put all that together.

If I’m adding it up right that’s about 13 percent and then moving from as Scott referenced, 50 percent actuarial value today up to 60 percent could push that into the mid-20s. So that’s sort of the average. And then as you think about what’s the range of outcomes there, you’re going to have situations where some people are faced with 100 percent plus rate increases in ’14, the young, healthy population, and then you’re going to have some people that actually see rate decreases which would be people that are 64 and sick. And that has everything to do with the change in the rating bands. So in 2014 the most you can charge your oldest, sickest person is 3 times what you can charge your youngest, healthiest.

A lot of markets today, that number is six to one or eight to one. And so the practical implication of moving to three to one is that you’ve got to raise your prices on the young, healthy people very significantly so you can charge your oldest, sickest people enough. And so I think the result of that is that over the course of ’13 there’s going to be a long discussion among regulators about, how do we prevent this from happening? And yeah, if it turns out that hospitals are paid at Medicaid rates then it’s not a big issue. Although I would say that we’ve spent the first half of this meeting talking about how much leverage providers have, how many must-have providers there are.

So I don’t know that Medicaid is the right answer. But in any event, if it does turn out that we are seeing rates up 20, 30 percent there’s going to be a lot of discussion about how do we mitigate that? CMS has suggested one solution, which is keep the high risk pools intact in 2014. So all of the people that are in the state high risk pools today, don’t allow them into exchanges in 2014. If that happens, plans don’t have to price for it. I think another thing that’s going to get a lot of consideration is, do we have to go to three to one rating bands in 2014 or can we phase it in? Five to one in 2014 and three to one by 2017 or whatever the right year is.

Scott Fidel: I would just add too, and I feel bad for the Aetna CEO. I know there was actually he got a lot of press on that comment, it was a response to a question that I asked him at the Investor Day on that. But the going to Carl’s point and I think from a policy perspective this is where the age ratings bands, I think we really see the intersection of risk with the weak individual mandate panel (inaudible) because it’s clearly I think the healthier individuals that would be more interested and sort of tuning in, turning out, and dropping out and paying the penalty and as we think about just the cost of the penalty which starts at as low as $95 in 2014, if these individuals because of the age ratings bands are going to see a 100 to 200 percent increase in their premiums.

One month’s premium increase for them will be more than what the penalty would cost for the entire year. I see the age ratings band regulation while I think the motives are clearly to try to bring down the cost for the sicker individuals, structurally is one of the most challenging of the ACA.

Paul Ginsburg: Yes. Bob, how do you think the policy makers will respond to this either next year in anticipation or afterwards if it happens?

Robert Berenson: Yes. No, I think I want to agree with all the comments. I think in particular the possibility that states that are sort of reluctant to even go in this direction and they’re going to turn over the function to the feds or in some shared relationship are possibly not going to be actively enrolling, marketing the opportunity for the subsidized relatively healthy population to get in. The people who we know will get in are those with high health care needs. This is a very good deal for a 64 year old with health care problems.

I think the risk selection issues are huge here in year one and year two as this goes, so the idea of maintaining the high risk pools, I think what the states I guess what I’m saying is that the states that sort of don’t want to do this and don’t want to actively implement the ACA are probably the states that are going to suffer the worst from the rate shock and need to sort of understand that and try to really be actively bringing in that other the relatively healthy subsidized population. I also agree, the penalty is pretty weak and a lot of people won’t come in. So those who should come in are those who will be subsidized who would be able to deal with the high risk population to sort of average that out. So I think this is a huge potential problem in year one.

Paul Ginsburg: And you know, when you think of the range of policy tools, if you assume that new federal legislation is not going to be possible the question is between state regulators and the federal regulations put out by HHS, is this going to be how much of these responses are capable within our policy infrastructure now versus off the table because we don’t seem to have any prospects of going back and refining the Affordable Care Act?

Scott Fidel: Well I would just start with, I think where it would need to come from this would need to be a CMS action. To begin with, in year one the exchanges are turning out to be largely a federal gig anyway in terms of where we’re heading. So it’s going to be a book of business managed essentially by CMS. And in terms of sort of, policy, latitude, while I think specifically changing the age ratings bands would be something where I think it would be more comfortable to do through a legislation. We have seen CMS take some pretty wide latitude around interpreting a number of ACA provisions that already went into effect.

For example, the star bonus payment demonstration in Medicare where CMS did significantly adjust the structure of that program to include more robust payments in the front years for that. So I would think that there might be approaches to try to tinker with these things given what they’ve done in the past. But obviously, this is something that it’s in the law and I think both sides of the aisle should be able to see the challenge that this could present to the market.

Paul Ginsburg: Thanks. What about small employers? Think of two groups, both small employers already offering coverage or small employers who are going to begin offering coverage. Are they likely to use the exchange to offer coverage to their employees or are they likely to use the traditional ways that small group coverage is obtained?

Carl McDonald: Yes, I mean I would say initially I think small groups are very likely to continue doing things the way they’ve been doing them just from a timeline perspective given the fact that we’re just getting regulations out now; no one’s exactly sure how exchanges are going to operate. There’s still a major question about, are exchanges even going to start on January 1st of ’14? It’s hard to make a decision from a small employer’s perspective to say we’re just going to buy through the exchange or drop coverage or do something ahead of knowing that everything actually is going to start on ‘14. So at least in the early year, I think it’s going to be a status quo from a small group perspective.

Scott Fidel: Yes, I would completely agree with Carl there. I think that the notion of dumping or a crowd out into the exchanges is very much more a topic for 2015 and 2016 from a timing perspective which I think would give policymakers a very short window here to try to address some of these risks. This is something we’ve done a lot of survey work on. We do do annual health benefits survey of employers and what we found in our most recent survey that was published in December of 2011 was around 11 percent of employers told us that they were actively considering the exchanges and that really did not differentiate between small group or large group.

Recent industry feedback that we’ve received from some of the companies is that they think that that 2014 sort of crowd out from the small group market could be in the 5 to 10 percent range; so some but not a waterfall. I think though from a timing perspective again, 2015 and 2016, you could see this accelerate particularly if the rate shock does end up being a reality and then these small employers see these very significant increases. That will be the incentive for them to look more opportunistically at the exchanges.

Paul Ginsburg: I mean, since rates are supposed to be the same on and off the exchange, why would the rate shock motivate them to go to the exchanges?

Scott Fidel: Well I think more along the lines of small employers dropping coverage

Paul Ginsburg: Oh, okay.

Scott Fidel: and then paying the employer penalty. So just getting out

Paul Ginsburg: Sure.

Scott Fidel: of the health insurance (inaudible).

Paul Ginsburg: I see what you mean. So that’s what you mean when you talk about the crowd outs.

Scott Fidel: Right, that’s what I mean by the dumping as well.

Paul Ginsburg: Okay, and the dumping. Yes. To what extent will small or midsize employers convert to self insurance to avoid the community rating, the excised taxes?

Sheryl Skolnick: Can I actually try that?

Paul Ginsburg: Sure.

Sheryl Skolnick: One of the advantages of being a health care analyst at a small group business with 300 employees and also being the co head of research and on the management committee is that I get to sit on the benefits committee and get to help in the negotiations and do my own firsthand due diligence on our health insurance. And it’s very interesting. The decision and maybe because we are broker dealer and maybe because it’s a white collar business as opposed to a blue collar business. But the decision to first of all, even look at the exchanges as an option has pretty much been taken off the table until they get their act together; absolutely taken off the table.

And then the second thing is that the health plans themselves are doing a very good job of and in particular the one we ultimately chose which was not United for this coming year, we chose them because they’re particularly good at or saying that they will be good about giving us the data, the information, and the tools to manage our own benefits and claims expense so that we can look to become self insured perhaps in 2014 or ’15. Get a couple of years of sort of pretend management of the claims under our belt. There’s a middle step that’s being offered which is basically that we prefund the expense. Rather than paying a premium, we are actually prefunding our benefit expense.

It’s a very bizarre little product. We ultimately decided not to do it this year, but we may do it next year as we get more comfortable with our level of claims. So there are some very interesting little twists on the self-insured product for the smaller group out there that may in fact encourage us ultimately to go maybe not even 2014, but ’15 or ’16 to go self insured.

Paul Ginsburg: Thank you. And let me talk about Medicaid managed care. And the question is are there new directions? How is the product evolving? And particularly, how do the provider payment models fit within Medicaid managed care?

Carl McDonald: Yes, I mean I would say overall I haven’t seen a really meaningful evolution in the benefit design. I mean, there certainly have been certain states that have tried different mechanisms but no real major shift there. I mean, it’s still I think the focus on the states has been we can see a path to more immediate savings by just pushing more populations into managed care and once we get to that point, maybe then we think about changing the delivery system to a significant degree.

But I think the thought in a lot of states is it’s hard to do both at the same time and if you’re moving (inaudible) disabled into managed care and then you want to move the duals into managed care and go to statewide even in rural areas for your traditional Medicaid population, to do all of that and go to an ACO or some other type of a delivery system, it’s just a lot happening at one time. So I think the focus at this point is still on getting just more people into the managed care system.

Scott Fidel: Yes, I would just add that I think the real story in Medicaid managed care in terms of evolution is more around how the business mix shift is changing from traditionally Medicaid managed care being focused on the TANF [Temporay Assistance to Needy Families] market into being now much more about moving into the higher cost driving areas with obviously age, blind, and disabled having been the big, big theme recently and then the duals being an even bigger theme over the next few years. And this is where I think conceptually this is where managed care companies can add a lot of value and a lot of the classic managed care techniques can be well deployed into these marketplaces.

At the same time, if the pricing is not sufficient it can have a devastating effect on managed care companies solvency and bottom lines. We’ve already seen just in the last year some major rollouts of Medicaid managed care into age, blind, and disabled populations that have not gone well. Hidalgo County in Texas is I think the best example of that. This is a region that traditionally has been from a provider setting, very hostile to managed care, and Texas initially assumed dramatic savings from this shift of around 15 to 20 percent in year one and the managed care companies just got absolutely bludgeoned down there initially in terms of what’s happened with the loses. So again, as we think about duals rolling out across the country all at the same time, we see even right now some of these sort of beta tests can consume a lot of resources just in one specific region of one market.

Robert Berenson: The only thing I’d add on what Medicaid plans are doing on the delivery site is the activity around medical homes which seems at least half or more of the states are actively pursuing whether they’re called health care homes or patient-centered medical homes or advanced primary care. There’s a lot of activity, they’re participating in multipayer demos, whether it’s a game changer or not we don’t know. But part of it I think one of the reasons is states have been early to that one more so, in fact as early as the commercial payers and Medicare’s come along a little later, is that it was basically a pediatric innovation 30 years ago. And states with their experience with moms and kids have known about medical homes and now they’re trying to sort of build on that experience. So I think that is the one area in the delivery system that Medicaid managed care is part of the vanguard.

Paul Ginsburg: Thank you. This would be a good time to talk about the demonstrations of managed care for dual eligibles. And the first question that comes to my mind is that how prepared are managed care plans to meet these challenges of taking responsibility for and I’m talking about the demonstration that include long term care.

Carl McDonald: Yes, I would say generally not great. This is an area that they historically haven’t managed, particularly the long term care and support services. And I think all of the plans know what they should do, which is you sign up a dual and within the first couple of months you have a nurse go into their home and spend a couple of hours, tell me what all your issues are, tell me what drugs you take, I’m going to come up with a care coordination plan for you, you’re going to see your primary care doctor every other Tuesday, I’m going to have a taxi waiting outside to pick you up and bring you home after.

So they get the general idea of what they’re supposed to do, but putting that into practice none of the plans have the capacity to be able to do that. So United has some business that they just bought earlier this year that does that, but it’s very, very small. And so it’s difficult to scale that particularly when a state says to you, okay, on January 1st you’re going to pick up 200,000 duals. You know, it could take them years to be able to get through that entire population.

Scott Fidel: Yes, I would just add this might be one of those areas where the eyes might be bigger than the stomach in terms of absorbing all of these duals. And managing these duals is where for an MCO, it really requires a lot of elbow grease. You’re talking about, we’ve already referenced it a few times, going into somebody’s home, doing a rigorous evaluation the individuals need, and then going and doing things like taking their garage and converting it into an at home nursing station, and hiring contractors to do that and going out and contracting with the nurse. It’s just as Carl just said, these aren’t necessarily things that are widely scalable.

But at the same time, the revenue figures associated with dual eligibles are so enormous that for managed care companies it’s hard to ignore that. And this is something where I think whereas with the exchanges, it doesn’t really seem like there’s a huge view that this has to be this land grab in 2014. I think a lot of these MCO’s would be afraid of missing the land grab around the duals. So again, this is something where execution risk is going to be a very significant element to watch in 2014 and 2015.

Robert Berenson: Yes, I agree with those concerns. What makes the discussion a little difficult is that there are some Medicaid managed care plans that are also special needs plans and have experience with the duals or with institutionalized Medicare, Medicaid patients. And in some places I understand, like L.A. County as I understand it, the primary contract the state will have will be with a Medicaid managed care plan which will then subcontract to a SNF. Now what makes the whole thing even more sort of challenging is that there are my understanding is that across the country there are about a hundred or 120,000 duals who are in Medicaid managed care plans.

There’s 1.2 million duals SNFs and so that gives at least a little more confidence that there’s some experience and expertise out there to do what we all recognize as an unmet need around care coordination across Medicaid and Medicare. Having said all of that however, the data doesn’t suggest that there’s cost savings, at least so far by the SNFs. They cost as much or even a little more than in inefficient traditional Medicare. So I guess I’d raise the issue of whether the sort of what’s being called a demo is actually too ambitious. In many cases it looks more like a waiver program for converting most of the duals in a state into a new arrangement without really the proof of concept having been established. So I’m concerned about the size and scope of this demo, which seems more than just a demo.

Scott Fidel: I would just add too, I think that this is one area where CMS I think is going to help stabilize to some level the potential real volatility risks that could have been experienced in other scenarios in terms of not starting out with dramatically ambitious savings targets. And I think for a lot of the states they had viewed this conversion as really a real sort of payday in terms of fixing their budget issues for year one. Again, the analogy I gave around taxes with Hidalgo County and so the states wanted to use these very ambitious savings targets to help fill their budget gaps and CMS has pushed back on that and wants more sort of low, single digit type savings assumptions in year one. But as was already mentioned by Bob, the question is how much incremental savings is there going to be in year one and two. So it’s good not to assume that in the pricing there’s going to be a very significant amount initially.

Sheryl Skolnick: And you may in one or two years for that population may not be enough to actually see the savings. The tails are going to be fairly long because if you’re going to increase the number of social services, etcetera at the beginning the expenditure is actually going to be over a broader array of services and therefore likely to be higher potentially. Where you’re going to get the savings is keeping them healthier and out of a high cost setting longer. So if you’re only looking at it over one or two years, you may wrongly conclude that it doesn’t save the system money.

Robert Berenson: I know part of the problem that I have with the design of the payment model is that Medicare and the state takes their savings off the top essentially. I mean, not lots but I understand in California it’s about a billion dollars and the budget deficit is being sort of booked based on sort of the assumption of what the state’s going to be able to take off the top which puts the pressure on the plan. And so one of my concerns is that the plans then have to pay low payment rates as the way they stay within their integrated capitation is by having narrow networks and getting whoever will take the Medicaid like rates rather than Medicare like rates to play.

And so that is one of my concerns. These are I agree with the focus on the need for care coordination, but some of the subpopulations of duals have extremely specific health care needs that requires unique expertise. About 30 percent with serious mental illness, schizophrenia, bipolar disease, physical disabilities, and it’s not all just about care coordination. There needs to be some real health professional expertise and so I’m a little concerned that we might be moving toward narrow networks that are doing great care coordination but may not have the requisite skills that are needed.

I guess all I’m saying is it needs some time to work through all of this and I’m concerned about the ambition that underlies the way this has been constructed. I see all the invitations to the meetings, the $300 billion opportunity is the way this is being promoted and I think we should go a little slower.

Paul Ginsburg: Good. I’ve got a bunch of questions about integration between health insurers and providers. And actually, at about five or seven minutes we’ll stop for more questions from the audience. I’ve got more from the first half, but if you have questions from the content we covered, please fill out your cards and pass them down to the right. I see many different forms of integration between health insurers and providers. One is insurer ownership of hospitals or physician practices or physician organizations.

Another is insurers providing support to providers in IT actuarial services or other skills that they have. And then there’s a joint ventures health plan between a hospital and insurer. I just wanted to ask people on the panel whether in any of these forms you see having substantial promise and what are we going to be seeing more of over the next few years?

Lisa Goldstein: Yes, I think there’s a very interesting experiment happening potentially in Pittsburgh with the Blue Cross plan, Highmark. They have made offers to buy a couple of community hospitals, but of course if you have been reading the situation, the jewel of their hospital network system that they’re forming is expected to be West Penn Allegheny Health System which we believe is on the verge of bankruptcy for the second time; very, very unusual. The first bankruptcy was the old AHERF almost 15 years ago to the day. So Highmark has embarked upon a plan.

It’s a very unique market, very competitive market to set up its own hospital network including physicians along the way. So this’ll be an incubator case to see if it happens and that’s a big if right now, how it’s going to work. I don’t see a lot of that model necessarily being replicated by other either not for profit or for profit insurers going out to buy hospitals unless Scott or Carl feel differently on that front.

Carl McDonald: Yes, I mean I would say generally I don’t think that you’re going to see a lot of managed care companies buying hospitals. I think that’s just a tough, tough model to work. I mean, I think the situation in Pittsburgh is sort of unique in the sense that Highmark, the other big provider there, UPMC basically said, we’re not going to contract with you anymore. West Penn’s going bankrupt, so if one won’t contract with you and the other’s going out of business, it’s kind of a problem. So I think that’s sort of spurring in that unique market, but buy in large, I don’t anticipate we’re going to see a lot of health insurers very interested in getting into the hospital business.

Scott Fidel: Yes, and that’s where I think the feedback from the plans has been everything but. That’s crossing the Rubicon that we haven’t yet done. And again, just sort of following this example in Western Pennsylvania which primarily involves single market nonprofit operators where you would think there would be the best potential for this type of combination it’s been from every element, the employers, the political structure, the providers, the health plans, there have been challenges toward getting this partnership initiated. So I think that’s something that we’re still a long ways away from.

Paul Ginsburg: Yes.

Sheryl Skolnick: So if you think about it, I’ll ask the question this way. You’ve got evidence pointed to you very frequently that vertically integrated, full service health organizations like Kaiser Permanente are successful in some markets. So what is it that the commercial managed care companies really don’t like about my poor hospitals? Why do they hate them so much? That’s question number one. I know the answer. Because they spend a lot of money and add no value. That’s the answer.

The second question I’ll ask is, how are we ever going to solve the problem that has led to the severe breakdown of the healthcare payment and delivery system if we don’t change the conversation between health plans and hospitals? There is no more room left for this war. There is no more room left for the incremental margin at every stage of the game at the historic levels. Not to say there’s no room for incremental margin, but not at the historic levels. So it’s kind of like an equity analyst on Wall Street. Wall Street’s been in a depression for 10 years. It takes five or six years of being beaten over the head on bonus day to figure out that you’re not worth as much as you used to be. Okay? You’re just not. And that realization has to come to both the health plan and the hospital. We are at a very, very serious crossroads. There needs to be a different conversation. There needs to be innovation in that relationship. There needs to be something that is more a kin to a partnership than a competition or a war. And these are easy things to say and extraordinarily difficult things to accomplish and I recognize that.

But one of the things that needs to happen as part of that conversation is that the leadership of both organizations has to realize that the fundamental broken part of the healthcare payment and delivery system won’t get fixed and this great experiment won’t be successful unless we change the nature of the relationship between the hospital and the health plan and the physician. That triangle has to change. And so when I hear United and I hear the other health plan saying everything up to and excluding the hospital, I cringe at that because I think by not being willing to think in an innovative way that how you can make that work instead of sitting there and assuming that it can never work, means that we’re not going to get to the end goal that we may be able to approach.

Meaning fixing what’s broken, making the system a continuous not single payer, but a continuous, seamless, coordinated delivery of high quality care at reasonable prices for everyone. So that’s my little sermon, but I see us at this juncture right now. If the health plans and the hospitals can’t put aside the competition, we will not succeed.

Paul Ginsburg: Yes, Sheryl, what about hospitals hiring plans to provide services to them? Do you see that as

Sheryl Skolnick: They do it every single day.

Paul Ginsburg: Yes.

Sheryl Skolnick: I mean, if you think about how many hospitals are served by Optum and some of the other health insurance companies subsidiaries, Optum is kind of unusual because of the coding business, the old Ingenix coding business. But they have 4,500 hospital customers, they have a couple of thousand health plan customers. I mean, they’re very agnostic; they’ll take anybody’s money including yours and mine. So yes, there are already relationships like that. Now the hospitals are engaging with managed care plans.

In some cases there’s subsidiaries to help them manage risk, to help them assess risk, to help them understand what the data they have in their clinical systems is telling them about the health status of their populations, and the health plans are the ones who understand how to use that data best, so they’re selling those services. So it’s very, very strange. I mean, the integration’s actually taking place without these folks really acknowledging that that’s what’s happening; the sharing of knowledge and best practices and information.

Sometimes it feels more like the shoving down the throat of one or the other, but it is still sharing. And then the other issue is that there’s really a lack of leadership. The skill sets that led to success in the hospital management world of yesterday and the managed care plan world of yesterday may not be the right skill sets to go forward. We’re seeing one of the worries that I have in the hospital space is a significant number of the most talented executives retiring and resigning. They just don’t have the energy. Even if they have the vision, they know they don’t have the energy to make the changes to the organizations that will need to be made.

Paul Ginsburg: Good. I’ve got a bunch of good questions from the audience. Let me move to them. One is the proposed Medicare savings. In the current budget discussions is in the range of $400 to $600 billion with most of it coming from providers. This is roughly a 5 percent cut over current Medicare baseline. How do providers adapt? Who gets impacted the most?

Lisa Goldstein: Sure. This will not be good for hospitals to state the obvious. On average, not-fo- profit hospitals about 45 percent of their revenues are Medicare, traditional Medicare. So any skimming off the top, 2 percent, 5 percent, pick your percent, they’re going to respond with cost reductions, trying to be more efficient, more centralized, more standardized, some have even threatened to cut back services which we’ve seen before so that would be nothing new. But they have to if they’re going to maintain some type of bottom line performance to pay their debt, reinvest in their plants, put a little bit on the balance sheet, it’s going to come from the cost side, the expenses.

Sheryl Skolnick: So I would like to see them stop threatening and actually do that. Let’s actually see the reduction in capacity. Maybe they might actually be able to persuade some people in this town that they really mean it if they stop crying wolf. And the significant -- I see in the lobbying statement that hospitals will close, hospitals will close, okay, let’s see it actually happen if it’s really going to happen. But having said that, hospitals face a very big issue with occupancy already, they’re not generally located in the place where the patients are, and or there’s too many beds and too many services.

So rationing becomes the watch word. That’s the way you’re going to reduce cost is by eliminating the number of services, reducing the number of beds, rationing access to health care. That’s not necessarily a bad thing in an over bedded, over served market, but it might be in some markets where you have an unintended adverse consequence. However, depending upon what rate they actually get on the exchange and depending upon how much volume they actually secure on the exchange, you have to remember that this is all happening at the same time that there’s this major expansion. Let’s think about what converting from a no pay patient where cash is flowing out the door today, so negative cash flow, real money associated with caring for those patients is replaced by even a Medicaid payment.

The potential power of that on top line goes a long way to offsetting a 5 percent cut. Depending upon the cost structure of the company, there could be significantly greater amounts of money available from the expansion of coverage on the top line and the assumptions you make about so it’s pricing, it’s conversions, it’s coverage, it’s whether or not the state ops in or ops out, there are multiple variables. I ran it for one of the companies. The impact of paying for a service that today is a negative cash flow service making it even cash flow neutral. It’s so powerful it can go a long way to offsetting the significant Medicare cuts that we expect.

Lisa Goldstein: That’s if they’re starting with a decent amount of no pay patients to make that margin to move that

Sheryl Skolnick: That’s correct.

Lisa Goldstein: needle. I recently met with the largest not-for-profit healthcare system in Houston. Houston is still a population growth market, still gas and energy as the biggest part of its economy, doing very well, and the CEO said, we have 7,000 empty beds in Houston; 7,000. It’s incredible the amount of debt or stock or what have you that was issued to build all those towers and beds just sitting empty. So there’s going to have to be some rationalization and we do expect hospitals will close. This will be survival of the fittest 101 across the country.

Robert Berenson: I would just make the point that I was at HCFA, the former CMS, when the BBA cuts hit and that was largely on hospitals and then the Affordable Care Act was largely on hospitals and health plans, Medicare Advantage plans. Most of the sort of policy recommendations that are now being talked about that would add up to the 300 or 400 billion don’t focus on hospitals as much as normal, as much as this historical present. The two areas that are getting attention are graduate medical education payments for teaching hospitals, the IME over at what is viewed as more money than is needed to deal with the problems with the inpatient PPS, and then the question of whether all the rural critical access hospitals, sole community hospitals deserve the 101 percent of costs.

So at least as of now, other providers are being fingered a little bit looking at the double-digit margins for skilled nursing facilities and home health agencies, that is getting attention. The pharmaceutical part D in terms of extending the Medicaid drug rebates to Medicare that went away, MedPAC had a major proposal for taking money from docs as part of an SGR fix, so I guess I’m not saying that hospitals are off the table now, but I don’t think they are the primary target this time although there are these sort of particular kinds of hospitals that are being identified.

Paul Ginsburg: Thanks. For Scott or Carl, what do you see as the role of private exchanges going forward?

Scott Fidel: I’ll start on that. And there is a lot of discussion around private exchanges and there is some enrollment that’s moving into those. I think the Sears and Darden article in the Wall Street Journal attracted a lot of attention on that front and one of the drivers here is that you do see the health benefits consulting community very involved in this actually as a new market opportunity for them. So Aon Hewitt which is one of the leading health benefits consultants actually is operating one of the private exchanges and they have loud voices amongst a lot of employers.

So this is something where there is a lot of conversation. One of the elements around private exchanges that I struggle with starting in 2014, and again this is the latest sort of approach to moving from defined benefits to defined contributions, which we’ve all been talking about for years and this is the latest sort of packaging of that. But as you get to 2014 when you have the public exchanges, one major challenge for private exchanges is that you don’t have the subsidies or the premium credits on the private exchanges. So if an employer is going to decide to move more toward an exchange functioning and exchange environment and they’re doing the math, the federal government subsidizing a large portion of their employee’s healthcare expenses in the public exchanges is one of the key elements that makes the math work and you don’t have that on the private exchanges.

Carl McDonald: Yes, private exchange is really interesting if you’re a retail company or a restaurant company but for a Citi Group or a union dominated type employer, not even an option. I think the challenge that the private exchanges have is that you’re taking what’s today predominantly self-funded employers and moving them into a risk product, and by doing that now you’re subject to the premium tax, now you’re subject to state mandated benefits. So there’s a whole host of things that actually push up the premium and that gets offset by having the health insurers actually compete with one another on these private exchanges.

So I think when Aon Hewitt goes out and presents this to employers, there’s going to be a certain group where you can actually save some money and they get to move to defined contribution; so it’s a win for them. But there’s a whole host of other employers where it just doesn’t make financial sense. You’re actually going to end up paying more under private exchange because of the risk component.

Scott Fidel: And just to combine our two points, when you look at those industries that Carl mentioned, retailers, restaurants, these are industries with very low wage level employees where there would be very significant eligibility for subsidy payments in the public exchanges.

Carl McDonald: And one other really quick side note that’s maybe here nor there, but the first couple of weeks of open enrollment what Aon Hewitt found with the private exchanges is that they expected if the employer gave the employee a $300 credit, the employee would buy $300 worth of health insurance. The reality is employers are actually buying up. They’re buying $400 or $500 premium products, which was surprising to me, surprising to them. And again, these are low or lower income workers that are making this decision. So they’re actually saying, we’re willing to pay more in premium up front to have the certainty of not having a giant deductable or copay at the point of service. So again, very early; it’s just a couple of employers, but interesting to think about in the context of exchanges and sort of how consumer behavior would if that’s applicable or not.

Scott Fidel: For the health insurers this would be a windfall though because they make a lot more money on a fully insured member than they do in a self funded administrative services structure.

Paul Ginsburg: Yes. Well our time is up so I’d like to bring this to a close. I’d like to thank the panelists who I thought did an outstanding job this year. And I’d also like to thank again the Peterson Foundation for its financial support for this conference and the HSC staff that made it possible for this to run so flawlessly.

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Participant Biographies

Robert 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.

Scott Fidel – Director and Senior Equity Research Analyst, Deutsche Bank

Scott Fidel is a director and senior equity research analyst at Deutsche Bank, where he is responsible for research coverage of the managed care and health insurance sector. Fidel has been covering the U.S. health insurance (managed care) industry for Wall Street investment banks for the past 14 years. As part of this coverage, Fidel has published extensive research on the U.S. health care system, with a focus on health insurance coverage, health insurance premium and medical spending trends, and health care reform. Prior to joining Deutsche Bank in 2006, Fidel was the senior research analyst covering the managed care industry at J. P. Morgan Securities and held equity research positions covering managed care at UBS Securities and PaineWebber. Before beginning his career on Wall Street, Fidel worked in Washington, D.C., as a health care lobbyist and legislative researcher with the government relations firm Cassidy & Associates. Fidel received a bachelor’s degree in history from the University of Colorado.

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. He also serves as research director for the nonprofit, nonpartisan National Institute for Health Care Reform. Ginsburg is a noted speaker and commentator on changes taking place in the health care system. His recent research topics have included provider-plan leverage, cost trends and drivers, Medicare physician and hospital payment policy, and competition in health care. Ginsburg has been named to Modern Healthcare’s 100 Most Influential People in Health Care list 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.

Lisa Goldstein, M.P.A. – Associate Managing Director, Moody’s Investors Service

Lisa Goldstein joined Moody’s Healthcare Team in 1990 and was named team leader in 2004.  Goldstein is a member of the rating committee for the health care rating team as well as several other sectors within Moody’s Public Finance Group. As team leader, she leads a group of 11 analysts responsible for credit analysis and ratings of more than 500 health care organizations. Goldstein has authored several Moody’s “Special Comments” on timely matters relating to the health care industry and the impact on bond ratings. Her research is frequently quoted in national trade publications and media outlets. She served on the national board of directors of the Healthcare Financial Management Association from 2006-2009 and is a faculty member of The Governance Institute.  She has annually been named by Smith’s Research and Rating Review to the All-Star Fixed Income Research teams. Goldstein received a bachelor’s degree in American studies from Brandeis University and a master’s in public administration from New York 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 No. 1 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.

Sheryl Skolnick, Ph.D. – Managing Director & Co-Head of Research, CRT Capital Group

Sheryl Skolnick joined CRT in 2006 to provide equity and credit coverage of health care services companies and rejoined in 2010 after a short tenure at Pali Capital. She became CRT’s co-head of research in September 2011. With more than 24 years on Wall Street, she has been named The Wall Street Journal’s Best on the Street in Healthcare Providers on several occasions. She is known for her differentiated research, unique perspectives and client service. She has provided differentiated health care services investment research at Robertson Stephens and Fulcrum Global Partners, a top independent research boutique, among other sell- and buy-side firms. In her early career, Skolnick was an economist for the U.S. Department of Labor and the antitrust division of the U.S. Department of Justice. In addition to her roles at CRT, Skolnick is an adjunct professor at Columbia University’s Mailman School of Public Health, teaches classes in the executive masters of public health program and is a featured speaker at several annual health care conferences, including University of California-Irvine’s Paul Merage School of Business’ Health Care Forecast Conference. She is a frequent guest on CNBC and Bloomberg TV and is a widely quoted expert on health care issues. Skolnick earned her doctorate in economics from Washington University in St. Louis where she was an Olin Fellow.

 

 

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