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Printable Version

DR. GINSBURG: I'm very pleased to welcome you to this conference, which we're calling "Update on the Nation's Health Care System: Results from Tracking 12 Communities."

There are two objectives to this conference. First, is to share with you early findings from the Round II site visits of the Community Tracking Study. The second objective is to get the reaction to these results from both the respondents and the audience, and we're doing this to seek to deepen our analysis. We are preparing papers based on these presentations and are planning to revise them after the meeting and submit them to journals in the next one or two months.

Let me just briefly say that, for those not familiar, and I think most are, that the Center for Studying Health System Change is a research organization set up to inform decision makers about how the health system is changing and its effects on consumers. And the Center has exclusive funding from the Robert Wood Johnson Foundation, and it's affiliated with Mathematica Policy Research. And these site visits were conducted in collaboration with the Lewin Group.

If you turn to the Agenda in your program book, first, I'm going to make a transition from opening remarks to the first presenter, and I'm going to be examining the range of changes that we've seen over the two-year period between our first round and second round of site visits.

I want to introduce to you on the panel Cara Lesser, who has played many roles in preparing for this conference. First, she is the co-author of the presentation that I'll be giving. Also, she is the project director of the site visit efforts, and also she has assisted the other presenters with their presentations.

There will be a response to my remarks by Jeff Goldsmith, who is the president of Health Futures. His bio and bio of all of the other panelists is in your book towards the end, and I won't read it to you, but I want to say that I, and many others, have been listening to Jeff for many years and have always gained stimulating insights when he's speaking at a conference.

After Jeff responds, we will have discussion among the panel on this presentation and then comments from the audience, questions and comments from the audience, and we're going to have a question period after each segment of the meeting.

After the break, the next presentation will be by Jon Christianson, who is James Hamilton Professor at the University of Minnesota, and he'll be talking about how specialist physicians are responding to the pressures of managed care. I want to point out that Jon has worked with us on both rounds of the site visits, as an active site visitor and author of some of the community reports.

The respondent to Jon is not J.D. Kleinke, who called yesterday. He has a family emergency and couldn't be with us. But I've asked my colleague, Marsha Gold of Mathematica Policy Research, if she could fill in at the last minute, and I'm pretty delighted of her willingness to do this. Marsha is a senior fellow at Mathematica Policy Research, who is very well-known for her in-depth knowledge of managed care.

The final presentation will be on Blue Cross Blue Shield plans and how they are distinct from other health plans. And this will be presented by Bradley Strunk of HSC. Joy Grossman is dealing with a series of family emergencies and is unable to be here, and I'm really pleased that Brad, who has been deeply involved in not only Joy's paper, but also the site visit work in general, will be able to make this presentation.

The respondent to that paper will be Ed O'Neil, who is director of the Center for Health Professions at UCSF, and executive director of the Pew Health Professions Commission. I've long been familiar with his work on health professions, but when I was asking people who would be a good respondent to the Blue Cross Blue Shield paper, I kept hearing Ed O'Neil and learned that Ed has a lot of experience consulting on strategic issues for Blue Cross and Blue Shield plans, so he is very familiar with those organizations.

The final session will be a discussion with the three respondents on their view of the future for the issues we've discussed. In fact, what I've asked them to do is hold off on their future predictions in their initial response and save them for this panel.

I mentioned there are a lot of opportunities for audience participation. A few ground rules is that please state your name and organization, please keep your questions brief and ask one at a time, and then get in line again for a second question.

So, with that, I'm going to go over and get my notes. As I mentioned, I'm going to talk about an overview of change over this two-year period from roughly '97 to '99, between the two rounds of site visits. Here are the highlights I'm going to emphasize:

First, the large degree of turmoil and organizational change that we saw in the first round of site visits is continuing. We don't see any let-up in that phenomenon. But a contrast between the first and second rounds is the degree to which we are seeing now the prior strategies of health care organizations are being dismantled. This is a contrast to earlier on when we were hearing about new types of organizations or relationships being created that has the potential to improve quality, reduce costs.

More recently, the emphasis has been on taking apart some of those creations that perhaps didn't work very well and don't seem viable in the current environment for health care.

The third highlight I want to point out is that managed care backlash is driving the marketplace. We've seen a great deal of sensitivity to consumers' concerns about managed care and that the efforts to address these concerns are a key driver of many of the organizational changes that we're going to be reporting on.

Let me back up that these site visits are part of the Community Tracking Study. In this study, we gather community-level data from a nationally representative sample of 60 sites. We collect these data on a two-year cycle, and the data includes surveys of households, physicians and employers, and today's content, site visits in 12 of these communities, which involve interviewing key leaders.

That map, which none of you can read, but I think it's in the program, shows the 12 markets that we're studying. I just want to point out that these markets were a random sample of communities of metropolitan areas with populations in excess of 200,000 people and that the units that we address, as a community, is a primary metropolitan statistical area.

A few things about our site visit approach, and this is relevant to all of the presentations, so they don't have to repeat it. In Round II of the site visits, we collected two types of information. One type was an update, in a sense. For each site, we came into the site with some information about what we found in Round I and wanted to look at what changed.

The second type of information was special topics, where we gathered information on particular topics, most of which were identified in Round I as, "Gee, this sounds really interesting across the sites. Let's learn more about it." Our technique, when we went into the sites, was to conduct semi-structured interviews in person, and we averaged about 40 to 60 respondents per site that were interviewed on site, and we've prepared two types of products from this information: One is the community reports focusing on what changed in the community, and you have the 12 community reports in your book; and the second, which we are doing today, is cross-site analyses, looking at the similarities and differences across the sites on a number of dimensions.

Here is what I'm going to do in the presentation today: First, I'm going to discuss the retreat from highly managed products and from integrated systems and explain to you the role that backlashes play and the role that the organizational complexity of the integrated systems have played in this retreat.

Then, I'm going to discuss health plan and hospital consolidation and tell you that the story is different in health plans versus hospitals. There's been much more active consolidation in the former than the latter in this round, and this is a change from the previous rounds.

And, finally, I'm going to discuss how physician organizations are continuing to experiment to find what works for them to play this role of an intermediary between the physicians on the one hand and either health plans or hospitals on the other hand.

One thing I want to point out is the very strong trend towards more loosely managed products. Now, this is something that you don't need our site visits to be aware of. I'm sure most of you are. But one thing that was a surprise is the fact that HMOs are growing more slowly than they had grown before has caused some real problems for organizations in the sites.

There were many instances where either hospitals or physician organizations had made changes and geared up for a world with much more extensive HMO enrollment than actually happens. And a prime example of this was in Seattle, where following Boeing's move to managed care, many providers expected that many other employers in the Seattle market would do the same, and they geared up for a real shift from fee-for-service to managed care. This did not happen. Other employers, Boeing went through with its plans, but other employers did not, and many providers found that their preparations for a world of more HMO enrollments were not viable in the market that actually resulted.

There's been a strong trend towards more choice and flexibility. Almost all managed care plans broadened their networks so that their networks are very broad; enrollees can access often a large part of the providers in a system through their plan; plans are providing easier access to specialists, again, in response to this demand for greater flexibility.

The recent announcement by United Health Care that it would no longer review physicians' individual care management decisions is really another piece of evidence in this trend towards more choice and flexibility.

I want to point out the role of tight labor markets and modest premium trends in these developments. Basically, from the perspective of many employers having moved their employees into managed care plans and facing tight labor markets, these employers have been very accommodating to employee desire for less restrictiveness in their health plans. And we heard the most about this in Boston and Seattle, where high-tech workers are so important.

Now, a period of very favorable premium trends perhaps encouraged this attitude on the part of employers of let's be flexible, let's loosen up the management, but this raises the question as to how employers will respond should premiums start going up more rapidly, as many are projecting.

Another finding we had is that the use of capitation grew much more slowly than had been anticipated. And like the slower growth of HMOs, this also had ripples in the marketplace, as far as organizations having geared up for a lot more use of capitation than actually was the case. And this came from both the plans and from providers, that we heard from many plans about their reluctance to delegate responsibility and to shift capitated risk to providers because doing this only makes sense if you think the providers will succeed in managing under risk environments. So many plans have pulled back from capitation, perhaps based on examples of providers that have difficulty managing in environments.

But another factor is that provider organizations have been much more cautious about agreeing to capitation because of some of the injuries they've encountered from their earlier experiences with capitation. Probably most striking, and which has been in the news lately, has been the experience by California IPAs and large medical groups with capitation. They've lost a lot of money, and the unexpected cost increases seem to be the key driver here; that California organizations often sign long-term contracts accepting a fixed percentage of the premium as their capitation payments, and as costs have increased faster than projected, particularly for pharmaceutical spending, they've lost a lot of money.

The California groups that pioneered acceptance of capitation are looking eagerly not to take risk for pharmacy costs and to, in a sense, shrink a portion of the medical expenses that they are responsible for. In addition, many provider organizations find it difficult to manage in this capitated environment. They just weren't prepared, did not have the infrastructure to do this.

A final reason for slower-than-expected growth in capitation is the challenges in managing open products with the rapid growth of point-of-service plans, where many who would have been enrolled in an HMO instead enrolled in point-of-service plans. These are inherently more difficult to manage for a provider organization and, again, has made capitation a less-attractive option for them.

One striking thing we found is the trend away from vertical integration. We saw health plans selling their primary care physician practices that they had acquired a few years earlier. We learned of hospitals selling their health plans and the notion that putting hospitals, physicians and insurance in one organization appears to be very much in retreat at this time.

What's behind this? What were the problems with vertical integration? Well, for one, it's a stretch beyond core competencies to try to include all of these functions in an organization. Hospitals are not likely to be good at running health plans and their different cultures, and many hospitals found that their health plan was a distraction of key management from running the hospital enterprise.

But there are two other factors which push this: One is the fact that vertical integration works best when there is limited provider choice, since when you can enroll people in the health plan, and they will be served by the hospital that owns the health plan and the physicians associated with that hospital.

Well, products like that aren't acceptable in today's market; in the sense, that if you are not going to be able to offer a narrow product, it just doesn't make a lot of sense to have an integrated system. And one of the reasons is competitive threats; that vertical integration can add to competitive challenges of individual components. So a hospital or a physician group may have difficulty in contracting with other health plans if it has its own health plan in the organization.

We found that health plans are consolidating rapidly. First, we found that national mergers among health plans, particularly the ones from Aetna, are affecting local markets. In some cases, the two companies that merged each had an operation in a market so the merger increased consolidation in those markets. In other situations, these mergers left more powerful competitors. So, for example, if a national plan acquired a hospital-based plan, this often put a much more vigorous and capable competitor into the markets that had been there before.

What was particularly striking is the degree of regional mergers of local health plans. We saw many--there have been Blue Cross and Blue Shield mergers across markets. These are plans that were not competing with each other, but have decided to merge, and we saw this in both contiguous markets and in markets which are not contiguous.

Examples of contiguous markets are the mergers of the Blue Cross plans operating in Syracuse, one of our sites, and Rochester. And some of the recent Anthem mergers in New England are also taking adjacent markets and putting them together. But we also had examples of distinct markets, where the, for example, a local plan in Syracuse merged with a local plan in Buffalo, which is quite a few miles away, and also the Anthem Blue Cross Blue Shield has started out in Indiana and has a number of plans in New England, attempted to merge in New Jersey.

Now, in the contiguous areas, Blue Cross and Blue Shield mergers have the ability to serve some employers better because employers have their workforces disbursed all over, but in the noncontiguous markets, these mergers have to achieve substantial scale economies, otherwise they're not going to be successful. And this may be one of these fads that, when we come back two years from now, we may say, "Oh, a lot of them didn't work." We'll just have to see if they can pull this off.

Now, in contrast to the extensive activity among health plan mergers, we found that mergers among hospitals were slowing down. In some cases, the reason is bumping up against antitrust constraints. Particularly in many of the smaller markets, hospitals are already down to two or three systems in the community and antitrust might be a real barrier to pursuing further mergers. This has actually happened in a large community in Cleveland. Almost all of the hospital capacity is now in two systems; one, the Cleveland Clinic and the other University Hospital system.

Another factor is the absence of the threat of an aggressive Columbia HCA organization. During the previous rounds, we heard many stories about Columbia HCA and its aggressive acquiring of hospitals being a catalyst for other mergers; that nonprofit hospitals may have merged to become stronger to compete with Columbia or they may have merged to grab the hospital that Columbia was thinking of. Well, given what's happened to Columbia HCA and its change in strategy, this catalyst is gone, and this has probably also contributed to the slowing of hospital mergers.

What we've seen in hospital mergers is an attempt to seek broader geographic reach; that the mergers are often oriented towards expanding a hospital's reach within a community. And hospitals are doing this, they see this as enhancing their clout with insurers, that if they own hospitals in different parts of the community, that they would be in a stronger negotiating position.

But we need to point out that mergers of hospitals that are not very close to each other have really few potential for efficiencies. They don't have the potential to close down the duplicative capacity because there's something three miles away that can serve. These seem to be very much pushing the market power aspects of mergers and don't have the efficiency potential that other mergers may have.

Over these two years, this was a period of provider organizations, and I really should say physician organizations stumbling. First, the physician practice management companies. The bankruptcy of FPA and Med Partners abandoning the physician practice management company business has had a devastating effect on many physician organizations in Orange County and Phoenix in particular.

Now, what happened here? Why do these physician management companies fail? Well, some of the things we heard were that their overhead was very high, and they really weren't delivering efficiency gains to offset that overhead. Another problem was reduced incentives for physicians, that they were taking physicians who owned their practices and made them into often very wealthy on paper employees of these physician practice management companies, and physicians are known for having productivity that can decline very rapidly when they go from self-employed to salaried status. Nevertheless, some specialized physician practice management companies have done better than the general ones.

Another provider organization that has stumbled is physician hospital organizations. We saw in our sites important ones collapsed, and some have been very much hurt when their physicians left to join IPAs.

What have the problems been of physician hospital organizations? Well, for one, they found that they had minimal clout with health plans, and this is because they tended not to have exclusive arrangements with physicians, so that the plans could sign up those physicians without contracting with a PHO, and also a lack of trust or loyalty of the physicians to the organization.

As physician practice management companies and physician hospital organizations have stumbled, there's been a shift towards IPAs and MSOs, and some of the reasons for the shift is their emphasis on physician leadership, that physicians prefer organizations that they lead to ones that they perceive as controlled by hospitals. These newer organizations have lower overhead, so they don't have to produce as much to be viable, and they've provided much more targeted services being more focused on what physicians need.

One striking phenomenon that you'll hear more about from Jon Christianson's presentation is specialty physician organizations becoming an important competitive force in communities. We have seen examples of increasing clout of specialty groups and specialty IPAs with health plans and also specialty organizations have composed a competitive threat to hospitals. They have created ambulatory surgical centers; they have created, often in joint partnership with physician practice management companies, heart hospitals, hospitals that specialize in doing cardiac procedures. You'll hear more about this from Jon.

Let me summarize the major points. I believe the backlash against managed care is leading to less management of care and is threatening the viability of vertically integrated health systems; the second one is the national or regional focus of consolidation in both health plans and hospitals; and, finally, that physicians are continuing to search for effective organizational forums despite the very painful stumbles that they have been through in the last few years.

Here are some of the key issues to watch, going forward into the future:

Will this backlash tide change? How angry will physicians and consumers be in the future? Will they be more or less angry than they are today? What types of legislation will be enacted to regulate managed care plans in response to this backlash? And, third, how will employers respond to this? In particular, how will rising premiums influence employer responses to the demands from employees, as far as getting away from tight management of care?

Another question is this national and regional consolidation in health plans and hospitals, will this influence care delivery in local communities? So, in a sense, will these organizations achieve scale economies and, in the process of achieving scale economies, standardize how care is delivered in communities or will they not, and will they wind up having to leave the differences in communities alone, despite their common ownership?

And the final question is what does the physician organization of the future look like? We've seen many failures, but it seems as though the need to organize individual physicians into a working entity appears to be as strong as ever, and given this need, at least I would predict that we will see some new attempts at finding physician organizations that can fill this need and do that job.

Thank you.

[Applause.]

DR. GINSBURG: Okay. I'm going to ask Jeff Goldsmith to come to the podium to give his response.

DR. GOLDSMITH: Thank you, Paul, very much. Good morning to you.

I have the advantage or disadvantage of having worked in most of the markets that Paul and his crew surveyed or having friends who were trying to manage health plans or health systems in these markets. And I would tell you, based on what I know, that this is a largely accurate picture of what's going on in those markets. It's certainly not a pretty picture, but a largely accurate one.

I think, you know, to explain how you kind of got to where this is, you have to remember how these structures and market arrangements were created. If you go back six years now--I guess it was six years or so--there was an almost universal consensus that health reform, which providers assumed was a done deal, was going to result in markets dominated by a handful of closed-panel, vertically integrated systems--five Kaisers in Los Angeles, for example--and that the key feature of these markets was that they would be nonoverlapping health plans, that when you chose a health plan, it came with a subset of the doctors and hospitals in that community attached.

And providers really believed that, unless they configured themselves to be one of those systems, they weren't going to get paid, which led to, and a lot of my consulting work of advising people to have hospital networks that span entire regions so they could be sole-source contractors for care across a continuum, that they have a captive, salaried, at a minimum, primary care physician network that put a primary care physician within ten minutes of everybody's homes. Well, this was a very expensive vision. It was also a vision that people didn't really test marketwise by asking employers and patients how they felt about it.

And the market test, I mean, we really did give people a wide array of health insurance options, people didn't want the closed-panel model. And so the people that, the providers, in particular, and some health insurers that were organizing to be just like Kaiser, discovered that they had kind of tricked themselves out to play a game of hockey, and then when they show up, it's tennis. So what you have in a lot of these markets right now are a lot of people trying to play tennis in hockey gear, and it's really not a very pretty picture.

The response, both on the health insurance and health care delivery side to the uncertainties posed by not only the prospect of health reform, but also the growth of these national companies that Paul talked about, the response of providers and insurers to this uncertainty was really, I think, a flight from competition.

On the health plan side, I think there is some irony here that a managed care industry that promoted itself on the basis of consumer choice should have moved so aggressively, both through merger activity and through the total replacement model; the idea that an employer should select a single health plan that would offer multiple products, I think there's irony that an industry that promoted itself on the basis of multiple choice should have moved so aggressively to reduce or eliminate choice. I think that has been a major contributor to the managed care backlash.

Now, my spies in the managed care world, my colleagues that are doing consulting in this field, tell me that the total replacement movement has kind of fallen out of favor, but I don't see a lot of evidence of employers offering more choices rather than less. Maybe that's something that could be pursued in a subsequent tracking study.

On the provider side, I think, clearly, a lot of the consolidation that took place in merger activity, and Cleveland is a perfect example of this, was patently anticompetitive in its motivation; that the goal was to try and get a sufficient degree of market mass and a sufficient degree of control over the primary care base so you could dictate to the health plans what the rates were and try and increase them.

And, indeed, in some highly consolidated markets, San Diego as an example, the Scripps Health System in San Diego about a month and a half ago did something that hasn't gotten a lot of press back here in Washington. They simply tore up all 119 of their health plan contracts, just tore them up and said, We can't continue functioning under these. Come back and talk to us about what a living wage is for our system.

I think you are going to see a great deal more of that. And admittedly, in some communities, the antitrust barrier prevented hospitals or systems from consolidating to the point where they had really all that much market leverage, but in some, you know, you have monopolies. I mean, let's call them what they are. Communities with 5- or 600,000 people in them or markets with 5- or 600,000 people in them with a single provider entity, where the presumption of virtue and the fact that they are nonprofit gave comfort to regulators that, well, of course, they are not going to actually use the market leverage. So we'll see what happens there.

I think as a result of this consolidation we have the irony that the substantial excess of physical and human capital that exists in these markets is now inside the systems. And as per-capita payment for health services, both from the government and from private payers has either declined in absolute terms or declined in real terms, these systems have been totally incapable of rationalizing that capacity in a way to avoid catastrophic losses and, indeed, in a lot of these markets you are seeing health systems losing a million dollars a month. There are some large regional nonprofit systems that are losing a million dollars a day, and yet their managements and boards have been unable to take the steps necessary to really consolidate.

I think what you saw in these markets, Paul, was not consolidation at all, but concentration of ownership. And the pressure to consolidate has resulted in, frankly, paralysis. I mean, even where you have arterial bleeding, the governance in these organizations isn't strong enough to be able to make the choices necessary to reduce it. So a lot of these systems are literally bleeding to death.

I think we got our first look at a fatality in AHERF, the Allegheny Health Education and Research Foundation, that just literally bled to death and left $1.3 billion in debt hanging up there. Bad management, catastrophic governance failure, a failure to read and react to market conditions.

If you ask what the mind-set is in a lot of these institutions right now, I just finished reading "A Perfect Storm," and that vision of the people hanging onto the life raft with the 80-mile-an-hour winds blowing spray in their faces is as close as I can come. It's not a dynamic situation, from the standpoint of management action.

I will say, finally, that I'm a good deal less optimistic in calling the successful future physician organization in all of this. The IPAs and MSOs that Paul talked about in his talk are hemorrhaging as well. They have not been able, in a lot of cases, to be successfully risk-bearing enterprises, and I think there's a tremendous amount of fear on the part of physicians that none of the strategies that they have pursued to try and position themselves to contact effectively with managed care plans have really worked out very well.

Certainly, the people that seem to have come closest to achieving market leverage are people that have been able to create sort of single-specialty bargaining monopolies and have used those single-specialty IPAs or quasi-IPAs to try and get higher rates out of the health plans. But I guess the theme that I would kind of look at here, if I were going to talk about this phase of market reaction to the growth in managed care, would be really a flight from competition. I think there's a tremendous amount of consulting opportunities for retired consultants.

[Laughter.]

DR. GOLDSMITH: I mean, you kind of look at all of this stuff and you say, "Gees, why didn't I stick around?"

Thank you all.

DR. GINSBURG: Let me start off the discussion among the panel by asking a question to Jeff about his theme of flight from competition. In some sites, particularly the smaller ones, we've seen substantial concentration in not only the hospital sector but the health plan sector, and in this one particular case, the employer sector.

In a sense, is this flight from competition likely to land us into kind of informally public utility-regulated situations? The specific example would be Lansing where there are only two hospital systems, but they confront a very powerful insurer who, in a sense, is representing very powerful employers. How often do you think we'll evolve toward situations like that?

DR. GOLDSMITH: Well, I think there--I don't know if this is on or not.

DR. GINSBURG: No.

DR. GOLDSMITH: It's dead.

DR. GINSBURG: Here, try this one.

DR. GOLDSMITH: I think there are a lot of antitrust issues that are going to be raised by the behavior both of health plans and health systems in these highly concentrated markets. In the Twin Cities--and this is anecdotal--a lot of the health plans are getting requests from the highly consolidated provider systems up there for 30, 40, 50 percent rate increases. And to the extent that they're able to get them, I think a lot of people are going to go back and examine the premises under which these combinations were permitted and decide that they were flawed.

So I think there's going to be a lot of litigation and sort of pre-litigation maneuvering to try and assure, to the extent that there are competitive opportunities, that they're pursued.

I will be really interesting to see how much of the rate increases that have taken place on the health plan side have actually stuck in markets where there are only a handful of plans. In other words, are highly competitive health plan markets seeing lower rates of increase because people aren't able to make the 12 percent request for rate increases stick?

So I think there's tremendous grist for the research mill here in evaluating how these markets actually behave and whether the more fragmented markets are able to maintain somewhat greater levels of cost stability than the markets where, for whatever reason, the degree of concentration that you talked about in Lansing was permitted to occur.

DR. GINSBURG: Thank you.

Are there any comments or questions by others on the panel?

[No response.]

DR. GINSBURG: Now let me turn to the audience. Questions for me, comments, for Jeff?

MS. MILLER: I have a question. I'm Linda Miller with Volunteer Trustees. Did you look at all at the impact of Medicare in these communities and whether Medicare Plus Choice is where it--what kind of an influence it's having on HMOs in and out of the market or managed care companies or providers?

DR. GINSBURG: Oh, sure. I remember from round one we heard a lot about Medicare--there wasn't Medicare Plus Choice then--that this was seen to be the most profitable segment of the health plan business and often was the reason that we were told that a health plan pursued a market. It was because there was such potential in the Medicare business.

Now, obviously, that changed very quickly. I think one factor was the BBA, particularly the high AAPCC markets made the Medicare health plan business less attractive, but I think another one thing was the underwriting cycle that didn't come into this talk. But in our first round of site visits, health insurance had been very profitable, and the norm was health plans wanting to get into additional markets, build their market share. There was this notion that all markets are going to slim down to two, three, or four health plans, and if you don't get in now, there's no chance you'll be one of them.

Now we're in a very different stage of the underwriting cycle where plans are not profitable. They're withdrawing selectively. And while we read in Washington particularly about the withdrawals from the Medicare Plus Choice program, there also have been withdrawals from selected commercial insurance markets for the same reason.

So I would say at this point we haven't heard anything about Medicare Plus Choice. It seems as though the plans that are doing okay are continuing, and the ones that in a sense saw the profitability the furthest off in the future are the ones that are dropping out.

MS. PETERSON: I'm Cheryl Peterson with the American Nurses Association.

Robert Wood Johnson has also funded a project called Colleagues in Caring, which looks at the nursing workforce, and there's overlap in the 12 regions that you've already looked at. They're supposed to be looking specifically at education and doing futuristic workforce planning around nurses in particular.

I'm wondering if you all have looked at those programs and the impact that the potential nursing shortage is going to have on some of these regions and the costs to the health systems.

DR. GINSBURG: Yes. Well, you know, having been in this field a while, I've been through so many different cycles of nurse shortages and surpluses, and I don't know that it has long-term effects. It seems as though when there is a nurse shortage that nursing compensation goes up and hospitals perhaps substitute more for nurses than they would otherwise and then it passes.

I didn't see anything in the site visits, and I'd ask Cara if she is familiar with anything about real changes in the way hospitals are using nurses.

MS. LESSER: No.

DR. GINSBURG: Okay. Yes?

MS. FUBINI: I'm Sylvia Fubini. I write a newsletter on the health care industry, and I missed the first part, so if you've discussed this, you'll have to explain to me what you said. But I'm really interested in the concept of hospital concentration and what it really means given the fact that almost no hospitals have closed. They don't merge their clinical departments. And I remember the Wall Street Journal always talking about managing physicians like herding cats. And I wonder what--so what does concentration mean in that market? Maybe people might speak to that.

DR. GINSBURG: Sure. Cara, do you want to--yes, Cara Lesser, who did a study of hospital mergers in our markets, is in a great position to comment on that.

MS. LESSER: Well, I think that your views are very consistent with what we found, that there has--although we observed a number of hospital mergers across our markets, they've really resulted in very little consolidation of capacity or consolidation of clinical services that some people had expected and in some cases fear. And I think that we found that that's due to a number of factors. One, Paul made reference to in his talk that in some cases the mergers are not involving hospitals that are really geographically close enough to allow those types of--that type of consolidation from occurring. So that's one real deterrent.

But even in areas where there is significant geographic overlap, we found that there have been real barriers to consolidating services and capacity, and we see that that's really linked to a number of factors, one of which is the sort of competing interests of physicians and the conflict that that stirs up with physicians in local communities. And also in terms of the conflict that that potentially poses for the community in general, given fears about reductions in access and fears of sort of loss of the local sense of the hospital system.

So there are a lot of barriers that hospitals are facing out there as they try to consolidate services, and in some respects, we feel like it might take a lot more time for that to really occur. But at the same time, there are disincentives with maintaining that geographic scope that even if hospitals are able to get through these difficult issues with their physicians and with the community, in negotiating with health plans there are real disincentives to reduce the services that they offer.

DR. GOLDSMITH: Well, even where the hospitals are across the street from one another, the managements have been unable to take the steps to consolidate the clinical departments or to close one of them.

I think people were really in denial. I, they assumed that when they got to a certain level of market share, they'd be able to stabilize their operations and through clever health plan deals take business away from other people and close their beds instead. And I think it's pretty clear now that that isn't happening, and the problem is that this generation of CEOs do not have either the reflexes or the governance support in their boards to take the next step, which is to say, you know, what are the most important things about our organization that we want to save.

I think that may be--you know, when they completely run out of money, they hire the Hunter Group, and the Hunter Group comes in and does it for them.

[Laughter.]

DR. GOLDSMITH: I kind of liken those guys to Red Adair. Do you remember the oil well fire? But there's all these fires, and it seems like people are setting them.

[Laughter.]

DR. GOLDSMITH: And that people would sort of go back and look, well, where did all these fires come from? Eventually, when the Hunter Group goes home, there's going to be a management in place to actually rationalize the capacity. But, I mean, in the interim we're going to destroy billions of dollars in wealth--billions of dollars in wealth--that is the community's wealth that could have been used to do important things in improving the health of people, pay for uncompensated care. It's the opportunity cost of all this money that's being burned that's really the scary part of all of this.

DR. GINSBURG: Caroline?

MS. STEINBERG: I'm Caroline Steinberg from the Lewin Group. We collaborated on the site visits. And I'm interested in getting your perspectives on what lessons can be extracted from the events of the last two years for health care leaders. To me, the events between 1996 and 1998 are really sort of a study of unrealized expectations.

In 1996, we saw a huge amount of turmoil as organizations were preparing for capitation, they were integrating, they were consolidating. New organizations were emerging such as physician intermediary organizations. And then in 1998, basically the environment did not progress the way everyone had expected, and everything began to unravel, causing huge turmoil for the industry, for consumers, for financial markets. And I'm just interested in your opinions on whether health care leaders should have been able to do a better job in sort of predicting how things would go and how things really went so awry over the last two years.

DR. GINSBURG: I was about to answer the question until I heard the last part.

[Laughter.]

DR. GINSBURG: But let me give you the answer to the first part. I think you've really captured very nicely the difference between--you know, there was a lot of optimism--maybe not optimism, but there were challenges that we had the solutions and everyone had their plans and we were going to deal with the changing health care markets.

I don't sense that optimism today. I think people are looking back at their strategies not having worked. I think they understand some of the changes in the market from the demand side, but at least I haven't heard about a whole bunch of new ideas that they're enthusiastic about.

Jeff? Then Marsha.

DR. GOLDSMITH: Well, I mean, it isn't a completely intractable situation. I mean, people know what they need to do. They really do. I mean, they know that they can't continue subsidizing their physicians' incomes at beyond market levels. They know they can't continue to do that. It's just stopping doing it. They know they can't continue to operate 50 percent-occupied hospitals that are across the street from one another. They know that they can't continue to do that. It's just a question of stopping doing it.

They know that they are not getting any real leverage or creating any value by owning and operating health plans in a lot of cases, but they don't know in many cases how to stop doing it, or it's just a question of acting.

This isn't rocket science. And the thing that is so stunning to me is that sitting on the boards of these organizations are people who took their own corporations through a restructuring, a re-engineering, a refocusing during the 1980s, or they'd be completely out of business and we wouldn't have an active, growing economy. And yet they have been unable to translate what they learned into what they need to do as trustees to create a framework where they can make more efficient use of resources.

I think the fundamental problem on the provider side is just a catastrophic failure of governance.

DR. GINSBURG: Marsha?

MS. GOLD: Yes. Well, the one thing I wanted to say is that I'm not sure that--we're in Washington here. I don't know that the incentives are there for people to really want to predict. And I'm sure there's a lot of knowledgeable people who would understand it was very hard to do all those things all at once.

But it's very seductive, when you have elections right away and polls and all the rest, to assume that there's magic bullets. And the things that Paul and others were talking about are hard. You have to change physician behavior. You have to figure out how to organize the system to deal with today's technology. You have to figure out how to deal with all the politics and infrastructure of hospitals and how you merge them and how you deal with medical department chiefs who want to run their own fiefdom in a medical school. You have to convince patients they should do something different than they've done before. And those are hard things, and there's not a lot that gives you--you don't win elections and you don't get promoted by saying you're just going to--it's going to take a long time and it's going to be hard.

So I think there's some of that within that. You know, we'll have another magic bullet, and then something else will happen. It's very difficult.

So I think that it's not just that someone screwed up. I think there's a lot of reasons why this kind of stuff happens. I'm not convinced it's all--I mean, we sort of--it seems like this is a--there's a tone here that this is ultimate disaster and everything is happening. There are some really serious problems. But there's also--I think Paul alluded to this in some of his final comments. There's a lot that's happening in the system. We haven't heard the end of it.

DR. GINSBURG: Let me just say one more thing before the questions. There were some times when organizations just were not under pressure to make hard decisions, and I remember a conversation with a CEO of an academic medical center, who had come in and made some changes and then found that it couldn't go any further because the medical staff wouldn't go along. The organization was doing fine.

Given the fact that the BBA--that they've attributed to the BBA cuts, they're looking forward to another round of change because that pressure is there. And that's what it may take.

Let me go to the woman who is in the back at the microphone who was there first.

MS. RIVERA: Thank you. Lillian Rivera, deputy administrators of Miami-Dade County Health Department.

We've been involved in this project from day one. We've been working with you. And as a public health official, I'm very interested for you to comment on the issue of the role of the public health departments in these communities when it comes to looking at the undeserved and also in their assurance role when it comes to dealing with HMOs and the health care system and the hospital-based system for the underserved.

DR. GINSBURG: It's difficult for me to give you an answer because when this project got going, there was another project funded by the Department of Health and Human Services led by Rose Martinez at Mathematica Policy Research focusing entirely on public health departments, and they have produced reports, and we stopped looking at the public health departments because of that study.

I don't know if Marsha is familiar with it at all.

MS. GOLD: Not to--if you want, we can certainly arrange to get you information about the findings and things she's come up with.

DR. GINSBURG: Thank you.

Gerben?

MR. DeJONG: Yes, I'm Gerben DeJong, and I'm with the Center for Health and Disability Research at the National Rehabilitation Hospital, and my question is directed to either Paul or Jeff. My question relates to the consolidation particularly in the hospital industry and many of the local markets.

My question really is: Does the Department of Justice Antitrust Division and the FTC really have the capacity to monitor and to seriously evaluate what goes on in all these local markets given the fact they also have very large fish to fry in the telecommunications industry, for example, in the oil industry today, and also in the financial services industry?

DR. GINSBURG: I've wondered about that myself.

DR. GOLDSMITH: Well, I can't comment on their capabilities. I can comment on their track record, which has just been appalling. I mean, they've gotten the stuffing kicked out of them in situations where they tried to stop mergers where it was pretty obvious what was going on, but they were just beaten in court.

I think there's a lot of grist for the mill here, and I think what's missing is the research to establish how people are using the market leverage that they've got. And I'm talking on the health plan side as much as on the hospital or health system side.

I mean, if it is the case that this consolidation has made it easier to raise prices, to raise rates, and contribute to the modest resurgence in inflation that's going on, maybe there will be a greater body of evidence to hold some of these plans and provider systems accountable for not holding us up as consumers.

DR. GINSBURG: Yes, actually--or, Cara, maybe you were going to say what I was going to say.

MS. LESSER: I guess I was just going to comment that there is a difference in some respects in that the majority of the mergers, the hospital mergers, are involving nonprofits, and Jeff alluded to this concept of the--

DR. GOLDSMITH: So what?

MS. LESSER: --comfort of virtue. And I think that there is some research, although it's also been disputed, saying that there is a difference when you have nonprofits merging in a community, that there's a level of accountability to the community that affects how you would evaluate what the competitive or anti-competitive concerns are.

DR. GOLDSMITH: Well, don't you think the level--an important test of the level of accountability is whether they could prevent themselves from spending their entire endowments--

[Laughter.]

DR. GOLDSMITH: --because they can't control their expenses or rationalize expenses to revenues? It seems to me that that's sort of an acid test of how accountable a board is.

DR. CHRISTIANSON: I think one of the things that's also happening is that the states' attorneys general have now keyed into the health plan convergence and are paying a lot more attention to hospital consolidations and actually doing some of the bird dog watch for the Department of Justice.

DR. GINSBURG: Thank you.

This is the time we should take a break, and we'll be back in 10 minutes with the next segment of the meeting.

[Recess.]

DR. GINSBURG: I'd like to begin the next segment of the session by introducing the James Hamilton Professor at the University of Minnesota, Jon Christianson.

DR. CHRISTIANSON: Hi. Am I okay here? I don't think anybody has touched the mike.

You can't hear me. Okay. Great. I don't--that's it, that's it. Okay.

The title of our next session is "Jockeying for Position: Specialist Responses to Health System Change." The phrase "jockeying for position" is stolen from the work of Michael Porter, who writes and talks about strategy from the Harvard Business School, and he uses this phrase to talk about how different companies or firms try to find a way to generate a competitive advantage in their field, and that is, some way in which to sustain profit over a long period of time.

Actually, I think the phrase pretty well describes what we're going to talk about in terms of specialists and how they're functioning in local markets. They really are jockeying for position, trying to seek out some way to maintain their incomes in the face of mounting managed care pressures.

We know what those pressures are. We know that specialists control a substantial amount of spending, health care spending in the United States. Exactly how much we're not sure, but we know through their decisions they control a large portion of the bucks. And we know that the pressure that has been building on specialists' incomes over the past five to ten years is very real.

Again, the exact amount that managed care activity has--the exact amount of pressure that that has created for specialists' income is difficult to determine, but it's very real. It's certainly very real when you talk to specialists and specialist group managers on our site visits.

To organize the--is there something that can be done with that light there?

I direct you to your slide in the book.

To try to organize your thinking about what's going on with specialists, I want to focus today on a couple of relations that specialists have within health care markets that are very important.

The first is their relationship with managed care plans. Obviously, this is important to specialists because managed care plans provide patients and then income, of course. The old dotted line from hospitals to that relationship suggests that hospitals have attempted to sort of get in the middle of that relationship over the past few years by creating things like PHOs that connect specialists and hospitals together for managed care contracting.

The other set of relationships historically has been, you know, more important, the bedrock of--the ability of specialists to generate incomes has been relationships with hospitals. The hospitals are the specialists' workshop. What the hospitals do has an enormous effect on the ability of specialists to generate income.

We're going to focus on those two sets of relationships.

It's important to note that as you think across these 12 markets, there are really three--and you look at this little scheme here, there are three kinds of submarkets that will affect the relationships between specialists and managed care plans and specialists and hospitals, and that is, managed care plans compete with each other in these markets, and the kinds of contracts and relationships they have with specialists depend in part on how competitive that market is.

Hospitals compete with each other for patients, and the kind of relationships they have with specialists then depends partly on what the nature of that hospital market looks like. And then, of course, specialists compete with each other for patients as well.

So in thinking about the specialist submarket, the situation as we found it when we did our site visits was, first of all, there was a distinct change in the managed care market which had bolstered the ability of specialists to negotiate with managed care plans, and that is, the consumer demand for broad networks translated through their employers, through the managed care plans, gave the specialists some negotiating power or increased negotiating power that they hadn't had in the early 1990s.

But there were a number of competitive disadvantages that specialists faced. One was that in all markets but one, all of our respondents agreed that there was an oversupply of specialists. And then you'd press them and say, well, are there any specialty areas where there isn't an oversupply of specialists? And sometimes they would say, well, maybe this one. But, you know, it was pretty generally accepted that there was an oversupply of specialists, except for Greenville. In Greenville, everybody suggested that there was not an oversupply of specialists. And, in fact, the quantitative data that we have on physicians' locations in the United States support that very dramatically. Greenville has the lowest specialists per capita of any of our 12 sites.

There are also what I call exit barriers. Once you've established a specialty practice in a community, it's hard to pick up and leave. It's really built around long-term development of this practice and set of relationships. And where would you go, anyway? If there's a general oversupply in all communities, it's not like there's some wonderful place specialists could go where they're needed. So they really are kind of locked in to their existing relationships.

There's still relatively limited organization of specialists despite the sorts of comments about IPAs and PHOs and so forth. The core building blocks of the specialist market in communities is still the solo and small number--you know, three-, four-, five-person practice. And there's often little differentiation. What I mean by that is in the minds of consumers, in most markets for most specialists, specialists are interchangeable, and they don't demand a specialist. They ask their primary care physician. The primary care physician refers them to a specialist, but in most cases, there's little differentiation among specialists.

We also found different kinds of specialist organizations that existed in these markets, and Paul and Jeff have talked about this already. There are some that are hospital-centered organizations, particularly in markets where academic medical centers are strong. Boston is a good example, Syracuse, Little Rock. Here, one of the ways that specialists come together in some kind of an organizational form to deal with managed care plans is through collaborations with hospitals. There are also the multi-specialty kinds of contracting vehicles that Paul talked about, and I won't say anything more about those.

There are single-specialty IPAs that we'll talk about in a moment. These are not particularly common in our markets, but they're relatively new and developing.

And then there are the single-specialty group practices, smaller in size than the other organizations but obviously more prevalent.

Then, finally, in some of our markets, there are large brand-name specialty-driven organizations: Cleveland Clinic in Cleveland, Mayo Clinic in Phoenix, Virginia Mason in Seattle. These are large multi-specialty groups that have developed into what you could call integrated health care systems. They sometimes own hospitals, own primary care practices, and so forth.

Now, as you look across particularly the first three kinds of organizations, if you're a specialist, you're probably in all of those submarkets. There's a market where there's an academic medical center, or you may be in a PHO. You may be in a single-specialty IPA. You may be in a multi-specialty IPA. You're in lots of different kinds of organizations that give you some flexibility in contracting with managed care plans.

The key specialist strategies focus on redefining relationships with managed care plans and redefining relationships with hospitals. Trying to increase bargaining power with health plans, trying to counteract what specialists feel is the erosion of their reimbursement from these health plans over time, and then attempting to create organizations that capture larger percentages of income or portions of income that have traditionally gone to hospitals. So if you think of that diagram and those two relationships, trying to increase the reimbursement from managed care plans and trying to grab a hold of some of that income and profits that have gone to hospitals historically and bringing them directly to specialists. And we're going to talk about the kinds of strategies that specialists have adopted and then how they played out in practice.

Talking about increasing bargaining power with managed care plans, there are three things that were obvious in our site visits: trying to increase your size and presence of your core building block specialty group by merging with other single-specialty groups. So if you have a three-person specialty group in cardiology and there is a five-person specialty group in cardiology, merge, you have an eight-person specialty group in cardiology, and you hope by doing that strategically that you can negotiate better rates with health plans. And we'll talk about the strategic part of that as we move along here.

Trying to establish contracting and negotiating vehicles vis-a-vis the single-specialty IPAs and joining multi-specialty IPAs. And then trying to appeal directly to consumers by enhancing your name brand in the community. Trying to create a demand for you, your particular specialty group, as opposed to other specialty groups, so that managed care organizations can't think of offering a broad provider network in your community without having your specialty group be part of it.

In terms of trying to capture additional revenue, we saw several different kinds of strategies that specialists have been pursuing. One is trying to establish free-standing surgical centers or hospitals to capture revenue that had traditionally gone from health plans to hospitals, sort of diverting some of it to specialists.

Negotiating joint ventures with hospitals and other concessions that involve specialist ownership, so that instead of your income stream coming from your reimbursement for services, you know, there's only--we can ask Jeff about this, but he can tell us that there's a limit to how much money you can make by selling your time. So specialists have a limit on how much money they can make by selling their time, so trying to get an equity position in some other enterprise so that you can augment your income through the profits of that enterprise instead of just selling your time is a way that specialists in some communities are trying to react to managed care pressures on reimbursements.

Then trying to secure exclusive long-term kinds of affiliations with hospitals so that the hospitals reconfigure themselves in a way that will allow you to earn more income.

So the effectiveness of these strategies to date. We have found that several single-specialty groups have been able to achieve significant size and presence in local markets, and I'll just give you an example. Indianapolis is a market that, by our data, has 32 percent more specialists than the national average. There's a medical school there, and they just turn out a lot of specialists there.

Between our site visits, mergers occurred in specialty groups involving sports medicine, neurology, urology, OB-GYN, and orthopedics. This is all within a two-year period, and it's not single mergers in these areas, but often multiple mergers in these specialty areas.

Two cardiology groups merged. They now have a single-specialty group there consisting of 87 cardiologists, and they own 52 primary care physician practices as feeder practices for the cardiology group. And they think they're the biggest cardiology group in the United States. I have no idea whether that's true or not, but that was something that they told us.

Creating viable alternatives to hospital-based care has really been to us the most fascinating thing that's been going on in the specialist submarket. This has happened in two ways. First of all, the specialist group-owned ambulatory care, ambulatory surgery centers have been proliferating in some of our sites. In seven of the 12 markets, our respondents noted significant growth in the number of these centers.

Cleveland was probably the most dramatic. Between the two years that we visited Cleveland, the number of these free-standing surgery centers went from seven to 12.

Now, what's the ownership of these? We tried to trace down the ownership of these ambulatory surgery centers, and it gets kind of difficult. It depends on whether you think Cleveland Clinic is now a hospital organization or a specialty group. I think it's still a specialty group that owns hospitals. Most of these organizations in that case in Cleveland would have been formed by specialty groups, three or four of them, by our count, by the Cleveland Clinic, but the others by individual single-practice specialty groups.

The notion behind these is that you're going to secure contracts with managed care organizations and they'll send patients to your ambulatory surgery center. This hasn't always been a successful strategy for the specialists that have formed these groups.

In Little Rock, the new ambulatory surgery centers have really been unable to secure managed care contracts. GM has said they don't want their employees using these centers, and Blue Cross reportedly won't contract with them. So it hasn't been an easy road. This is a strategy that hasn't clearly been successful, but it's been very interesting to watch.

Another strategy that's maybe even more interesting to watch is the creation of heart hospitals in some of our markets. Little Rock is a case where there were four new ambulatory surgery centers under construction when we visited there. Under construction when we visited there. That's not a huge metropolitan area. And also the Arkansas Heart Hospital had just been established in Little Rock. They were a group of cardiologists associated with the hospital that wanted the hospital to invest more money in developing an infrastructure that would support their practice. The hospital said no, we have other priorities that are more important for us, and so these heart surgeons contracted with or joint-ventured with a group called MedCath, which is in North Carolina, that came in and built a heart hospital, separate from the regular hospital, where only heart surgery is done. MedCath reportedly has 51 percent of the ownership and the heart surgeons have 49 percent of the ownership.

Again, the success of this in the long run isn't clear. So far the revenues for that heart hospital have been coming from Medicare, and they haven't been able to secure managed care contracts.

Phoenix also has a heart hospital, Arizona Heart Hospital, the same arrangement. MedCath is the joint-venture partner. A couple of prominent heart surgeons in Phoenix partnered with MedCath to do this.

MedCath also approached a suburban hospital in Phoenix. There, the heart surgeons turned it around and went to their hospital and said, "We are going to go with MedCath, and we are going to build a heart hospital unless you do something." That hospital then joint-ventured with the cardiologists to build a separate heart hospital on the same campus of that hospital organization with part ownership on the part of the physicians.

Another group of specialists in Phoenix tried the same thing with their hospital, and that hospital has a relatively protected geographic area. In other words, there are not a lot of competitive hospitals. There are not any competitive hospitals in that geographic part of Phoenix.

That hospital said, "Well, thank you for the opportunity, but we do not think we will do that with you." There were not any other options for those cardiologists. So they are still with that hospital.

So, to sort of circle back, this is a case of where specialists are trying to generate other sources of income to replace lost reimbursements for managed care plans.

With respect to direct vehicles for contracting with managed care plans, we saw limited numbers of single-specialty IPAs. Relatively few of our sites were these important factors in the market.

Phoenix was an exception. There was an entrepreneur in Phoenix who had helped physicians put together three single-specialty IPAs, one in cardiology, one in general surgery, and the other in orthopedic surgery. The cardiology IPA has a contract with one of the managed care plans for 175,000 covered lives. So what the managed care plan does is it capitates the single-specialty IPA. The single-specialty IPA delivers services to all members for cardiology care.

We talked about antitrust issues. They are very careful to try to limit the number of participating specialists to about 30 or 31 percent of the specialists in the market in Phoenix. That raises the issue, of course, in a time of demand for broad networks and access to large numbers of physicians, whether that is going to continue to be an attractive model.

Paul also mentioned the complexity of multi-specialty intermediaries like PPMCs and PHOs. We have really seen in many of the markets that we have visited that PHOs have declined in importance, and the story that we are told is this. From the specialist's point of view, you are looking at the contract with the managed care plan to the PHO and you are saying, "Gee, there is a lot of that contract that gets used for administrative purposes," and it seems like those people in the administrative areas are employees of the hospital.

So, really what the hospital is doing, they are taking out dollars that could have come to us and they put it into hospital administration, and we do not think that is right. We do not like that, but from the hospital's point of view, they are saying, "Gee, this is not working out as well as we thought it would because we thought it was a way of tying our physicians to us, through managed care contracts," but the physicians, they want relatively high reimbursements for their services as part of the PHO.

In fact, in order to keep them participating in the PHO, we have to give them relatively high reimbursements. So we are getting lower reimbursements for hospital care than we think we can get by contracting directly with managed care organizations. So you have both partners thinking, "You know, we think we can do better if we are not part of this PHO."

So we have seen PHOs financially collapse or just basically becoming relatively unimportant as contracting vehicles for specialists.

As we look forward in the specialist market, what sorts of trends are going to affect what happens in the future? We think there are some favorable environmental transfer specialists. Certainly, the decline of gate-keeping, the emphasis in some large managed care organizations on direct access to specialists.

The demand for broad networks does not seem to be diminishing. Some plans seem to be backing off of care management that would involve dealing directly with specialists, and then there is an interest on the part of hospitals in developing these kinds of equity arrangements with specialists, to lock in their physician groups.

From the standpoint of specialists, these are important favorable trends. There are also some negative trends as well. Over and over again, we were told that specialists were reimbursed on a fee schedule and that that fee schedule was related to Medicare fees, and there was a percentage of Medicare fees. So it was always the Medicare fee schedule minus something, and how much the minus was depended on the relative negotiating power of the specialists vis-a-vis the managed care plans.

As Medicare bumps down Medicare fee schedules, the specialists get a double hit. They get less reimbursement from Medicare, and they get less reimbursement for managed care plans, who tie their own reimbursement to those Medicare fee schedules. There is a lot of concern about that.

The only community in which the tie to Medicare fees was not in a negative direction was Greenville, and this was the community that was identified as not having an oversupply of specialists. In that community, it was reported to us that managed care reimbursements to specialists were at more than the Medicare fee schedule.

Certainly, a negative trend, as Paul has already pointed out, is the difficulty in farming and sustaining physician-based organizations, like single- and multi-specialty IPAs as negotiating vehicles with health plans. We do not know how that is going to turn out.

Then, of course, what is the response of employers going to be as they see the premiums for health plans increasing over the next few years, and how is that going to trickle down to specialty care?

The issues to track in the specialist area, I think there are four that are kind of interesting. One is this attempt to create single-specialty monopolies in geographic submarkets.

I am going to say a little bit about this because this really escapes the radar screen of antitrust. What you are talking about here is health plans having to create broad networks of specialists to satisfy the demands of employers and consumers. That means if you are going to market to employers, especially larger employers, you need to have specialty care coverage in all parts of your city, all parts of your market area.

You have got to cover Southeast Phoenix and Northeast Phoenix. You have got to cover north of Austin and south of Austin. If you are single specialty, you do not need to form a single-specialty group that includes all of the specialists in a given market area to have market power. If you did that, you would get antitrust attention.

What you do need to do to have market power is if you can get everybody, say, in the southeast part of the city together in one group and my managed care plans have to negotiate with you because they have to have that specialty covered in your area of the city, then you have created a geographic submarket monopoly, in other words, an area where you have market power and it is going to fly under the radar of antitrust. We see this happening in most of our communities.

These mergers among single-specialty groups are very strategic. They are not sort of get together. They are very strategic, trying to create more bargaining power with managed care plans.

Competing rather than partnering with hospitals, we were very surprised by the degree to which this is going on. We did not capture this. It did not appear in our initial round of site visits. So we did not focus on it. When we went back, it was very clear that it was an important part of what is going on in these markets.

On this emphasis on physician leadership that Paul mentioned earlier and then finally the pursuit of brand-name differentiation, I am a little surprised historically that physicians have not been quicker to try to establish a brand name for themselves, particularly specialty groups.

We see direct marketing to consumers now by drug companies trying to create brand awareness that will get translated back to physicians. It would be interesting as we move forward in the future to see whether specialty groups try this same sort of direct marketing approach to consumers, trying to create brand-name recognition that will translate into better and stronger bargaining power with health plans.

Of course, how will all of this affect consumers? Will specialists succeed in differentiating themselves, and will they succeed in creating submarket monopolies? And if so, what is going to happen to price, what is going to happen to consumer choice, and ultimately, what is going to happen to quality of care?

I think that what is happening in the specialty market is a really interesting part of this sort of churning that Paul describes is going on in health care markets right now, and you see a lot of variation across the 12 markets. They are starting at different places. So specialists start with different degrees of market power, and they are choosing to exercise it in different ways. It is very hard to predict exactly where this is all heading.

Thank you.

[Applause.]

DR. GINSBURG: Response by Marsha Gold.

MS. GOLD: Good morning.

My perspective is really someone who studies markets, but then tries to translate that back into what some of the policy issues are, what some of the challenges are in an operational sense, and so I am going to take perspective in talking about Jon's paper.

I was really excited to see that the center had focussed on specialty care, and really, it is always a pleasure to hear Jon talk about some of this analysis. I think it is a really important topic that has really not been studied very much.

Basically, those of us who have been looking at physician contracting with managed care and the financial incentives, a lot of the research has focussed on primary care for the most part, and we do not know very much about specialty care, although we have started to learn that, but the dollars are in specialty care. That is where the costs are. So it is very important that we start to understand more about what is happening in the specialist market.

The other thing that is happening--and, Jon, I think this might explain why you see specialists competing with hospitals now more than in the past--care is moving out of the hospital setting. It is certainly not inpatient anymore. It may or may not be hospital-based.

I would guess that that has to give the specialty physicians a little more clout because they can build a new hard hospital or they can do a freestanding center, and so that changes the dynamics some. So it increases the importance of knowing about specialty care.

One of the things that I think is really interesting is that we know so little and there are so many specialists, and they have different reaches. We are in the middle of a study for the Medicare Payment Advisory Commission, and one of the things we are trying to look at is how physicians are paid and we are trying to look at specialty care, but when we got into it, people said, "Well, you can look at this specialist." David knows you can look at that specialist. You could not. You could only keep people on the phone so long. So we had to make certain decisions as to what we looked at and what we did not.

One of the things that this type of study, I think, can do is really help us focus on what are the most important kinds of specialty arrangements to look at, where is it happening, among which specialists, and all the reset. So it is really important.

In terms of the policy implications of the changes that Jon was talking about, I would like to focus on two that I think really come out of the findings as to what is going on in the community. The first is sort of what all this organization or not organization where it is happening or capitation means at the specialty side, and the second is what that means about the relationship between primary care and specialty care. So let me start with the organization and capitation.

What Jon has, I think, described--and I am not sure how you would characterize the magnitude of the activity. That is one of the things that is hard with this qualitative work. It is sort of getting a sense of how deep it goes and things like that, but what he has described is sort of pieces of specialists contracting with hospitals or health plans to take on certain responsibilities, and I think if you think about that at least conceptually, there are both advantages and disadvantages to that type of structure.

Starting with the disadvantages first, potentially it adds to administrative costs and fragmentation of care because each piece has to do its own negotiation. That obviously reduces the dollars that are available to care and could hurt people. If people are trying to figure out how to negotiate the system, that could make it harder for them to know where to go because they do not have a specialist. They have a whole person, and they may use several specialists.

There also is the potential for cream-skimming. In markets, people are trying to get a market niche. So to what extent are people trying to pull of cases that are less expense, like the heart hospitals? What is the impact somewhere else down the line? Where does disease management fit in all this? So those are sort of the concerns, I think, from a public policy perspective because of the distributional effect,s how is our money spent and what is available to support what.

You also have an ability through that organization to enhance some of the care delivery. There are some specialists that really are very people-focussed and population-based. So you have mental health, you have some cardiology, radiology, and pathology. Those deal with sort of a more integrate set of conditions, and to the extent you can use the contracting mechanism, the health plan really can both get into potentially some really quality contracting with providers that make a lot of sense and also impose some standards and things like that.

The second advantage, I think, as specialists get more organized, it give you the ability to engage with the primary care physicians and a debate as to what is the appropriate way medicine should be practiced. That is something I think Bob Berenson when he was running a health plan commented on a lot, and he would talk about sort of if you could capitate the specialists and leave the primary care physicians in fee-for-service, you give them an incentive to talk to each other about what the primary care physician should handle and what the specialist should handle.

So I think that there are both risks in some of the structural changes and there are opportunities, and one of the harder things is to get enough beneath the surface to be able to sort out what is happening at a sufficient level to be able to interpret it in terms of those risks and opportunities.

The second area of interest is sort of what this says about the role of specialists versus primary care physicians or how it affects it really, I should say.

When managed care started out, it started out as a very primary care-focussed activity. There was a medical home. You had the primary care physician, but medicine is becoming more complex, and we have also seen a movement to looser networks. So, as medicine gets complex, how much should the specialist really get involved, and you see things like hospitalists. As you get some of these contracting arrangements with specialists, is there a way and opportunity for that to create a tension that is creative between what the primary care physician is going and what the specialists are doing?

The other point about that is there is a big variation across markets, and when you are thinking about some of these contracting arrangements, I think it is important to keep in mind that the infrastructure of physician practice is different. So the submarket that Jon talked about there is different.

In studies we have done of markets of Medicare managed care, we looked, for example, at New York City and Portland. New York City, it is all very specialty-oriented, very teaching hospital-based. Everyone wants to go to the specialist, and they know which one, in which hospital.

In Portland, Oregon, it is much more primary care-focussed, and if you look at the statistics there, you will see that.

In other markets, it may be specialist-focussed, but not so much the name recognition of the hospital, and so those characteristics of the infrastructure and the way physicians practice are going to influence what contracting opportunities are possible, what role the specialists are going to play, and the big problem is there is very little data that helps us differentiate among markets that vary on those characteristics.

The final point, then, to leave with this is a question I have. We sort of describe markets, but one of the questions is where does the patient fit in this, and these are sort of structural arrangements and they are contracting arrangements and they affect the flow of funds, but they also have a potential to affect how care is delivered.

So, if I am a patient, what does that mean about how I access care? If I am a physician or I am multiple physicians, how does that affect how I coordinate care for people? So I think linking the structural changes, they are tools.

We talked earlier in response to Paul's paper about how you get the system to work together, and as medicine gets complex, one of the questions is how do you make it be a system rather than a series of parts. These contracting arrangements with specialists are interesting because they have an ability either to help sort of pull it out into pieces, or it also has an ability to start creating an infrastructure that can help care get delivered.

Unfortunately, I am not sure there has been enough emphasis because all the change having been done so fast on the care side of it as there has been on just the contracting and structural side of it.

DR. GINSBURG: Thank you, Marsha.

[Applause.]

DR. GINSBURG: Let me get our discussion going with a question to Jon or anyone else who is talking about the resistance by insurers in many of the sites to the ambulatory surgical facilities.

What strikes me is that the notion that we do not want all of these extra sites of care available because that will stimulate use seems like the thinking that was very prominent in the 1970's, and it seems somewhat outside of the box of the thinking of the 1990's where you think of the plans and you say that is great, they are opening up all these ASCs, we will get to compete with each other and we will get a very low price. Do you have any thoughts about that, Jon?

DR. CHRISTIANSON: Yes. One thought about it is that some of that pressure is coming from hospitals, and it seems to be the most effective in markets.

Paul talked about earlier, we have some sites that are relatively small markets that basically have a couple of hospital systems operating in them now, and if the health plans want to deliver hospital care, they have to contract with those hospitals. So, when those hospitals say, "You know, we do not think you should contract with this new ambulatory surgery center because it is going to proliferate services and increase costs in the long run," the implicit threat behind that is "And you need us because we are the hospital in down, you have to contract with us." So you see that kind of resistance playing out in those smaller markets, and you do not really see it in some of the larger markets in that way.

DR. GINSBURG: Thanks.

DR. O'NEIL: Jon, any partnerships, though, between plans and specialty physicians and the creation of those, particularly around the creation of centers of excellence and branding those as a part of the marketing ploy on the part of the plan?

DR. CHRISTIANSON: We did not see that in the markets that we studied.

DR. GOLDSMITH: Jon, your comment about single-specialty groups focussing on geographic submarkets is prescient because I see that going on in primary care as well. Instead of forming 150-person primary care physician group that tries to stretch across an entire metropolitan area and take on a lot of the overhead characteristics of the small hospital, I am seeing in some places like San Diego 5-person family practice groups that have half or two-thirds of the primary care in an attractive neighborhood, making alliances with other 5-person groups and having 60 people that you have to contract with or you cannot penetrate the 10 most attractive neighborhoods in that market. Those folks are getting leverage without the dis-economies of scale and coordination that you get by creating some type of massive entity with a lot of overhead.

DR. CHRISTIANSON: Yes, exactly. I think it makes a lot of sense from their point of view, but I think it is also important to realize that this really is a strategy that is created by a consumer demand for a certain kind of product and the effect that has, then, on what managed care plans have to do in terms of setting up networks. That is what creates this opportunity for these single-specialty groups to carve out these submarket monopoly positions, and they are reacting to that opportunity. So I think that sort of cause and effect is what is really fascinating to me about this process.

DR. GINSBURG: Yes. That is a very good comment because, in general terms, you would say consumers' demand for broad networks is weakening the power of health plans to negotiate with providers, and that is really a very specific way that it can happen.

DR. GOLDSMITH: You kind of wonder whether it is really going to change. I look at how hard organizations like Kaiser and Group Health are struggling even to break even, let alone to create a product that has any qualitative advantage over that broad network. So I think we may be, for better or for worse, stuck with that broad network framework for quite some time.

DR. CHRISTIANSON: We did see some cases where specialists have tried to create community-wide presence, maybe like the old model where you would think if we were a single-specialty group that had offices all over town, then we would get the sole contract with the managed care companies, but that does not seem to be a strategy that has worked and in fact we just do not see that happening in these markets.

DR. GINSBURG: Questions from the audience?

DR. GLICK: My name is Henry Glick, and I am a practicing obstetrician/gynecologist for 37 years and vice president of Medical Affairs of Baptist Health Systems which is one of the largest health centers in South Florida.

I have a tremendous frustration because I can recognize how critical it is to study health system change. We know the question, and what I want to know, which is difficult, is the answer.

I can tell you what has happened in South Florida. If you review the health care studies in 1997, I believe we had 64-percent penetration of managed care. Probably, my practice is 95-percent penetration of managed care.

The hospital system, which has been one of the most successful systems, has 1,800 physicians, has now 4 hospitals, and for the first time this year is losing a significant amount of money.

What is the answer? We participate in the advisory board, which is a think-tank in Washington which suggested the PHO, which was not successful. Then we formed an IPA of 800 physicians, which was totally a disaster because, when somebody talks about hurting cats, you cannot have 800 physicians hurting and establish a risk model or fully capitated model.

Five years ago, what would have been totally impossible because of the economics of the condition--I formed 2 years ago a single-specialty group OB/GYN practice that managed 80 percent of all the OB/GYN care of Baptist, South Miami, and Mercy Hospital, which are the significant hospitals. It was almost totally impossible.

Our obstetric fee, 5 years ago, was $3,500, and it was racheted down to 12-, 13-, $1,100. With this single-specialty group, which I thought was one of the biggest in the country--and it would only have happened because of the economic conditions at that time--were able to successfully negotiate contracts with managed care for maybe 18-, 19-, 100 or $2,000, and that is just an example for obstetrics.

In the meantime, we formed a diagnostic center. We formed a partnership with a group called Medisphere out of Nashville, Tennessee,and the point I wanted to make--two points. One of them is that, unfortunately, what has happened in medicine--and I sort of relate it to business--if you make $100,000 in your business and all of a sudden the next year you make $22,000 or $18,000, what do you do to increase your income? You find more ways to make money.

When you talk about diagnostic centers or you talk about procedures and increased technology and pharmacy costs, everyone, unfortunately, in medicine is trying to make more money. I have practiced for a long time, and that is the perspective that I have.

So what I am asking is that sometimes I tell the chief and the CEO of our hospital--you know, he sees it from the skybox. I see it from the plane floor. With your view of the future, it is easy to talk about all the things, the IPAs, the PHOs, but I want to know substantially. A single-payer system, isn't that a good idea?

[Laughter, applause.]

DR. GLICK: I hate to say this because I know there is probably 99-percent consultants in the room. Somebody told me that if somebody gave you watch and they would tell you what time it is--

[Laughter.]

DR. GLICK: With all due respect--and the last thing I am going to say is I heard Dr. Ijamhopen who was the founder of managed care make this statement at a meeting a year and a half ago at a conference. He says when he had the idea of managed care, it was with a focus on cost and quality. I do not have to tell you, it is a focus on cost, and there is no regard for quality. I am sorry, but that is why.

[Applause.]

DR. GINSBURG: I think you brought up a lot of important things. I think people on our panel will have responses.

DR. GOLDSMITH: I do not own a watch myself.

[Laughter.]

DR. GOLDSMITH: So, if you ask me what time it is, I have got to borrow one from Jon Christianson.

A single-payer system would certainly put a floor under your income and would reduce a lot of your uncertainty, but we have not had a very good record as a country in managing things that we declare to be public goods. Maybe there is going to be a big groundswell of support for it. I do not know.

As to your question of what needs to be done, the thing that is really scary to me is that you look at different subspecialty groups or different obstetrical groups, different hospitals, there may be a four- or five-fold variation in your risk of being killed by using one of those groups, depending on who they are.

Obviously, the way managed care is configured now, you would think that managed care plans would have quality screens so that the open-heart programs that were killing 1 out of every 6 or 1 out of every 7 of their patients simply did not get paid, but they would get sued if they did that and there is all sorts of problems with actually setting an empirical standard for patient safety.

So what I think a lot of these managed care plans are going to do for their second act is begin--and there will be a hail of dead cats when they do it--publishing the comparative performance information as well as comparative cost information of the different elements in their provider networks and letting people see where the risk and cost is and maybe creating payment structures so that if your obstetrical group is able to reduce complications and produce really good results for a given price, then people will not have to pay anything out of pocket if they visit you.

So I think the innovation is going to have to begin in major part on the health plan end in changing this paradigm that everybody in their network has an entitlement to be paid and the illusion that, of course, everybody is doing a great job. We know that both of those things are not sustainable.

So I see the health plans coming back with information and feeding a lot of it to consumers directly through the internet, bypassing the employer in Washington and all the rest of it. I think that it is becoming accountable for the quality and for a higher standard of patient safety where I see the health plans in our health system needing to go.

The structures that get you there, I think we are besotted with structures. It is like find a structure. All those other guys are doing it. Let's be exactly like them. I think we have got to discipline ourselves to stop doing that.

DR. GINSBURG: Jon?

DR. CHRISTIANSON: I do not have much to add to that. I would just say that the comments you heard here are the kinds of comments obviously that fed into this talk today because he really touched on everything that we were hearing in our interviews in terms of how frustrated the specialists are feeling about how do we respond to this kind of market change, what do we do.

I guess the other thing I would just sort of throw out on the table, the question presumes a solution. The question presumes that somehow if we look hard enough, we are going to find a model or we are going to find an approach that is going to be able to accomplish all of the things that we want to accomplish in our health care system, most of which are contradictory.

I think the health care system will evolve in the best of worlds, much the way Jeff describes it, but I think it is very difficult to predict how any system will evolve when in effect you are asking the system to do contradictory things.

DR. GINSBURG: Let me just make a final comment. One thing where health care differs from a lot of other industries is that in other industries, if a company is losing money because they cannot get price for their product that measures up to their cost, they either perceive a way they are pretty confident of, of lowering their costs or they get out of the business and go and do something else.

One of the phenomenons of health care is that we have non-profit hospitals that they have no incentive to leave until they actually have to close their doors. So, in a sense, you do not have those exits that, in a sense, can hasten those adjustments. I think in physicians, they have trained in medicine and they are not about to leave and do something else.

DR. CHRISTIANSON: And as I said in the talk, there also is an enormous inertia in terms of moving to a different location. So exiting a market is tough for specialists. So you have both of these phenomena going on, too.

DR. GINSBURG: So, to the degree that some of the pain is due to oversupply, hospitals and physicians, it is going to take a much longer period, and maybe a lot more suffering and attempts to do things that do not work, I think the cost of this notion of health care. This is why I think you hear more from physicians about single-payer system. That probably is their short-run way out of this, but it is not necessarily good for society.

We are running late. The woman at that second microphone has been up for a while.

MS. SEVERONI: Thank you.

My name is Ellen Severoni, and I am president of California Health Decisions, which is a non-profit public involvement organization in California.

I wanted to pick up on Ms. Gold's point where you said clearly where is the patient in all of this. From my perspective, the past 15 years, I have listened to well over 100,000 people talk to me about their concerns with the health care system. What I see reflected in the system that we have today is no real structure-sorry, Joe--but a real structure or process for bonding the patient and the physician as the center point of the interaction or the provider, let's say if you want to talk in broader terms.

I do not see structures or processes in place, for instance, that allow for health plans and medical groups to contract for the benefit of the patient. There is no structure in place, at least in California, for health plans and employers and medical groups to work together on quality improvement.

My organization has formed some of those kinds of projects with specific plans, providers, and employers to do that, and as soon as we the consumer organization try to extricate ourselves from that work, the projects fall apart. What the players tell us is there is really no incentive. There is no structure in place that allows for that communication other than the contracting period. So that, what we have are patients that literally, I think, feel like we are getting creamed all the time because who can survive these kinds of, I think, very-driven-by-greed and self-interest kinds of contracts which I understand in the business sense, but now that we are talking about provision of health care services or provision of information to people who need it--

So do you see on the horizon any of those structures? I mean, even single payer seems to me to be a tactic that would try to force us to communicate with one another, but if we are going to continue with a market-based system, how would we put into place some of those structures or incent the institutions to focus in on the benefit of the patient or improving quality

DR. GOLDSMITH: I think the patient completely disappeared in this process. I think the patient was thought of in terms of blocks of hundred-thousand lives, you know, that I am acquiring lives by buying your physician group or I am acquiring lives by merging with this other health plan. I think the individual patient was completely lost in this process.

The individual patient's reponse to this loss of focus on their needs has been to completely bypass the existing health care system and use the internet to try and get answers to their questions. That is really what the internet revolution in Medicine is about. It is about people confronting this increasingly arrogant corporate delivery system and insurance system and saying I am not getting the solutions to my problems that I need out of these corporations or organizations. So I am going to go directly to the information sources, and I am going to talk to my fellow patients and see if we can work it out that way.

That is not an optimal solution, is it? We have invested hundreds of billions of dollars in creating this medical infrastructure that people do not feel is meeting their needs.

MS. SEVERONI: And the value of the information on the internet, how do I know what I am getting so I can begin driving--

DR. GOLDSMITH: A major commercial opportunity, I can assure you.

[Laughter.]

DR. GINSBURG: We could discuss that for a long time.

MS. GOLD: I like the internet.

I wanted to sort of make two points. One is that while it is appealing, I think, to think about going back to the old Marcus Welby-type arrangement of the doctor and the patient, one of the things that I think is challenging in putting the patient back in here is that medicine is changed. The issue is it is not just a doctor. It is probably multiple doctors. It is other providers. It may be the internet. It may be other ways.

Yet, for an organization, what is the models of putting the patient back in and having the patient feel a loyalty or feel a commitment or feel a communication when medicine itself has changed? That becomes important.

The second is, I think, a comment on some of the changes in the health systems that people are talking about here, which is that it becomes really harder to implement those kinds of changes when you are emerging, consolidating, and things because it is disruptive. I think you just spend all your time.

I do not know how you do an information system when one day you are doing it for one company, another day you are doing it for another, and Aetna is merging with Pru and they each have different systems and if you are a patient the name of your place changes. So I think that is sort of an under-appreciated fallout of some of this, but I do not think we would ever go back to the same model.

So the question is: If you look at this from the patient's point of view, what are the different models and what are the more realistically based ways of connecting the patient in this? I am not dealing with your financial questions because those are sort of a different level.

DR. GINSBURG: Good. Thank you.

This was lively. We have got a schedule, though. Let's carve some time off our break. Let's take a break now and be back in 7 minutes and start the final segment.

[Recess taken at 10:48 a.m.]

DR. GINSBURG: Let me give you some background on the next presentation about Blue Cross and Blue Shield plans. After our first round, we sat around the table and started thinking about, well, what was interesting that we didn't get much on but we'd like to learn more in the second round?

And this was one of the topics that came prominently, that basically in people's interviews with Blue Cross and Blue Shield plans they got a sense of them as organizations that was different from the conventional wisdom and particularly different from what they were hearing on Wall Street. So, we pursued this as one of our special topics and I am pleased to introduce Brad Strunk, of HSC, to do the presentation.

MR. STRUNK: Thank you, Paul.

Good morning. I am very pleased to be here this morning and to have the opportunity to share with you some of the results from our site visits on Blue Cross and Blue Shield plans. Through the course of this presentation, I will be highlighting some of the key findings from research I've been working on with Joy Grossman looking at what it means to be Blue in today's market. And I would like to emphasize that we interpret being Blue in a very broad and general sense and not just in terms of the relationship to the Blue Cross Blue Shield Association.

Our interest in this topic was motivated by a number of factors. There's currently over 71 million Blue Cross and Blue Shield subscribers. And if all the independent Blues plans were taken together, this would make them the largest health insurer in the United States.

The Blues have held a unique role in the health system and it's historically been the dominant plans throughout the country. In fact, in our first round of site visits to the 12 communities we track, we found that this was still true in many cases, as Paul said earlier.

We are interested in this topic because in general health plan analyses and research focuses on national managed care companies and HMOs and not local markets and PPO and indemnity business. This study gives us the opportunity to look at traditional local health plans operating in a changing health system.

As for the Blues, in particular, much has been written about them but there haven't been many recent systematic studies of them in the managed care environment. Given the lack of recent analysis of the Blues in the managed care context, this study attempts to fill this gap by looking at Blues plans in a nationally representative set of markets.

There is at least one Blues plan in each of our 12 sites; in fact, in two sites, Seattle and Orange County, we find two Blues plans. The two sites are--these two sites are particularly interesting in that the Blue Cross plan and the Blue Shield plan there or plans, sometimes a number of plans, haven't merged with each other and vigorously compete against each other.

As I mentioned earlier, the Blues played a unique role in local health systems across the country. They are started by or as a close collaboration with hospitals and providers and, as such, enjoyed a relationship with providers that other commercial insurers did not. While the Blues have historically been diverse in many ways, many share the commonality of being founded with a sense of a community mission and working to serve the public's benefit.

Connected to this social mission, many of the plans were started out of unique enabling legislation and as such were often faced with unique regulations, as well. This included the responsibility to be the insurer of last resort, for example. In many States it also meant that the Blues enjoyed special tax treatment and up until 1986, they even enjoyed a special Federal tax exemption.

Under the purview of the Blue Cross and Blue Shield national associations, plans were granted the exclusive right to operate in particular areas of the country. With competition among the Blues restricted and limited competition from commercial insurers, the Blues plans were often able to obtain very significant market share in their local markets. And with large market share they eventually developed one of the most recognizable brand names in the country.

Now, given the history I just discussed this study turns to the present situation of the Blues and asks the question, what does it meant to be Blue in today's market?

We're particularly interested in examining what makes the Blues different from their competitors and how are these differences playing out? What competitive pressures are the Blues facing and how does being Blue affect the strategies they pursue? And, overall, how are the Blues faring into today's changing market place?

The major findings from our study challenge many of the common perceptions about the Blues. And we have three major findings to this effect. First, despite perceptions about the Blues' difficulty competing and the sense that they are being left behind by managed care, we found that the Blues continue to maintain a strong position in most of our markets.

Second, our study challenges many perceptions about the competitive advantages and disadvantages of being Blue. For example, the Blues plans were often thought of as quasi-public organizations; when in reality it's no longer so much what's on the books that affects their ability to compete, but rather lingering expectations from a legacy of regulation.

While the Blues are not distinguished in many ways that many commonly assume, they remain unique in many respects. And this leads to our third major finding that being Blue leaves its mark on the strategies that the Blues are pursuing today.

While they are facing similar pressures and pursuing similar strategies as competitors, implementation is sometimes shaped by the unique features that distinguish the Blues.

Now, to get into these findings in a little bit more detail, I will start by focusing on market position. Our first major finding is that contrary to many common perceptions about the Blues, they continue to maintain a strong position in most markets. Looking across all products, the Blues actually remain the dominant plan in 7 of 12 sites that we study and they are major competitors in the rest of the sites.

Much of their strength is attributed to their presence in the PPO and indemnity market. This is even the case in those markets where they have strong HMOs such as in Greenville, where Blue Cross and Blue Shield of South Carolina has the largest HMO enrollment but they still rely on their other lines of business for the bulk of their enrollment.

In fact, the sites where the Blues maintain a dominant position are those with below average HMO penetration. For example, in the low HMO penetration site of Little Rock, the Blues are reported to hold roughly 50 percent market share in that market. In places with higher than average HMO penetration the Blues tend to face more competition that has been cutting into their dominant position.

For example, in Boston, the Blues are competing with two other local health plans, Harvard Pilgrim and Tufts, that also have a very strong brand name recognition and are particularly known for their HMO products.

Cleveland and Lansing stick out here as exceptions to this finding. Cleveland is a special case because a few years ago the Blue Cross and Blue Shield license and trademark were transferred from what was formerly Blue Cross and Blue Shield of Ohio to Anthem as a result of concerns stemming from a proposed merger with Columbia HCA.

Anthem still hasn't gained the market share they hoped for and, in fact, the former Blue Cross and Blue Shield of Ohio, which is now Medical Mutual of Ohio, is still the dominant player in that market.

In Lansing, even though there is larger than average HMOs penetration Blue Cross and Blue Shield of Michigan remains the clear leader there with respect to overall market share, mainly because of its unequivocal dominance of all other product lines.

Now, moving now beyond the discussion of market position, our next set of findings help us to explore the competitive advantages and disadvantages of being Blue. As I noted earlier, many of the findings about these issues test conventional wisdom about what differentiates the Blues. In the next few slides, I will discuss four key features you see here that differentiates the Blues and explore the extent to which these are competitive advantages and disadvantages.

The Blues' unique history and longevity in the market plays out in a number of ways today. Clearly their history has given the advantage in terms of size, which gives them considerable market clout. Their history and longstanding relationships with providers have left them with broad networks that are very appealing to purchasers, and their longevity in local communities leaves many market observers to characterize the Blues as stable and secure, which is positive at a time when there is so much turmoil in today's changing health system.

However, there is a flip side to these advantages. Because they have so many lines and have been part of the community for so long, the Blues are subject to heightened scrutiny from providers, purchasers and the public at large. Similarly, the broad networks have a downside in that they may complicate Blues' ability to pursue managed care initiatives, such as working with a more selective group of providers.

And, finally, their size and longevity leaves them susceptible to being perceived as old-fashioned and bureaucratic.

In many markets we heard the Blues sometimes referred to as the 1,000-pound gorilla, which speaks to their market clout particularly in relation to providers but also to the fact that they are perceived as slow-moving.

One of the common perceptions of the Blues has always been that they are a uniquely regulated set of organizations required to serve in some sort of public benefit role but often rewarded with special tax treatment. However, the findings of this study question that perception.

In fact, we find that the Blues are not subject to as much differential regulatory treatment as they were in the past. And, as a result, both their related advantages and disadvantages have diminished.

In most cases, in the study the responsibility to be the insurer of last resort was eliminated in the late 1980s and early 1990s. Furthermore, the special Federal tax exemption that the Blues enjoyed was largely eliminated in 1986.

There are still some differential tax treatment for certain plans due to differences in organizational structure in that some are not for profit, some are mutual companies and in this study we also have one investor-owned company, Wellpoint in California. But differences vary by market and were usually perceived by our respondents as insignificant in competition.

Blue Cross and Blue Shield of Michigan, I should note, sticks out here as an important exception. It still is required to be the insurer of last resort in Michigan and the State is very active in regulating many aspects of the plans' operations.

The fact that differential regulation has diminished relative to the past does not mean that the Blues face a completely level playing field, however. In many sites, market observers expressed and Blues' respondents perceived an expectation to serve in some sort of a community benefit role despite a lack of a requirement to that effect.

Premier Blue Cross in Seattle, for example, felt significant pressure to remain in the individual market despite very significant financial losses. The Insurance Commissioner there made this a very prominent issue and it received a lot of attention in the press. Although they did finally exit the market, they felt that their actions were subject to a higher level of scrutiny, in part, due to their history in the individual market.

The sense that there is a different expectation for the Blues' plans also becomes apparent in the case of conversions and I will address this issue later in the presentation.

A third factor that differentiates the Blues from their competitors is the brand name recognition of the Blue Cross and Blue Shield trademark. However, many respondents in our study questioned the actual value this provides. Most market observers do agree that the brand name recognition is strong in certain segments and helps to bring them business. For example, it's strong for seniors, individuals, people who travel and unions. However, the benefits of attracting these traditional Blues segments are not always positive, due to variations in the profitability of these segments across markets.

Furthermore, respondents suggested that Blues, like their competitors, need to be pricing at markets to be competitive and that the trademark does not give them the ability to obtain a premium on their products. Price being equal, respondents suggested that being Blue does actually give them some advantage over their competitors. Nevertheless, market observers questioned the overall value of the trademark given today's very price sensitive purchasers.

In addition, there's a sense that the trademark does not represent managed care which is a disadvantage given employers' reliance on managed care today. However, some respondents suggested that given backlash, the Blues' broad networks and strong PPOs might be seen as very attractive to purchasers.

A final way that the Blues are distinguished is by their unique, by a unique national association that provides certain benefits, such as the ability to organize national and government accounts, the Blue card program which allows Blue Cross and Blue Shield subscribers to access care when they're away from home; and a forum that helps to facilitate closer relationships among its members. For example, when Mountain State Blue Cross and Blue Shield in West Virginia went bankrupt, other Blues, including the former Blue Cross and Blue Shield of Ohio, stepped in to help them recover.

However, our study challenges the perception that the Blues are a monolithic organization or a collection of uniformly characterized organizations making up one big national player. in fact, our results show a great deal of market variation in the way these plans look and act. Take, for example, a plan like Blue Cross of California, which is owned by Wellpoint, which given the advanced managed care environment in Orange County, no longer offers any indemnity products. In contrast, Blue Cross and Blue Shield of Central New York's indemnity business still makes up a huge chunk of this plan's business in the low HMO penetration area of Syracuse. In fact, the plan just introduced the PPO last year following the elimination of hospital rate setting that had previously made this product unfeasible.

This contrast underscores the local orientation of the Blues. While the association offers them a number of strategic options their strategies are primarily shaped by the specific circumstances of their local market. Unlike national managed care companies that might try to impose a national strategy on their local markets, our data suggests that the Blues are driven first by their local market and second by a national Blues identity.

Thinking across the many features that differentiate the Blues, their history, their regulatory legacy, their brand name and a unique affiliation of local plans, our study suggests that there remains something distinctive about being Blue.

This leads to our third major finding which is that while the Blues face many similar pressures and are pursuing similar strategies as their competitors, the way these strategies are implemented and getting played out is sometimes distinctively Blue.

Like their competitors, Blues' plans are confronted by purchasers who are demanding broad choice and low premiums in an effort to maximize the value of their health care dollar. Just as other plans, the Blues are also experiencing pressure on margins given the current stage of the underwriting cycle. Like many plans around the country, many of the Blues have been challenged by financial difficulties in recent years.

The Blues also face pressure from new competitors and the threat of entry and from shifts in the balance of power as providers consolidate. In addition, the Blues share with their competitors a continuing struggle to find effective ways to work with providers to find effective ways to deliver cost-effective care.

In response to these pressures, they are also pursuing strategies that on the face of it appear very similar to their competitors. They are actively involved in mergers and acquisitions and joint ventures in an effort to gain market share or achieve efficiencies and expand into new geographic regions.

In addition, certain plans are closing out unprofitable business, such as Medicare and Medicaid and exiting the non-core lines of business, such as zoning and manager provider groups, while at the same time introducing new products where there is greater potential for profitability.

However, despite these many similarities, our study highlights that while these strategies may be similar on the surface, they are sometimes being played out in a way that is distinctively Blue

Now, the Blues are pursuing consolidation and geographic expansion, they are usually doing so with other Blues plans. And the extent of this consolidation can be seen in the fact that there is 51 Blues' plans today versus 69 just four years ago and much of that consolidation has involved the Blues merging with one another.

One of the plans that is leading this trend is Anthem which Paul alluded to earlier in the morning, which started as the Blues plan in Indiana and now has not only merged with the Blues plans in Ohio, Kentucky and Connecticut, but also has pending merger plans with the Blues in Maine, New Hampshire and Colorado.

While Anthem has gotten a lot of attention for its national consolidation efforts, it's not to say that other Blues' plans haven't been pursuing mergers and affiliations to strengthen their regional presence, as well. For example, the plan in Syracuse merged with its neighbors in Rochester and Utica to form a more regional entity in Central New York.

In addition to the fact that the Blues tend to merge with one another, the pursuit of mergers is also distinguished by heightened scrutiny from regulators and the public stemming from the unique expectations of the Blues. A good example of this from our study involves the failed merger between Anthem and Blue Cross and Blue Shield of New Jersey. In this case regulators ruled that despite the contentions of the New Jersey Blues the company was actually a charity, thereby, responsible to the community as a whole and not just its subscribers. Therefore, in order to convert the plan would have had to have establish a charitable foundation and given the anticipated size of that foundation the two plans called off the merger. Several respondents noted that the regulators' decision seemed to reflect lingering expectations about the Blues' role in the community.

The effect of being Blue is also seen in Blues' strategies to expand to new geographic markets. Because the plans are licensed for particular services areas, they are unable to market themselves as Blue outside of those areas. And this is particularly problematic in areas with wide commuting patterns that cross State lines such as the New York City/New Jersey/Pennsylvania area.

One way that the Blues have gotten around this is by creating unbranded products which are products that are sold under a different name than Blue Cross and Blue Shield.

Northern New Jersey is again a good example of this. In order to expand into neighboring areas, Blue Cross and Blue Shield of New Jersey renamed itself Horizon Blue Cross and Blue Shield of New Jersey and is now marketing itself outside of New Jersey as Horizon Health Care in places such as New York City and Philadelphia in Pennsylvania. Similarly, the licensed Blues plans in New York and Pennsylvania have also entered the New Jersey market with unbranded products of their own.

Finally, while the Blues are pursuing a number of strategies that deal with unprofitable business, there are some cases where being Blue makes it more difficult than would otherwise be the case. In Boston, Blue Cross and Blue Shield of Massachusetts is the major and only local provider of Medigap products, a product that is particularly unprofitable in Massachusetts. And attempts to improve this situation such as by raising premiums have met with strong opposition from the State.

The Blues, like their competitors, are also pursuing new lines of business. Our respondents generally don't view the Blues as innovators, especially relative to national managed care companies, nonetheless, the Blues do show signs of the ability to innovate and in some cases leveraging the unique features of being Blue.

Consider the following examples, the Selection's point of service product in Seattle. It was there that longstanding relationships with providers left Regents Blue Shield with lots of data on those providers and Regents was able to use that data in order to select a tighter network and create a very successful product.

There is also the new claims processing business in Greenville, where Blue Cross and Blue Shield of South Carolina has a long history as claims processor predominantly for government programs, and is now marketing its claims processing systems and experienced services in the commercial sector nationally. For example, they are now doing all the claims processing for Blue Cross and Blue Shield United of Wisconsin.

And, finally, there's TriWest Health Care Alliance in Phoenix. Blue Cross and Blue Shield of Arizona is one of 14 partners which is mostly made up of Blues plans that formed a company to compete for CHAMPUS business on a regional basis.

Looking across these examples, while the Blues may not be product innovators in the traditional sense, one can see that they are being innovative in other nonconventional ways.

This perspective on innovation is consistent with our overall findings that challenge many of the common perceptions about the Blues. First of all, despite the rise of managed care and a rapidly changing health system, the Blues are, in fact, holding their own admist increasing competition. Second, the study finds that the uniqueness of being Blue may not always be what we think it is. For one, the Blues are not the big, monolithic organizations that many perceive them to be but rather a collection of diverse, local plans operating in diverse circumstances.

Furthermore, the Blues are no longer quasi-public organizations although a shadow of their former role continues to confront them in the form of expectations to act in the public's benefit.

And the value of a trademark that has historically been one of the most recognizable brand names in the country is now in question by today's market observers.

Nonetheless, our study confirms that the Blues' history and legacy in local markets has left its mark and it's still the case that the Blues remain unique in important ways although not in the ways that many commonly assume.

And, finally, the features that make the Blues unique in today's market when taken together are shaping the Blues' strategies as they adapt to a changing market place.

As they attempt to merge and expand, exit unprofitable lines of business and replace them with lines of business that have greater potential for profitability, they're doing so in a way that is shaped by their unique history and distinguishing features. Ultimately, our study suggests that these plans are a diverse set of organizations that are nonetheless continuing to evolve in a uniquely Blue way.

Thank you.

[Applause.]

DR. GINSBURG: Now, we will hear from Ed O'Neill.

DR. O'NEIL: Thanks, Paul.

First, let me apologize for this cold and also just affirm that I get my care from a fee for service compensated primary care provider in the last indemnity plan operating in California.

[Laughter.]

DR. O'NEIL: Just to show you how good it is.

Basically I agree with the comments offered by Brad on his paper from Joy. And my observations come from experience over the past 5 years in being in about 25 of the remaining 50 or so Blues plans and being invited back to about a dozen of them to help them read their watch over an extended period of time.

Let's just get a little bit of perspective. Between 1975 and 1995, the Blues lost one-fourth of their business. There are very few businesses in this country, outside of health care, that could take that kind of body blow, about a 22 million loss in covered lives. But since 1995, they've added 8 million lives back to the stock and begun some significant change in the way they operate.

Much is made of the Blues' conservatism in this paper and I think that the Blues, in fact, are conservative. Sometimes when we hear all of the advice taken from the advisory board and others being conservative is not such a bad thing in health care. You can see the failures as others are paying for them.

But the tradition of operating in a regulated environment and also the tradition of being a not for profit but sort of cost-plus, reimbursed business has not produced a great deal of innovation and contributes to that conservatism.

There is a lingering public benefit orientation which changes dramatically from State to State depending on the position of the plan, the market share of the plan, the ambition of the plan to move from a nonprofit status to publicly traded status. I think one of the hands of conservatism on these plans that Brad alluded to is not just that they were started by hospitals and physicians in the '30s and'40s, but that many of them still operate with physician and hospital representatives on their board in the nonprofit sector.

In fact, some of the publicly traded companies have maintained those board positions in consent agreements with States Attorney General.

I think many of the leadership cadres within the Blues have come out of legal, never a source of great innovation; or, if not legal, operations. So, they are wonderful at discussing the issues and paying the claims but may not be quite as quick on the uptake on a new product design or a new network development scheme.

They have large market share. If you have a large part of the market you tend to be conservative and don't respond. And they have this traditional relationship with the providers. And some sense of noblesse oblige I think in some parts of the country, still, particularly in the southeast in that relationship with the provider community, perhaps more so with the physicians out of that provider community than the hospitals.

I think part of that complexion is also informed by the fact that while they have this enormous market share if you go in and look at a State like Minnesota, you'll find that in the cities they actually duke it out with the other two big plans in terms of about equal share of the market. But where they really pick up their market share is the out of the cities area. And, so, not surprisingly, those conservative, not as intensively managed regions of the State contribute in part to the conservatism as well. But by and large, I think they have been and remain a conservative part of the health plan community.

Now, about the Blue mark. One of the great urban legends in the insurance industry is the story told by all Blues members when you go in and that is that the Blues mark is the second most readily identifiable corporate symbol underneath Coca Cola. Regardless of whether or not that's truth, within the Blues system that kind of attachment to the mark is significant.

It's important I think though to separate in health care today particularly as branding and consumer preference become increasingly important, the difference between brand awareness and brand identity. Brand awareness, people recognize the Blue. What do they actually understand that to mean when they to go the market?

And in the past, I think sometimes--and this paper alludes to it--we've thought that from inside the beltway or from inside the consultant world or from inside the movers and shakers of health care, maybe the Blues looked a little bit like they were in the back seat, not really engaged in cutting edge decisions. And that may be the case.

Interestingly when we surveyed in three States, we've actually found for our clients that consumers disassociate the Blues with managed care for the very same reason, the Blues may be just as managed, they may have just as many lives in that but the consumer doesn't perceive that product to be a managed care product and would prefer that. Particularly when the Blues' products are a price point sensitive and approaching whatever their competitors are bringing to the market.

So, a consumer now with that perception that even though they say it's managed care it's really not managed care, because it's a Blues' product, and I can now purchase it for essentially the same price, the consumer at the individual level or even at the corporate level, is showing a distinct preference for the Blues and I think that's one of the reasons to attribute to an 8 million growth over the past four years.

Alluded to the association and the role in it and I think there's a set of mixed signals. Right at the time when you would hopefully be able to generate some market clout for national accounts, for integration of IT, the development of care management strategies, whatever the particular strategy of the association is, is right at a time when the association is not being rent asunder but certainly being pulled as plans go from not for profit to for profit, as they go across geographic boundaries to compete with one another. And, so, the same kind of colleagueship and common vision and strategy that might have existed 5 or 10 years ago is more difficult, I think, to generate within the association. Though, interestingly, now, there are large regional aggregations, regions in the Northwest, the Anthem accumulation and the accumulation of plans under the Blue Cross California Wellpoint, that may, in fact, achieve the same kind of market power that could be assumed or advanced by a powerful association.

One of the things that the Blues haven't taken advantage of is using this 26 percent share of the market that they have. They've showed little appetite for using that market share to push back on the provider beyond what--the sort of accepted level of push-back from the managed care industry in individual States happens to be.

And I think that is distinctly to their disadvantage. In part they might approach that in a way that invites the provider into a different kind of partnership, a different kind of linkage and then pushes them to refine their product offerings to the customer base. But across-the-board, categorically, Blues have been unwilling to do that.

The other thing that they have been unwilling to do, I think far more so than other health plans, is to demonstrate selectivity in the development of the provider network. They grew out of the non-exclusive world of any provider being paid and they have not developed, I think, the same kind of critical ability to think about the future and how to limit access to some providers.

The paper also alludes to this lingering issue of public benefit, and I think that there there is probably more torture than advantage that goes to the Blues plans because they're unwilling to advance or redefine the public benefit. Right at a time when I think, as evidenced by many of the questions today, there's a considerable amount of angst about what's next in health care, the Blues are in a unique position among health plans by this public perception to be able to articulate a sort of broad public strategy or health commons because they serve in many places the entire jurisdiction of the state.

But, by and large, right at a time when they might be able to take advantage of that, I think they're pulling back from that public benefit and trying to make themselves appear to be just like any other managed care company, and thereby perhaps giving up, perhaps, a big piece of an important part of their legacy.

Thank you.

[Applause.]

DR. GINSBURG: Thank you.

We should start with the panel.

DR. GOLDSMITH: I just wanted to ask either the presenter or discussant, Don't you think it's kind of ironic that after tens of billions of dollars in investment in creating a managed care infrastructure, what we have today in managed care looks remarkably like what we had with Blue Cross 20 years ago? In what meaningful way does a United Health Care, shorn of its utilizing management capability, differ from a Blue Cross plan except for this gloss of community that you talked about?

DR. O'NEIL: Not much. I mean, I think one of the ways to understand the past 15 years from the health plan perspective is 15 years of trying to bring some discipline to the system. Now, I do think that we can't underestimate their capacity to bring cost discipline to the system, but in terms of medical management, I don't think that there's much to be demonstrated.

Of course, the United decision is based upon ten years of experience in which they control selectively the provider group and can still discipline that group, the serious outliers in that, without having to engage directly in medical management throughout the entire network.

DR. GINSBURG: Ed, when you were talking about the opportunity for the Blues at this point to, in a sense, step up and address the public benefit notions, do you think that's most likely to come from the individual plans or from the national association?

DR. O'NEIL: I think it's too fractured within the association to see that. I don't think you could even get a vote on that issue.

Remember, you can think about the association in one of two ways. It's either a fractious trade association or it's a unified health plan. It's probably not either one of those, but we tend to think about it as if it were one of those.

I think the states that have single Blue Cross/Shield plans, United, without a lot of out-of-state competition, may, in fact, be well positioned--well, think about it this way: If the physician from Florida gets his way for a single payer and Jeff can write his article about insuring a floor on payments, then who's going to process those claims? The largest ASO TPA processor in the country are the Blues, so the Blues are going to be with us.

Why not go to your point earlier about what happens if, in fact, we've got so much consolidation and concentration that there really is a public interest question resolved at the state level out of the trade commission and that trade commission is going to have to turn to some insurance entity to form or reformulate the public benefit. And I think the Blues have the only insurance legacy to at least offer themselves as the provider of that.

DR. GINSBURG: Certainly in Lansing, we have a case where, in a sense inspired by both the public and major employers, the Blues in a sense have decided how much of a pound of flesh to take from the hospitals. And so I think that's what you're getting at, that they in a sense could become the enforcer of, yes, we have a monopoly, but we still want this to address the public needs.

Any other comments or should we go to the audience? Yes?

FLOOR QUESTION: Yes, I'm Rob Neelenberg (ph) from the University of Washington. I think this session, this particular topic of plan administration, is probably the most valuable of the morning, particularly as we address the issues of high cost of plan administration and also of managing care. I think the United announcement this week is really a sea change in terms of what's going on out there. They spent $108 million to deny $100 million worth of care that the physician and the patient felt was necessary.

What is unsaid there is that hospitals and doctors who were responding to United Health Care probably spent another $108 million in that process. And I think that's a national scandal that we are now spending upwards of 30 to 40 percent in managing care, in plan administration, in what essentially should be an intermediary function. And I was wondering if you will be studying this aspect of the health industry and reform.

DR. GINSBURG: Well, certainly to speak for myself, you know, this development of a significant, potential significant decrease in the degree to which plans attempt to micromanage care in the sense of reviewing individual decisions I think is going to have a profound effect on the system. For one thing, we'll find out perhaps in a couple of years if United is right in its analysis about the fact that what it was doing wasn't cost-effective even from its narrow interest, let alone the interest of the whole system, which includes the administrative costs of the providers.

I think we'll also see--and I think United may be one of the leaders as far as putting forward the newer forms of care management--the more creative uses of profiling and the more active intervention of preparing patients to be discharged from hospitals.

DR. GOLDSMITH: Well, look at the political costs associated with maintaining that adversarial posture. I mean, they far outstrip the administrative expenses. These plans are selling at price earnings multiples of 10. I mean, that's like a cement plant. You know, electrical utility, they're not regulated, but, you know, they've generated such public animosity and investor skepticism, they really do need to begin doing things differently.

You know, to the point about innovation, if Peter Drucker were here, he'd say that it's innovation that's going to save this industry. I guess that was one of the pessimistic pieces of your comments and your response, Ed, is that maybe these systems are less capable of innovating than the Uniteds or the Wellpoints.

MR. STRUNK: Well, I certainly think that from the perspective of the market observer that's the case, that they are not as capable of innovating as other plans. And the Blues are huge, and when you're that big, I mean, sometimes there's a question of they have this dominant position and why do they need to do something different to do something else.

But I do think there's an opportunity for the Blues, if they are able to leverage some of these distinguishing factors that I was highlighting to do things that are innovative, and they might not be products in the strictest sense, but to do things that are going to further the health system and find new things to do.

DR. O'NEIL: I think if you drill down to the individual plan level--and some of the ones you've looked at, Arkansas--I don't think you looked at Minnesota--Premeira and regions in the Northwest, there's significant innovation and considerable breaking of the mold of their role and their relationship to providers, and I think it's also panning out for many of them in their market position.

DR. GOLDSMITH: Well, talk about what some of those innovations are for a minute, Ed. What specifically are they doing that's innovative?

DR. O'NEIL: In the Arkansas market, I think the alignment--I said that as a group the Blues plans didn't use the alignment process, not an exclusive relationship but the alignment, but I think seriously thinking about major alignments with tertiary care centers of excellence, developing that early on, investing in that, limiting costs through that relationship, channeling patients, not worrying too much about controlling the primary care network, providing open access there, but then focusing the need for specialty care in those centers of excellence. And that same model plays out, I think, in Montana and in Washington State.

These are innovative models, oftentimes not using the latest capitation, hard-core managed care approaches that many people are backing away from anyway today.

DR. GINSBURG: You know, one perspective is looking back in previous years, it may have been that there wasn't a premium on innovation in health insurance. In a sense there were the easy cost savings from paying providers less, and so I think many of the for-profit plans were very much focused on growing, consolidating their position, and perhaps looking forward in the sense that there will be more of a battle on the basis of who can innovate better in the situation where the low-hanging fruit has already been captured.

DR. GOLDSMITH: Just to quibble, but do you consider closed-panel selective contracting an innovative strategy? It's an old strategy that's fallen out of favor because people didn't want it. But is that innovation to you?

DR. O'NEIL: It's innovation if it works and grows the market share. There are innovations, there are good ideas that never get implemented, never get managed, and some of them get managed at quite high levels of success.

DR. GINSBURG: Did you still want to ask your question? Oh, there was woman with the red top there.

MS. BROWN: Yes, thanks. I'm Jill Brown from Managed Care Week, and on the subject of conversion to for-profit entities, I think we're seeing another fight right now with the Missouri Blues' efforts to merge with their subsidiary Right Choice. And I wonder if you would care to project the success of other Blues plans with efforts at converting to for-profit in the future.

MR. STRUNK: Well, I would hesitate to look too far into the future. We can look to what exists today, an example like Wellpoint that is one of the most successful managed care companies around right now and is expanding nationwide and seems to be doing pretty well.

I do think that these conversions are getting away from what the Blues have been in the past, and there's a real question as to how that will play out and how the public will perceive that. But it's hard to say how that will play out in the future.

DR. O'NEIL: Yes, I think that the attorneys general are much more aware of this transition, and the barrier or the hurdle that was at one time pretty low, even though Len Schaeffer had to pay $5 billion for his, which we appreciate because it's in two big foundations in California now. But that barrier just gets higher and higher, and I think it also gets highly politicized in the states for the reason that the paper points to, the traditional public benefit perception of the Blues plans.

So I think if they're going to compete as other health plans, they're going to have to face this issue of conversion. If they don't choose to do that, though, I think they're going to have to go back and ask these questions about how do they recapture some of that traditional public benefit role and work off that and maybe, Jeff, provide some innovation in that arena. There aren't many innovative discussions about the recovery of the public health function, and it may well be that that's an appropriate place for that to take place.

DR. GINSBURG: We just have time for one more question.

MR. McGARVEY: Mick McGarvey from Horizon Blue Cross/Blue Shield of New Jersey. Just a couple of comments going to Jeff's comments and skepticism about innovation within the Blues.

There are examples, I think, peppered throughout the system. Anthem in Ohio, really using the model used in New York State, did a very, very good program on cardiac centers of excellence with very significant drops in mortality and morbidity in the facilities that are performing cardiac surgery.

In our own State of New Jersey, we launched a kind of unilateral office radiography survey and standard-setting requirement which has shamed the State of New Jersey into adopting a very similar thing, which I think has been a useful thing in the State of New Jersey, protecting a lot of patients from some pretty severely antiquated machines and incompetent providers.

So I think some of that kind of thing is going on; though I think given the fact that the Blues are not, in fact, a monolithic presence, anything at a national level is probably a little bit of a reach.

DR. GINSBURG: Thank you.

I'd like to turn to the final stage of our meeting where we ask each of the responders to make just a few minutes of comments about what they see in the future, and they're not limited to the presentation they commented on.

Jeff, do you want to start?

DR. GOLDSMITH: Well, you know, it seems to me that the real leverage point in changing this sort of World War I poison battlefield picture that you've gotten this morning about the state of health care markets lies with the consumer. And I think that there is manifest evidence of tremendous hunger on the part of consumers for better and more accessible information about their own health, a greater motivation perhaps than existed in the past and using that information to improve their own health, and a rising level of skepticism about whether professional judgment, institutional branding, any of those things really are going to make a difference for them.

It seems to me that if there's a way out of this, it is by health plans and health systems innovating to provide consumers better information to enable them to make better choices. If broad networks and choice is sort of one of those rock-hard things about our health care system that people don't want to see changed, but we also know it's a knowledge business--there's a tremendous amount of information, a tremendous amount of variability--it seems to me that leveraging the consumer's desire to make better choices is one of the really important ways in which we can make this health system better.

This is something that I think we can be watching for in these markets.

DR. GINSBURG: Marsha?

MS. GOLD: I was struck listening to all the papers, which I thought were excellent, about the sort of mixed message that you get from the findings, which is the mixture of instability and persistence. I was sort of thinking about Brownian motion. There's a lot happening, but then there's a lot that isn't changing at the same time, and I had two thoughts on that.

One, from the researcher side of me, is that we track pieces now when we look at the health system. We track docs, we track hospitals, but we don't track the way they're relating to one another in the national databases. And I know that's something people have thought about it, but it's really a problem when you've tried to get beneath the surface and see what really is changing about the infrastructure for delivering care.

Second--maybe it's a projection--I think what we're going to have is potentially, as you try and deal with some of the issues brought out from the floor today and people sense is a real fight. I mean, the solution or the approach to these issues is complicated, and I think there's two things going on, the sort of fight between the old market versus planning and command and control. And markets, when you look at that, have both their advantages and their disadvantages, but they don't necessarily pull the pieces together, and they don't deal with some of the distributional issues. But the issue--I don't think anyone in this country is ever going to go to a system that is going to just decide how all these issues are going to be resolved.

So I see a lot of tension between that, and one of the questions I have is whether on the public level it's a continuing debate of market versus regulation, market versus regulation, or whether there's some focus on what might be a potentially more effective way of talking about these issues in terms of whether it's regulated utility models or all the rest as to where--how you put the public interest into the market in a way that's consistent with wherever the value preferences in this country are to deal with some of those issues, because it seems that there's a lot of things that are being lost in the cracks.

DR. GINSBURG: Ed?

DR. O'NEIL: Thanks, Paul.

I agree with Jeff that the consumer is likely to be the next big thing in health care in terms of choice and the integration, but of late, I have been thinking about a quote from Eric Hoffer, which goes something like: When one doesn't know what one needs, one can never have enough--which strikes me as a good little aphorism from the American health care system. Not knowing what really makes us better or keeps us well, we want open access and unlimited access to drugs and all kinds of things.

So I suspect there will be a value for systems that can, in fact, deliver on consumer choice, on information, and on demonstrable quality within health care. And as soon as we have a financing system that doesn't shield the individual consumer from all of those decisions and makes them accountable, at least in part, perhaps removes the ultimate financial liability of catastrophic health incidents, but makes them exposed to those costs, and I think that we'll actually seek out either on the 'Net or from our primary care provider or from our neighborhood or from whomever we seek information, that kind of branded input to help us decide what we need.

I think the larger issue that has touched on most of the presentations today is the issue ultimately of what's the large governing thing that we're going to use to dominate health care. We tried professions. That didn't seem to work. I agree we don't have much taste for public solutions. The market has its downside. And when we turn to the fourth one most readily available to us, the community, we find a woefully inadequate infrastructure to even begin to think about those questions. And it seems to me that the recovery of the health commons at some face-to-face jurisdictional level is one of the great tasks for the next century.

DR. GINSBURG: Other reactions on the panel? Jon?

DR. CHRISTIANSON: Well, maybe a little different take on a consumer voice. I think the consumer voice has been heard remarkably loud over the past few years. I think prior to about four or five years ago, most consumers had options and the private sector had options in their health benefits, and they exercised their right to exit. And that's how you heard that voice. Some people decided they wanted traditional plans and PPOs, and others stuck with managed care plans.

But what happened about five years ago is well documented by Steve Long over here and his colleagues, and that is, that choice was replaced, that in middle-size companies, indemnity or broad panel plans were replaced by managed care plans, and in large companies, the indemnity option was replaced by managed care.

So instead of having the option to exit to show their ability to exit and choose something else, now they only option left was voice, and we've heard the voice, and what you've seen is a remarkable change, I think, in the direction of the way the managed care system is going so that now we're looking at broad panel plans, we're looking at the largest private for-profit health insurers saying we're not going to restrict access to specialists. We're seeing at the state level and the federal level, I think, pieces of legislation that are responding to consumers.

So I think the consumer voice is being heard and the industry has changed as a result of it. Then I will also say that I don't think in the future managed care organizations are going away because they serve a very unique and important political purpose; that is, it's almost impossible to conceive of how you're going to have a health care system that can control costs, give broad access, and improve quality all at once. And I think at least somebody in the public sector has recognized that's the case and that the optimal strategy for politicians, at least, is to delegate that responsibility to private organizations and then respond to interest group complaints about the way it's being done on a complaint-by-compliant basis where you can look like the hero if you're Senator Whozits and get a piece of legislation passed to constrain this or that, but never really undertaking in a public sector any serious debate over what we want the health care system to look like.

DR. GOLDSMITH: That's sort of a scary thing. I mean, it's like what we did with the Shiite Muslims in Iraq. You know, rise up and smite Saddam and we'll be right in there behind you with our fire power. And then they go and rise up and Saddam crushes them, and, you know, we never showed up with the fire power. I think it's pretty funny that you can delegate responsibility to people and then stand back, like governments and employers have, and just watch the messenger boy be shot to pieces. It's really been--

DR. CHRISTIANSON: It's a good strategy.

DR. GOLDSMITH: Oh, it's a great strategy.

[Laughter.]

DR. GOLDSMITH: It's shifting blame.

You know, if they can't attract more capital--and I can tell you right now, health care is sort of redlined by the capital markets. I mean, if we were concerned about the influence of hot money on this health care system, believe me, except for those heart hospitals--actually, they're private. They're not even publicly traded. KKR took them private a year or two ago. New capital isn't flowing into this field. I mean, maybe that's good. I don't know. But, you know, the venture firms are basically shutting down their health services. You know, unless you can give somebody a Palm Pilot, they're not really interested in funding a start-up in this field.

So, you know, I'm a little bit worried that, you know, in this cycle of reaction and recrimination, health care really has an odor now. It's an odor of burning flesh, and people don't want to put new money into it.

DR. GINSBURG: You know, Jeff, I wonder if maybe some of the limited capital could be a blessing to health care given what capital has done in the past few years.

[Laughter.]

DR. GOLDSMITH: Could be.

DR. GINSBURG: I was recalling hearing from you at a conference a few years ago saying that, well, health care is not really that capital-intensive a business; a lot of this capital that's being raised is being used to buy someone else's assets.

DR. GOLDSMITH: Well, what happened with all those PPMs was a massive transfer of wealth from investors to the founders of these groups, who walked away with billions of dollars. And the ones that really blew it were the ones that took it in stock and weren't able to sell the stock before the companies crashed.

So I think it's not an entirely unmixed blessing here, that maybe the hot money has fled, but I think that capital does help innovation, and we do need innovation in this field. And if access to capital is a limitation on the ability of people to innovate or of new people to come in with a different idea, I think that's not entirely good.

DR. CHRISTIANSON: But the capital, you know, I think that will enter health care is in the sort of activities that you mentioned earlier. It's going to come in through the information technology development.

DR. GOLDSMITH: Through IT.

DR. CHRISTIANSON: So I think there is going to be an enormous amount of capital indirectly enter into the health care system and affect delivery.

DR. GINSBURG: Cara?

MS. LESSER: And that links to the point I was going to make, actually, about the fact that there is such a demand for knowledge in the health care system, and that's obviously driven in large part by consumer interest. But I think that there's a great deal of opportunity there for providers to partner with consumers in some way or to think about other ways that their interests are aligned.

I think much of the backlash, you know, is driven by consumers' dissatisfaction with constrained choice, but there is also a great deal of provider--interest group politics behind that backlash, and those two pieces I think really point to some of the commonalities of interests between providers and consumers. And when we talk about providers thinking about ways to develop brand-name identification and market themselves directly to consumers, I think if there's a way for providers to directly give consumers objective information about the quality of the services that they're providing and the range of options that are out there, that would take enormous steps toward helping to bring consumers into being full partners in the health care system in that way.

DR. O'NEIL: But that assumes a world that I don't think I've ever seen exist. That means that the providers will have to be self-critical and publish the data.

DR. GOLDSMITH: Well, you see--

DR. O'NEIL: And it also means that the consumer will have to have some financial responsibility. The providers benefit by having the whipping boy the health plans.

DR. GOLDSMITH: But, you know, I think--you asked where the hundreds of millions of dollars in venture money are going. They're going to gather the information. And, you know, you have the option, like with some of the people that don't want to be NCQA certified of not being surveyed and all the rest of it.

But, I mean, I think it is going to behoove provider organizations to figure out how to kill fewer of their patients. And eventually the variation in patient risk is going to be public knowledge. You know, why is it that we as consumers can't get access to the national practitioner data bank information? We can't. As I understand it, we are statutorily enjoined from getting access to it. But look who's in there. You know, was Dr. Swango in the national practitioner data bank, that infamous doctor that eventually was caught? I mean, we need this information.

MS. GOLD: I have a question, though. I mean, what's realistic to assume on the information? Assuming one could get all the information and publish it and have it, to what extent are our--are the kind of patterns you are talking about going to show up so strikingly obvious? I mean, in some areas, I suspect they are. But will they differentiate? Will it be clear which plan is better, which doctor is better? How does a consumer, how do people decide that? I mean, how much should we really expect of that information?

DR. GOLDSMITH: If the plans are all using the same provider networks, it would be pretty amazing if they differed very much. I think the variation that's there is in the delivery system, and I can tell you the physicians know it's there because of the pattern they employ when they decide where to send their children for care or where their wife or they go for care.

There's a lot of time expended trying to figure out the safest, most competent person to send them to. And maybe if we could just figure out how to quantitate that process, you know, we'd be a little bit ahead of the game.

DR. GINSBURG: Well, this was a great discussion and we're running out of time, so I'd like to close the meeting with a couple of summary things.

First of all, those green things passed out are evaluation forms, and we'd really appreciate if you filled them out. We do surveys as well, and we're very sensitive to high response rate information being much more valuable than low response rates. So please do that.

Let me just make some comments about some of the key points that I heard today at the meeting. You know, one was that the backlash to managed care by consumers has been leading to less management of care and to many organizational changes in the system. The pattern of consolidation that we've seen in hospitals and health plans has increasingly a regional or a national focus. It's less adjacent competitors than before. And physicians have had a very hard time in finding intermediaries to help--organizations to help them intermediate their relationships with either health plans or hospitals.

Jeff Goldsmith in responding to this expressed concern about the anti-competitive direction of many of the organizational changes and feels that this may very well cost society a lot in either paying more for health care or in a sense precluding forces that might drive more efficiency in the delivery of care. And he criticized hospital boards for dissipating their resources rather than take steps to deal with their situations.

The paper on specialty physicians showed a very extensive degree of action on the part of groups of specialists to increase their clout with health plans and hospitals. This is something that I don't believe has been put forward much in our health policy research or health policy debates and that organizations of specialists have emerged in many communities as very important threatening competitors to hospitals for their most lucrative outpatient services and pose a risk of additional fragmentation of the delivery system.

Marsha Gold had raised a question about the various developments in specialty organization, what their implications are for patient care, particularly focused on this issue of the scope of care of primary care physicians versus specialists and what implications that would have for them.

Turning to the presentation on Blue Cross/Blue Shield plans, we heard that the Blues remain key players in the changing health care systems and that they still are distinguished from their competitors, despite the erosion of some of their traditional advantages and disadvantages. And we did hear about the issue of limited innovation from those plans and a suggestion by our respondent Ed O'Neil in a sense focusing on the consumer and the Blues rethinking their old public benefit role probably is one of their greatest potentials, but it's likely to come from individual plans rather than from the association, which now is torn by some of the competitive conflicts among the various Blue Cross and Blue Shield plans.

Our discussion afterwards about the future focused very much on the consumer, and it's something that we didn't hear a lot of through the conference. And what I take from it is that it's been the consumer unhappiness with some of the developments of health care that has been heard very loudly, both by health care organizations in the market and by government, although I'm not sure that these organizations that have heard the consumer very loudly have figured out productive things to do to respond to what the consumer is saying. Many of our other comments were about saying that really the way out of the morass we're in is for organizations to innovate and be able to listen to the consumer and provide what they're really looking for, and likely the Internet is going to be an important component of that response.

I want to thank very much the panelists for their contributions here. You all did outstanding jobs, and I particularly want to thank Brad Strunk and Marsha Gold for filling in at the last minute and being able to do a great job, nevertheless. I want to thank the staff of the Center that have worked so hard on this conference, particularly Ann Greiner and Cara Lesser and also Roland Edwards, who provided us the great support throughout this process.

Thank you.

[Applause.]

[Whereupon, at 12:01 p.m., the meeting was concluded.]




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