Wall Street Analysts Predict Several Years of Higher Health Plan Premiums

Conference Executive Summary
June 10, 1999

ASHINGTON, D.C.- Average increases of 6 to 7 percent for health plan premiums this year mark the beginning of a trend that will likely persist into 2002, predicted a panel of Wall Street analysts brought together on June 9 by the Center for Studying Health System Change (HSC). The analysts noted that the underlying costs of health care are increasing at a somewhat more modest rate. The panel also agreed that the Balanced Budget Act of 1997 (BBA) has had a more devastating impact on health care providers than was originally predicted, and that along with proposed risk adjustment, the future of Medicare managed care is in trouble.

Premiums Increase. After several years of slow premium growth and diminishing profitability, managed care plans are reasserting themselves by successfully negotiating higher rates with employers and improving their profit margins, according to panelists Karen M. Boezi, Venture Partner, Coral Ventures; Norman M. Fidel, Senior Vice President, Alliance Capital Management, LP; Geoffrey E. Harris, Global Head, Health Care Research, Warburg Dillon & Read; and Patricia F. Widner, Partner, Deerfield Management. The analysts were participating in the fourth annual roundtable hosted by HSC to elicit Wall Street's perspective on changes in the health care system.

As an example of the kind of premium increases that are beginning to take place, the analysts cited the recent 9.7 percent increase by the California Pension Retirement System (CalPERS) for the year 2000. CalPERS is the second-largest purchaser of health care benefits in the country. Other purchasers with less leverage, the analysts noted, will likely have to swallow even higher increases.

The trend of higher premium increases will last for several years, the analysts predicted. "Right now, we are in the early stages of a big upswing in premiums, margins and profitability in the industry," said Harris.

Providers, however, are not benefiting from higher health plan premiums. According to the analysts, plan payment rates to providers are rising only 2 percent. Despite recent media accounts of physicians "getting tough" with health plans, most providers do not have the market power to negotiate more favorable rates with health plans-a problem that is compounded by an oversupply of providers in many local markets, the analysts said. In addition, many providers have had difficulty managing global risk under managed care and are trying to pass it back to the health plans.

Underlying Costs Rise. The underlying costs of providing health care services are increasing by about 5 to 7 percent a year, according to Fidel. This trend, which is higher than it was 18 months ago, has been fueled by pressures from consumers for greater choice of providers and easier access to services. "We had a three-year period when premiums didn't rise, the economy was strong and consumers wanted more freedom," Fidel noted. "Now, costs are rising and the question is: How does people's desire for freedom compare with their desire to keep costs down?"

BBA and Medicare Payments. Low rates of increase in Medicare payments to health plans under BBA and proposed risk-adjustment policy spell big trouble for Medicare+Choice, Medicare's managed care program, the analysts warned. A number of health plans have already scaled back their participation in Medicare+Choice by raising premiums for enrollees and reducing benefits. If recent news reports of a proposal to create a generous prescription drug benefit for Medicare come to pass, the outlook for Medicare+Choice is even grimmer, analysts agreed.

BBA is having a dramatic impact on other parts of the health care industry as well. Hospitals, skilled nursing facilities and home health agencies are reeling from the effects of BBA, which froze or strictly limited Medicare payment rates to these and other health care providers. While few hospitals have closed, providers of post-acute services are going out of business-and their prospects are even worse, the analysts said.

A complete transcript of the June 9 roundtable discussion, Wall Street Comes to Washington: Analysts' Perspectives on the Changing Health Care System, is available. The roundtable was moderated by HSC President Paul B. Ginsburg and by HSC Health Researcher Joy Grossman.

Health System Change – an independent research organization funded exclusively by The Robert Wood Johnson Foundation – provides objective, timely analyses about changes in the nation’s health care system and their impact on consumers to private and public decision makers. Health System Change, based in Washington, D.C., is affiliated with Mathematica Policy Research.