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

Conference Transcript
June 14, 2007

P R O C E E D I N G S

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

The equity analysts advise investors about which publicly traded companies will do well and which ones will not, and bond analysts advise on the likelihood of debt repayment. The good analysts develop a thorough understanding of the markets that that companies they follow operate in, and they also follow public policy which often has important implications for these companies. Some analysts work for brokerage companies and advise the clients of these firms, others work for institutional investors such as mutual funds, pensions, or hedge funds.

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

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

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

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

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

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

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

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

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

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

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

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

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

Paul Ginsburg: Josh?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Paul Ginsburg: Did you want to add something?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(Laughter.)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Paul Ginsburg: Josh?

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

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

(Laughter.)

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

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

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

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

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

Paul Ginsburg: The trend is exactly the same.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Paul Ginsburg: Sure. Doug?

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

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

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

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

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

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

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

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

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

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

Christine Arnold: It should.

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

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

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

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

Christine Arnold: Slowing.

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

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

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

Paul Ginsburg: Josh?

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

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

Paul Ginsburg: Doug?

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

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

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

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

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

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

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

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

Joshua Raskin: I think as a response.

Paul Ginsburg: Doug?

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

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

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

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

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

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

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

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

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

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

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

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

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

Christine Arnold: The Mayo thing.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Christine Arnold: It's the carbs.

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

Paul Ginsburg: Sir?

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

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

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

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

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

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

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

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

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

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

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

Paul Ginsburg: Yes.

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

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

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

(Applause.)

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

(Recess.)

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

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

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

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

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

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

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

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

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

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

Paul Ginsburg: Jeff?

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

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

Paul Ginsburg: Bob?

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

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

Geoffrey Harris: I think it's quite significant. I can give an anecdote of a for-profit hospital in McAllen, Texas, and this was a thriving investor-owned hospital that had very robust profitability and delivered a wide array of services to the community and a physician-owned and sponsored hospital was set up down the road and essentially took all of the high-paying patients and procedures from that hospita