HSC's 13th Annual Wall Street Comes to Washington Conference

Conference Transcript
July 9, 2008

P R O C E E D I N G S

PROCEEDINGS

(9:00 a.m.)

Paul Ginsburg: Welcome to the 13th Annual Wall Street Comes to Washington Conference, and the purpose of this conference is very specific. It's to give the Washington health policy community better insights into market developments that are relevant to health policy, and we're going to discuss market developments and their implications for people's healthcare, which is the core activity of HSC Center for Studying Health System Change. And I see this as an opportunity to tap a different source of information, equity, and bond analysts on this topic. Equity analysts advise investors about which publicly-traded companies will do well and which ones will not, and bond analysts advise in the likelihood of debt repayment.

Among the good analysts, like the ones on our panels today, development a thorough understanding of the markets that the companies they follow operate in, and they also follow a public policy, which often has important implications for these companies, and some of the analysts work for brokerage companies and advise the clients of those firms, some work for institutional investors, such as mutual funds or hedge funds, and one of the analysts on our panel works for a mutual fund that invests in bonds issued by not-for-profit hospitals, and this adds to our panel a window on an industry dominated by organizations that don't come into the equity markets.

This is an opportunity for the equity and bond analysts to take a break from their day jobs of assessing the outlook for profitability or solvency of the companies and bring their understanding of market forces to bear on the questions that those involved in health policy have on their minds. And we also include on each panel a Washington-based health policy analyst, and these people have made valuable contributions to these sessions by better tying the market developments into health policy issues.

Our format this morning is like what we've done in the past, that it'll be a roundtable discussion of a series of questions that I have shared with the panelists in advance, and we're going to have a panel of the people you see here. It's the panel on healthcare costs and premium trends, and various issues connected with health insurance. And the second panel is on delivery system issues from the perspective of providers of care, such as hospitals, physicians, and the pharmaceutical industry.

They'll be an opportunity for audience question and answers after each. There are question cards in your packet. Please fill them out and give them to an HSC staff member, or you can go to the microphones and ask your question, and we'll really like to have some of each at this meeting if we can.

Please note that the analysts are often not permitted to answer questions about the outlook for specific companies, but that's not what this meeting is about. We care about the impact that policymakers care about, which is the impact on consumers, the budget, et cetera.

I want to thank the Robert Wood Johnson Foundation that funds this conference and is the largest funder of HSC, and I want to thank the people at kaisernetwork.org for webcasting the conference, and the webcast will be available afternoon tomorrow at kaisernetwork.org. And HSC will post a transcript of this conference on its Web site by early next week. And before you leave the conference, we'd appreciate it if you would fill out our evaluation form. It's the yellow paper in the packet -- I hope it's yellow this year -- and leave it on the registration.

I want to briefly introduce the panelists. The panelists comprise mostly of people who have been here before at this conference, and, so, for those that come frequently, you're familiar with them. Those that have been here before are Christine Arnold, formerly of Morgan Stanley, Matt Borsch of Goldman Sachs, Josh Raskin and Adam Feinstein of Lehman Brothers, Jeffrey Harris of the Cerimon Funds, and Bob Berenson and Bob Laszewski, who comment as policy analysts rather than as bond analysts.

One thing I want to mention about Bob Berenson is that Bob has participated in HSC's site visit work on a number of projects, including the broad community tracking study, and some of what he'll bring is the perspective from that.

And new to the panel is Kevin Ponton of Dreyfus Corporation.

So, I'd like to begin the discussion with an issue that's very much on the radar screen not this week, but, otherwise, the question of healthcare reform. And the first question, I'd like to ask about insurance industry leaders and how are they positioning their company for the possibility that some type of healthcare reform could be enacted next year, and is there more than one scenario that they see, including a scenario when some say nothing is going to happen, we're going to ignore it?

Who'd like to start? Yes, Matt?

Matthew Borsch: Yes, I'll take that. Just a quick crack at that.

I think just to spotlight one company that has made efforts in a couple of different directions, perhaps not -- while they haven't expressed this as openly as preparing for health reform I think in some ways it is, which is Aetna and their purchase about a year ago of Schaller Anderson and the Medicaid infrastructure that that acquisition brought to Aetna, and I think that prepares them for the potential of reform in one direction.

And then the other would be the focus on the individually purchased health insurance, direct health insurance purchase market, which, historically, Aetna was not as focused on. They've been much, much more focused on that over the last couple of years.

And, so, in that sense, those are both immediate growth opportunities, but they're also hedging their bets in the sense that one direction reform could take would be certainly greatly expanded public sector coverage programs for not only the Medicaid eligible, but the low and even moderate income uninsured, and then in the other direction, the individual purchase market, which would be more in line with some of the pro-market health reform initiatives, and, of course, it's possible that health reform could expand enrollment on both of those fronts.

Paul Ginsburg: Christine?

Christine Arnold: I agree with what Matthew has said, I would just add that it's not just Aetna that's kind of discovered the individual market. Cigna, for the first time, has gone into the individual market. We've seen unprecedented growth in new markets by Coventry and Humana on the individual segment side. I think the expectation is that barriers to entry in the individual market will decline. If you've got guaranteed issue and the (off mike) brokers has diminished, the concept is if you're in a lot of different markets, then when that growth happens, you're in the best position to take advantage of it.

Humana's developing networks, especially for their private fee-for-service segment with the expectation that deeming could go away and funding for private fee-for- service is vulnerable and it's a big topic this week as the Senate takes up their bills -

Paul Ginsburg: We'll go into that next.

Christine Arnold: And both Aetna and United have acquired Medicaid companies, so, we are seeing a shoring up of Medicaid with the expectation that will grow, and I would simply point out that the companies are saying that they think it's going to be very hard to do anything more than incremental because of the budget situation, because of Iraq and the economy, but with a single party potential control, I think if you look at the MMA, there's definitely precedent for something more sweeping than the companies anticipate or a positioning.

And the one thing I'd add is that Kaiser is looking is at retroactive rescission as a potentially big issue, and they're offering that anyone they've rescinded in the last couple of years can come back on the roles, as they expect the issue of retroactive rescission in the individual market to be taken up at a state level, and it could bubble up to a federal level.

Paul Ginsburg: Yes. Josh?

Joshua Raskin: I would just add, I guess, sort of taking a step back, I think about broader healthcare reform, I think everyone's sort of eluded to without sort of stating it obviously, that there's a focus on the uninsured. I think that's going to be the big topic going forward, and that's not new news to these companies.

So, the big question becomes: How do you prepare for that? And I don't think there's an answer. You've got two presidential candidates with different ideas, I think, of how to ultimately get there. And from a health plan's perspective, you can introduce more individual products and different price points at the lower end and things like that, but, at the end of the day, I think that the biggest efforts have been hiring lobbyists and just trying to help with the actual formation of that legislation as opposed to any real preparation work at this point.

Robert Laszewski: I would just add to that that, obviously, the debate between Obama and McCain, democrats and republicans, is whether you build on existing employer-based systems, Medicare and Medicaid, which Obama favors, and McCain wanting to redo the system on an individual platform.

I agree with everybody here that companies are sort of covering their bets and expanding what they're doing in individual health insurance. The big exception to that is what Christine just mentioned in the rescission controversy.

You probably saw on the news yesterday WellPoint settled on an $11 million suit with hospitals in California over the people who are rescinded. It boggles my mind that the industry would be playing those games out in California at a time when the republican nominee for president wants to build on an individual platform. I would have to think most of the people who run these insurance companies are republicans, and they're not doing the republican nominee a big service by fighting these battles in California the way they are.

For those of you who know me, you know that I've run a health insurance company, and when I came up through the ranks, we didn't rescind policies for the things that they're rescinding them for.

So, that adds to my confusion as to why they don't get it straight.

The second thing that I would say I think that's important is that leaders in the health insurance industry are firmly behind expansion through the employer-based system. While there are some cover your bets things going on in terms in building individual capability, there is no question that the leadership in the health insurance industry wants to see an expansion through the employer- based system. And some people have even said that publicly. The CEO of Aetna, testifying before Congress, came out and said that flat out.

So, there is a discomfort in moving in the individual direction.

Paul Ginsburg: Yes, that's a good segue to talking about the individual market with either an Obama plan or a McCain plan. To different degrees, they'll be increased emphasis on the individual market because that's where a lot of people who are uninsured but are in the income ranges that tax credits or subsidies might be used are going to have to get their coverage, and the question is: From your understanding of how the individual market works, what will the federal government have to do in legislation as far as structuring, legislation, et cetera, of that individual market to get it to deliver what society would be looking for? For it to be spending a lot of government money, we want people to get good health insurance and efficiently through it.

So, who'd like to start? Yes, Christine?

Christine Arnold: Individual market is complicated because you've got the broker in between kind of the manage care company and the individual. I think the key is to entice healthy people into the pool, and we've got some -- now, Clinton had suggested an individual mandate, which neither Obama nor McCain supports, but I think there's precedent for going halfway in terms of not really implementing an individual mandate.

And the question is: Well, how would you really enforce that? Would you send people to, I don't know, Guantanamo if they didn't actually sign up for coverage? And, so, it gets really kind of tricky in terms of making sure it actually happens.

So, if you look at the PDP, I think we've got some precedent here. There was a penalty for seniors who didn't get into a PDP plan within six months. Right? So, maybe if we enact this legislation and the folks choose not to get into the health plans, then they're going to be subject to medical underwriting in three months, six months, or there's going to be an incremental penalty or they're going to be stuck in a different plan with less choice of doctors and hospitals, but some form of enticement to get healthy people into the risk pool I think is critical because insurance is all about spreading risk, and if we have guaranteed issue without enticing healthy people into the risk pool, then all we've got is people waiting until they've had the car wreck and then calling Geico and getting the car insurance to cover it, which is not going to work from a structural perspective. We need subsidies for the sick, and we need serious discussion about a minimal affordable benefit.
So, what protects people against catastrophic costs, but also entices them to have the right behaviors and change their consumption of health insurance coverage, and then we need to get around, I think, some of the state mandates, so then we need to change what's traditionally been regulated by the states in terms of minimum benefits versus the federal government. Are we going to cover, say, infertility the way that New Jersey does? Is that going to be part of what's required to be covered in a minimum benefit package? Are we going to take all of the mental health circumstances that California covers? We have to make some tough choices.

Paul Ginsburg: Thanks. Bob?

Robert Laszewski: I would suggest - I think your question was what does the federal government need to do to make the individual market work? The federal government actually has some pretty good experience there. It's called the Part D drug benefit. It's community rated, it's voluntary. The age range starts at 65. There are people in it who are 95-years-old. The people in the population are fairly sick and high ulitilizers, and it's a system that has worked surprisingly well. I've been surprised at how well it works.

So, we can devise a community rated, voluntary, not mandated plan for lots of people who have lots of pre- existing conditions, and we've seen it work before, and I think that's the model. I'm very surprised that Senator McCain, who has proposed the individual solution, has been so reticent to embrace what I think are pretty much traditional insurance principles.

Senator McCain says we ought to deregulate the market. If you're sick, you would not be guaranteed coverage, other than, perhaps, an estate-based risk pool so that the insurance industry takes the healthy people and puts the sicker people in a state-based risk pool, and I think they point to Minnesota as an example of one that works pretty well. And if you look carefully at Minnesota, Minnesota is 50 percent subsidized by the government based upon assessments made through the back door to insurance companies.

An individual platform can work really well, as it has in Part D, and you do guarantee issue, as we have done in Part D, in a voluntary system, and you can figure out how to take care of the sick people coming through through a re-insurance scheme that assesses the entire block.

So, it's very possible, it can work, it can work well. Distribution is a big issue; overhead costs are a big issue. Overhead costs in the group market average 12 percent, overhead and profit. In the individual market, they average almost 30 percent.

Now, Part D, they average about 10 percent because we've gotten involved with sending people a catalog and marketing in that way so we can come up with some pretty efficient ways to do it.

So, we can create an efficient individual market, and I don't think it's saleable to the American people. I don't think you tell the American people to give up their employer-based health insurance without giving them some assurance as to how they make that transition.

The one thing that has worked for Joe and Mary middle American and the American healthcare system is the employer-based system. It may cost the employer a lot of money, may be unsustainable, but it's the one thing that everybody appreciates.

How many people in here would give up your employer-based health insurance? You're not going to do it; you've not going to take that leap unless you're confident you're going to be able to do that somewhat seamlessly.

So, it can be done, and Part D is an example of it.

Paul Ginsburg: Josh?

Joshua Raskin: I would just add one thing. To me, I sort of think about Part D, a huge success, and, obviously, high satisfaction levels, but the key to Part D in my opinion was the government was the backstop. They provided massive potential subsidies for losses through risk corridors and providing catastrophic insurance.

So, what's going to happen, I think, in a scenario like that is you end up footing the bill at the government level, and I don't know, maybe they find some funding, maybe there's an idea to sort of spend in that direction, but, ultimately, whether it's 10 years or only 5 years, or, who knows, 20 years, you're back at the drawing table because spending in this environment or whatever and how you've sort of rolled that out is going to be sort of out of control. I think ultimately the way to attack the individual market is the cost.

I think the one thing everyone talks about is improving access and rolling out new products and new programs, and I don't think there's a traumatic loss. I mean, everyone in the country, there are ways to get insurance. I mean, there's certain pockets, right? If you've got pre-existing conditions and things like that.

I mean, there was that article I think it was the Times or the Journal -- I forget -- this morning that was talking about the high risk polls, but, at the end of the day, it's not an affordable product, and, so, I think there's got to be someway to bring down the cost of the product before we can really address the access.

Paul Ginsburg: Let me move on. So, the issue of this week, which is Medicare advantage, and the second panel will get into the other side of the issue of physician payments.

I'd like to start off about private fee for service plans and ask the panelists: Do they have the potential to bring value to Medicare and its enrollees? Matt?

Joshua Raskin: Sure, I'll just take a stab at that. I think the truth is the jury's still out on this. There are a couple of things that can be done, even without defined provider networks, some voluntary disease management outreach, and some targeted, high-cost case management.

Whether those things, at the end of the day, yield demonstrable savings has yet to be determined. Humana, one of the largest firms in the private fee-for-service market would argue that it is yielding value at the same time. That company is moving towards the eventuality towards private fee-for-service likely going away, and it may be that we won't have the full answer to the question until after the product is gone.

Paul Ginsburg: Is there a private fee-for-service business left if there's no deeming?

Joshua Raskin: I would say, I mean, private fee-for-service as we know it, no. I mean, clearly without deeming, you have to build networks, and I think, as most of you know, the problem that you run into is in rural and semi-rural areas where you have a scarcity of providers and the plans don't have network leverage to yield unit pricing that is comparable or even close to Medicare.

I would say though that some of the larger plans are probably better positioned on this front, given that they already have commercial relationships, and I believe in the legislation that did not get through, but was recently proposed, there were exceptions for rural areas, so, you would continue to have those types of plans in areas where networks were perhaps the most difficult to develop.

Paul Ginsburg: Sure. Bob?

Robert Laszewski: Well, the problem with private fee-for-service is two levels, I think.

First of all, private fee-for-service was never intended to be a permanent product. It was intended to be a transitional product.

As I think most people in this room know, the 1997 Balanced Budget Act really kind of screwed up the private Medicare markets, pushed seniors out of it, pushed insurance companies out of it.

So, in 2003, to get insurance companies and seniors interested in the product again, to sort of prime the pump, private fee-for-service was created with some generous subsidies, if you will, so that insurance companies would go into markets where there were not provider networks, have the incentive to build a block of business that could then be later converted to networks, and provide the incentives for seniors who may have been skeptical to come into the programs. Once you've got a ton of lives in a particular market, you would then go to the next phase, which is to build the network, because I think anyone who believes that managed care can be more efficient that Medicare would have to believe that it's managed care that will do it, not a fee-for-service product. There's no traction.

It starts with the fact that Medicare has an expense ratio of around 3 percent. I realize that's controversial in some places because people feel that there are unallocated costs someplace else, but for the sake of comparing what Medicare charges itself versus what the insurance company can charge, they're operating at about a 3 percent expense ratio. In the private market, you're operating at a 10 to 15 percent expense and profit margin, and, so, on day one, the private insurance company starts out more than 10 points in the hole. So, you've got to make up that 10 points and being able to manage care.

Well, if you have no networks, which is the case in private fee-for-service, how do you make up the 10-point margin? So, it's a non-starter. It was always intended to be a transitioned product.

So, and what the Baucus Bill does is it says that by 2011, people have to have networks.

And, really, I think that's a pretty reasonable thing for the democrats to be expecting. They're not cutting the rates; they're simply saying gee whiz, guys, you've been doing this since 2004 now, you get to 2011, 7 years later, maybe we can kind of take the training wheels off.
So, I mean, that's what the proposal is about, and, no, private fee-for-service is not sustainable because it was never intended to be a sustainable product.

Paul Ginsburg: Yes. Following-up, Christine, is there a way that policy changes can actually force changes in private fee-for-service to make it viable long-term?

Christine Arnold: Well, I mean, I think the key issue here is that, according to MedPAC, we're paying 19 percent more per senior that's enrolled in a private fee-for-service plan relative to what we would have paid if they'd stayed in regular Medicare fee-for-service.

So, I think the issue here is: Is it fair that we're depleting the Medicare trust fund by overpaying for this small portion of seniors, who, presumably, are getting better benefits and potentially overpaying the manage care companies?

So, I think the question is: Do we want to support private plans or not? And if I were a policymaker, here are the things I would consider: Let's make this a product since we're paying more than a fee-for-service Medicare that's only available to those seniors that need the enhanced benefits, and then let's regulate to make sure those enhanced benefits happen. So, here's how I would think about it. This would be a product that would only be offered to low-income seniors, and, right now, CMS does not audit the bids, so, there's no guarantee that the incremental 19 percent in payments is actually resulting in incremental benefits to seniors.

So, I'd give CMS audit responsibility to ensure that that 19 percent or some portion of that 19 percent is going to these low-income seniors in the form of enhanced benefits because they're vulnerable seniors who can't afford many of the co-pays and deductibles associated with fee-for-service Medicare. I would require that these plans offer Part D. Right now, these plans do not have to offer drug coverage. And by not offering drug coverage, they could be risk-skimming the healthiest seniors. And what you want is an integrated package so that managed care can truly work, so require that it be an integrated package, and then permit some medical management.

According to the manage care companies, going from an unmanaged product to a managed product can produce up to 10 percent savings. So, if you can harvest that 10 percent savings, you can get some of that 19 percent back without harming patient coverage, so, allow incentives to doctors and hospitals to notify the manage care company when someone's been admitted, coordinated care, pre-cert, prior auth. None of that's happening right now because the doctors and hospitals aren't required to tell the health plan that a member's in the hospital, so, how could the health plan manage the care if they don't know that you're getting care? So, I would implement some manage care provisions and allow pre-cert and prior auth. That's what I would do.

Paul Ginsburg: Okay. I'd like to turn the discussion to the rest of Medicare advantage, the Coordinated Care Plans, the HMOs, and the PPOs, and ask the analysts about how are these plans evolving, and maybe one way of crystallizing it is are they going in the same direction that commercial plans are going or are they, because they're different, heading out in a distinct direction, or not heading anywhere? Yes, Matt?

Matthew Borsch: Just quickly on that, the one key difference, obviously, is that the Medicare Advantage product is at the individual retail level, and, so, I don't -- in that sense, Medicare Advantage Plans do not have the burden that employer-based plans increasingly have, and I say "increasingly" because employers more and more are contracting with fewer and fewer carriers, and, in many cases, a single carrier, and, so, they have to select a plan that has very broad networks that meets the needs of a geographic and otherwise diverse workforce, and that's not the case with Medicare Advantage. In fact, with coordinated care plans, you can design something that's much closer to the original concept of the HMO model or even a staff model plan that can work for a segment of the population that you're targeting.

Paul Ginsburg: Josh?

Joshua Raskin: And I would just add one of the things about sort of the core of the HMO, I think that same MedPAC report that Christine was alluding to suggested that the HMOs were spending about 95 cents on the dollar to provide the same level of benefits as Medicare. So, clearly, there's an opportunity to use private plans to save for the government, so, I think there is long-term viability in Medicare Advantage, broadly speaking. I would agree with the previous comments that private fee-for-service is not the answer.

In terms of the product design, I think you are seeing actually a migration towards techniques used in the commercial populations. The drug benefit, which is now all of almost three-year-old, looks a lot like the three their co-pay structure that we've seen in the commercial population for the last decade or so. We were just looking at some data that was talking about co-pay differentials, and you're even seeing in terms of the bids -- we haven't seen the 2009 stuff, but the 2008s versus the 2007s, the same exact trends, keeping that first tier of generic co-pay very low, no changes there, and then increasing the spreads between the second and the third tier.

So, I actually think you're seeing the techniques that were useful in the commercial population being translated to the Medicare population. At the end of the day, they're all designed for cost savings, which sort of helps everyone involved.

Paul Ginsburg: I remember a few years ago when Part D was developed, a lot was said about the potential for integration of the Medicare Advantage benefits and the Part D benefits.

In your sense, was that just a buzzword or a plan to actually really taking advantage of the fact that they're providing both drug coverage and medical services?

Joshua Raskin: I'll start that. I think the biggest problem is the product design. So, if you think about it, if you're a health plan, you've got different sort of reimbursement and loss potentials in Medicare Advantage, sort of the MA product versus a PDP product and sort of that bridge with MAPD. So, there are areas where you may -- from a total medical cost, it may be more efficient to provide a certain pharmaceutical spending in terms of preventive medicine where, under the MAPD Plan, that may not be the most economical for the plan.

So, I think the integration of pharmacy and medical data is certainly a reasonable way to better manage healthcare costs and improve quality, I'm just not sure the product design necessarily facilitates that at this point.

Robert Laszewski: Paul, again, I think it's important to remember the reason we did this in the first place. The conservatives believe that the way you bring Medicare under control is using the private market to do it, and, obviously, liberals have a different view.
I actually think George Bush had it right in 2000 when he ran for president because what he called for in 2000 in running for president in Medicare was to create a system where private plans would competitively bid, and you would set the reimbursement rates based upon competition in the market.

When the 2003 Medicare Modernization Act was passed, instead of that, while we had that provision in there, it's been long ago lost. In place of the system that's currently being taken advantage of, where CMS sets the rates based upon what they think they paid for standard Medicare, and that's done county by county, and, so, what we've got is a system right now where the way you make money in private Medicare is figuring out which markets you get the best reimbursement in taking advantage of that. That's the biggest reason why we've had such incredible growth in private fee-for-service, is because you get, by far, the best reimbursement in private fee-for-service, particularly in certain counties.

And, so, what we've got is a marketplace chasing a system, trying to figure out how to gain the system instead of a marketplace trying to figure out how to manage care more effectively. And that's a bit of an oversimplification because in many of the mainstream Medicare Advantage Plans, health plans are trying to do a better job of managing care and bringing costs down. But not enough of that is going on in the market, and that's why private fee-for-service is, by far, the fastest growing part of the system. And as long as we have a policy here in Washington that we send out to the health plans that says go figure out which counties you can make the most money in, we're not going to be chasing the right objective, which is managing the cost of care much more effectively and efficiently.

Paul Ginsburg: Yes. Actually, this kind of reminds me of something that I was never taught in economics programs, but I think comes up at these meetings often, is that there are easy ways to make money and hard ways to make money, and people won't get to the hard ways to make money until they've exhausted the easy ways.

Robert Laszewski: That's right. And they're making it pretty easy with 17 percent overpayments. Yes.

Paul Ginsburg: That's right. Christine?

Christine Arnold: One issue that you didn't necessarily ask about but that I've been thinking about a little bit is that the PDP Program has, as Bob talked about, done really well and been really successful for seniors, but I think we have a looming policy challenge, which is that 40 percent of PDP members are in United and Humana, and both are struggling with the challenge of the dual eligibles.

So, the risk corridor is contracted, both companies are -- I mean, Humana is losing a lot of money on their PDP. And United's not doing much better. And if you look at the structure of the plan designs, both United and Humana cover the majority of the top 10 drugs taken by seniors, whereas the companies who I think are making a lot of money don't have those branded drugs on formulary.

So, the issue with the dual eligibles, the maximum you can charge them is a $5 co-pay because they're poor and they're old and they don't have the resources. So, the only way to keep that senior from getting that brand of drug is to take it off the formulary and say no. And the challenge we were going to have is either United and Humana are going to do the right thing or their business, which is to take these drugs off the formulary, in which case, all these seniors in nursing homes aren't going to have access, nightmare at the nursing home, or they're not going to do the right thing and we're all going to be pretty irritated for another year.

But this will only go on for a certain period of time, so, I think it's time to revisit the way we're treating the duals in the PDP Program, and a little tweaking of that benefit might be in order. I don't know how my friends on the panel feel about that, but.

Paul Ginsburg: Yes, actually, let me ask a follow-on or maybe a statement.

It seems to me that as far as dealing with the issue of risk selection, that PDP Program has the very toughest job imaginable because (off mike) to enrollees no more than they're likely spending on drugs for the coming year, and the fact that they would enroll as individuals.

So, in a sense, we could have the most sophisticated risk adjustment and market rules about who you have to enroll, and we still could have a selection spiral.

I don't know if any of the panelists have thoughts on that.

Robert Laszewski: We may be in the beginning of one. I've always been dubious about PDP in terms of some of the issues in the market, and we do seem to be seeing a tightening of margin. I've always believed anti-selection could be a big issue with the seniors. It didn't show up in the first and second year. It's not clear that it's showing up in the third year, but the first year, the seniors were intimidated by Part D and everything about it. Now, they're not so intimidated any longer. They go into the catalog, they find the drugs that they need, and they find the insurance company that gives them the best coverage, and they take it.

So, I actually think that the senior market is getting smarter about it, and it could be a problem down the road. That's why it's so much better to have the Part D drug benefit integrated into a larger Medicare program rather than sitting out there all by itself. And I think that we're going to have to get to the point where it's integrated into a larger Medicare program or we're going to have this sort of cherry picking going on on behalf of the consumer.

Paul Ginsburg: Okay. Let me go to the next question, which is commercial insurance, and I want to begin by -- for those that do follow the stock market, I'm sure you've noticed that insurer stocks have experienced very large price declines year to date, and I'm sure that these analysts have been interpreting what that means for their clients, but I want to raise the question as: Is there anything in what's happened in the insurance industry in the stock declines, any reasons behind them, that are relevant to a policy audience in a sense that, as far as the future of the insurance market?

Matt?

Matthew Borsch: Let me take a crack at that. I think that we see -- there are multiple facets to what's negatively impacted companies this year, but two things I would point to as major causal factors, first and foremost, and we can get into this a little bit in the next question, the health insurance underwriting cycle, and I'm not sure that that dynamic has really any particular lessons for policymakers other than to be aware of that in terms of forecasting where health spending is going.

Secondly, though, is what's going on in the employer marketplace, and I think there's clearly a big problem because normally in -- if we just backtrack for a minute, in economic expansions, you normally see an expansion of employer coverage, and you certainly saw that in a pretty pronounced way in the late 1990s. And then, of course, as expected, we saw some pretty sharp erosion employer coverage in the sort of mini recession of 2001, but the economic expansion that we've been through until recently has been contrary to the trend you'd expect. Employer coverage has been eroding during that expansion, and now it appears -- and we see this in some of the pressure felt in the manage care companies -- that the erosion of employer coverage is really in an accelerating phase, and the danger here for the industry is the political support for the employer-based system. It may be eroding more rapidly than is commonly assumed.

Paul Ginsburg: Anyone else? Josh?

Joshua Raskin: Yes, I mean, I think it's (off mike) sort of to play on Matt's point. Is that when you see difficult times like this for the health insurance industry and it corresponds with an election year, you start thinking about well, if you're McCain, we've got to dismantle the idea of the tax subsidy for employers and change the whole system, et cetera. My belief, it's just the markets are self-correcting. If the health plans have been doing something, acting in ways that were not sustainable, that will correct itself.

So, I'm not sure there's a ton to pull. I mean, the problem is the uninsured has been a big issue, and it's been rapidly growing in the last several years. So, I just think it's one of these environments where we're going to talk a lot about it. I'm just not sure that this is - I don't think we're necessarily going to get policy action. I'm not necessarily sure we even need policy action at this point.

Christine Arnold: The one thing I would point out is that the sector is not in the position of strength from a capital access and balance sheet perspective. Therefore, policy changes that destabilize or dramatically reduce the profitability of the industry creates a real risk that we see reverberation, i.e., liquidity issues. These companies levered up to buy stock at higher prices, and they're not hugely levered, but they're more levered than I've seen them in two decades, and they're getting to the point where they're saying look, we can't borrow any more, we're at risk of losing our debt rating. So, steps to reduce profitability in multiple business lines all at the same time could really destabilize these companies, and if some of these companies have issues go away, the repercussions to doctors and hospitals are not insignificant.

Robert Laszewski: I don't think you can ignore from a policy perspective what's going on. For those of you who don't follow the stock market on a daily basis, as of July 1, the S&P 500 Index was down 19 percent. Universal American, one of the largest disproportionate players in the Medicare Advantage in Part D business was down 62 percent. United Health down 57 percent. Humana down 55 percent. This is over their 12-month highs. So, Humana down 55 percent over its 12-month high. Coventry down 53 percent. WellPoint down 48 percent. Cigna stock price down 38 percent. And Aetna down only 34 percent.

When the day is done, the value of a company is a function of what the marketplace believes its value is to deliver its product in the marketplace. If the company is doing a good job of delivering the value of its product, its stock price will reflect that. If a company is doing a poor job of delivering the value that the customer expects it to have, it'll have a high price. What business are these people in? They're in the business of delivering cost effective and quality healthcare. What does the marketplace say about the value of the product they're delivering today?

It's interesting when you look back at Medicare Advantage and Part D. Two-thirds of these companies have lower stock prices than the day they went into the Medicare Advantage business. Everyone of them has a lower stock price than the day they launched the Part D business. Shareholders, interestingly, have not benefited whatsoever from the privatization of Medicare.

And you can say well, but they're going through an earnings cycle, and I guess we're going to talk about the earnings cycle in a few minutes. Well, that's part of the business, and what you have is a lack of confidence in the part of investors that these people can deliver value. There's a policy implication to that.

Paul Ginsburg: Matt?

Matthew Borsch: Just quickly because I know we're going to get into the topic of the secular trend in the industry, but, Bob, I actually disagree with your viewpoint there because I think what the market is reacting to really reflects the financial cyclical trend in the industry, which I don't pretend to completely understand, nor do I think the market completely understands it. But what the market is reacting to is very specifically the prospect that the earnings at these companies are declining, not growing, where we went through a period where earnings growth was astounding in this industry at 30 percent or more a year for the years between 2000 and 2005, and the market's always been pretty shortsighted about that type of thing, but the market's looking at declining earnings now, and the market's worried about the Medicare side, which, in some ways, is still working, but there's some problems where there are storm clouds on the horizon in terms of reimbursement in full.

Robert Laszewski: Do you have a buy rating on any of these?

Matthew Borsch: Well, let's go through them. I have I guess -- we're actually not supposed to get into that.

Paul Ginsburg: I don't think we're going to get into that. But let me ask the next question.

Do you think that these hard times for insurers will result in new business models arising or even entry into the industry by someone that's doing it a different way?

Joshua Raskin: I guess if you think about the last downturn, which was just about 10 years ago, that was sort of the tail end of sort of the HMO era and where sort of the middle of the PPO era, so, it was more of a product design change, et cetera. But, at the end of the day, these companies are still in the business of delivering health insurance to employer groups and individuals and government entities in any way, shape, or form. So, unless there is a large change from a regulatory standpoint about how the design of the tax code is around health benefits, I can't imagine that these companies you're going to reorganize, decide to get out of commercial group insurance and go just individually. I can't imagine you'd see anything like that.

Christine Arnold: I think there's real evidence that the consolidation of the industry has actually been value destructive, and that's been the card this industry's been playing for the last couple of years, right? So United and Humana gobble up a whole bunch of companies; I don't know what their cost trends are; I don't know the price; can't process a claim; yadda, yadda, yadda, it's in the papers. So, you know, that - and consumer-directed healthcare have been the thing that we've been talking about for, what, the last five years? And nothing positive has come from those trends. And I think we've actually reached the point of diminishing marginal returns on both of them. I think we've shifted so much cost to the consumer that they're delaying and deferring and now we're seeing a spike in catastrophic care because people are train wrecking. That's consumer-directed healthcare. And we've talked about the issues with the consolidation. So I think the marketplace is really ripe for a disruptive health plan. So think about what's happening in the marketplace. The hospitals are only collecting 50 percent of co-pays and deductibles. Half, that's it. So no wonder the hospitals are raising price to managed care companies, which is spiking their medical trend, because they're not collecting co-pays and deductibles. But what if a new entrant were to come in and say here's your benefit card, and you have to have personal credit to cover your out-of-pocket maximum and it's linked to this. Now Aetna and CIGNA tried to have a card and link it to Visa, but Visa and AMEX were like oh no, we don't want to take any of the medical risks because you could file for Chapter 11 bankruptcy, dah, dah, dah, as an individual and all of that gets wiped out and they didn't want the risk. So you have to put it on the consumer. That's one example of kind of a disruptive health plan. Employers are really irritated with the whole disease management thing. So if we talk to Mercer, Towers, Hewlett, all those guys, they'll say look, people get sick, they die or get better. It's a version to the mean. How do we know disease management is actually producing anything positive? What they really want is an at-risk health plan. So some new health plan that takes risk and says, you know, I am limited in what I can do with the ERISA with my beneficiary, right? So, if I say you've got to, you know, you've got to get your body mass index to X. Okay, so we ask you to participate in a program, but if it doesn't work, and you don't do the things you're supposed to, there's no penalty under ERISA. So what we need, according to employers, is kind of a health plan on steroids with respect to how they treat doctors and hospitals. So, let's pay the docs and the doctor groups double if they actually produce positive results in terms of health, and let's pay them half if they don't. So, and let's take the people once they've been diagnosed out of the mainstream health plans, which employers believe aren't doing anything very interesting for people -- about 80 percent of costs driven by 20 percent of people who are sick -- let's pull them into a separate health plan. I mean these are things that employers want. And from my perspective, from a policy perspective, the industry needs a little bit of adult supervision here, they need to be forced to share data so that we can actually identify who the best doctors and hospitals are because if Aetna's saying this is a great doctor and United's saying it isn't, then we erode consumer confidence that we have any idea who a good doctor is. And so I think the time's ripe and I'm hopeful that we'll see some movement.

Paul Ginsburg: Okay, let me get into the core of the cost trends, premium trends, underwriting cycle, and, you know, basically ask, you know, is there change in the cost trends and, you know, what's your spin on the underwriting cycle? And Josh, you haven't had a chance to star yet.

Joshua Raskin: Sure, thank you. So, yeah, I mean, just looking at the cost trend, it's been a real, you know, sort of interesting year observing the publicly traded companies because, you know, there really hasn't been, you know, maybe Coventry, there really hasn't been anyone that's come out and said there's been this massive uptake in, you know, the commercial medical cost trend. Everyone thinks it's -- I don't know whether it's 7.5 or 8 percent, you know, somewhere in that range -- you know, the data behind it if you look at hospital admissions or, you know, certainly pharmacy data, you know, and some of the other Medicare data that you can pull, it's just not visible that increase in cost trends. So if you think about, you know, what we're, you know, what we're seeing this year versus what the companies are sort of reporting from earnings, there's a little bit of a disconnect there, you know. But I think until we see evidence in the market, I think it's hard to say that there's, you know, definitive up trend in medical costs here.

Paul Ginsburg: Yes, Matt?

Matthew Borsch: Why, I would generally agree with Josh, I guess I would just, you know, interject one point here on the cost side, which is, you know -- on the one hand you can look at pharma-scripts and hospital volumes and it's definitely true that, you know, that the volumes are -- certainly don't appear to be rising at an accelerated rate, in a number of areas they look more sluggish if anything. But what may be impacting the managed care companies to some degree on the margin, and perhaps more so this year, is a sort of form of adverse selection when you think about, you know, how much the consumer and small employer is squeezed in this environment. One theory is that those who - and this has clearly been going on to some extent for a while -- those who need coverage are, you know, are very tenacious in holding on to it and obtaining it, and the healthier, younger people in this economic environment perhaps more likely to decline even heavily subsidized employer-based coverage. You've got the fact that more, you know, more people are disrupted from their jobs and a higher take-up of COBRA. And COBRA's sort of the ultimate form of adverse selection if you will. And even some anecdotal information in the industry that there's been some adverse selection towards the lower benefit products. And in the middle market employer groups a shift to employer self insuring, which, you know, tend to be the healthier groups on the margin. So you've got this segmentation of the community risk pool, what used to once be a community risk pool has increasingly becoming one where risk is concentrating. I think that is impacting trend as experienced by some of the managed care companies.

Christine Arnold: I'm seeing evidence of medical trend uptick. And it became more definitive for me after first quarter. I also cover the hospital sector, and we do a survey every quarter of hospitals. And over 50 percent of hospitals said that they were getting commercial pricing increases that were accelerating in excess of 200 basis points entering 2008. The problem that we have is that hospitals got price increases, and that the pricing power of the hospitals has somehow increased. Now, we got the same survey result of the hospitals asking the question different ways in January versus May, and what baffles me - what I don't understand is that hospital pricing was negotiated. So the managed care company and the hospital were at the table kind of like we are and how the managed care company could leave the table not realizing he had just negotiated a price increase is one of those great mysteries. I don't

--

Paul Ginsburg: Well, what makes you think they're not aware that they may be had no choice but to agree to a price increase?

Christine Arnold: But you call them now when they say there's been no price increase --

Paul Ginsburg: Oh, I see.

Christine Arnold: -- and then you look at the price per adjusted admit at the hospitals and you're like, wow, there was a flu first quarter, which is low acuity, which should bring down price per adjusted admit. Yet it was through the roof, and the survey results twice asking the question different ways of different hospital CEOs and CFOs suggests the same thing. So another data source that I use is talking to the reinsurers, and I am seeing with the reinsurers a spike in catastrophic claims. I don't know whether it's a train wreck, i.e., you had a $5000 deductible, you delayed and deferred, and so in stead of getting diagnosed stage I, you were diagnosed stage IV of whatever disease state. That's a possibility. It could be the adverse selection that Matt's talking about, the people who are insured or just generally sicker. It could be the fact that hospitals are getting price increases so we're bumping more claims into that catastrophic coverage area. So for example, Coventry said the 50-150 category of catastrophic claims, which is your first tranche, rose, which could be just a bump-up of a hospital pricing. Some of the reinsurers are saying that they're seeing an increase in obesity-related claims, which is producing single-birth NICUs as the borderline diabetic mom is full blown to stational diabetic, and also an increase in dialysis-related claims also they attribute to some obesity issues. With the whole Christopher Reeve thing, out-of- pocket maximums have increased; used to be $1 million lifetime max, now we're seeing $2 to $5 million lifetime maxes, which is increasing catastrophic claims as well. So I think medical trend is accelerating, and those are the reasons I think that it is.

Paul Ginsburg: Okay.

Robert Laszewski: On the medical trend situation, I would agree with you that we're starting to see an uptick in medical trend. One of the interesting things out there -- you know, we can talk about stock prices and we can talk about insurance company pricing behavior, but one of the observations that I'm making is that we are, in fact, seeing a lot more big claims. And we are, in fact, seeing people sicker and there's no answer for why that's going on. You've got some pretty good theories about it that I think are intriguing.

Christine Arnold: But I made them up. I mean, I --

Robert Laszewski: I know you did, but they're good, they're pretty good. The point is -- what troubles me a bit is there is no answer for what's going on out there. There is no really good explanation for what's going on out there. But we are seeing a sicker American people, particularly at the top and particularly when it comes to these big claims. Now that aside, the trend is ticking up a slight amount. You know, one of the big questions you hear -- people ask out there is, is there an underwriting cycle? No, there isn't an underwriting cycle. Last time we had an underwriting cycle in this business was probably in the late 1980s. What we are having is a medical care trend cycle where we go through periods where the payers and the providers are sort of in and out of equilibrium. In 1999 we had the -- we got costs down to like 0 percent trend and we got the patient's right rebellion -- probably should have called it the provider's right rebellion -- we got pushed back, the lid came off, costs went from 1999 0 percent trend to 2003 13 percent trend. We reached a kind of equilibrium between the doctors, the hospitals, and the insurance companies starting in 2003 and trend began to decelerate, and it decelerated to a low of about of 7 percent in 2007. And it kind of -- and that trend deceleration hit bottom and with the trend deceleration, it was really easy to make money in this business as trend is coming down. When it hit bottom in 2007, it could only go one place. It was either going to kind of bounce around there or start going up. And what we've seen now are indications that it's may be ticking up a little bit. Two things tend to drive medical cost trend in the insurance business. One is higher inflation and the other is cost shifting from doctors and hospitals to insurance companies when the government, Medicare and Medicaid, underpays. Looking through the rear view mirror the last few years, we have not had inflation and we have not had cost shifting because really Medicare and Medicaid have been paying about as well as they have ever paid. Whatever the providers tell you out there, Medicare and Medicaid have been about as good as it's been.

All right. Now going forward, obviously we're going to start seeing some significant inflation. Going forward, I don't have to tell anybody in this room, doctors and hospitals and others are under a lot of pressure for cost cutting by Medicare and Medicaid, and we're going to start to see that trend really increase. So this industry had from 2003 until now one heck of a nice tail wind, but now the industry is starting to face a real head wind, and it's going to be a very very difficult period for the next three or four years as providers now need to get money. And they're going to get it from the payers, and the payers are always a little bit behind in getting those things priced through and that's going to hurt margins. And that's at a time when Medicare, private Medicare, sales have slowed down. The low-hanging fruit's gone. And what they're being reimbursed for, those things are tightening up. So we have the trend windfall and we have this wonderful private Medicare market thing the last five years; those two things start to turn to be negatives going forward and you've got a head wind.

Paul Ginsburg: Matt.

Matthew Borsch: I just want to comment on the pricing side. And I do agree with the points that Bob has made in the cost trend side, you know, is definitely an important factor in impacting the earnings and fundamentals for the health insurance. But the pricing side is important, too, and I do think there's still an underwriting cycle, if you want to call it that, in this industry. And so, you know, be cognizant of the fact that in the early years of this decade, coming off of the last downturn in the industry, you had a situation where most health insurance plans were pretty squeezed. Their capital levels were depleted from the last downturn, their profitability was severely depressed or negative in many cases, and, you know, the end result of that is the pricing discipline, if you will as it's called in the industry, was very hard coming into the early years of this decade. In fact, what you saw was the health insurance industry had an accelerating cost trend, but was actually pricing above that accelerating cost trend and expanding margins, again in the early years of this decade into about 2003 when the not-for-profit plans got to a point where they had a little bit of a problem of an embarrassment of riches relative to their not-for-profit status and things started to turn. And now you have a market where, at least until recently, pricing has been very aggressive and margins have been coming down.

Paul Ginsburg: Thanks. Next question is about benefit design. If any of you have data on whether buy- downs, benefit buy-downs, are slowing, which I think last year Christine reported. And is there any movement towards some of the more innovative benefit designs, such as value- based benefits, or is that something that is more of the talk of conferences rather than reality?

Christine Arnold: Our data suggests -- we do a broker survey every year -- that the first time in three years, benefit design changes are decelerating. So we're seeing basis points less in cost shifting to the consumer; therefore, if the trend remains stable and so you have a 10 percent trend both years and last year you shifted 5 percent to the consumer and this year you're shifting only 4.5 percent, the trend realized by a managed care company would rise, right? So that's a head wind. I agree with Matt that we also have a pricing problem because the broker survey suggests that pricing before buy-downs is decelerating by 100 basis points. So I think we have an acceleration in medical trend for the reasons we talked about earlier, we've got pricing coming down because the industry hoped or expected or whatever the trend would come down and it didn't, so pricing's coming down before benefit changes, and we've maxed out benefit design changes according to both brokers offering to small employers and large employers. So the only place we can continue to shift costs to the consumer and we haven't is unionized accounts where there's obvious impediments.

Joshua Raskin: I guess, you know, my only question is, you know, what's the economic impact there? And if you're a large employer group, and, you know, summer to fall of 2007 things seemed to be okay still at that point. So, you know, we do a media survey as well and, you know, the data that we show -- that we saw as well was that '08 was a lower level or incremental buy-down versus 2007. As we're looking at 2009 and we're getting into the sort of, you know, renewal cycle, you know, as large corporations across America are struggling, you know, we may feel like we've saturated that, you know, point of no return in terms of how much the employer can take, but when the employee -- the employee can take, but when the employer is struggling, I think it will be interesting to see, I wouldn't rule out the idea that we see further, you know, additional buy- downs, you know, nine versus what we're seeing in '08.

Paul Ginsburg: Do you think -- how would you say this is linked to the developments in the economy over the next year?

Joshua Raskin: You know unfortunately, you've got to make healthcare decisions way in advance of what happens, you know, in the economy. I mean if you're a large, large employer in the United States, you're deciding on your benefits for 2009 today, so, you know, you're making a guess as to what's going to be happening in the end of 2009 in the summer of 2008. So, you know, if we were to see an economic recovery that was somehow quick and rapid in 2009, I don't think that'd be indicated in the decisions made by benefit managers. I think that's probably not reflected until 2010.

Paul Ginsburg: Good. Next thing I want to get into is health promotion and wellness. And certainly HSC has been publishing about how, you know, this sharp increase in interest by employers in programs to promote wellness, etc. I wanted to ask the panel, is this just a fad that's going to pass, or is this something real and, you know, do they have powerful tools that are just a matter of deciding to use them?

Joshua Raskin: I'll jump in there. You know, we cover a couple of disease management companies in our coverage universe, and you know, what's interesting is we've been doing a little bit of work on this. It looks as though the, you know, application for new wellness programs is actually slowed, and I think it's been a recent phenomenon, i.e., the last three months or so. I'm not sure exactly what's doing it. The economy certainly could have something -- the idea of implementing a new additional cost for an employer group. Even if it's preventive and it's got a good ROI, etc., it's still an impediment in the short term, just the economy. But, you know, it's interesting, you had the CMS, those Medicare health support pilot programs that they rolled out which were just, you know, nine failure after failure after failure there, and, you know, CMS basically just put their foot down and said we're not going to throw bad money after -- or good money after bad -- and so, you know, I think there was a little bit of a tarnishing from a reputational standpoint and, you know, I don't know how many decades it's been, but that wrestling between am I really getting a return on my investments? It's very hard to measure, and you know, it's very hard to determine whether or not there's been success in that. So, you know, it could just be temporary, again economically driven or something like that, but we've actually seen a slowdown in interest in the wellness programs.

Christine Arnold: I agree that the disease management thing is slowing down. And when you talk to employers and you talk to employer groups, the new, new, new thing is the kind of the Medical Home. So it's the concept that, you know, this disease management company over here that's doing cardiovascular and this one over here is doing diabetes -- well, hello, she's diabetic and has a cardiovascular problem, there's a cause-effect thing. So the whole fragment in disease management thing doesn't work, and none of us want to get a call from our health plan telling us how to make ourselves feel better because like that's not something you can really trust, right? So, the sense is that I think the managed care companies risk losing the function of managing care, which -- and I don't know what you want to call them -- but we'll talk about that next year. The doctors are the place where we think that care should be managed. So I think we need to overhaul the doctor's office and these Medical Homes are all about changing the profile of the doctor's office. In stead they're being told they're running around at the front desk while you wait for half an hour with a paper file so that you can sit there for ten minutes and have the doctor look in your mouth and ears and eyes and take your blood pressure as if you've just swallowed a golf ball. I mean those days are probably over. So I think what we're going to have is new specialists in the doctor's office who can really help to coordinate care. And Medical Home is all about that. We got rid of the big group practices with multi specialties when the physician practice management model fell apart, but now I think we're trying to implement more coordinated care at the point of the physician and, you know, there's probably a place for a whole new specialty in the medical field, take it out of the disease management companies, the fragmented disease management companies, take it out of the managed care companies, and put it in the purview of the doctor. And I mean there are some doctor practices that do really well at this and there's many that don't.

Paul Ginsburg: Are insurers in a position to somehow get this to happen?

Christine Arnold: Well, I mean that's why we need this adult supervision from the policymakers that we've been talking about, right? So, you know, I mean someone has to come in and figure out okay what are the best practices? What should we be doing for the person that has diabetes and cardio blah blah blah and she's noncompliant and he or she is gaining weight and smoking and dah dah dah. Fine, what do -- how do we treat this person? What's the protocol? And then which doctor groups and hospital groups do best in implementing that? And then steer them. So the health plan on steroids where we're paying the group, you know, double for doing the right thing and half for screwing up and all their people winding up in the hospital. That's an opportunity for a managed care company to do something interesting, but I talked to the managed care companies and they're like well, Christine, do you want us to recontract with all of our hospitals and doctors? Yes, yes, I want you to recontract with your doctors and hospitals or someone else is going to do it. So in the absence of managed care companies doing this and, you know, I've been talking to venture capital firms and, you know, private equity firms about hey, here's an opportunity. The big companies, they're not there; their heads aren't there; they're not there.

Paul Ginsburg: Yeah. Actually the reason I asked that is some interviewing we were doing about high performance networks and when we would talk to medical groups, you know, they would tell us about this fragmented system that Aetna says I'm great and CIGNA says I'm nuts.

Christine Arnold: That's absurd.

Paul Ginsburg: So in a sense it almost means that except in some states where there's a very dominant Blue Cross Blue Shield plan, it kind of looks to Medicare as best positioned if an insurer is going to do anything to do this, but then Medicare plods along and it's going to do demonstrations for a few years.

Christine Arnold: Study it.

Paul Ginsburg: Study it.

Robert Laszewski: I think the policy implication here is that as the managed care industry and physicians and disease management companies take a step forward in trying to manage the cost of care and improved quality, the American people have been taking two steps back. You've seen any number of studies recently about how the health of Americans is declining. The most recent one was the Harvard-University of Washington study that found that 20 percent of women see now a decline in their life expectancy and obesity, diabetes, and smoking is right at the top of it. And that's -- and you've heard that the youngest generation risks being the first generation whose health is going to be worse than the prior generation. So, you know, the fundamental problem here is that you can take a step forward in the market or government or anywhere else in terms of quality of care, and the American people take two steps back on you and health declines.

And I think to your point, I was at a Blue Cross conference composed of sales managers a few weeks ago, three weeks ago, and one of the questions they kept asking was about this insurance underwriting cycle and if, in fact, we're seeing under pricing. And the answer was no, you know, I mean the pricing environment has been the same, it's been pretty static. You know, you've always got somebody undercutting you and underbidding you and -- but people are not behaving any differently from a competitive standpoint than they ever have before. But what they were complaining about is the Blue Cross sales executive would say to you, but you know what's really different about it now is I've got -- one guy said I've got like twenty alligators picking at me constantly. Where we have the whole package before, now I've got a disease management company trying to take the disease management piece away. I've got a PBM trying to take the PBM piece away. And so what's happening out there is that we're getting more fragmentation in the market, to your point, and rather than having one organization kind of controlling the whole thing, we're getting a lot of different organizations, a lot of different specialists. And when you get the specialists pulling the pieces away, whether it's wellness, PBM, disease management, whatever it is, you lose the integration. And when you lose the integration, you lose the ability to deal with these things. So we're probably going a little bit backward, but the American people are pedaling backward faster than we are.

Christine Arnold: Yeah, but part of that's an ERISA problem. I mean it's discrimination if you charge the person more for premiums if they were, know what I mean? So your hands are tied from a benefit perspective. What you should be doing is noncompliant people should have benefits taken away. You can't do it. So policy implication, change ERISA.

Robert Laszewski: The policy implication is that we've got to hit this obesity epidemic, etc., head on and stop ignoring this huge elephant in the room that's creating more problems for us than anything we're doing in the marketplace.

Christine Arnold: No carbs outside kids.

Paul Ginsburg: Yeah, sure. Josh or Matt, do you have any comments on this?
Okay, we've got about five more minutes of questions, so it would be a good time for you -- for those that have questions -- to ask from the audience that want to do it by card rather than by microphone to write them out and pass them to -- I guess have everyone pass them to the center aisle. It would be easier for the staff to pick up. Got a few possibilities, one is I want to ask about consumer-driven healthcare. What's happening in that sphere? What are its prospects? Is that still -- is that evolving into something that's going to be with us for the future? Is it tiring? Josh?

Joshua Raskin: Yeah, I mean, I guess, I don't know. I think about, you know, the search for, you know, the Holy Grail every couple of -- every decade or so is when, you know, we hit a tough economic period, a recessionary period, and that corresponds with an inflating health premium period. And so, you know, I think of these as sort of those intolerable periods of history where the employer groups are seeing declines in their revenues and net income, and yet they're being asked to pay an accelerating amount for their healthcare benefits. So we think of, you know, whether it was the HMOs first or what have you, we need something new. And so, you know, I think that was what the idea that really generated this idea that hey, you know, let's get something new consumer-directed health plans. You know, the uptake's been I think, you know, steady, but relatively slow still. You know, we're still at may be 3-4 percent market share in the United States. I think it's an attractive product ultimately because depending -- in either funding arrangement, you're still saving money, you're still paying less. I don't think the health plans necessarily have a huge incentive to promote these from a financial standpoint other than, you know, the ability to retain their membership or attract new members to the plan. So, it's been a little bit slower. You know, I think there are certainly some benefits to it. I love the idea of, you know, more transparency and to quality, and even into cost. I think that's useful as well. But I think it's, you know, it's going to continue to sort of chug along a little bit slower than expected.

Paul Ginsburg: Matt?

Matthew Borsch: Just that I would say that, you know, we went out and met with a number of large, you know, national employers late last year, and I was a bit surprised at just how skeptical universally those employers were about the consumer-driven health plan products, I guess with one exception. But, you know, at the other end of the scale and the individual and small-employer market, you see these products and, you know, whether it's consumer-directed health plan or not, the really, you know, high deductible, lower benefit products, they're just being adopted out of desperation as the only alternative to having no coverage at all.

Christine Arnold: We've seen a stalling out of the products in the small and individual market, which means it's not expanding the health insurance market. Where we're seeing the growth is in large group, which means it's just -- it's eroding benefits for people who already have coverage, and exacerbating the collection problem that the hospitals are having, which is resulting in the hospitals raising pricing because now - so it's raising costs overall ironically. That this vehicle that was supposed to reduce the number of uninsured and lower costs is ironically raising hospital pricing and raising costs for everyone and not reducing the number of uninsured, which is interesting.

Paul Ginsburg: Good. I'd like to just ask before we begin questions whether any of the panelists have something they'd like to add - a question I didn't ask or some final thought about a discussion? Doesn't look like it. Okay.

Now I'll invite questions from the audience and actually let me start when people are coming up with -- this one with healthcare reform looming, how -- wait a second, that's what I asked. Let me not do that one. That was our first question, may be someone came in late. "Why are" -- this is for Christine -- "Why are hospitals only collecting 50 percent of co-pays and deductibles? Are people not able to pay? Are hospitals not aggressively going after them? Is it a structural change in benefits, higher co-pays and deductibles? And do you see a similar situation for Medicare patients?"

Christine Arnold: Okay, so for Medicare patients, there are provisions in the hospital -- the panelists, the next panel probably could give you some information on this, too -- but for Medicare, there's provisions where you can go back to Medicare and get patient cost sharing if you've been unable to collect it. So it's less of an issue for the Medicare population in terms of collections for doctors and hospitals. The average co-pays and deductibles are in the $1500 to $2000 range for the individual and small-group market, and people just don't have $1500 to $2000 lying around. And the out-of-pocket maximums can go up to $5000. So, you go to a hospital. The hospital's in network. The doctor's in network. The anesthesiologist wasn't. Well, what are you going to do? Undergo surgery while awake? No. Right? So, you wind up with these hidden - I mean I actually went through this -- you wind up with these hidden costs and now you're out of network so now it's more than the $2000 which was your co-pay or deductible because now you're into out-of-network territory and there's a whole new out-of-pocket max which can go to $5000 or $10,000. So two years ago, Community was saying that they were collecting 70 percent of co-pays and deductibles, as were most of the other publicly traded hospitals, and now they're saying they're collecting 50 percent. And it's simply a function of co-pays and deductibles rising faster than incomes. Good. Here's another question. I guess no one wants to use the microphone. But -- Oh, there I've got someone. Sir? Go ahead. Could you identify yourself?

MR. FERNBACH: Yes, I'm Harvey Fernbach, M.D. I'm with Physicians for National Health Program. We believe in single-payer national health HR-676 Conyers. Obviously we believe in the (off mike) approach to health insurance and replacing it with government-financed care. I was -- my question is I was pleasantly surprised to see an article by William -- a quote from Wilbur Ross who's an industrialist out of New York who came out for single-payer. And the question is why are employers not seeing the benefits of going for single-payer, which would level the playing field between GM and Toyota of America. If you have a laying off of part-time workers -- I mean employers would come to -- employees would come to their employer with health insurance right there. What is the reluctance to do a very obvious thing?

Robert Laszewski: The best answer I can give you -- I'll give you a two-part answer. The first part is the reason most employers aren't in favor of single-payer is that the people who run these companies are Republicans and they don't think that way. But what is really interesting --but I think you question opens up a really interesting avenue here, and that is, you know, there is this debate going on again -- McCain, Obama, it's in the Wyden-Bennett bill, about moving away from the employer-based system to a market-based system, okay? So I think that an even better question is why aren't employers embracing this notion of moving away from the employer-based system that Wyden- Bennett and McCain this opportunity that they're giving them for the reasons you just asked? And what I have been really surprised at over the last couple of months is the way the employer community continues to really want to embrace employer-based health insurance. And I say that as being surprised by it. Employers continue to believe that it is really important to compete in the workplace as part of the wage and benefits package, even though healthcare trends at 10 percent and wages trend at 3 percent. But in talking to, you know, advocates for Wyden-Bennett, for example, they continue to get a lot of opposition on the -- or at least nothing much more than a lukewarm response from the employer community -- and it is surprising, but it's there.

Christine Arnold: Well, a couple of observations. One, no one looks at Medicare and says what a progressive -- I mean, what a progressive program, it's doing great disease management and really coordinating care. And we just got a drug benefit, what, two years ago? So I think part of it is that people look at Medicare and if we're not able to say this is something we all want to be in, then how can we embrace it, as something everyone should have, number one. And number two, these are business men, so they don't want the government making cars, they don't want the government doing their business, and so I think they've kind of aligned with the business people that are walking in that are running the hospitals and used to be in the physician practice management business and are running the managed care companies.

Paul Ginsburg: Why don't we go to the next question? Yes, Amy?

Christine Arnold: Amy Taylor, (off mike). This is a question for Christine. You said that it would be good if the insurers kept better records so we really knew who the good doctors were?

Christine Arnold: I'm not sure they should keep better records; I think they should share the data.

MS. TAYLOR: Okay, they should share the data.

Christine Arnold: So there's a huge battle because you've got WellPoint and United and some of the other big ones --

MS. TAYLOR: But here's a question from my experience and those of my friends. There aren't that many really good doctors out there, particularly -- okay -- particularly among internists, primary care doctors, gynecologists. Either they don't take insurance or their practice is full. Okay? How do you handle this in the -- not taking insurance obviously if people paid doctors who, say, talk to you more --

Christine Arnold: See, that's what my health plan on steroids is supposed to do. It's supposed to pay those doctors double, like really stretch the limits of what you're going to pay the best and the worst. So guess what, his practice may not be quite so full if he's going to get paid double, right?

QUESTIONER: Who's going to pay the double, the insurance company or the patient?

Christine Arnold: There's 40 percent cost savings right place right time to be had, so there's a lot of room here to stretch the limits. And what you -- Care Focused Purchasing, which is an effort I was involved in at Mercer, saw a little bit because they're having a hard time getting really good data in and the health plans won't share the data. So that's the first impediment, but once you get beyond that, you can profile the doctors and hospitals. The goal is to cut out the bottom, you know, 10 or 20 percent, and what you're going to do is you're going to start to, you know, move the worst to better. And then -- and so you're also going to improve physician practices and the whole Medical Home concept is about NCQA and some of these other organizations having specific criteria that you meet in order to improve your practice. So it's about initially carrots and sticks, double and half the pay, which will improve the availability of physicians at the high end and also will move the ones at the low end to the high end.

QUESTIONER: Okay, so you're talking really long term?

Christine Arnold: Yeah, this can't happen overnight. I mean we need the data to really determine -- we need to agree on what the best practices are first of all. That needs to be done by medical societies, and we've got that. We've already got the medical societies that came together on the Medical Home. We've got NCQA with the criteria. So we've started there. Now we need to identify which doctors and hospitals are doing it and which ones aren't. And that's where we can't have everyone hoarding their data because if you've got, you know, someone who does pretty complex cases or, you know, is say operating on cancer patients, he may do, what, five operations a week? Someone with 20 percent market share only sees one of them.

QUESTIONER: No, you need risk adjustment for anything --

Christine Arnold: Yep, risk adjustment and you need pooling of the data, and I think the government policy role initially is to force the pooling of the data and start by opening the Medicare data base.

QUESTIONER: Okay, thank you.

Paul Ginsburg: Okay. There's a question here about special needs plans, which we didn't get into when we were talking about Medicare Advantage. Do you see them playing an increasing role in coming years? And, you know, for those -- you know, the special needs plans are the coordinated care plans that are focusing on particularly high-risk populations.

Joshua Raskin: Yeah, I would just jump in. I'd say, you know, two things on that point. The company that's really led the way with the special needs plans and the SNP plans has been UnitedHealth. They've got literally ten times as many as the next plan, or may be eight times as many as the next closest plan in terms of total membership. And for them it has been a very difficult population this year. They're seeing all sorts of adverse selection issues. So, you know, the plans that have done well with some of the special needs plans in terms of costs, etc., are ones that are rolling out, you know -- I mean special needs plans that aren't really special needs almost. I mean they're just general Medicare/HMO plans where they're getting higher reimbursement and you've actually seen, you know, some Congressional efforts already to focus on that, you know, Medicare in the new regs. You know, they suggested that I think you needed to have a minimum of 90 percent of your SNP membership actually being special needs. So I think it's an interesting concept and I think with isk adjustment that that can work out, but the plans that seem to be doing it right, like a United, really targeting the sickest patients are getting hurt economically. So you're going to see a reduction in their membership next year, whereas those that are sort of, you know, looking for, you know, a special need being, yeah, elderly, I mean or something crazy like that. It just seems like that's where, you know, they're making money, and that's going to slow down. And CMS is already on top on that I think.

Paul Ginsburg: Yes, Matt? No? Okay. Let me see. One extent that you see is international trends in the use of evidence-based medicine in influencing clinical practice pricing and payments for healthcare in the United States.

Christine Arnold: I don't get out much, so I don't have anything to --

Paul Ginsburg: Okay. May be we don't have an answer to that. Here's -- duals and PDPs. "Do you have any sense of how CMS's risk adjusters for low-income subsidy enrollees and Part D are working? It seems curious that some insurers seem to argue that they're losing money on" - guess that's "duals, enrollees, and might even be bidding strategically to unload these enrollees while other insurers seem to be glad to have 75 percent of their PDP enrollments in -- I guess dual enrollees." Bob, did you want to answer that?

Robert Laszewski: I just have the same observation; I don't really have an answer. In my blog earlier this year, I posted on this that the two biggest players in PDP -- Humana and United -- were unloading, and the smaller guys with less data were uploading. So I think it probably says something. It probably has to do with market sophistication, not anything else.

Christine Arnold: I think it's formularies. So if you look at the top, you know, kind of ten drugs taken by seniors, you've got United and Humana saying yes to those drugs and the most they can charge a dual for is $5. And you've got companies like WellCare, Health Net, and Coventry, who seem to be doing okay, saying no, it's not covered. If you want the drug, no. So I think it's a function of formulary management, and I think the policy issue that we're running - that we're going to run into is either the big companies, United and Humana, with all these duals and, you know, 40 percent of PDP members are going to do what they need to do for their business, which is cut the formularies, and create a potential issue with these nursing homes with these frail, elderly seniors. Or they're not, and we're going to continue to have this issue of them losing money. So for example, Celebrex, Lipitor, Prevacid, Toprol, and Xalatan -- I'm pronouncing these all wrong, I'm not a pharmaceutical person -- Xalatan -- none of those are covered by WellCare, and they're all covered by Humana United. So, duh. Of course United and Humana have a problem.

Robert Laszewski: I think that data's really good, Christine, because it does point to a policy issue and that is you can't control drug costs if you can't control formulary. And one of the problems on the Hill, the Democrats early last year tried to pass a bill that would allow Medicare to negotiate drug prices, but they gutted it -- it never passed -- but it was gutted if it would have been passed because you couldn't play with the formulary. You had to offer everything. So, you know, the short answer to all of this is if you want to control drug costs, as they do in Europe, you've got to be able to limit what's on the formulary.

Christine Arnold: Right, and I think the risk -- I mean may be we think about a risk adjuster just for the duals because the risk adjuster had reimbursed companies for 80 percent of costs above expectation once they got 2.5 percent beyond what they bid. This year the risk adjuster went to you only get half coverage once you've gone 5 percent, and 5 percent's your margin. So part of the problem is that you saw stratification of the formularies, which stratified the sick seniors at a time when the training wheels were coming off the risk orders.

Paul Ginsburg: Good. I think we just have time for one more question. Sir?

MR. ROSENBLATT: Bob Rosenblatt, freelance writer. Christine mentioned there's a real problem of noncompliance by patients with what they should be doing, and Bob talked about American people pedaling rapidly towards obesity. How far are you prepared to go to be tough with patients? For example, should insurance companies say you're obese, I'm giving you a free gym membership and I'm giving you a consultation with a nutritionist. If you don't -- a year from now if you haven't lost 25 pounds -- your co-pays and deductibles will go up significantly. Should insurance companies do that?

Christine Arnold: Well they can't now. It's a violation of ERISA and the ADA. So, you know --

Robert Laszewski: They're worried that it is, yeah.

Christine Arnold: Well, they won't do it; employers will not do it; go to the Mercer employer form. So what they do is they say we'll give you dollars to enroll in a program and we'll give you, you know, I've got $50 to take the Mayo thing or I lied.

Robert Laszewski: You know Christine, I think you just -- you know, you just hit on it. Employers won't do it. Employers will not do it, and --

Christine Arnold: -- which is why disease management and managed care for managed care companies isn't working. They're getting, you know what I mean, they're getting my fictitious Mayo thing in, you know, so that's why it has to come from the doctor's office. The doctor's office knows what I, you know, what I weigh. He knows what my cholesterol is, so we need to take all of this from the realm of the patient and the disease management company and the managed care company up to the doctor.

Robert Laszewski: I think it's also a place where conservatives have a good argument for moving the system to one of individual responsibility and individual accountability, because until there is that direct responsibility, we're not going to be there. There's also the overarching issue, I think, of confronting obesity head on in this country which no one wants to do, not just the employer. The way we confronted smoking over the last 30 years, and I don't mean that by having (off mike), I mean that by confronting it head on and talking about it and dealing with it and saying it's a really stupid thing to do to yourself, which we're very reluctant to do. Half of it I think is bully pulpit.

Paul Ginsburg: Good. It's time for a break. I want to thank the panel for an enormous job. And we'll restart with our second panel.

(Recess)

Paul Ginsburg: Okay, it's a good time to get started if you could take your seats. Pleased to have this second panel, and we're going to focus on a range of provider issues, and I'd like to begin with some questions about the underlying -- something we discussed at the earlier panel -- the underlying spending trends from the perspective of those that look at the provider sector as to what you're seeing for hospital inpatients and outpatient facilities, physician services, you know, what is happening to utilization, and what is happening to prices.

And you're the hospital equity analyst, so why don't you begin?

Adam Feinstein: Yeah, when I - Thank you, Paul. I appreciate being part of the panel. Just -- maybe just to kick it off in terms of utilization trends. It's been an interesting year. I'd say, you know, more so than any other period in our history, really seeing the economy having an impact everywhere. So, (inaudible) side of healthcare is not being impacted by what's going on more broadly, whereas this year we really, you know, are seeing an impact. Geoff and I were talking earlier and just saying that the month of May I heard so many anecdotes with different types of healthcare companies about a big slowdown in May, so hospitals, labs, surgery centers, senior living, you know, pretty much any type of company that I look at is all slowdown in their utilization trends.

Now, you know, certainly I guess the big question everyone's trying to figure out is, is that going to be something we're going to see for the next several years, or is this just a temporary blip, and, you know, the answer is I don't know but, you know, clearly, you know, I had been somewhat shocked just by the magnitude of the impact. And, you know, you heard from the other panelists here talking about managed care with more cost sharing and what's going on in the benefits market, you know, what would be the ultimate patient having more (off mike) in here, we're looking for modest utilization trends in 2008. But certainly I do think with the demographics, it will come back over time, but that's probably been the biggest surprise for 2008.

Paul Ginsburg: Yeah. Adam, could I push you in some detail. You mentioned, you know, a striking change in May, presumably due to the weak economy, and, you know, what kinds of services are feeling the impact? I would think that the services that are more discretionary?

Adam Feinstein: Yeah, it's a good question. Certainly you would think that, so particularly elective surgery. So, we saw a big slowdown there. So, as I look at surgical cases, there's been a slowdown in both inpatient and outpatient, but, you know, clearly, you know, that's been one of the areas we've seen the biggest slowdown, and then, you know, it goes down the food chain, you know, in that if you look at procedures that, you know, are purely discretionary, like laser vision surgery and things like that, we've seen a real extreme slowdown. But even, you know, procedures that are more serious than that, I've been, you know, hearing a lot of anecdotes about a slowdown as people delaying their treatment because of just what's going on in the economy.

Paul Ginsburg: Sure. Anyone else?

Kevin Ponton: I'd agree. I'd also note that I tend to look at what you'd consider weaker hospitals, hospitals that have a weaker financial strength and your overall aggregates in the country, and I've noticed that your area of -- your geographic location is very important. If you look at the aggregate numbers for the United States, you'll see certain things, but you'll be able to notice that if you look in some of the states that have been hit hardest economically or have been suffering economically for the last several years -- take for example, Michigan -- you'll find that those facilities in those states to be like the canary in the mine as an indicator of what the rest of the country might be able to go through, and the only example I give is the stark and dramatic effect on their financial condition of maybe even two months of experience with lower patient or value indicators for a period of, say, one or two months, and this can be the difference between profitability and nonprofitability for these places, and given that 85 percent of the hospitals in the country are not for profit, we're talking profit margins. As you heard this morning, 2 percent is great, if you will, compared to the stronger interpretations in another market -- in a for- profit market. Therefore, any kind of a drop in utilization will have a much quicker effect on their financial performance and much more deleterious if it's dropping off.

Paul Ginsburg: Yes, Geoff.

Geoffrey Harris: The only thing I would add is the one sector that seems to be bucking this trend is -- the -- perhaps understandably, the psychiatric hospitals are actually reporting very strong volumes and some have attributed that to, in fact, stresses related to the weak economy, and that report has come not only from the providers of services who've seen their volumes go up but also from -- the payers who are paying for those services have seen higher than expected utilization trends.

And then just to add to what Adam said on the discretionary areas, yeah, things like, again, laser vision surgery -- these aren't necessarily directly in hospital. Any kind of cosmetic surgery, dental implants -- these are all things that have experienced very dramatic drops in utilization, again, because they're often paid for out of pocket or using credit, which is very tough to get right now.

Adam Feinstein: I'm sorry -- just to add one more thing. It's somewhat interesting. I just bring it up, because it's something that you will be hearing a lot about. Even births are down. Some of the companies that, you know, manage neo-natal intensive care units have been talking about a real slowdown there, and I first heard it and I thought maybe they were just blaming some of their business issues on that, but the more hospitals that I spoke to I've heard anecdotes about a slowdown in births. So, that's a more recent data point that I thought was interesting.

Paul Ginsburg: Yeah. Now, we've -- often in our work we've picked up reports about, you know, substantial capacity expansions and hospitals, physician-owned outpatient facilities, and how are you seeing th