HSC's 16th Annual Wall Street Comes to Washington Conference

Originally published as a Conference Transcript by the Center for Studying Health System Change (HSC), October 12, 2011. HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation. This conference was supported by the Peter G. Peterson Foundation.

The 16th Annual Wall Street Comes to Washington Conference brought together leading equity analysts from major financial institutions and health policy experts for a wide-ranging discussion of health care market trends and their policy implications. Paul Ginsburg, president of HSC, moderated a single panel that covered health insurers, providers, the implementation of health reform, and broader spending dynamics. The panelists included Robert Berenson of the Urban Institute, Matthew Borsch of Goldman Sachs, Carl McDonald of Citi Investment Research, Doug Simpson of Morgan Stanley, and Gary Taylor of Citigroup.

Health Care Spending Trends and the Post-Recession Slowdown

A central theme of the conference was the unexpected slowdown in private insurance utilization during 2010 and 2011. Matthew Borsch of Goldman Sachs framed this within a historical pattern stretching back several decades: after each major recession, health services demand remained depressed for four to five years before recovering. Following the 1982 recession, utilization did not rebound until 1986. After the 1991 recession, the recovery came around 1995-96. The 2001 recession showed a similar lag, with trends picking up in 2006-07. Given the severity of the 2008-09 downturn and the weak recovery that followed, Borsch expected the current period of suppressed utilization to persist at least through 2012.

The drivers behind this pattern included employer actions to shift costs to employees during and after recessions -- in the early 1980s through second-opinion reviews and early managed care, in the 1990s through the wholesale move to HMOs, after 2001 through three-tier copay structures, and in the current period through accelerated cost sharing and consumer-directed health plans. Doug Simpson of Morgan Stanley raised the question of whether stagnant wage growth combined with ongoing cost shifting might represent a structural change rather than a purely cyclical phenomenon, pointing to the growing price sensitivity among consumers paying more out of pocket.

Gary Taylor noted that from the provider side, the utilization slowdown was visible across virtually every service category -- hospital inpatient, outpatient, lab, physician office visits, and surgery center visits all ran at least 200 to 300 basis points below normal trend. He pointed to the role of fee-for-service incentives in generating marginal utilization: when economic conditions change and the economics of procedure volume shift, borderline cases that physicians might otherwise have performed simply do not happen. Carl McDonald cautioned against assuming this represented a permanent 'new normal,' noting that even Medicaid -- where patients face no cost sharing at all -- had seen utilization declines, suggesting the economic factors ran deeper than copay levels alone.

Premium Increases and the Surprise of 2011

The Kaiser Family Foundation's employer survey revealed that 2011 premiums rose 9 percent, a sharp jump from the roughly 3 percent increase recorded in 2010. This tripling caught many observers off guard. Borsch suggested that the 2010 figure may have been artificially low in the Kaiser survey, and the 2011 number correspondingly high, with the true underlying trend falling somewhere in between. The panelists debated whether the premium spike reflected catch-up pricing by insurers after a period of underpricing, the impact of health reform provisions such as dependent coverage to age 26 and elimination of lifetime benefit caps, or simply normal variation in survey-based estimates.

Provider Consolidation and Market Power

Hospital and physician consolidation emerged as a major discussion point. Gary Taylor described the hospital sector as undergoing a 'wholesale merger wave,' driven partly by expectations that health reform would advantage larger, more integrated delivery systems. Many of these mergers involved acquisitions of physician practices, creating vertically integrated organizations. Robert Berenson expressed concern that this consolidation was increasing provider market power without necessarily improving quality or efficiency. He noted that the Federal Trade Commission was beginning to scrutinize some hospital mergers more closely but lacked the resources to challenge the volume of deals taking place.

The panelists discussed how consolidation was shifting bargaining leverage from insurers to providers. In many markets, dominant hospital systems could demand significant price increases because health plans could not sell a viable network without them. This 'must-have' status translated into pricing power that could persist regardless of broader utilization trends. Several panelists observed that commercial prices at hospitals had been increasing at rates well above the Medicare payment updates, a divergence that raised questions about cost shifting between public and private payers.

Health Reform Implementation and Exchange Prospects

The panel assessed the state of Affordable Care Act implementation roughly 18 months after passage. The analysts noted that uncertainty about the law's future -- including pending Supreme Court review -- was affecting business planning across the industry. Insurance exchanges, scheduled to launch in 2014, were a particular focus. The panelists debated which insurers would participate most actively in the exchanges, whether narrow-network products would dominate exchange offerings, and how the individual mandate would affect the risk pool. Berenson raised the broader question of whether exchanges would actually drive competition on value or simply become another distribution channel.

The discussion also covered Medicare Advantage, where enrollment had continued to grow despite payment reductions under the ACA. The analysts attributed this partly to favorable demographics and partly to plans' ability to reduce benefits and increase premiums gradually rather than exiting markets abruptly. Medicaid expansion was another area of uncertainty, with states taking widely varying positions on whether to participate.

Accountable Care Organizations and Payment Innovation

The conference devoted considerable attention to accountable care organizations (ACOs) and other payment models designed to move away from pure fee-for-service reimbursement. While the concept generated significant interest, the panelists were cautious about near-term impact. Berenson noted that many organizations calling themselves ACOs were primarily using the label to justify physician acquisitions and market consolidation rather than genuinely redesigning care delivery. The financial incentives in the Medicare Shared Savings Program were relatively modest, and the risk of losses under two-sided models gave many providers pause.

Private-sector ACO initiatives were somewhat further along, with several large insurers developing shared-savings arrangements with provider groups. But these programs remained small relative to total business volume. The panelists agreed that meaningful movement toward value-based payment would take years and likely require both regulatory pressure and competitive market forces to sustain.

Sources and Further Reading

This transcript was from HSC's 16th Annual Wall Street Comes to Washington Conference, held October 12, 2011, and sponsored by the Peter G. Peterson Foundation. Panelists included Robert Berenson (Urban Institute), Matthew Borsch (Goldman Sachs), Carl McDonald (Citi Investment Research), Doug Simpson (Morgan Stanley), and Gary Taylor (Citigroup), with Paul Ginsburg (HSC) moderating. Related HSC research on spending trends, provider consolidation, and health reform implementation provides additional context.