Wall Street Analysts Bullish on Managed Care, Bearish on Rev | HSChange | HSChange

Originally published by the Center for Studying Health System Change (HSC). HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

Wall Street Analysts Bullish on Managed Care, Bearish on Health Care Information Technology Revolution

Conference Executive Summary | June 22, 2000

Insurance premiums were climbing faster than provider payments and other underlying costs, placing health plans in their strongest financial position in years, according to a group of Wall Street analysts assembled by the Center for Studying Health System Change (HSC). At HSC's fifth annual Wall Street roundtable, industry watchers forecast that premium growth would top out at roughly 10 percent over the following two years and that employers would largely absorb the higher rates. The reason was straightforward: employees feared restrictions on their health care choices even more than they feared rising costs. "People want more freedom and corporations have been willing to go along with that because it has been an unusual period of prosperity in the economy," observed Alliance Capital Management Senior Vice President Norman Fidel, one of five panelists at the event.

Premium Increases and Provider Pressures

Other participants in the discussion included Dennis Farrell, managing director of public finance at Moody's Investors Service; Roberta Walter Goodman, managing director at Merrill Lynch; Geoffrey Harris, managing director at Warburg Dillon & Read; Samuel Murphy III, vice president and senior equity analyst with American Express Financial Advisors; and Joy Grossman, associate director at HSC.

Health plans were channeling less than half of their premium revenue growth into hospital payments, Farrell noted. That dynamic, compounded by Medicare spending reductions imposed by the 1997 Balanced Budget Act, left many hospitals in financial distress. The institutions faring best were those reassessing internal operations, concentrating on core hospital services, and shedding money-losing physician practices they had acquired during the integration wave of the mid-1990s. "Hospitals are going back to calling themselves hospitals," Farrell said.

Physicians found themselves in an even weaker bargaining position relative to health plans than hospitals. Some were pinning their hopes on legislative efforts to gain collective negotiating power, but opposition from consumer advocates and a broad coalition of stakeholders made passage of a bill by Rep. Tom Campbell (R-CA) granting doctors that authority unlikely. Meanwhile, capitation -- once heralded as a vehicle for restoring provider autonomy and profitability -- continued its downward trajectory. "It's another failed experiment in American health care," Murphy declared.

Class Action Suits and Plan Reforms

A wave of class action lawsuits had recently been filed against managed care organizations, alleging everything from malpractice to racketeering. The panelists were skeptical that these suits would produce major verdicts or trigger fundamental changes in plan behavior, though they predicted the litigation would push plans toward greater transparency about their policies and procedures.

Some health plans had already begun responding to the complaints of consumers and physicians about care restrictions, clinical micromanagement, and administrative hassles. United Healthcare, for example, had recently replaced its utilization management programs with less intrusive, retrospective review processes. The goal, according to Goodman, was to demonstrate that the plan "can have a positive impact without being in the face of the provider." Whether such moves would genuinely improve efficiency or simply quiet critics remained an open question.

Mergers, Acquisitions, and Pharmaceutical Spending

With strong cash flows, some plans were well positioned to pursue mergers and acquisitions. The panelists cautioned that the pace of consolidation would depend heavily on local market conditions. Merging data systems remained a risky undertaking, but deals involving overlapping geographic territories could strengthen a plan's bargaining leverage with providers. "My guess is that the newer mergers and acquisitions will do well, because the [economic] wind is at their back," Harris predicted, while adding that mergers lacking territorial overlap offered limited upside.

Pharmaceutical spending had surged substantially in 1999, though the panelists expected growth to plateau at around 15 percent before potentially declining. The pipeline of blockbuster drugs was slowing, and several major medications were nearing patent expiration. Among the cost-containment tools gaining traction, three-tiered copayment structures were proving far more popular with consumers than closed formularies, reflecting the ongoing demand for choice. The unresolved debate over a potential Medicare prescription drug benefit remained a major wild card for the pharmaceutical sector. A new drug benefit would massively expand the market for drugmakers, the panelists agreed, but price controls or other mechanisms to contain program costs could offset the impact of increased prescription volume.

The Internet: Evolution, Not Revolution

Despite widespread enthusiasm about the internet's potential to transform health care, the panel concluded that technology would facilitate gradual evolution rather than wholesale disruption. Established health care companies that incorporated internet tools into their existing operations stood to have a greater impact on quality and costs than pure-play internet health startups. Progress on squeezing out administrative expenses would remain slow until the industry settled on transaction standards, and standardization was proving difficult to achieve. On the flip side, better access to health information online was likely boosting consumer awareness of -- and demand for -- treatments, which Goodman suggested was probably driving up health spending rather than containing it.

Sources and Further Reading

Kaiser Family Foundation -- Employer Health Benefits Survey -- Annual data on employer-sponsored health insurance.

Health Affairs -- Peer-reviewed health policy research.

Robert Wood Johnson Foundation -- Health policy research and programs.

Commonwealth Fund -- Research on health care coverage and policy.