Wall Street Comes to Washington:

Originally published by the Center for Studying Health System Change (HSC), a nonpartisan policy research organization that operated with principal funding from the Robert Wood Johnson Foundation.

Issue Brief No. 43 -- September 2001

HSC's Sixth Annual Wall Street Roundtable

With health care costs surging again, most insured consumers were enjoying broader access to care, many health plans were prospering financially, and employers were struggling with how to pay for it all. Those were among the assessments offered by market and health policy analysts at HSC's sixth annual Wall Street roundtable. Panelists discussed the outlook for managed care -- including Medicare+Choice -- hospitals, and pharmaceutical costs, as well as the untapped potential of evidence-based medicine to help rein in spending and the growing friction between health plans and providers.

The Managed Care Backlash Drives Up Costs

Against the backdrop of a booming economy and a tight labor market, efforts to control health care costs had taken a back seat to consumer demand for broader choice and more services. Insurers responded by offering plans with wide provider networks at higher prices, and employers -- facing another round of double-digit premium increases headed into 2002 -- had so far done little to shift costs to workers. Norman M. Fidel, a senior vice president at Alliance Capital Management, observed that the prevailing climate favored providing more care rather than cutting costs, and he noted that the biggest surprise of 2001 was how little employers had done to pass costs along to employees.

Robert Reischauer, Ph.D., president of The Urban Institute, identified three factors that would determine how quickly employers began major cost shifts. First, if the tight labor market loosened significantly, companies would no longer need to compete as aggressively on benefits to attract and retain workers. Second, if corporate profits continued shrinking, firms would have less room to absorb premium hikes. Third, the size and duration of underlying medical cost increases might eventually force employers' hands. Roberta Walter Goodman, a managing director at Merrill Lynch, pointed out that consumers' health care expectations had become almost boundless, creating a fundamental mismatch between what people expected and what the system could sustainably deliver.

Rising Medical Costs Drive Premium Increases

Pharmaceutical costs remained a major driver of rising medical spending, though drug expenditure growth showed early signs of tapering due to patent expirations and increased consumer cost sharing. Meanwhile, hospital costs were accelerating from low-single digits to high-single digit growth. Physician costs, which had been flat or declining, were rising in the mid-single digits. Outpatient care had become the single largest incremental cost trend confronting health plans. Fidel argued that employers could not keep absorbing double-digit premium increases and remain competitive globally, so the only realistic solution was to shift more costs to consumers.

HSC Associate Director Joy M. Grossman, Ph.D., reported that health plans were exploring new product types based on information from the organization's recently completed site visits to 12 communities, though few had actually been brought to market. Ideas under consideration included multiple provider networks with different cost-sharing levels at the point of service, enrollment-time trade-offs between premium levels and future cost sharing, and narrow-network products aimed at small employers.

The Unrealized Promise of Evidence-Based Medicine

Goodman predicted that more health plans would abandon restrictive care-management tactics like preauthorization and instead invest in information technology to analyze physician and hospital practice patterns. Research had identified substantial gaps between what practicing physicians were doing and what evidence-based medicine indicated was most appropriate. Closing those gaps through quality incentives could have a positive impact on costs over time, she argued. Fidel agreed that identifying high-quality, cost-effective providers and investing in disease management for high-cost conditions were worthwhile goals, but acknowledged that the necessary IT infrastructure was expensive and time-consuming to build. Grossman noted that HSC site visits showed quality improvement and IT investments were still in early stages, and most respondents could not point to any evidence of cost effectiveness.

Plans and Providers Play Hardball

Prominent hospital systems had gained enough bargaining leverage to demand significantly higher payments from health plans, and the resulting contract negotiations had become increasingly contentious. Dennis M. Farrell, a managing director at Moody's Investor Service, described an extraordinarily adversarial dynamic between providers and plans that was not healthy for the industry or its participants. Both sides had shifted from strategies focused on gaining market share to strategies focused on restoring profitability. The self-inflicted pain of this transition was producing an era of fiscal discipline driven by survival instincts.

The Perennial Trade-Off: Cost, Quality, and Access

Panelists returned to the age-old tension among cost, quality, and access. With health plans retreating from restrictive managed care and employers reluctant to cut benefits in a competitive labor market, costs were rising rapidly. The Medicare+Choice program illustrated the challenge in microcosm: plans were exiting the program because payment rates were too low to sustain viable products, leaving beneficiaries with fewer managed care options. The consensus was that the system could not simultaneously deliver unlimited access, the highest quality, and stable costs -- and that the question of who would bear the burden of trade-offs was becoming harder to dodge.

Sources and Further Reading

AHRQ -- Federal health care quality research agency.

Health Affairs -- Peer-reviewed health policy research.

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

Urban Institute -- Nonpartisan policy research organization.