Wall Street Comes to Washington

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 Comes to Washington: Market Watchers and Policy Analysts Evaluate the Health Care Market

Issue Brief No. 54 | July 2002

Consumers would shoulder a bigger share of health care costs as employers responded to a third consecutive year of double-digit insurance premium increases expected in 2003. Companies planned to raise deductibles and copayments to protect their margins and increase worker awareness of the true cost of care, according to a panel of market and health policy experts at HSC's seventh annual Wall Street roundtable. Most large employers were expected to proceed cautiously, eyeing new products like consumer-driven health plans and tiered provider networks without overhauling benefit structures. Meanwhile, a hospital construction boom was underway, raising concerns about a renewed medical arms race.

Goodbye, $10 Copayments

Despite forecasts of another round of double-digit premium hikes, most large employers were unlikely to overhaul their benefits dramatically. Merrill Lynch first vice president Roberta Walter Goodman predicted "much more tweaking of existing benefit plan structures than moving to things that are new and different." After years of being shielded from costs under managed care's generous designs, many consumers had grown accustomed to $5 or $10 copayments. Employers planned to raise deductibles and copayments and possibly expand coinsurance. However, Goodman cautioned against raising premium contributions, warning it could push younger, healthier employees to drop coverage.

Tightly Managed Care Comes Undone

As managed care plans loosened restrictions -- including referral requirements and preauthorization for hospital admissions -- consumer utilization and costs climbed, especially in the most restrictive plans. HSC president Ginsburg predicted steeper premium increases for tightly managed plans because they were "being affected more by the loosening." The most restrictive plans were seeing medical cost increases of 20 to 25 percent.

Hospitals Gain Upper Hand

As hospitals consolidated and reduced excess capacity, many gained leverage in negotiations with health plans. Facing Medicare and Medicaid payment squeezes, hospitals fought for higher private managed care rates. Goodman noted that hospitals had "engaged in really stupid pricing during the mid-1990s" and were now trying to get rates to more rational levels. Some hospital systems with local dominance had engaged in aggressive pricing that could attract antitrust scrutiny.

A New Medical Arms Race?

In many markets, hospitals were investing heavily in profitable specialty services -- cardiac, cancer, and orthopedic care -- raising worries about excess capacity and higher costs. In Indianapolis, four major hospitals were pouring more than $200 million into building separate cardiac care centers, while the public hospital struggled to raise $12 million for its burn center. HSC researcher Cara Lesser described the pattern as "a return to medical-arms-race-type behavior." Robert Reischauer of the Urban Institute warned that technology advances could render expensive new facilities obsolete, arguing for regional planning rather than individual hospital decision-making.

Slower Rise in Drug Spending

The widespread adoption of three-tier pharmacy benefits had helped moderate drug spending growth, though pharmaceuticals remained a major cost driver. Drug patent expirations and increased generic availability contributed to the slowdown. Panelists were pessimistic about the future of Medicare+Choice, Medicare's managed care program, noting that even legislative fixes to low payment rates would be unlikely to reverse the exodus of health plans.

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.