BB&T at the 2008 Healthare Forecast Conference
By MICHAEL SIMONSEN, PhD
Biomedical Business & Technology Contributing Editor
IRVINE, California The 2008 Healthcare Forecast Conference, organized by the Center for Health Care Management and Policy in the Paul Merage School of Business at the University of California Irvine (UCI), and now in its 17th year, provides an annual update on trends in the healthcare market in the U.S. and on political and economic factors impacting future growth in the market.
Experts with backgrounds ranging from economists to political analysts, public policy makers, and market analysts addressed a wide range of topics in healthcare, including the potential impact of this year s presidential election on the course of healthcare policy in the U.S. over the coming years.
Forecasting of long-term healthcare trends is especially challenging in today s uncertain economic environment, particularly in light of the lack of a definitive answer concerning who will be picked in the November election to reside in the White House. But for the rest of this year, there is a rather general consensus that the odds of a major federal healthcare initiative emerging are low, since neither political party wants to implement policies that might constrain the healthcare agenda of the incoming administration in 2009.
The markets for healthcare products medical devices and equipment, pharmaceuticals and supplies are expanding more rapidly than the growth rate of worldwide gross domestic product (GDP), driven primarily by emerging markets. However, the markets in developed countries, while continuing to grow, are potentially at risk of a slowdown, given protracted negative economic.
Although the healthcare market often is viewed as recession-proof, since the demand for healthcare services is considered to be independent of the economy, in fact an economic downturn is likely to have a negative impact on growth in the provider market, in turn felt in the healthcare products segment.
However, most economists are in agreement that any recession in the U.S. will be short-lived and mild, due in part to the impact of the economic stimulus package introduced by the Bush administration.
Global economy remains strong
A major factor driving growth in the U.S. economy is the strength of exports, which is off-setting a sharp downturn in the home building sector. Exports are expected to provide underlying strength in the U.S. economy as emerging markets continue to expand at a rapid pace, coupled with the value of the U.S. dollar which makes U.S. products increasingly attractive to foreign buyers and reflects a more balanced global economy.
As shown in Table 1, Asia is projected to account for a growing proportion of world GDP, increasing from 42% of the total in 2008 to two-thirds by 2050. Meanwhile, North America, including the U.S., which now accounts for 25% of world GDP, will decline to 15% of the total by 2050. Europe and Latin America also will see their share of world GDP decline, while the Middle East and Africa will remain about the same.
Growth in the healthcare market, including the medical device and diagnostics sectors, is expected to outpace GDP growth in the emerging markets, due both to an expansion of personal income and rising prices as well as increased adoption of advanced medical technologies and aging of the population.
Asian aging also in Middle East
The size of the population age 65 and older in leading countries in Asia including China, India, Indonesia, Malaysia, Thailand, and Vietnam is projected to increase by 300% to as much as 575%, while in the U.S. the increase is projected at 147% and in most countries in Western Europe at between 53% and 108%.
In Middle Eastern countries such as Saudi Arabia, Egypt and Morocco, the projected increase ranges from 493% to 786%. The increasing demand for healthcare services. coupled with growth in personal income. will drive strong expansion in the healthcare markets in Asia, as well as in the Middle East, creating ongoing opportunities for exports by medical device companies in the U.S. and Western Europe.
As discussed by Jim Glassman, PhD, managing director and senior economist at JP Morgan Chase & Co. (New York), at the UCI conference, the U.S. economy is expected to grow by 2.6% in 2008 in real terms, while real GDP in newly industrializing countries will grow by 7.3%, down from 8.1% in 2007.
Economists have been warning of a possible recession in the U.S. (that possibility obviously be-coming more real following the conference), key indicators that closely parallel GDP.
One big concern voiced by Glassman and others speaking at the conference relates to securitized finance, a new and now widely utilized method of financing credit that has resulted in creation of the sub-prime lending market, and the increase in high-risk loans and subsequent defaults. The sub-prime crisis poses a real threat to the financial system, as well as to the economy if not resolved, he said. However, Glassman believes that the Federal Reserve has the ability to act to avert a crash of the markets, and that banks must step back in to support the system.
Financing, in terms of access to capital, also is an important factor enabling long-term growth of the healthcare products market, as discussed by George Bickerstaff, managing director, CRT Capital Group (Stamford, Connecticut).
Somewhat in analogy to trends in the real estate loan sector, a new source of capital for growth companies in the medical device and pharmaceutical markets has emerged over the past decade in the form of hedge funds, which now represent the largest source of investment capital for such companies, overshadowing venture capital and private equity sources.
Hedge funds began to emerge in the mid-1990s as a significant source of capital for growth companies and achieved 17% compound annual growth in assets under management between 1997 and 2007. Total assets under management reached $1,810 billion ($1.8 trillion) in 2007, compared to $90 billion for venture capital and $300 billion for private equity.
Because the initial public offering market for small medical device and pharma/biotech companies is virtually closed, hedge funds are now a key source of funding that provides an attractive alternative due to a lower cost of capital (typically a 15%-25% internal rate of return vs. 25%-50% for venture capital and private equity), greater liquidity and a larger investor base, and a broader range of financing tools.
Bickerstaff said he believes hedge funds will play an important role in funding the roughly 430,000 healthcare companies in the U.S., including both healthcare service pro-viders and product suppliers, particularly the emerging companies in the sector.
Healthcare provid-ers face an uncertain year, due to lack of any clear direction in the economy, at least in the U.S., as well as to questions about government initiatives that could threaten reimbursement levels. Physician fees continue to be a target of healthcare cost-reduction efforts by Congress, with the current moratorium on scheduled major reductions in rates ex-tended only until the end of this month.
At that point, physicians could see fees paid by Medicare drop substantially (cumulatively, more than 40% by 2016, including a 15% cut in 2008) if the automatic cuts prescribed by current law go into effect. Major cuts in physician reimbursement in an election year are viewed as unlikely, although there are also strong pressures, some of which are already included in existing statutes, to take action to reduce the rate of increase in healthcare costs.
Hospitals also are at risk, with proposed Medicare cuts of 30% over two years in Disproportionate Share (DSH) payments to hospitals which serve large low income populations, as well as potential cuts in payment rates for the Medicare Advantage program due to the perception that existing rates are too high.
Most experts presenting at the conference said they did not expect cuts in DSH payments to be implemented, but some reduction in Medicare Advantage payments rates was considered likely.
Prospects dim for '08 healthcare reform
Trends in the U.S. healthcare system and the potential for system reform were key topics at the UCI conference. The existing employer-based healthcare insurance system, while often criticized for failing to provide coverage for an estimated 45 million Americans, remains the dominant form of healthcare coverage in the U.S. As discussed by Jon Gabel, PhD, senior fellow in the National Opinion Research Center (Bethesda, Maryland), 160 million in the U.S. receive healthcare benefits through their employer.
Healthcare costs have continued to increase under the employer-based system, although the rate of increase in healthcare insurance premiums has slowed, as shown in Table 2. The increase in 2007 was the smallest for the past seven years, and approached the rate in 1998, the last time that healthcare insurance premiums increased at a rate comparable to other economic indices. Nevertheless, the increase was about twice the rate of inflation, and three times the percentage increase in workers earnings. Gabel predicted that premiums will increase more rapidly in 2009 and 2010 because of the low profits of healthcare insurers.
Trends in healthcare insurance premiums correlate roughly with trends in overall healthcare spending, which increased 8.2% in 2005. Healthcare costs, as reflected by provider revenues, have increased most rapidly in the hospital outpatient and ambulatory surgery sector, while the lowest rates of increase have been observed for physician payments and hospital inpatient revenues.
One recent healthcare reform initiative aimed at reducing the rate of increase of healthcare costs, consumer-driven health plans (CDHPs), has so far not been widely implemented, with only 4% to 5% of employees adopting such plans.
CDHPs, which are structured as high-deductible health plans combined with a Health Savings Account (HSA) or a Health Reimbursement Arrangement (HRA), are designed to give consumers an incentive to use greater discretion when purchasing healthcare services.
The plans include an account funded with tax-exempt contributions that can be used to pay the deductible or medical ex-penses that do not count toward the deductible. The consumer has a tax incentive to avoid exhausting the account, and thus to shop more discriminately for healthcare services.
Gabel said that the low adoption rate for CDHPs is due to their complexity, which makes them difficult for consumers to understand, as well as to risk of losing the funds in the account if one changes health plans in the case of an HRA. Furthermore, the plans offer minimal tax advantages for most consumers, and are just as expensive or in some cases more expensive compared to traditional options.
Other voices, other views
However, other speakers at the UCI conference provided a different and more positive view of CDHPs.
According to William Sharon, senior vice president of consumer-driven healthcare at AON Consulting (Tampa, Florida), 10% of AON s 2,500 clients have HSA CDHPs in place, and adoption is growing at 20% to 30% annually. Nationwide, an estimated 11 million to 12 million were enrolled in CDHPs as of the beginning of 2008, according to Sharon, up from only 500,000 in 2003, and 10% of all employers now provide CDHPs with either an HSA or HRA.
The plans go well beyond providing only a tax advantage, and provide features such as targeted communications with the consumer at the point of service. For example, a consumer who fills a prescription for Lipitor at a pharmacy might receive an e-mail suggesting that the same drug can be purchased online at lower cost.
As discussed by Michael Chernew, PhD, professor in the department of health policy at Harvard Medical School (Boston), it has been demonstrated that cost-sharing reduces utilization of healthcare services, although not necessarily in an ideal manner. Consumers respond to higher co-pays, for example, by reducing their use of both inappropriate as well as appropriate medical services and products.
Chernew advocates value-based design of insurance plans, which makes consumers behave as if they are better informed, and provides targeted incentives to reduce utilization or use services more cost-effectively. Value-based insurance plans can be designed to target specific patient populations, such as asthma patients or diabetics, and provide incentives to use appropriate preventative care. Such plans have been shown to reduce overall costs, reducing the annual cost per participant by $1,200 to $1,872 in one example.
A key goal is to improve disease management for the 20% of individuals who ac-count for 80% of the cost in a typical health plan. Incentives can be designed to encourage compliance with medication regimens that help to prevent worsening of the condition of chronic disease patients.
While value-based insurance, particularly when structured as a CDHP, is obviously more complex than traditional insurance, Chernew said that he believes this can lead to improved patient outcomes at equivalent cost to the employer, and even generate savings when factors such as productivity gains and reduced disability costs are considered.
So far, CDHPs have been adopted at the highest rates by large employers having more than 20,000 employees, while smaller employers have adopted the plans at a lower rate than projected when CDHPs were first introduced.
Paul Fronstin, PhD, director of the health research and education program at the Employee Benefit Research Institute (Washington), noted that the existing level of adoption of CDHPs of 4% to 5% of total enrollment is similar to that for preferred provider organization (PPO) plans in 1988. Since PPO plans are now the most popular type, accounting for 57% of total enrollment in the U.S. in 2007, there is the potential for CDHP adoption to expand over time.
A survey of major employers discussed by Fronstin found that most do not expect CDHPs to play a central role in the healthcare system, although they are expected to be an important component.
In 2007, conventional health plans accounted for 3% of enrollments for covered workers in the U.S., HMOs accounted for 21%, PPOs for 57%, point-of-service (POS) plans for 13%, and CDHPs accounted for 5% based on data from the Kaiser/HRET Employer Health Benefits Survey.
Some new proposals
CDHPs represent one of the few significant new initiatives from the federal government and the Bush administration aimed at reforming the U.S. healthcare system.
Other changes proposed by Congress, such as modifications to the State Children s Health Insurance Program (SCHIP) and appropriations for the Department of Health and Human Services, have been vetoed by President Bush, who has become surprisingly activist given his lame-duck status. After not having used the veto for a record 2,006 days in his two terms in office, Bush sharply accelerated the number of vetoes cast in 2007, coinciding closely with the Democratic Party s ascension to control of Congress following the 2006 election.
Key themes of the new Bush budget related to health system reform include a standard tax deduction for individuals who purchase their own healthcare insurance; new incentives to promote competition in the insurance market; medical liability reform; and provisions to enable states to implement experimental healthcare system reform programs.
Medicare costs to balloon
As discussed by James Baumgardner, deputy assistant director for health policy in the Congressional Budget Office, outlays for Medicare are projected to almost double between 2007 and 2017 without changes to the budget. Overall government spending on healthcare could also double over that period. Furthermore, a new long-term budget projection performed by the CBO shows combined federal spending on Medicare and Medicaid accounting for 20% of GDP by 2082 (or more than 35% in the worst-case scenario).
The Bush budget contains proposals designed to slow the growth of Medicare spending, and to implement pay-for-performance (now redefined as pay-for-value) programs as well as measures designed to increase individual responsibility for healthcare utilization by Medicare beneficiaries.
Other budget measures are designed to promote increased disclosure by physicians, possibly tied to revisions to the Medicare physician fee schedule, including disclosure of items and benefits given to doctors by drug and device companies.
The Bush budget proposals are also designed to protect the current funding status of the Medicare Advantage program, although presenters at the UCI conference concurred that Congress is unlikely to approve those provisions given the widely held perception that the program is over-funded.
Key healthcare priorities incorporated in the fiscal 2009 federal budget proposed by the Bush administration, as shown in Table 3, are focused on savings in inpatient hospital spending, skilled nursing facility payments, and home health spending. However, as discussed by Dean Rosen of Mehlman Vogel Castognetti (Washington), the Democrats in control of Congress have a different view of budget priorities, as reflected in the Children s Health and Medicare Protection (CHAMP) Act passed by the House of Representatives in August 2007.
That act would provide a 44% increase in spending over five years for improved Medicare Part B and D beneficiary programs, as well as a 56% increase for physician payments. Savings would accrue primarily from an 84% drop in Medicare Advantage program funding, a fundamental disparity compared to the Bush budget.
New budget pressures
There is additional pressure on the Bush administration and Congress to deal with the issue of rising government expenditures on healthcare as a result of a new provision of the legislation that enacted the Medicare Part D prescription drug program.
That provision mandates that if for two successive years general revenue funding for Medicare is projected to account for 45% of total financing within the next seven years, the president must propose and Congress must consider legislation to address the issue.
As shown in Table 4, the 45% trigger has been reached based on 2006 and 2007 projections for future Medicare spending.
As discussed by Liz Fowler, vice president for public policy at WellPoint (Indianapolis), the administration has proposed that Medicare beneficiaries with income above $82,000, or $164,000 for couples, must pay higher Part D premiums, and that non-economic damages in medical malpractice lawsuits be capped at $250,000 along with a limit on the share of damage awards that plaintiff s attorneys can collect. The proposals also authorize the Secretary of Health and Human Services to publicize price, cost and quality information on providers, health plans and treatment options.
Comparative effectiveness, HIT in spotlight
There are a number of other proposed changes to government-funded healthcare programs (i.e., Medicare, Medicaid and SCHIP) as well as to laws governing the private health insurance sector that may alter the structure of the healthcare system in the future. Assessment of comparative effectiveness of medical procedures and products is one item for which there is growing political support. The Agency for Healthcare Research and Quality (AHRQ, Rockville, Maryland) already has published a number of reports on comparative effectiveness of medical and drug treatments for a range of diseases, many of which relate to use of medical devices. AHRQ was authorized to perform comparative effectiveness studies by the Medicare Modernization Act of 2003.
The high level of interest in comparative effectiveness evaluations on the part of lawmakers stems from the major impact of new medical technologies on healthcare costs. A study published in January by the CBO on technological change and the growth of healthcare spending found that technology-related changes in medical practice accounted for about half of the growth in real healthcare spending per capita in the U.S. between 1940 and 1990. Improved assessment of the effectiveness of new medical technologies, coupled with initiatives such as reimbursement changes, could consequently have a significant im-pact on healthcare costs.
Healthcare information technology (HIT) is another area attracting considerable attention in Washington, since it is perceived as a vehicle to improve the efficiency of the healthcare system and thereby contain cost.
HIT also can play a role in improving the use of medical technology, by allowing data to be collected concerning physician practices and patient outcomes which can then be used to identify the most effective procedures and related technologies.
At the time of the UCI meeting, an HIT bill was awaiting floor action in the Senate, and a House bill was to begin moving through committee shortly. However, privacy concerns and physician opposition to disclosure of Medicare and Medicaid claims data represent barriers to passage of such legislation, particularly in an election year. HIT also will play a central role in a nationwide electronic medical record (EMR) system.
For that application, the slow progress of government initiatives may prove less important, since a number of private entities, including Google (Mountain View, California), in collaboration with the Cleveland Clinic Foundation, and Microsoft (Redmond, Washington) have recently unveiled programs to develop personal EMRs.
None of the changes to the healthcare system being proposed represent a substantial reform of the U.S. healthcare system. The prevailing view is that more substantive reform efforts will be deferred until the new administration takes office in 2009.
Big differences among candidates
There are significant differences in the health reform plans proposed by the leading presidential candidates, both in their philosophical approach to healthcare as well as in the cost of implementation.
As discussed by Dean Rosen, coverage proposals range from an individual mandate for universal coverage (Clinton) to tax incentives for individuals to buy coverage (McCain), with Obama taking a middle ground calling for universal coverage by 2012 with a mandate for parents to buy children s coverage.
In general, the primary goal for both Democratic plans is to increase coverage; for Republicans, cost reduction.
No candidate is proposing a single-payer, government-run healthcare system like the one proposed by the Clintons in the 1990s, although the Clinton plan includes a Medicare-style option for individual coverage. Both Democratic proposals call for an employer mandate with credits or exemptions for small employers, whereas the McCain plan does not include a mandate and in fact eliminates the employer tax exclusion for healthcare expenses and provides tax credits for individuals to purchase their own insurance.
Perhaps the biggest difference between the plans relates to cost, Clinton s plan projected to be most expensive ($110 billion annually), Obama s plan estimated to cost $50 billion to $60 billion per year. No new net spending is projected for the McCain plan.
Implementation of any of the proposed reform plans obviously hinges on the outcome of the election. In the event of a McCain win, implementation is likely to prove particularly challenging since there is essentially no chance that the Democrats will lose control of Congress in the 2008 elections.
Published June 1, 2008