Q. Why do you think that employers continue to shoulder the majority of the cost increases? In other words, even though out-of-pocket costs to employees are going up, as a percentage of the total, their costs remained about the same.

A. Employers have few choices for dealing with these cost pressures, none very appealing. Either they can spread the pain widely and make all employees contribute more to the cost of their coverage. Or they can impose more of the pain on those that utilize more healthcare by imposing higher deductibles and copayments.

A third option is to go back to the future, to one of the original notions of managed care—tightly controlled plans with limited provider networks. Health plans say that they can save employers money in that way, but they get very little take-up. When the California State Employees' Retirement System directed Blue Shield to cut a number of expensive hospitals from its network in order to save money, it attracted a good deal of attention. But a few years later, many of the hospitals have been restored to that network. It seems that provider choice has surpassed costs as the primary driver for consumers and employers alike.

A. While both Medicare Advantage plans and Medicaid HMOs have been strongly profitable, both face significant risks going forward. With Medicare you have Democrats that campaigned successfully to regain control of Congress and promised to have the federal government bargain with drug companies for lower Medicare drug prices. They see the Medicare Advantage payments (107% to 116% of the average for traditional Medicare) as enriching the insurance companies without providing significant additional value. With the Bush Administration proposing cuts in Medicaid, the State Children's Health Insurance Program and Medicare, it is tempting to look at reducing MA payments subsidies as a way to maintain funding of the other programs.

Medicaid HMOs, especially the publicly traded companies that have emerged in the past five years, generally have done very well, except for the occasional quarter when they seem to lose control over medical costs and their stocks get hammered. They face two risks. First, they have a single customer in most states, namely state government. While those relationships are generally good and the federal requirement that state payment be actuarially sufficient provides significant protection, their profitability can be a tempting target for state legislators. Second, states require Medicaid HMOs to offer broad provider networks, so Medicaid recipients have access to "private medicine" and not just traditional safety net providers. That's a desirable goal, but it also limits the ability of those plans to use traditional managed care strategies of steering enrollees to a focused network of providers to gain efficiencies and promote quality practice.

Even so, Medicaid plans are eager to participate in states like Ohio and Georgia that have expanded their use of HMOs. WellPoint, which runs the largest Medicaid managed care program in the country, has acquired a Medicaid HMO plan in Ohio, soon after Centene and Molina entered the state. Aetna, a company with little previous exposure in the market segment, has a new Medicaid contract in parts of Texas.