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Today’s Changing Healthcare Economics. WSHMMA Meeting April 13, 2011 Presented by Jeff Veilleux, EVP & CFO. Adapting to a New Reality… Positioning for Success. Long Term Pressure – Healthcare Reform. Organizational Expectations. Slow Growth Cost Pressure Deteriorating Payer Mix - PowerPoint PPT Presentation
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Today’s Changing Healthcare Economics
WSHMMA Meeting
April 13, 2011Presented by Jeff Veilleux, EVP & CFO
Adapting to a New Reality…Adapting to a New Reality… Positioning for SuccessPositioning for Success
3
Long Term Pressure – Healthcare Reform
Cost Impact from Declining Payor Reimbursement(No Change in Volume Assumptions)
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10
Expense "Plan" Reduced Expenses
30% More Efficient in 10 Years
4
Organizational Expectations
• Slow Growth• Cost Pressure• Deteriorating Payer Mix• HCR Pressures
– 3rd party insurer pressure– Medicare and Medicaid rate decreases– Medicare and Medicaid volume increases– Move to outpatient– Bad debts may decrease
5
Expected Shift in Insurance Coverage
Dual coverage affects the total insurance coverage population calculation, thus total insurance coverage population does not equal to the true US population amount.Estimated Effects of the Patient Protection and Affordable Care Act, as Passed by the Senate, on Enrollment by Insurance Coverage, in millionsSource: Congressional Budget Office and the staff of the Joint Committee on Taxation. Centers for Medicare & Medicaid Services, Office of the Actuary. January 8, 2010 (http://www1.cms.gov/ActuarialStudies/Downloads/S_PPACA_2010-01-08.pdf)
Individual24mm
Individual23mm
Individual 24mm
Individual27mm
Medicaid & CHIP50mm
Medicaid & CHIP49mm
Medicaid & CHIP42mm
Medicaid & CHIP40mm
Medicare47mm
Medicare52mm
Medicare55mm
Medicare60mm
Uninsured - 18mmUninsured - 18mmUninsured - 23mm
Uninsured50mm
Employer Sponsored (Small & Large Group)
168mm
Employer Sponsored (Small & Large Group)
169mm
Employer Sponsored (Small & Large Group)
172mm
Employer Sponsored (Small & Large Group)
150mm
Exchanges - 22mmExchanges - 20mmExchanges - 14mm
0mm
50mm
100mm
150mm
200mm
250mm
300mm
350mm
400mm
2010E 2014E 2016E 2019E
314mm 327mm334mm
342mm
6
Translating Insurance Coverage into Bottom-Line Impact
2006 U.S. Hospital Cost Shift Estimate
Source: Milliman Inc. – Hospital and Physician Cost Shift, December 2008. Of the $89 billion in total cost shift, 57% or $51 billion is hospital related.
In 1999, the gap between Medicare and Commercial Payers was 11.3%. By 2006, the gap widened to 32.5%.
7
State Medicaid Spending is Expected to Increase because of Health Reform
0 - 25th Percentile
25th - 50th Percentile
50th - 75th Percentile
75th - 100th Percentile
Source: Center on Budget and Policy Priorities (FY2011 estimates) and National Association of State Budget Officers (FY2008 data); based on a composite score comprising equal weightings of the estimated percentage of state spending on Medicaid and most recently available state deficit/surplus as a share of general fund.
National Medians
State Budget Deficit: 14.2%
Medicaid Spending: 19.6%
Statistical Key:
B = Budget Deficit (Share of FY2011 state budget that is under-funded as of 7/15/2010)
M = Medicaid Spending (State Medicaid spending as a percentage of total state expenditures, FY2008)
B: 20.2%M: 23.2%
B: 34.7%M: 28.2%
B: 38.3%M: 19.5%
B: 13.9%M: 25.9%
B: 36.6%M: 22.8%
B: 21.6%M: 19.7%
B: 41.5%M: 29.5%
B: 9.4%M: 34.5%
B: 15.9%M: 26.7%
B: 30.3%M: 26.4%
B: 15.6%M: 30.3%
B: 9.8%M: 28.5%
B: NAM: 8.4%
B: NA%M: 20.3%
B: 21.6%M: 11.1%
B: 28.9%M: 17.4%
B: 11.5%M: 11.5%
B: 12.0%M: 11.2%
B: 18.9%M: 17.9%
B: 8.7%M: 18.7%
B: 8.8%M: 21.3%
B: 12.5%M: 19.3%
B: 14.4%M: 18.9%
B: 9.6%M: 17.7%
B: NAM: 15.1%
B: 14.8%M: 18.6%
B: NAM: 13.7%
B: 8.8%M: 22.3%
B: 14.6%M: 13.6%
B: 30.2%M: 18.9%
B: 8.8%M: 15.1%
B: 12.9%M: 16.3%
B: 23.9%M: 13.5%
B: 10.3%M: 10.2%
B: 26.2%M: 19.6%
B: 3.4%M: 21.9%
B: 9.6%M: 18.7%
B: 9.2%M: 22.2%
B: 26.0%M: 22.6%
B: 16.1%M: 22.4%
B: 54.0%M: 12.3%
B: 24.1%M: 26.0%
B: 11.3%M: 23.2%
B: 25.6%M: 21.1%
B: 9.4%M: 21.7%
B: NAM: 16.8%
B: 6.2%M: 20.8%
B: 10.2%M: 16.4%
B: 8.3%M: 11.0%
B: 3.6%M: 12.1%
8
States With Stronger Economies May Lower System Bad Debt Risk
N: 7.7%U: 6.3%
N: 9.4%U: 6.8%
N: 12.4%U: 6.5%
N: 5.4%U: 9.0%
N: 8.5%U: 6.8%
N: 12.6%U: 4.8%
N: 10.3%U: 5.9%
N: 10.9%U: 3.6%
N: 9.7%U: 9.2%
N: 11.3%U: 4.5%
N: 13.0%U: 7.2%
N: 10.2%U: 6.0%
N: 8.9%U: 7.9%
N: 9.7%U: 8.8%
N: 11.0%U: 8.5%
N: 9.6%U: 8.0%
N: 12.9%U: 7.1%
N: 12.6%U: 9.1%
N: 14.9%U: 9.6%
N: 13.6%U: 8.2%
N: 11.6%U: 10.5%
N: 11.3%U: 12.0%
N: 13.6%U: 7.0%
N: 11.8%U: 8.9%
N: 13.6%U: 6.8%
N: 9.8%U: 10.0%
N: 11.9%U: 10.1%
N: 14.6%U: 8.5%
N: 20.1%U: 11.4%
N: 19.3%U: 7.0%
N: 11.9%U: 10.3%
N: 19.0%U: 7.9%
N: 17.0%U: 7.5%
N: 16.1%U: 8.0%
N: 14.7%U: 8.8%
N: 13.1%U: 10.4%
N: 15.9%U: 7.3%
N: 15.9%U: 6.8%
N: 14.7%U: 10.1%
N: 18.9%U: 9.6%
N: 18.4%U: 12.3%
N: 17.7%U: 10.0%
N: 14.8%U: 10.0%
N: 11.7%U: 13.2%
N: 18.3%U: 11.0%
N: 18.0%U: 14.2%
N: 23.1%U: 8.2%
N: 15.9%U: 10.0%
N: 16.5%U: 10.5%
N: 16.1%U: 10.7%
N: 25.1%U: 8.2%
0 - 25th Percentile
25th - 50th Percentile
50th - 75th Percentile
75th - 100th Percentile
National Medians
Uninsured Population: 13.1%
Unemployment Rate: 8.7%
Statistical Key:
N = Uninsured Population (Percentage of Total Population Under 65, 2010)
U = Unemployment Rate (Seasonally adjusted percentage of civilian labor force, as of June 2010)
Sources: Bureau of Labor Statistics (June 2010 figures) and Robert Wood Johnson Foundation (2010 estimates); based on a composite score comprising equal weightings of the state unemployment rate and uninsured percentage of state population.
9
Market Expectations
• Local Competition– MD’s– Employees
• Battles for Market Share– Programs– Patients
• Consolidation– Local– Regional– National
10
$-
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
-
100
200
300
400
500
600
700
800
Number of Transactions Transaction Value
Health System Consolidation: Poised to Re-Ignite
1985-1998: HMO Heyday - Payors control livesAct 1: Payor consolidation
Federal Policy/ Economic Factors
CommercialPayors
ProviderCatalysts
2003-2008: ACT II Payor Consolidation
Returns
2002-2007: Provider Recovery
2001-2002: Tech Bubble
Implodes
1997-2000: BBA After
Shocks
1998-2003: Specialty Companies Emerge
and outperform
1992-1994: Anticipation of Clinton Reform
1990-1997: Columbia – Take No
Prisoners Approach to Growth
October 1983:Inception of DRGs
2004-2008: NFPs embrace growth
2008-2010 Great Recession
2009-2010: Reform
Overhang Kills M&A
2008-2010: Preserve cash
Growth in response to external factors
Portfolio Rationalization driven by financial considerations
Strengthening Fundamentals drives Growth
Twin bullets: Recession and Reform
11
2.8%2.2%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
> $5B NFP $3 - $5B NFP $1 - $3B NFP < $1B NFP
Operating Margin
Note: Historical Data based on approx 250 reporting systems; Preliminary 2009 data is based on 168 systems, which represents 64% of the systems used in the 2008 Citi Growth Study. Approximately 90% of systems above $5 billion and 60% of all systems with operating revenue below $5 billion have reported 2009 data.
Comparative data from Citi Growth Study. Health system data reflects average value of category. NMHS’ FY 2001-2009 data reflects data reflects operating margin calculated from audited financials.
2.2%
3.6%
Largest Systems Continue to Experience Highest Operating Margins
Preliminary 2009 results show the impact of improved operations. Average Operating Margin of 2.5% was an improvement of 90 bps from 2008 levels.
Scale continues to drive difference in performance
between “Haves” and “Have-Nots”
12
Leading IHN’s and Large Systems Have Clear Sustainable Competitive Advantages in Periods of Transformation
Advantages of
Scale
Advantages of
IntegrationHighest Revenue Growth
Lowest Bad Debt Expense Ratio
Lowest Supply Expense
Lowest Cost of Capital
Leveraging of IT & Routine Capital Spending
Highest Investment in Strategic Spending
Operating Margin
13
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
18.0%
19.0%
20.0%
21.0%
22.0%
23.0%
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08*
>$5 B $3-5 B $1-3 B <$1 B SDI Group SDI Top Quartile
Supply Expense Ratio
18.1%
21.7%
15.2%
18.5%
Both Scale and Integration Favorably Impact Supply Costs
21.4%
21.8%
*Note: Historical Data based on approx. 250 reporting systems; Comparative data from Citi Growth Study. Health system data reflects average value of category. NMHS’ did not break out supply expense in its audited financials prior to 2008.
14
Wild Cards
• ACO Activity
• New Payment Structures– Bundling– Pay for performance
15
Long Term Pressure – Healthcare Reform
Cost Impact from Declining Payor Reimbursement(No Change in Volume Assumptions)
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10
Expense "Plan" Reduced Expenses
30% More Efficient in 10 Years
Recommended