Mercy Community Leader Breakfast

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1

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The New Performance Standard

Responding to the Changes Reshaping Health System

Economics

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Road Map

2

3

1

3

Four Forces Shaping Future Margins

Health Care on a Budget

Closing Remarks

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Meet Your Newest Medicare Beneficiaries

4

Happy 65th Birthday!

Donald Trump Sylvester Stallone

Pat Sajak

Cher

Liza Minnelli Dolly Parton

Source: Health Care Advisory Board interviews and analysis.

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Universal Access: The Boomers’ American Dream

5

Baby Boomers Redefining American Industries

Zinkewicz P, “Baby Boomers ‘boom’ their way toward golden years,” available

at: http://www.roughnotes.com/rnmagazine/2005/july05/07p106.htm, accessed

September 23, 2011; Health Care Advisory Board interviews and analysis.

• Greater integration of

women into workforce

• Rise of part-time

employment

• Expansion of public

university systems

Education

Employment

Homeownership

• Mortgage interest

deductions

• Homeowner subsidies

Health Care

• How will Medicare balance

entitlement with solvency?

• Will choice, access be

preserved?

1960s

1970s

1980s

2010s

From Opportunity to Entitlement?

Transformative at All Stages of Life

“Baby boomers didn’t just eat food; they

transformed the snack, restaurant and

supermarket industries. They didn’t just wear

clothes; they transformed the fashion

industry. They didn’t just buy cars; they

transformed the auto industry. They didn’t

just date; they transformed sex roles and

practices. They didn’t just go to work; they

transformed the workplace. They didn’t just

get married; they transformed relationships

and the institution of the family. They didn’t

just borrow money; they transformed the

debt market. They didn’t just go to the doctor;

they transformed health care. They didn’t just

use computers; they transformed technology.

They didn’t just invest in stocks; they

transformed the investment marketplace.”

”

Ken Dychtwald

Gerontologist

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An Industry Preparing For Fundamental Change

Coverage Expansion, Payment Reform Reshaping Health Care


Timeline of Health Reform Developments

VA Attorney

General files first

lawsuit against

individual mandate

CMS releases

proposed rule for

Medicare Shared

Savings Program

HHS releases

Meaningful Use

regulations

Patient Protection

and Affordable Care

Act (PPACA) passes

House of

Representatives

President

Obama repeals

1099 reporting

requirement

from PPACA

CMS issues

provisions to Hospital

Readmissions

Reduction Program

HHS releases

Medicare

Value-Based

Purchasing Program

final rule

6

IMA

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HU

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Before 2014, 2012

7

Future of Affordable Care Act Still in Doubt

Source: White House, available at: www.whitehouse.gov, accessed September 21, 2011;

Mitt Romney Media, available at: http://en.wikipedia.org/wiki/File:Mitt_Romney.jpg, Office

of the Governor Rick Perry, available at: www.governor.state.tx.us/about; Health Care

Advisory Board interviews and analysis.

Three Competing Visions

“I am not the first

President to take up

this cause, but I am

determined to be

the last.”

“If I were President, on

day one I would issue

an executive order

paving the way for

Obamacare waivers to

all 50 states.”

“On day one, as the

President, the executive

order will be signed and

Obamacare will be

wiped out as much as it

can be.”

IMA

GE

CR

ED

IT: W

HIT

EH

OU

SE

.GO

V.

IMA

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CR

ED

IT: G

OV

ER

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TA

TE

.TX

.US

.

IMA

GE

CR

ED

IT: M

ITT

RO

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EY

ME

DIA

© J

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SIC

A R

INA

LD

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(As Always) It’s The Economy, Stupid

Policy Debate Dominated by Economy, Deficit, Debt

8

“Jobless Rate Climbs in

D.C., Maryland, Virginia”

Washington Post

September 16, 2011

Washington Post

August 5, 2011

“S&P Downgrades U.S.

Credit Rating for First Time”

Richmond Times-Dispatch

“Debt Soars to All-Time High

of $14 Trillion”

January 16, 2011

Source: “Debt Soars to All-Time High of $14 Trillion,” Richmond Times-Dispatch, January 16, 2011; Goldfarb Z, “S&P Downgrades

U.S. Credit Rating for First Time,” Washington Post, August 5, 2011; Haynes V, “Jobless Rate Climbs in D.C., Maryland, Virginia,”

Washington Post, September 16, 2011; “Bank of America Layoffs: The Industry Bloodbath Continues,” International Business

Times, September 9, 2011; “Six in 10 Americans Don’t See Economy Improving Soon,” Los Angeles Times, September 21, 2011;

Health Care Advisory Board interviews and analysis.

Los Angeles Times

“Six in 10 Americans Don’t

See Economy Improving Soon”

September 21, 2011

International Business Times

September 9, 2011

“Bank of America Layoffs: The

Industry Bloodbath Continues”

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Washington’s Newfound Budget Discipline

9

Debt Ceiling Increase Contingent on Massive Deficit Reduction

Source: Klein E, “Thirty Years of the Debt Ceiling in One Graph,” The Washington Post,

July 15, 2011; Ernst & Young, “Budget Control Act of 2011: Where Do We Go From

Here?,” September 8, 2011; Health Care Advisory Board interviews and analysis.

0

2

4

6

8

10

12

14

16

U.S. National Debt and Debt Ceiling

$US, In Trillions

Legislation in Brief:

Budget Control Act of 2011

• 74th increase to debt ceiling in 49 years

• Establishes a process to raise

federal debt limit by $2.4 T

• Initial increase offset by automatic $917 B

in debt reduction over next ten years

• Further increases contingent on

enacting additional $1.2 T in

debt reduction

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No Blank Check From Employers Either

10

Defined Contribution Plans Displacing Defined Benefits

1) High-Deductible Health Plan.

Case in Brief: Orion Corporation

• 70-employee residential services firm

located in St. Paul, Minnesota

• Converted HDHP1 to defined

contribution plan managed by

Minnesota-based Bloom Health

• WellPoint, Blue Cross Blue Shield of Michigan,

and Health Care Service announce plans to

acquire 78 percent share of Bloom Health

• Insurers plan to offer fully operational

exchanges by 2013

Wall Street Journal

“WellPoint, Non-Profits Invest in

Private Insurance Exchange”

Payers Taking Notice

Transition to Defined Contribution Plan

Orion contributes $125-$350

per month toward coverage

Employee selects individual

policy on exchange

10% Reduction in premium

costs due to switch

Source: Bloom Health, available at: www.gobloomhealth.com, accessed September 21, 2011; Kamp J,

“WellPoint, Non-Profits Invest in Private Insurance Exchange,” Wall Street Journal, September 20, 2011;


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The New Great Depression Generation?

11

Amid Economic Uncertainty, Consumers Tightening Their Belts

95% Percentage of primary care

physicians reporting that

patients rationing or forgoing

medications, treatments due to

financial concerns

“We have a very weak economy and it’s just a

different environment for the elective parts of

healthcare. This could go beyond the recession.

Being a less aggressive consumer of healthcare

is here to stay.” Paul Ginsburg, Economist, Center

for Studying Health System Change

” 16%

20%

Households Postponing or

Cancelling Medical Care

2006 2009

…Or Is It An Enduring Trend?

Source: Martin A, et al., “Recession Contributes to Slowest Annual Rate of Increase in Health Spending in Five Decades,” Health Affairs, 2011, 30: 11-22; Johnson A, Rockoff J, &

Mathews A, “Americans Cut Back on Visits to Doctor,” Wall Street Journal, July 29, 2010; Health Insurance, “With or Without Health Insurance, Americans Skipping Doctors Visits,

Surgeries,” available at: http://www.insureme.com/health-insurance/or-without-health-insurance-americans-skipping-doctor-visits-surgeries, accessed September 21, 2011; Thomson

Reuters, “Thomson Reuters Study Finds More Patients Postponing Medicare Care Due to Cost,” available at: http://thomsonreuters.com, accessed September 21, 2011; Health Care


Is it Cyclical…

“In 2009, despite the economic

downturn, the number of prescription

drugs dispensed rebounded to

prerecession rates of growth.”

Health Affairs, 2011

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Getting Paid Less to Do Less

12

New Payment Models Calling Old Imperatives Into Question

Accountable Payment Models

Cost of Care Quality of Care Volume of Care

Performance Risk Utilization Risk

Bundled Pricing

• Bundled Payments for Care

Improvement program

• Commercial bundled

contracts

Shared Savings

• Medicare Shared

Savings Program

• Pioneer ACO Program

• Commercial ACO

contracts

Pay-for-Performance

• Value-Based Purchasing

• Readmissions penalties

• Quality-based

commercial contracts


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Seeking Shelter in Scale

13

Market Pressures Driving Consolidations, Integration

Source: Becker’s Hospital Review, “15 Growing Health Care Systems,” available at: http://www.beckershospitalreview.com/lists-and-statistics/15-growing-

healthcare-systems.html, accessed May 1, 2011; Lawley E, “Tenet Sues Community Health,” Nashville Post, April 11, 2011; Roberson J, “Texas Health Resources

Acquires MedicalEdge Healthcare Group,” Denton Record-Chronicle, January 5, 2011; Health Care Advisory Board interviews and analysis.

Recent M&A Activity Providence Health System

One of the nation’s largest

Catholic health organizations

adding hospitals, practices

Community Health Systems

has withdrawn its offer to acquire

all Tenet Healthcare

Corporation’s outstanding

shares after Tenet rejected two of

its bids for buyout offers

Steward Health

Care System

Owns six Catholic

hospitals in Boston

market, with plans to

acquire two more

Geisinger Health System

Full merger with

Shamokin Area

Community Hospital

Novant Health

Nine-hospital system

experiencing recent

growth through

acquisition of hospitals,

imaging centers

Vanguard Health Systems

Purchased Detroit Medical

Center for $1.5 B

Trinity Health

Purchased Loyola Health

System for $100 M, plus an

annual subsidy of $22.5 M

to medical school

Texas Health Resources

Acquired MedicalEdge

Healthcare Group and its

420 physicians, clinicians in

the country’s second-largest

acquisition of an independent

physician practice

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Defining an Expanded Value Proposition

14


Three Strategic Identities

Redesigning benefit plans

to create a closed network

Marketing value-added services

to capture new opportunities

Contracting directly to

share actuarial risk

System as Population

Health Manager

System as Preferred

Network

System as Service Provider

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Health Care’s Identity Crisis

15

Traditional Market Distinctions Blurring

Source: Mathews A, “UnitedHealth Buys California Group of 2,300 Doctors,” Wall Street Journal,

September 1, 2011; Weisman R, “Partners Plans to Acquire Insurer Neighborhood Health,” Wall Street

Journal, August 10, 2011; Health Care Advisory Board interviews and analysis.

Providers Acquiring Payers

Case in Brief:

Partners HealthCare Acquiring

Neighborhood Health Plan

• Partners HealthCare planning to acquire

Neighborhood Health Plan, Boston-based

payer insuring more than 240,000

primarily low-income residents

• Partners to provide grants to Neighborhood

Health affiliated community centers

Payers Acquiring Physician Groups

Case in Brief:

UnitedHealth Acquiring Monarch

HealthCare

• UnitedHealth planning to acquire

management division of Monarch

HealthCare, one of largest physician

groups in California

• Monarch to become part of UnitedHealth’s

health services business unit

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Road Map

2

3

1

16

Forces Shaping Future Margins

Closing Remarks


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Decelerating

Price Growth

Continuing Cost

Pressure

Shifting

Payer Mix

Deteriorating

Case Mix

• Medical demand from aging

population threatens to crowd out

profitable procedures

• Incidence of chronic disease,

multiple comorbidities rising

• No sign of slower cost growth ahead

• Drivers of new cost growth largely

non-accretive

• Baby Boomers entering Medicare rolls

• Coverage expansion boosting

Medicaid eligibility

• Most demand growth over the next

decade comes from publicly

insured patients

• Federal, state budget pressures

constraining public payer price growth

• Payments subject to quality,

cost-based risks

• Commercial cost shifting

stretched to the limit


17

Financial, Clinical Profiles Shifting Dramatically


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New Baseline Already Challenging

18

Affordable Care Act Significantly Reduces Public Payments

Source: US House of Representatives, “Amendment in the Nature of a Substitute to H.R. 4872, as Reported,”

accessed March 18, 2010; US Senate, The Patient Protection and Affordable Care Act and the Health Care and

Education Reconciliation Act,” accessed December 24, 2009; Health Care Advisory Board interviews and analysis.

Impact of Affordable Care Act on Provider Rates

Cumulative Federal Revenue from Decreased

Medicare and Medicaid DSH Payments

$110 B Cuts to Medicare

Fee-For-Service rates

$36 B Cuts to Disproportionate Share

Hospital (DSH) payments

2014 2015 2016 2017 2018 2019

Medicare Medicaid

$22.0 B

$14.0 B

$500 M $0 B

$3.6 B

$12.6 B

$7.6 B

$17.0 B

$8.4 B

$3.5 B

$1.7 B $1.1 B

Force #1: Decelerating Price Growth

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Health Care Likely On the Chopping Block

19

But Little Agreement on How

Source: New York Times, available at: http://www.nytimes.com/interactive/

2010/02/01/us/budget.html, accessed September 17, 2011; Health Care


1) Includes spending for Medicare, Medicaid, CHIP, substance abuse and mental health services,

National Institutes of Health, and Food and Drug Administration.

2) Includes spending for unemployment insurance programs, food stamps, military and federal civilian

employee retirement and disability, and Temporary Assistance for Needy Families (TANF) program.

Distribution of Spending in

2011 Budget Proposal

24%

20%

20%

15%

7%

14% Health Care1

Defense

Social Security

Other

Safety Net

Programs2

Interest

on Debt

Other

Possible Approaches to

Reducing Health Care Spending

Decreased

supplemental payments

Eligibility changes Provider rate cuts

Payment model overhaul

(i.e. voucher system)

Fraud, waste

reduction

Cost shifting to

beneficiaries

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Sequestration the Lesser of Two Evils?

20

Automatic Cuts to Health Care Relatively Small

Source: Congressional Budget Office, available at: www.cbo.gov, accessed

on September 19, 2011; Reuters, “Healthcare Lobbyists Want Debt

Committee to Fail,” available at: http://www.reuters.com/, accessed

September 17, 2011; Health Care Advisory Board interviews and analysis. 1) Nondefense discretionary and other mandatory spending.

Sequestration Impact on

Key Budget Areas

2013

Cutting Our Losses?

"Sequestration is the devil you know and the Super Committee is the devil you don't."

Max Richtman

National Committee to Preserve Social Security and Medicare

” -10.0%

-7.8%

-2.0%

Defense Other1 Medicare Medicaid

$123 B $1.1 T Health Care Other

Breakdown of Total Cuts

Under Sequestration

2013-2021

0.0%

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Medicaid Payment Cuts Across the Country

21

Budget Shortfalls, Declining Federal Funding Common Concerns

Texas: Cut

provider Medicaid

rates by 8%

North Carolina:

Dropping coverage

on adult eye exams,

glasses as part of

$354 M Medicaid

spending reduction

Arizona: 5%

provider rate cut in

April 2011, another

5% rate cut in

October 2011

Wisconsin:

Considering

$500 M

Medicaid cut

Washington:

Cut provider

Medicaid

rates by 10%

California:

Proposing

10% provider

rate cut

Mississippi:

Closing mental

health centers

and crisis centers

South Dakota:

Cut provider

Medicaid rates

by 11.5%

Pennsylvania:

Increasing

co-pays for

certain

services to

save $50 M

New York: Looking to

cut $53 B Medicaid

program by $2 B

Virginia: Cut

outpatient service

reimbursement by 4%


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Medicaid Budget Crisis Forcing Innovation

22

Three State Responses to Medicaid Budget Pressure

• Washington, California,

Texas, South Dakota

proposing provider rate cuts

of over 8 percent

• Mississippi closing mental

health and crisis centers

Cut Rates, Limit Services

• North Carolina placing

enrollees into enhanced

medical homes through

Community Care of

North Carolina program

• Florida Medicaid overhaul

to shift all Medicaid

enrollees to private

managed care plans

by 2014

Force Provider Innovation Outsource Program Operations


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Some Moving Beyond Traditional Cuts

23

Oregon Bill Ties Medicaid Cuts to Third-Party Care Coordination Plan

Source: Managed Healthcare Executive, "Oregon Medicaid shifts to global payments, coordinated care,“ available at:

http://managedhealthcareexecutive.modernmedicine.com/mhe/News+Analysis/Oregon-Medicaid-shifts-to-global-payments-

coordina/ArticleStandard/Article/detail/732912, accessed September 11, 2011; Health Care Advisory Board interviews and analysis.

Case in Brief: Oregon Health Care Transformation Law

• Law reduces Medicaid rates by 19 percent in 2012, mandates creation of care coordination organizations

(CCOs) composed of managed care plans charged with coordinating providers, developing new delivery

models to lower costs

• If CCOs fail to achieve expected $250 M in savings, lawmakers may propose additional cuts of up to 15

percent to take effect in 2014

Current 2012 2014

Additional reduction if

CCOs fail to produce

sufficient savings (19%)

(15%)

State pays fixed global payment to Care

Coordination Organizations (CCOs)

CCOs contract with providers to coordinate care,

develop new delivery models that lower costs

Oregon Medicaid Contracting Model Medicaid Payment Rates

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Future Payments Depend on Performance

24

Upside Opportunity Available, But Downside Risk Prevails

Source: US Senate, “The Patient Protection and Affordable Care Act and the Health

Care and Education Reconciliation Act,” February 19, 2010; Health Care Advisory

Board interviews and analysis. 1) Diagnosis-Related Group.

Payment Driver Description Payment Reduction Timeline

Value-Based

Purchasing

Program

• Mandatory pay-for-performance program

• Percentage of hospital inpatient payments

withheld, earned back based on quality

performance

• Withholds begin at 1% in

2013, grow to 2% by 2017

Hospital

Readmissions

Reduction

Program

• Hospitals with greater than expected

readmission rate subject to financial penalty

• Performance based on 30-day readmission

metrics for three conditions in 2013, expanding

in 2015 to include four others

• Penalties capped at 1% of

total DRG1 payments in 2013,

2% in 2014, and not to exceed

3% in 2015 and beyond

Hospital-Acquired

Condition (HAC)

Penalty

• Hospitals in top quartile of national, risk-

adjusted HAC rates subject to financial penalty

• 1% penalty deducted from

DRG payment starting in 2015

Prominent Pay-for-Performance Programs

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Picking Winners, Losers Based on Performance

25

Performance Scores Drive Payment Redistribution

Source: Centers for Medicare and Medicaid Services, “CMS Issues Final Rule for First Year of Hospital

Value-Based Purchasing Program,” April 29, 2011; Health Care Advisory Board interviews and analysis.

1) In FY 2013, clinical care measures are weighted at 70 percent

and patient experience measures are weighted at 30 percent.

Final Rule: Value-Based Purchasing Program Structure

Measure Performance

• CMS evaluates hospitals based

on achievement and

improvement on selected

clinical care, patient

experience measures

• Based on weighted average of

achievement and improvement

scores, CMS calculates Total

Performance Scores (TPS) for

each hospital1

Compare Hospitals

• Medicare ranks all hospitals

based on TPS

• For achievement score,

hospitals ranked below the 50th

percentile do not receive points

towards TPS

• For improvement score,

hospitals whose performance

has not improved relative to a

baseline score do not receive

points toward TPS

Adjust Payments

• Medicare converts TPS into

incentive payments

• Calculation will use linear

exchange function

• Hospitals that receive higher

TPS will receive higher

incentive payments

• CMS to notify hospitals of

incentive payment for FY 2013

on November 1, 2012

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Redefining the Acute Care Episode

26

Bundled Payments Drive Delivery System Integration

Bundled Payment Framework

Lump Sum Payments Drive Integration

Through Shared Accountability

Payer

Physician

Services

Hospital

Services

Post-Acute

Services

Program in Brief: Medicare’s Bundled

Payments for Care Improvement

• Program seeking voluntary participation in

four bundled payment models

• Models 1-3 provide retrospective

reimbursement; Models 2 and 3 include

post-episode reconciliation; Model 4 offers

single prospective payment

• Acute care hospitals, physician groups,

health systems eligible for all models;

post-acute facilities may participate without

hospitals in Model 3

• Physicians eligible for gainsharing bonuses

up to 50 percent of traditional fee schedule

• For all models, applicants must propose

quality measures, which CMS will use to

develop set of standardized metrics

Source: Centers for Medicare and Medicaid Services; Health Care


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All Models Require Discount of FFS1 Pricing

27

1) Fee-For-Service.

2) Inpatient Prospective Payment System.

3) Inpatient Quality Reporting. Source: Centers for Medicare and Medicaid Services;


Model 1:

Hospital Inpatient Services

for All DRGs

Model 2:

Hospital and Physician

Inpatient and

Post-Discharge Services

Model 3:

Post-Discharge

Services Only

Model 4:

Hospital and Physician Inpatient

Services

Eligible

Participants

Physician groups, acute care

hospitals reimbursed under

IPPS2, health systems, PHOs,

conveners of participating

providers

Model 1 participants plus post-

acute care providers

Model 1 participants

plus post-acute care

providers, long-term

care hospitals, inpatient

rehab facilities, home

health agencies

Model 1 participants

Clinical

Conditions All Medicare DRGs Select inpatient DRGs, proposed by applicants

Included

Services Inpatient hospital services

Inpatient hospital and

physician services;

related post-acute care and

readmissions

Post-acute care;

related readmissions

Inpatient hospital and physician

services;

related readmissions

Expected

Discount

Minimum increases

from 0% for first six months

to 2% in Year 3

Minimum of 3% for

30-89 days post-discharge

services; minimum 2% for 90+

days post-discharge

Proposed by applicant

(no set minimum)

Minimum 3% discount (larger for DRGs

in ACE Demonstration)

Provider

Payments

IPPS payment less discount for

Part A services; physicians

reimbursed on traditional fee

schedule

Traditional FFS payment,

subject to reconciliation with target price

Prospectively established payment;

hospitals distribute payment

to clinicians

Quality

Measures

All Hospital IQR3 measures,

plus additional measures

proposed by applicants

Proposed by applicants, with CMS ultimately establishing a standardized set of metrics aligned with

measures in other CMS programs

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Bundling Not Limited to the Medicare Program

28

Bundled Payment Initiatives Developing Nationwide

1) Coronary Artery Bypass Graft.

Bundling for

obstetrics

Bundling total joint

replacement

Bundling for

CABG1

Exploring

cardiac

bundling

Bundling for

prostate surgery

Bundling joint

replacements,

procedures with

“defined outcomes”

Developing

orthopedic

bundling

Reimbursing for

“Baskets of Care”

Participating in

Prometheus Pilot

Participating in

Prometheus Pilot

Participating in

Prometheus Pilot

Bundling for

cardiac surgery

Bundling total

knee replacement


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Shared Savings Options Taking Shape

29

Choices Cater To Varying Appetites For Risk


• Accelerated pathway to ACO formation

designed for organizations able to assume

utilization risk immediately

• Participating providers must serve at least

15,000 Medicare beneficiaries

• Offers higher risk, higher reward model;

providers can obtain rewards ranging from

50-75% of Medicare savings achieved

• Providers can choose retrospective or

prospective patient assignment

methodology

• Quality measures to match those in final

rule for Medicare Shared Savings Program

• Deadline to apply was in August 2011;

CMS expected to select Pioneer ACOs by

January 2012

Pioneer ACO Model Medicare Shared Savings Program

• First ACO contracts to begin April 2012;

contracts to last minimum of three years

• Final rule issued October 20, 2011

– Physician groups and hospitals eligible

to participate, but primary care

physicians must be included in any

ACO group

– Participating ACOs must serve at least

5,000 Medicare beneficiaries

– Bonus potential to depend on Medicare

cost savings, quality metrics

– Two options available:

• No downside risk, lower bonus

payment

• Downside risk, higher bonus payment

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Mechanics of Shared Savings

30

Applying Total Cost Accountability to Fee-for-Service Payments


Program in Brief: Medicare Shared

Savings Program

• Program begins April 1 or July 1, 2012;

contracts to last minimum of three years

• Physician groups and hospitals eligible to

participate, but primary care physicians must

be included in any ACO group

• Participating ACOs must serve at least 5,000

Medicare beneficiaries

• Bonus potential to depend on Medicare cost

savings, quality metrics

• Two payment models available: one with no

downside risk, the second with downside risk

in all three years

Shared Savings Payment Cycle

Billing Providers bill normally, receive

standard fee-for-service

payments

Assignment Patients assigned to ACO

based on terms of contract

Target Actual

Comparison Total cost of care for assigned

population compared to risk-

adjusted target expenditures

Bonus Bonuses or penalties levied

based on variance of

expenditures from target

2

1

3

4

5

Distribution ACO responsible for dividing

bonus payments among

stakeholders

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Who Can Participate?

1. Minimum population size: 5,000 beneficiaries

2. ACO Founders: PCPs, PCP Independent Practice Associations, employed groups, Federally

Qualified Health Centers, Rural Health Centers, some Critical Access Hospitals

3. ACO Participants: Hospitals, specialists, PCPs with <5,000 patients, other suppliers and providers

4. ACO must be a legal entity with own tax identification number, governance, management

Patient Attribution

1. Retrospective based on plurality of primary care E&M billings by ACO provider

2. Patients may not opt out of being counted against ACO performance measure

3. Patients retain unrestricted choice of providers

Shared Savings

1. ACOs receive shared savings payments if spending per attributed beneficiary grows slower than

national per beneficiary spending

Quality and Reporting

1. 33 quality measures (patient/caregiver experience, care coordination/patient safety, preventive

health, at-risk populations)

2. Bonus payout to ACO is adjusted based on quality performance

3. Significant transparency requirements around ACO operations and financing

Legal Considerations

1. No mandatory antitrust review required for ACOs, but regulators will monitor ongoing market impact

2. Voluntary pre-approval antitrust review available for ACOs above 30% market share

3. Five new waivers create ACO-specific exemptions from fraud and abuse laws

Final Rules for Medicare Shared Savings

31


Summary of Final Rules

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CMS Re-Calibrates SSP in Response to Providers

32

Critical Improvements Included in Final Rule

Changes in Final Rule Increase Attractiveness of SSP Participation

Broadening Participation Options

“Today’s menu of ACO options allows

America’s hospitals to create new models

of accountable care organizations on which

the transformation of health care delivery is

so dependent.”

Richard Umbdenstock, President and CEO

American Hospital Association

Source: American Hospital Association, "Statement on Final ACO Rule," available at: http://www.aha.org/presscenter/pressrel/2011/111020-st-acorule.pdf,

accessed October 24, 2011; Herman B, "10 Healthcare Leaders Share Thoughts on Final ACO Rule," Becker's Hospital Review, available at:

http://www.beckershospitalreview.com/hospital-physician-relationships/10-healthcare-leaders-share-thoughts-on-final-aco-rule.html, accessed October 24,

2011; Health Care Advisory Board interviews and analysis.

”

A More Attractive Financial Model

“We are very pleased that this rule allows

ACOs to share in every dollar of cost

savings and includes an option that limits

financial risk, which is important for many

physician practices.”

Peter Carmel, MD, President

American Medical Association

”

Decreased barriers to entry

Simplified quality requirements

Greater reward, lower-risk financials

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Rule Update Warrants a Second Look

33


Program Changes and Implications

Initial Concern Change in Rule Implications

Insufficient capital to

fund transition

• Upfront payments to capitalize physician-only

ACOs, others

• Meaningful use no longer a prerequisite for

participation

• Smaller providers face lower financial

hurdles to participation

• Advance Payment ACO Model smoothes

cash flow concerns

Resistance from key

stakeholders

• Meaningful use no longer a prerequisite for

participation

• Elimination of mandatory anti-trust review

• Lessened quality reporting, performance burden

• Relaxed requirements attractive to physician

stakeholders

• With structural hurdles lowered, provider

focus can shift to financial, strategic

considerations

Unfavorable risk/reward

calibration

• First-dollar savings, elimination of downside risk

from Track 1

• Benchmark calculation more sensitive to patient

mix

• Creation of relative “shallow end” minimizes

risk of slower transition

• Still, program designed for organizations

already working to manage utilization risk

Patient assignment

method

• Retrospective attribution supplemented with

prospective patient information

• ACOs benefit from ongoing insight into

panel composition

• ACO panel still comprises only patients

served by ACO

Overwhelming quality

performance, reporting

burden

• Fewer quality measures

• Slower transition to pay-for-performance

• Technical changes to bonus calculation method

• Less burdensome reporting requirements

• Underperformance on any given measure

less harmful

Onerous program design

prescriptions

• Elimination of mandatory anti-trust review

• Relaxed governance prescriptions, leadership

requirements

• Extended waivers for Stark, anti-kickback

• For ACOs confident in anti-trust compliance,

formal review hurdle eliminated

• Clarity around permissible activities with

ACO participants, professionals

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Reality Check: Success Remains a Heavy Lift

34


Key Determinants of Successful SSP Participation

Manage Utilization

Risk

• Drive care to ambulatory

medical network

• Reduce preventable

acute care episodes

Operate Under

Elevated Transparency

• Provide all necessary

documentation, data

to CMS

• Manage communication

to key stakeholders

Maintain Exceptional

Quality

• Meet high standards for

care quality across

multiple dimensions

• Demonstrate care

coordination across

sites of care, over time

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Implications for Organizations Сonsidering the SSP

35


Eliminating Downside Risk from Track 1 Creates a Relative “Shallow End" for Prospective ACOs

• The elimination of any formal downside risk and the promise of first-dollar savings mean the one-sided

model is now a much more attractive option for wary ACO prospects hoping to remain in the shallow end of

the pool for the time being.

With Greater Risk in Track 2 Comes Greater (and Greater) Reward

• The higher basic sharing rate (60%, as compared to 50% in the one-sided model) along with a fixed MSR

(2%, compared to a sliding scale in the one-sided model) offers higher upside to successful ACOs. Of

course, that potential reward comes with the risk of having to repay losses, so those considering the two-

sided model will need to feel very prepared to perform well from the beginning of the program.

No Changes to the Criteria for Success as a Medicare ACO

• Managing utilization risk, delivering exceptional quality and operating under intense transparency from day

one are all critical factors for succeeding in the Shared Savings Program. Although the structural barriers

are far lower, the fundamental strategic imperative to develop an integrated care enterprise capable of

managing population health across the care continuum remains the baseline for success as an ACO.

SSP Provides New Potential Upside—with Low-Risk—for Additional Return on Investments

• Whether in anticipation of accountable payment, in preparation for the challenges of an aging and

chronically ill patient population, or simply for reasons of clinical mission, many providers are building care

management infrastructure that can be leveraged to reduce the total cost of care. The Shared Savings

Program, especially the low-risk one-sided model, is a chance to convert a substantial portion of a

provider’s book of business to a payment model that rewards, rather than penalizes, this clinical

improvement.

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Project in Brief: Medicare Payment Innovation Project

Supporting You Through the Transition

36

The Medicare Payment Innovation Project


Key Program Resources Project Goals and Focus Areas

• Multiyear research initiative designed to support Health Care Advisory Board members as

they engage in payment experimentation with Medicare and private payers

• Main areas of focus include pay-for-performance, bundled payments, shared savings

models, and projects operated by the Center for Medicare and Medicaid Innovation (CMMI)

• For information on participating, contact Rob Lazerow at [email protected] or visit the

project resource page at http://www.advisory.com/hcab/paymentinnovation

• What are the key implications of new

payment models emerging as CMS

implements provisions of the Patient

Protection and Affordable Care Act?

• How do hospitals and health systems

deploy sound strategies for engaging in

payment innovation with Medicare?

• What key insights can hospitals and

health systems learn from organizations

participating in existing Medicare pilot

and demonstration projects?

Accountable Care

Publications

Quantitative Tools

and Assessments

Teleconferences with

Payment Innovators

“Toward Accountable

Payment” Blog

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Application Content and Key Dates

37

Source: Centers for Medicare and Medicaid Services; Health Care


1) ACOs applying for start dates in 2012 have the option to request interim payment

calculation based on first 12 months of program participation and quality performance.

Application Process Details

Potential Start Dates:

• April 1, 2012 (term of agreement is 3 years and 9 months)

• July 1, 2012 (term of agreement is 3 years and 6 months)

• January 1 in 2013 and subsequent years (3-year agreement)

Applications Accepted: Beginning early January 2012

Key Dates

Describe plans to distribute

shared savings among

stakeholders

Distribution of Savings

Indicate whether applying for

Track 1 or 2, request interim

payment calculation1

Selection of Track/Interim Payment

For Model 2, demonstrate

ability to repay potential losses

owed upon reconciliation

Assurance of Ability to Repay

Certify that participants,

providers, suppliers agree to

accountability terms

Accountability for Beneficiaries

Disclose previous participation

in Shared Savings Program,

affiliation with other ACOs

Disclosure of Prior Participation

Submit supporting materials to

CMS to demonstrate eligibility

Eligibility

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A Closer Look

38

“Rulebook” Offers In-Depth Detail, Analysis of Shared Savings Program

The Medicare Shared Savings Program Rulebook

Includes detailed analysis of:

• Eligibility requirements

• Legal issues including antitrust

• Patient attribution

• Benchmark calculation

• Shared savings, shared loss modeling

• Quality criteria

• Strategic implications

Study in Brief: Medicare Shared Savings Program Rulebook

• Clearly explained but detailed discussion of major provisions of final rule for Medicare’s

Shared Savings Program

• Go-to resource for technical questions as well as strategic guidance for those considering

application to program

• Available at www.advisory.com

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Burden on Commercial Pricing Unsustainable

39

Required Commercial Price Growth Unrealistic

Source: American Hospital Association Chartbook, available at:

http://www.aha.org/aha/research-and-trends/chartbook/index.html, accessed

April 26, 2011; Health Care Advisory Board interviews and analysis.

Commercial Price Growth Needed

to Maintain 2.5% Operating Margin

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

65% 67% 69% 71% 73% 75%

Non-Commercially Insured Share of Volume

Nece

ssa

ry C

om

me

rcia

l P

rice

Gro

wth

Potential

Public Payer

Price Growth

Average

Commercial

Price Growth,

2001-2009

1.5%

2.0%

2.5% 6-8%

Historical annual growth

in commercial payer

prices over last decade

3.5% Advisory Board estimate

of annualized commercial

price growth, 2011-2021

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Deceleration in Private Payer Pricing Likely

40


Pressures on Commercial Pricing

4

Quality performance

risk increasingly

prevalent

5

New payment models

demanding utilization

management

Regulatory scrutiny of

premium increases

intensifying

Exchange-based

coverage diluting average

commercial price

Employers

increasingly willing to

restrict choice

1 3 2

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Price Hikes Not to Be Taken for Granted

41

Traditional Growth, Operating Models at Risk

Source: “Employer Health Benefits 2010 Annual Survey,” Kaiser Family Foundation, September 2, 2010; Helfand D,

“Aetna to Scale Back Health Insurance Rate Hikes,” Los Angeles Times; Pear R, “Insurers Told To Justify Rate

Increases Over 10 Percent,” New York Times, May 19, 2011; Levey N, “29 States Get Grants to Boost Health Insurer

Oversight,” Los Angeles Times, September 20, 2011; Health Care Advisory Board interviews and analysis.

Medical Loss Ratio (MLR) Requirements

80%

85%

MLR for individual and

small group plans

MLR for large group plans

States Cracking Down on Rate Hikes

Los Angeles-Times

”

“A third major California health insurer has

agreed to scale back insurance rate hikes

this year for thousands of customers after

postponing the increases for 60 days at the

request of the state's insurance

commissioner….”

• New ratios mandate that insurers spend

fixed amount of every premium dollar

on either reimbursement for medical care

or activities that improve care quality

• Measure limits amount that insurers

can spend on advertising, other

growth opportunities

• Insurers that fail to meet standards

must provide rebates to plan enrollees

Regulatory Review of Premium Increases

• Insurers mandated to disclose,

justify proposed rate increases

over 10 percent

• Obama administration announced

$109 M in grants to states to bolster

oversight of insurers

Pressure #1: Regulatory Scrutiny of Premium Increases Intensifying

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90%

82% 87%

HMO PPO FEHBP

Commercial Coverage Not What It Used to Be

42

Benchmark Plan Likely Less Generous Than Employer Coverage

Source: “Good as Gold? A Primer on Comparing Health Plans,” New York Times, September 22, 2009;

“What the Actuarial Values in the Affordable Care Act Mean,” Kaiser Family Foundation, available at:

www.kff.org/healthreform/upload/8177.pdf, accessed April 11, 2011; Health Care Advisory Board

interviews and analysis. 1) Federal Employee Health Benefits Plan.

Actuarial Value of Common Plan Types

Coverage of Average Medical Costs

Silver

Plan

70%

1

Pressure #2: Exchange-Based Coverage Diluting Average Commercial Price

Provision in Brief:

Health Insurance Subsidies

• Available to individuals and families making

up to 400 percent of the federal poverty line

• Subsidies designed so individual

contribution to health insurance policy does

not exceed 10 percent of household income

• Subsidies calibrated to the silver plan level

of coverage, but consumers may choose to

buy bronze coverage instead to spend less

out of pocket, or may opt to buy up to gold

or platinum coverage, paying difference from

own earnings

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Exchange-Based Coverage Adding to Collection Risk

43

1) Patient Protection and Affordable Care Act.

2) Assumes 20% coinsurance after deductible, coverage of

benefits equivalent to typical employer plan and preventive

services under ACA, and estimated premium growth of

7%, 2009-2014.

3) Federal Poverty Level.

Estimates of PPACA1 “Silver” Plan Design

Deductible for Individual Policy2

$4,200

$2,050 $1,850

Actuarial Research

Corporation

Aon Hewitt Towers Watson

Cost of Plans Offered Through Exchange

For Family of Four, by Percentage of FPL3

Federal

Poverty Level

Premium After

Subsidy (Based

on Silver Plan)

150% $1,505

200% $2,778

250% $4,438

300% $6,483

350% $7,563

400% $8,636

Source: Kaiser Family Foundation, “Health Reform Subsidy Calculator,”

available at: http://healthreform.kff.org/SubsidyCalculator.aspx; Health Care


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Employers, Insurers Preparing for Exchanges

44

Individual Coverage Market Burgeoning

Source: Tully S, “Documents, reveal AT&T , Verizon, others, thought about dropping employer-sponsored benefits,” Fortune, May 6, 2010, available at:

http://money.cnn.com/2010/05/05/news/companies/dropping_benefits.fortune/index.htm?cnn=yes&hpt=C2; CBO, “An analysis of health insurance premiums under

the PPACA,” available at: http://www.cbo.gov/ftpdocs/107xx/doc10781/11-30-premiums.pdft, accessed April 11, 2011; Mathews A, “Health law puts Cigna in ad

mode,” Wall Street Journal, September 19, 2011; Health Care Advisory Board interviews and analysis.

70% Percentage Caterpillar

could save on health care

costs by dropping coverage

$1.8 B Total dollars AT&T could

save by dropping coverage

of 300,000 active employees

$255 M Estimated cost of “Cadillac

Tax” to Verizon in 2018

Employer Coverage Costs Insurer Response to Exchanges

• Cigna initiating national

advertisement campaign

designed to target consumers

who will purchase coverage

through exchanges

• Marketing campaign, estimated

at $25 M, is company’s first

since 2002

Health Law Puts Cigna in Ad Mode

23 M Number of people projected to

purchase coverage through

exchanges in 2016

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Limiting Choice No Longer the Third Rail

45

Narrow Networks Making a Resurgence

Source: Blue Cross Blue Shield, “Hospital Choice Cost Sharing,” available at:

http://www.bluecrossma.com/plan-education/pdf/hospital-list.pdf, accessed April 15,


Pressure #3: Employers Increasingly Willing to Restrict Choice

Case in Brief: BCBS Hospital Choice Product

• Product spurred by Massachusetts regulation, which mandated that insurers in

the Connector network offer at least one tiered or limited network plan

• Product incents patients to choose low-cost, in-network providers by imposing

fees for seeking care at 15 higher cost hospitals

• BCBS reports that the plan saves employers 5.5 percent; product the most

successful in plan’s history

Employer

Visits to higher-cost hospitals require

higher out-of-pocket payment

Access to lower-cost hospitals

available at standard co-payment rates

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Market Innovating to Meet Employer Demand

46

BridgeHealth Crafting Narrow Surgical Networks

Source: Employee Benefit Adviser, “Forecasting and Managing Surgery Costs,” available at: http://eba.benefitnews.com/news/forecasting-

managing-surgery-costs-2685253-1.html, accessed March 13 2011; Health Care Advisory Board interviews and analysis.

High-Quality, Low-Cost Network

BridgeHealth

• Negotiates discounts of 20%-

40% less than commercial rate

• Uses predictive modeling to

identify high-risk employees

• Educates employee population

about alternatives to surgery

Case in Brief: BridgeHealth

• Surgery benefits firm based in Denver, Colorado

• Aggregates high-quality providers to create virtual narrow networks for specific

surgical procedures, securing discounts of 20%-40% off commercial rates

• Sells network access, services to reduce surgical demand directly to employers

Employers

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Case in Brief: Lowe’s/Cleveland Clinic

Employers Assembling the DIY Narrow Network

47

Lowe’s Channels Employees to Best-in-Class Provider

Source: Appleby J, “Latest Destination for Medical Tourism: The U.S.,” USA Today, July 7, 2010; Medical Tourism Guide,

“Cleveland Clinic, Lowe’s Heart Deal Exceeds Expectations,” available at: http://www.medicaltourism-

guide.com/2010/10/22/cleveland-clinic-lowes-heart-deal-exceeds-expectations, accessed April 16 2011; Health Care


1) Estimated savings for one patient requiring

three complex cardiac procedures.

2) Pseudonym.

Savings Calculation1

Local hospital price: $531,000

Cleveland Clinic price: $469,000

$62,000 Total Savings:

Patient: John Smith2

10

23

Expected Actual

Employee Response Exceeds Expectations

Number of Participating Employees, 2010

• Lowe’s signed three-year contract with Cleveland Clinic to pay bundled rates for cardiac

procedures, any readmissions for employees nationwide

• Lowe’s designed employee benefit to waive cost-sharing, cover travel expenses for patients

opting to receive cardiac surgery at Cleveland Clinic

• Arrangement saves Lowe’s money on readmissions, provides high-quality care for patients

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Private Insurers Raising the Stakes

48

WellPoint Tying Pay Increases to Quality Metrics

Source: Adamy J., “WellPoint Shakes Up Hospital Payments,” The Wall Street

Journal, May 16, 2011; Health Care Advisory Board interviews and analysis.

Pressure #4: Quality Performance Risk Increasingly Prevalent

Case in Brief: WellPoint

• Insurer replacing traditional eight

percent annual rate increases with

new mandatory program that pays

increases only to hospitals with

sufficient scores on 51 quality of

care indicators

• WellPoint estimates that program will

reduce annual inpatient cost growth by

three to five percentage points

55% 35%

10%

Patient

Satisfaction

Health

Outcomes

Patient

Safety

Quality Metric Weights

3-5% Estimated percentage

reduction in annual

inpatient cost growth

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Utilization Risk Not Just a Medicare Mandate

49

Private Market Initiatives Developing Nationwide

Source: “Anthem Blue Cross, Sharp HealthCare Pilot San Diego-Area ACO,” available at: www.healthcarefinancenews.com; “Norton Healthcare, Humana Launch ACO Pilot,” “Aetna, Carilion Clinic

Building ACO in VA ,” available at www.healthleadersmedia.com; “An ACO Takes Root in San Francisco,” available at: www.chwhealth.org; “8 Aspects of UnitedHealthcare's Plans to Fund an ACO at

Tucson Medical Center,” available at: www.beckershospitalreview.com; “Advocate Health Care, Blue Cross and Blue Shield of Illinois Sign Agreement Focusing on Improving Quality, Bending the Health

Care Cost Curve,” available at: www.bcbsil.com; “Minnesota’s Largest Health Plan Signs ‘Total Cost Of Care’ Agreement With Park Nicollet Health Services,” available at: www.bcbs.com; “BCBS

Massachusetts Announces First Year Results of Alternative Quality Contract,” available at: www.bluecrossma.com; “CIGNA and Piedmont Physicians Group Launch Accountable Care Organization Pilot

Program,” available at: newsroom.cigna.com; Maine Health Management Coalition, available at: www.mehmc.org; Health Care Advisory Board interviews and analysis.

BCBS Massachusetts’s

Alternative Quality

Contract: Annual global

budget, quality incentives

for participating providers

Blue Shield California:

Two ACOs in Northern

California

Cigna: Medical home

contract with Piedmont

Physicians Group

BCBS Illinois: Shared

savings contract with

Advocate Health Care

BCBS Minnesota:

Shared savings contract

with five providers

UnitedHealth Care: ACO

with Tucson Medical Center

Maine Health

Management Coalition:

Multi-stakeholder group

supporting ACO pilots

Providence Health &

Services: $30 M, two-year

contract with public

employee benefits board

Humana: ACO pilot

with Norton Healthcare

Anthem Blue Cross:

ACO pilot with Sharp

HealthCare medical groups

Aetna: ACO pilot

with Carilion Clinic

Pressure #5: New Payment Models Demanding Utilization Management

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Changing Incentives Across the Delivery System

50

Putting Health Care on a Budget in Massachusetts

Source: Chernew M, et al., “Private Payer Innovation in Massachusetts: The ‘Alternative Quality

Contract,’” Health Affairs, 2011, 30: 51-61; Health Care Advisory Board interviews and analysis.

Key Contract Details

Program in Brief: BCBS Massachusetts

Alternative Quality Contract

• Payment contract introduced in January 2009 by

BCBS of Massachusetts with provider groups in

Massachusetts for HMO, POS enrollees

• 12 participating provider groups, with various risk

experience, organizational forms, size ranges

• Five-year contracts consist of global budget with

annual spending growth limits, 10 percent total

PMPM quality incentive payments, technical

support for participating providers

• In 2009, participating groups reduced

readmission rates worth $1.8 million; on track to

reduce growth trend by 50 percent over five years

Providers paid FFS with annual

global budget; all patient

services included in budget,

regardless of whether participating

provider delivered care

10 percent PMPM quality

performance incentive on 64

quality measures; outcomes

measures given triple weight

No specified physician structure

or organization mandated;

distribution of payments left to

individual providers

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AQC1 Pegs Cost Growth to Inflation

51

Program Gaining Acceptance in a Cash-Strapped State

Source: Chernew M, et al., “Private Payer Innovation in Massachusetts: The ‘Alternative Quality Contract,’” Health Affairs,

30, no.1 (2011):51-61; BCBS MA, “The Alternative Quality Contract: Year One Results,” available at:

http://www.bluecrossma.com/visitor/pdf/aqc-results-white-paper.pdf, accessed April 10, 2011; Health Care Advisory

Board interviews and analysis.

HMO Enrollment with Alternative

Quality Contract Providers

Total Lives, 2009-2011

Massachusetts Five-Year

Projected Cost Trend

Time

Health

Care

Expense

Growth

Projected

Growth: 10%

AQC Target

Growth: 5%

2009 2010 2011

305 K

355 K

470 K

1) Alternative Quality Contract.

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Resources for Payment Transformation

52


Playbook for Accountable Care

Lessons for the Transition to Total

Cost Accountability

Succeeding Under

Bundled Payments

Reducing Readmissions and

Protecting Hospital Profitability in an

Era of Increasing Performance Risk

The Medicare Shared

Savings Rulebook

Analysis of the Proposed Rules and

Strategic Implications for Providers

Webconference: Medicare’s

Bundled Payments for Care

Improvement Program

Details and Strategic Implications

Accountable Care

Readiness Diagnostic

Inpatient Bundled Payment

Impact Calculator

Research and Insights on New Payment Models

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Force #1: Decelerating Price Growth

53


Key Takeaways

1. Budget constraints on federal, state governments raise prospects

of substantial cuts to Medicare, Medicaid pricing

2. Commercial pricing subject to multiple downward pressures;

projected growth insufficient to maintain traditional cross-

subsidization dynamics

3. Revenue from all payers subject to intensifying performance risk

4. Accountable payment models beginning to impose utilization risk

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Long-Term Cost Growth Continuing

54

Market, Regulatory, Demographic Pressures Mounting




Force #2: Continuing Cost Pressure

Expenses per Adjusted Admission Drivers of Continued Cost Growth:

Market pressures pushing up

unit costs of labor, other inputs

Overhead expenses swelling

as new IT mandates take hold

Aging, sicker population

requiring increasingly complex,

costly care pathways 1989 2009 1999

$6,509

$10,045

$4,588

Cost Growth,

1989-1999:

3.6%

Cost Growth,

1999-2009:

4.4%

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No Relief in Sight for Labor Costs

55

Wages, Benefits, Utilization All on the Rise


http://www.aha.org/aha/research-and-trends/chartbook/index.html; Labor Notes, available at:

labornotes.org, accessed on May 1, 2011; Health Care Advisory Board interviews and analysis.

111 219

406

704

1,017

2000 2005 2010 2015 2020

33% Proportion of contract

negotiations involving explicit

strike threats, 2009-2010

Projected Shortage of RN

FTEs, in Thousands

Nursing Shortage

Union Pressure

Staffing ratios mandated

by unions, law

Wages must rise to

compete for scarce labor

Health benefit packages

difficult to pare back

Persistent Labor Cost Concerns

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IT Costs Draining Capital Budgets

56

Meaningful Use Demands Major Investments

Source: CMS, available at: https://www.cms.gov, accessed on

September 13, 2011; Moody’s Preliminary Medians for Not-for-Profit

Hospitals; Health Care Advisory Board interviews and analysis.

IT as a Percentage of Total

Capital Spending

12%

40%

2008 2009

$20-34 M Estimated cost of meeting

Meaningful Use requirements

2013: Stage 2

Advanced Clinical Processes

Quality improvement at the

point of care and electronic

exchange of information

2011: Stage 1

Data Capture & Sharing

Electronic capture of

health information in a

structured format

2015: Stage 3

Improved Outcomes

Improvements in quality, safety,

clinical decision support, and

patient self-management tools

Timeline of Meaningful Use Requirements Hospital IT and Meaningful Use Costs

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Maintaining Market Advantage Costly

57

Physician Acquisition, Clinical Technology Races Continue

Source: Medical Group Management Association, Cost Survey for

Multispecialty Practices, 2011; Intuitive Surgical (Sunnyvale, CA);


Clinical Alignment Never Cheap

Total da Vinci Robot Installations Net Loss per Employed Physician, 2010

($81 K)

($190 K)

($282 K)

75th Percentile 50th Percentile 25th Percentile

Clinical Innovation Never Complete

425

595

825

1028

1285 1411

2006 2007 2008 2009 2010 2011(Q2)

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Primary Diagnosis Rarely the Only Problem

58

Increasing Complexity of Care Driving Up Cost of Care

Source: Friedman B, et al., “Hospital Inpatient Costs for Adults with

Multiple Chronic Conditions,” Medical Care Research and Review,

2006, 63: 327-346; Health Care Advisory Board interviews and analysis.

1) Does not include maternity-related principal diagnoses.

2) Relative to patients with no chronic conditions.

Distribution of Total Discharges, by

Number of Chronic Conditions1

Percent Increase in Cost per Case,

by Number of Chronic Conditions2

7%

14%

17% 18% 16%

12%

8% 7%

0 1 2 3 4 5 6 7+

78.0% of treated adults have

multiple chronic conditions

108%

87%

77%

64%

47%

30%

15%

0%

7+

6

5

4

3

2

1

0

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Force #2: Continuing Cost Pressure

59


Key Takeaways

1. Historical cost growth outpacing projected pricing growth

2. Cost pressures derive from long-term, systemic factors; one-off

cost cutting campaigns will not suffice to alter overall trends

3. Strategically attractive—or even mandatory—investments in

technology, physician practices consume significant shares of

overall resources

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Demographics, Policy Reshaping Payer Mix

60

Source: U.S. Census Bureau, available at: http://www.census.gov, accessed April

26, 2011; Health Care Advisory Board interviews and analysis.

Force #3: Shifting Payer Mix

Aging of Population

Medicare-Eligible Population

15% 85%

Coverage Expansion

Medicaid Commercial

Uninsured

Medicare

Insurance Status of Population, 2011

Projected Status of Previously

Uninsured Population, 2021

Uninsured Insured

40 M

55 M

2011 2021 7%

45% 35%

13%

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Baby Boomer Surge Beginning

61

Medicare Rolls in Line to Increase Dramatically

Source: U.S. Census Bureau, available at: http://www.census.gov,

accessed on September 13, 2011; Kaiser Family Foundation, available at:

http://www.kff.org/medicare/h08_7821.cfm, accessed on September 13,


2011 US Population Distribution By Age

~7,000/day Newly eligible Medicare

beneficiaries

23% Percentage of

population covered

by Medicare in 2030

75 M Baby Boomers

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Moving Ever Closer to Single Payer

62

Medicare to Constitute Majority of Discharges by 2021


52%

20%

27%

Inpatient Volume by Payer Class

Medicaid

Commercial

Self Pay

Medicare

0.3%

37%

22%

35%

5%

Medicaid

Commercial

Self Pay

Medicare

2011 2021

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The End of Self Pay?

63

Commercial, Medicaid Eligibility Expanding

Source: White House, available at: http://www.whitehouse.gov/healthreform/timeline,

accessed on September 14, 2011; Kaiser Family Foundation, available at:

http://www.kff.org; accessed on September 19, 2011; Health Care Advisory Board

interviews and analysis. 1) Federal Poverty Line.

Elements of Coverage Expansion

2014

Percentage of Newly Insured

Individuals by Source of Coverage

54% 46% Medicaid Commercial

Increased Access to Medicaid

• Federal funding expanded to cover

individuals at or below 133% of FPL1

Creation of Health Benefit Exchanges

• State-based exchanges allow individuals

to shop for affordable health insurance

Establishment of Individual,

Employer Mandate

• Individuals required to obtain basic

health insurance coverage or pay fee

• Employees may take funds employer

might have contributed to their insurance

and purchase more affordable plan in

health insurance exchanges

31.7 M Number of newly insured

individuals through

coverage expansion

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Payer Mix Shift a Mixed Blessing

64

Demand Growth, Reduced Bad Debt May Balance Medicare Shift


Price, Demand Impacts of Payer Mix Shifts

Payer Mix Shift Impact on

Average Price

Impact on

Demand

Aging:

All Payers to Medicare

Coverage Expansion:

Self-Pay to Medicaid

Coverage Expansion:

Self-Pay to Commercial

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52%

20%

27%

Older Also Means Sicker

65

Medicare Population Much More Frequent Health Care Consumers


Population by Primary

Source of Coverage, 2021

Discharges By Payer, 2021

17%

19% 63%

1% Uninsured Medicare

Medicaid

Commercial

Uninsured

Medicare

Medicaid

Commercial

0.3%

0.042 0.076

0.183

0.536

Self Pay Commercial Medicaid Medicare

Medicare patients’ use of inpatient

services three times that of

patients in other payer classes

Projected Annual Discharges

per Capita, by Payer, 2021

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No Death Knell for Growth

66

Annual Discharges per Capita

Advisory Board Projections

Annual Inpatient Demand



Source of Discharge Growth


0.131

0.174

2011 2021 2011 2021

84.7% 15.3% Payer

Mix Shift

Population

Growth

39.9 M

56.9 M

In Absence of Utilization Management, Demand to Soar

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Virtually All New Volumes Publicly Insured

67

Sources of Inpatient Volume Growth

2011-2021


7%

100%

17%

88% (12%)

Commercial Medicaid Medicare Self Pay Total

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Future Demand Will Not Fund Capacity Expansion

68

Even at Current Prices, Public Payments Fail to Cover Total Costs

1) Fully-allocated costs.

2) Includes Medicaid Disproportionate Share Hospital payments.

Average Payment Relative To Cost1

By Payer

134%

90% 89%

Medicare, Medicaid volume

growth unable to finance

capacity expansion

100%

Commercial Medicare Medicaid2

Source: American Hospital Association Chartbook, available at



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All Growth Is Good Growth

69

(As Long as You Have a Place for It)

Contribution Profit per Case Effect of Demand Growth

Without Capacity Constraints


22%

43%

55%

Medicaid

Medicare

Commercial

Impact of Fully Captured Demand

(3%) Change in

inpatient revenue

per case

38% Change in

inpatient

volume

33% Change in

total inpatient

revenue

Hospital significantly

below maximum

occupancy; able to

absorb all new demand

Volume growth

mitigates negative

impact of worsening

case mix

By Payer

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Upward Pressure on Length of Stay

70

Older Patients Require Longer Courses of Care

Source: Center for Disease Control, available at: http://www.cdc.gov/nchs/data/hus/hus10.pdf,

accessed May 28, 2011; Health Care Advisory Board interviews and analysis.

Average Length of Stay for Selected Conditions

In Days, 2007

2.5

4.9 5.1

6.2

2.9

5.1 5.2

6.8

3.1

5.2 5.4

7.1

Hypertension Heart Failure Pneumonia Cancer

Ages 45-64 Ages 65-74 Ages 75-84

Average Length of Stay

In Days, 2007

4.8

5.6

All Ages Ages 65 and over

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Reaching the Limit of Inpatient Efficiency?

71

Length of Stay Improvements Slowing Over Past Decade

Source: Center for Disease Control, available at:

http://www.cdc.gov/nchs/data/hus/ hus10.pdf#102, accessed May 28,

2011; Health Care Advisory Board interviews and analysis. 1) Chronic Obstructive Pulmonary Disease.

Average Length of Stay for Common Medical Conditions

Patients Aged 65-74, 1990-2007

8.2

4.8 4.6 4.3

2.6 2.9

9.5

6.4

5.2

8.4

5.5

5.1

0

10

1990 2000 2007

Pneumonia

Heart Failure

COPD1

Hypertension

Length of

Stay (Days)

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Force #3: Shifting Payer Mix

72


Key Takeaways

1. Retirement of Baby Boomers, implementation of coverage

expansion poised to reshape hospital payer mixes

2. Decline in average price per case potentially offset by increased

demand—perhaps enough to create long-run capacity shortages

3. Vast majority of volume growth expected to be publically insured;

revenue from these cases too low to finance additional

physical capacity

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Payer Mix Not the Only Thing Shifting

73

Deteriorating Case Mix at HCA Cutting Into Profits

Source: HCA Healthcare, available at: www.hcahealthcare.com, accessed on

September 15, 2011; Seeking Alpha, available at: http://seekingalpha.com, accessed

on September 16, 2011; Health Care Advisory Board interviews and analysis.

Force #4: Deteriorating Case Mix

Annual Change in

Admissions at HCA

(1.3%) Change in revenue per

Medicare admission

Case in Brief: HCA Healthcare

• 164-hospital for-profit system in 20 states

• ~5 percent of national discharges occur at

HCA facilities

• Recent earnings call reported shift in service mix

from more complex surgical cases to less acute

medical cases, particularly among

Medicare beneficiaries

• Company did not report significant market share

losses during same period

• Case mix shift regarded as factor in 22 percent drop

in Q2 profit, year-over-year

Total

Surgical

(1.6%)

1.9%

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Surgical Share a Key Indicator of Success

74

Those that Profit with Poor Payer Mix Tend to Have Better Case Mix

Source: Medicare Cost Reports; Health Care Advisory Board

interviews and analysis.

1) Top quartile by share of inpatient discharges paid by

Medicare or Medicaid.

Surgical Share of Inpatient Volume

Hospitals with Largest Proportion of

Publicly Insured Volume1

15.4%

19.8%

Operating Margin <3.5%

Operating Margin >3.5%

Inpatient Contribution Income

Weighted Per-Case Average

$6,110

$2,927

Surgery Medicine

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61% 39% 73% 27% 76% 24%

More Medicine On the Horizon

75

Public Payer Volumes Composed of Predominantly Medical Cases


Medical and Surgical Shares of Volume, by Payer

Medical Medical Medical

Surgical Surgical Surgical

Commercial Medicare Medicaid

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Worsening Case Mix Not Just Due to Aging

76

Overall Population Health Deteriorating

Obesity Rate Among U.S. Adults1

1988

Obesity Rate Among U.S. Adults1

2009

Source: Centers for Disease Control Behavioral Risk Factor Surveillance

System, available at: http://www.cdc.gov/brfss/, accessed May 4, 2011;

Health Care Advisory Board interviews and analysis. 1) Body Mass Index ≥ 30, or 30 pounds overweight for 5’ 4” person.

No Data <10% 10%–14% 15-19% 20-24% 25-30% >30%

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Chronic Disease Growth Outpacing Population Growth

77

Source: Milken Institute, available at: http://www.milkeninstitute.org/

pdf/chronic_disease_report.pdf, accessed April 27, 2011; Health Care


Projected Increase in Chronic Disease Cases

2003-2023

29.0% 31.0%

39.0% 41.0%

53.0% 54.0%

62.0% 19%: Projected

population

growth, 2003-

2023

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Surgical Growth Headed Elsewhere

78

Financial, Technological Factors Driving Surgeries to Outpatient Settings

Growth in Surgical Volume

2010-2020

Drivers of Outpatient Surgical Growth

7.6%

21.1%

Inpatient Outpatient

Reimbursement gap closing

between comparable inpatient

and outpatient services

Technological innovation

allowing safe, efficient care in

outpatient settings

Outpatient service convenience

improves patient experience


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Patient Mix Problem Bigger than Payer Mix Problem

79

All Else Equal, Case Mix Deterioration Hurts More than Payer Shift


1) Based on five percentage point reduction in surgical share of inpatient volume.

Margin Impact of Potential Payer Mix Shift

2.2%

1.9%

Current Margin Future Margin

2.2%

0.8%

Current Margin Future Margin

Typical 300-bed Hospital

Margin Impact of Potential Case Mix Shift1

Typical 300-bed Hospital

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Force #4: Deteriorating Case Mix

80


Key Takeaways

1. Aging of patient base expected to lead to deterioration in

medical/surgical case mix

2. Medical volume growth also driven by rising incidence of chronic

disease across all payer classes

3. Surgical growth not absent, but concentrated in outpatient arena

4. Case mix deterioration combined with inpatient capacity

constraints poses powerful threat to operating margins

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Road Map

2

3

1

81


Closing Remarks


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