2006 PLUS MPL 2006 PLUS MPL SymposiumSymposium

Managing Amidst Crisis

Moderator:

James M. Fasone ARM RPLU

Gallagher Healthcare

2006 PLUS MPL 2006 PLUS MPL SymposiumSymposium

Managing Amidst Crisis

Panelists:Linda Klute- Tatum LLCHoward Pearl- Winston & StrawnSteve Wilson- RLI Corporation

2006 PLUS MPL 2006 PLUS MPL SymposiumSymposium

Managing Amidst Crisis

Session Outline:

Introductory RemarksHealthcare Industry Overview Healthcare Leadership ChallengesRegulatory/Legal ClimateFraud & AbuseUnderwriting Executive Liability Exposures

• “ This is like déjà vu all over again.”

- Yogi Berra

Healthcare IndustryHealthcare Industry

• Market Overview• Healthcare Industry Challenges

Regulatory environment Reimbursement issues Changing Healthcare Landscape

• Healthcare Leadership Challenges Market Changes – Specialty Hospitals Nonprofit Outlook Provider Relations Corporate Governance

Health Care MarketHealth Care Market

Providers – “use of funds”• Hospitals and systems, professional

services, nursing homes, suppliers, pharmacy, home health, retail, middlemen organizations, government administration

Payers and administrators – “source of funds”

• Insurance companies, HMOs, PPOs, employer managed plans and coalitions, Medicare, Medicaid, Medicare and Medicaid contractors, TPAs, PBMs. Case management companies, disease management companies

Related industries• Senior housing• Medical malpractice (insurance, captives)• Research organizations• RHIOs• Companies with some healthcare products

National:

• $1.4 trillion in 2007 growing to $4.0 trillion in 2016

• Outside the above $$$

The Market – Use of FundsThe Market – Use of Funds

Hospital care30%

Physician clinical services

22%Prescription drugs

11%

Nursing home care7%

Program administration

7%

Other23%

• Other includes dental services, other professional services, home healthcare, DME, over-the-counter medications and sundries, public health activities, research and construction.

Source: Modern Healthcare, “By the Numbers”, December 2005

Healthcare tab will hit $4 Healthcare tab will hit $4 trillion in 10 yearstrillion in 10 years

Projected Average Annual Spending Increase (2006-2015)

8.2%7.8%

7.4% 7.2% 7.1%

5.9%

4.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Prescriptiondrugs

Home care Private healthinsurance

Hopsital care Physician andclinical

services

Nursing-homecare

Durablemedical

equipment

Source: Modern Healthcare, February 27, 2006

Personal Consumption Personal Consumption DataData

2.7% 2.7%3.8%

4.8%

9.8% 10.2%

12.1%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Clothi

ng

Energ

y

Autom

otive

Defen

seFoo

d

Housin

g

Med

ical c

are

• Bureau of Economic Analysis – Personal consumption figures with the exception of national defense.

• Overall Healthcare expenditures are projected to account for 15.6% of the GDP in 2005 according to CMS.

Source: Modern Healthcare, “By the Numbers”, December 2005

INDUSTRY CHALLENGES

Health Care Fraud - ImpactHealth Care Fraud - Impact

95%

5%

• Estimated to be $48 to $80 billion nationally• Or 2-5% of healthcare spending

Healthcare LawsHealthcare Laws

• Amended Medicare and Medicaid Patient and Programs Protection Act of 1987 (anti kickback statute) for referrals

• EMTALA – emergency medical treatment

• False Claims Act – claims for services not authorized, upcoding, unbundling lab tests, double billing, billing for claims not provided, false prescriptions, bills for services not delivered

• Civil Monetary Penalties Law – claims known to be false and failure to disclose information

• Stark (physician self-referral) to businesses with any ownership interest

• Health Insurance Portability and Accountability Act of 1996 (HIPAA)

• Sarbanes Oxley accountability

• Gain-Sharing physicians sharing in savings/certain reductions in healthcare costs

• Bio-Terrorism Act

• In addition to wire fraud, mail fraud, criminal conspiracy, obstruction of justice, money laundering, antitrust, labor, taxation, intellectual property, environmental and other laws.

Healthcare Hot TopicsHealthcare Hot Topics

• $36 billion in budget cuts in Medicare/Medicaid • Fraud, corporate compliance, corporate responsibility• Medical errors, patient safety (50% error rate in every aspect of care)• The uninsured and the underinsured – who pays? How to collect?• Deploying technologies and drugs, paying for technologies and drugs• Access to capital• Demand for services, aging population, • Personnel shortages• Aging plants• Malpractice, risk management• Bio-disaster preparedness• Consumerism• Informatics, use of data, artificial intelligence, evidence based medicine• Supply chain efficiencies

Reimbursement Issues are a Top Reimbursement Issues are a Top Concern of Hospital CEOsConcern of Hospital CEOs

• $36 billion in budget cuts in Medicare/Medicaid All provider types will feel the cuts

• Care for the uninsured Maintaining a hospitals not-for-profit status

• Illinois looking to increase the amount of charitable care to maintain NFP status

• Pay for performance From Medicare to all Need for standards

• Push for transparent pricing by the Bush Administration• Bad debt• Revenue cycle management

Changing Healthcare Changing Healthcare LandscapeLandscape

• Consumerism Pay for Performance Cyber crimes Websites reporting

quality results

• Disaster Planning Natural disasters Pandemics

• Physician Issues Hospital in competition

with Physicians Malpractice Shortages

• Access to capital and capital needs/allocation

• Aging population• Interoperability• Bad debt• Personnel shortages and

expense• Technology

HEALTHCARE LEADERSHIP CHALLENGES

Nonprofit OutlookNonprofit Outlook

• Areas of Continued Improvement/Opportunity Tax status Accountability/internal controls over financial reporting Revenue cycle management Supply chain management Capital allocation (including IT) Asset-liability management Physician Alignment Access to capital Medicare and managed care

Source: Fitch Ratings, “2006 Nonprofit Hospitals and Health Care Systems Outlook”, January 2006

Healthcare Leadership Healthcare Leadership ChallengesChallenges

Ranking Issue 2003 2004 2005

1 Financial changes 73% 71% 67%

2 Personnel shortages 58% 33% 36%

3 Care for the uninsured 26% 36% 35%

4 Physician/hospital relations 26% 32% 33%

5 Quality 17% 18% 23%

6 Patient safety 9% 16% 20%

7 Patient satisfaction 7% 13% 18%

8 Capacity 28% 16% 17%

9 Technology 12% 14% 17%

10 Governmental mandates 18% 19% 16%

Source: ACHE conducted a survey in September 2005 of 941 hospital CEOs – 42% responded.

Breakdown of Top Focus Breakdown of Top Focus AreasAreas

Rank Financial Challenges Personnel shortages Care for the Uninsured

1 Medicaid Registered nurses Medicaid

2 Medicare Imaging technicians Underwriting costs

3 Bad debt Pharmacists Advocacy for funding

4 Revenue cycle mgmt. Therapists

5 Managed care payments

Physicians – surgical specialists

Provider RelationsProvider Relations

• Communications• Conflict of Interest Rules• Gain Sharing• Quality • Recruitment and Retention• Physicians serving on the Board of Directors

Compensation issues

• Technology adoption and obsolescence

Corporate GovernanceCorporate Governance

• Increase scrutiny and transparency• Moving more towards a corporate or enterprise

governance model Accountability Operating performance Goal achievement More than 50% of the nation’s largest health system has

adopted some components of Sarbanes-Oxley

• Regulatory compliance• Conflict of interest• Implementing “Best Practices”

As Shoeless Joe Jackson departed from the Grand Jury room, a small boy clutched at his sleeve and tagged along after him. "Say it ain't so, Joe," he pleaded. "Say it ain't so." "Yes kid, I'm afraid it is," Jackson replied.

"Well, I never would've thought it," the boy said. Chicago Herald and Examiner (9/30/1920)

Healthcare LawsHealthcare Laws

• Amended Medicare and Medicaid Patient and Programs Protection Act of 1987 (anti kickback statute) for referrals

• EMTALA – emergency medical treatment

• False Claims Act – claims for services not authorized, upcoding, unbundling lab tests, double billing, billing for claims not provided, false prescriptions, bills for services not delivered

• Civil Monetary Penalties Law – claims known to be false and failure to disclose information

• Stark (physician self-referral) to businesses with any ownership interest

• Health Insurance Portability and Accountability Act of 1996 (HIPAA)

• Sarbanes Oxley accountability

• Gain-Sharing physicians sharing in savings/certain reductions in healthcare costs

• Bio-Terrorism Act

• In addition to wire fraud, mail fraud, criminal conspiracy, obstruction of justice, money laundering, antitrust, labor, taxation, intellectual property, environmental and other laws.

Health Care Fraud - ImpactHealth Care Fraud - Impact

95%

5%

• Estimated to be $48 to $80 billion nationally• Or 2-5% of healthcare spending

Serono, 2005, $1.7 M, Medicaid, Marketing

TAP Pharmaceutical, 2001, $875 M for a total of 7 health care crimes

Abbott Labs, 2003, $600 M ,

FDA compliance

High Profile Settlements

SmithKline Beecham, 1997, $325 M, billing fraud

Fresenius a German Corp., $486 M for false claims and kick backs.

National Medical Enterprises, 1994, $379 M, Kickbacks

HealthSouth, $325 M, false claims, billing practices

Gambro Healthcare, $350 M, Kickback to Physicians

HCA• 2003, $631M for false claims.• 2000 and 2001, $840 Million for false billing practices

Recent SettlementsRecent Settlements

• Tenet - $7 million Medicare outlier payments

• McKesson - $960 million Accounting practices

• HealthSouth - $445 million Shareholder settlement

“ When you come to a fork in the road, you take it.”

• Yogi Berra

D/O Underwriting ExposuresD/O Underwriting ExposuresHealthcare Healthcare

Employment

Discrimination

Wrongful Termination

Sexual Harassment

Credentialing/Privileges

D/O Underwriting ExposuresD/O Underwriting ExposuresHealthcareHealthcare

Regulatory• Fraud and abuse• Whistleblower • CMS Audits• Compliance with State and Federal Laws

(Stark Laws,etc.)• Antitrust• Price Fixing

D/O Underwriting ExposuresD/O Underwriting ExposuresHealthcareHealthcare

• Not-for-Profit Status/Charity Care

• Patient billing

• State mandated levels of charity care (% of sales)

• Community involvement

• Use of JV’s and for-profit entities to carry out charitable mission

• Politicians picking up causes for upcoming election season

• Specialty hospitals

Corporate GovernanceCorporate GovernanceHealthcareHealthcare

• Executive Pay

• IRS and State Atty. General closely watching pay levels

• Internal Controls

• Appropriate Committees for Compensation/Internal Audit

Corporate GovernanceCorporate GovernanceHealthcareHealthcare

• Ethics

• Nominating/Finance/Investment/etc…

• Conflict of Interest

• Board of Directors and its involvement

Managing Technological ChangeManaging Technological Change

1,2,3…….15 Strikes1,2,3…….15 StrikesYou’re Not Out?!You’re Not Out?!

Executive CompensationExecutive Compensation

• "I know, but I had a better year than Hoover."-- Reported reply when a reporter objected that the salary Ruth was demanding ($80,000) was more than that of President Herbert Hoover's ($75,000).

ConsumerismConsumerism

Managing Amidst CrisisManaging Amidst Crisis

Questions/Answers