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Scanning the Health Care Environment: From Providing Care to Managing Health

Anne McLeodCalifornia Hospital Association

Environmental Scan: US Deficit

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Environmental Scan: Debt as Percent of GDP

Environmental Scan: Health Care Cost Growth

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Hospital Care, 42.67% Hospital Care, 32.58%

Physician Services, 20.25%

Physician Services, 21.71%

Other Professional,(4) 7.1%

Other Professional,(4) 7.3%

Home Health Care, 1.01%Home Health Care, 2.93%

Prescription Drugs, 5.11%Prescription Drugs, 10.73%

Other Medical Durables and Non-durables, 5.88% Other Medical Durables and

Non-durables, 3.35%

Nursing Home Care, 6.48%Nursing Home Care, 5.88%

Other,(3) 11.4% Other,(3) 15.5%

1980 2009

$235.6B $2,330.1B

Environmental Scan: National Health Expenditures

Environmental Scan: Hospital Inpatient Case Mix

1.05

1.10

1.15

1.20

1.25

1.30

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

CMI

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6,535 6,683

5,8075,483

5,2935,2835,092

4,569

3,972

4,638

CA U.S. averageNV NJ NY MAFLILWAUT

8%

Per capita health expenditures, 2009Dollars

CA growth of 5.7% CAGR vs. 5.9% CAGR for

U.S. overall from

1994-2009

Environmental Scan: California Health Care Cost and Growth

Environmental Scan: California Utilization Rates

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Environmental Scan: California’s Population Growth

3.03.1

Population Growth Rate

California US

Environmental Scan: Aging PopulationVirtually all projected growth in the state will be driven by seniors (aged 55+)

29

29

4

5

4

7

0 10 20 30 40 50

2010

2020

CAGR: 0%

6%3%

Under 5555 to 65Over 65

Population in Millions

Year

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Environmental Scan: Chronic IllnessBeyond coverage shifts, aging will also drive a significant increase in the utilization of inpatient services

Chronic Illness vs. Current Utilization Rates

120

140

160

180

200

220

240

260

25% 30% 35% 40% 45% 50% 55%

Chronic Disease Incidence

Med

icar

e In

pati

ent

Uti

lizat

ion

/ 100

0

For every 1% change in the incidence of

chronic disease there is a

corresponding increase in

utilization of 6%

Environmental Scan: Chronic Illness

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Environmental Scan: Access

Environmental Scan: Access

• Nationally, nearly one quarter (24.7%) of the active physicians in the workforce are age 60 or older

• California has the highest percentage of those over 60 years of age at 29.2%, or nearly one-third of all active physicians

Total MDs MDs per 100K Population

Total DOs DOs per 100K Population

Active Physicians in California - 2009

89,254 242.8 3,309 9.0

Active Patient Care Physicians – 2009

77,208 210.1 2,868 7.8

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Primary care physician supply could constrain the ability to manage the increase of chronic disease and other increases in utilization in several parts of the state

Environmental Scan: Access

Caregiver SupplyHealth Status

San Francisco

San Jose

Los Angeles

28-35%35-39%39-43%44-49%No data

San Francisco

San Jose

Los Angeles

1.3-2.51.1-1.30.8-1.10.2-0.7No data

The combination of low caregiver supply and are

poor health status is evident

throughout California

While many hospitals report operating profits today, most will likely be unprofitable as reimbursement approaches Medicare rates

Environmental Scan: Payment Reform

Per

cent

age

of C

alif

orni

a H

ospi

tals

80%

26%

20%

74%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Today Simulated Medicare Rates

Not profitable

Profitable

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Environmental Scan: Payment Reform

-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

35

40

45

50

55

60

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Private payer

Medi-Cal Medicare

Reductions in Medicare and Medi-Cal reimbursement have required hospitals to increase charges to private payers to maintain overall profitability

Environmental Scan: Cost Shift

Cost of Providing Care and Services

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Environmental Scan: Coverage Shifts

Despite an increase in the total insured, the net effect of this shift will be a significant dilution of margin

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Initial Margin

2.0%

Δ Margin = +1.2%

Key Shifts

New Margin -8.3%

Δ Margin = -1.5%

3

Δ Margin = -10.0%

Wei

ghte

d Av

erag

e O

pera

ting

Mar

gin

2

Reduction in the uninsured from 20% to 12% improves margin profile (Δ = +1.2%, now 3.2%)

1

With a higher mix of ‘Government’ business, ACA reimbursement reform significantly degrades margin (Δ = -10.0%, now -8.3%)

3

Aging into Medicare and the Exchanges (SHOP / HBEX) reduce proportion of Commercially insured from 50% to 44% and dilutes margin (Δ = -1.5%, now 1.7%)

2

Exposure

Higher

Capacity in QuestionNear-term threats may challenge these providers, despite readiness for tomorrow

Acutely VulnerableThese organizations are most at risk for failure and potential acquisition

Challenged SustainabilityRepositioning will be required for these

organizations to survive longer-term

Transformational LeadersThese organizations are best in a

position to lead and thrive in the new environment

ReadinessLower

Higher Lower

43% of Care

11%of Care

24% of Care

23% of Care

Environmental Scan: Hospital Vulnerability

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Conclusions

Environmental Scan: ConclusionsCore Strategies

Demographic and coverage shifts will require organizations to innovate their care model to,

among other considerations, address caregiver supply, cost levels, the needs of an aging population

and the transition from "providing care" to "managing health"

Scale is important, but integration will be critical in driving revenue and cost leadership to support

sustainable margins at significantly reduced levels of reimbursement

California’s high proportion of small business and active legislature will likely increase the impact of the health insurance exchange, which will be a key

future driver of financial risk

• Begin testing methods for reducing cost and improving quality beginning with hospitals’ self-insured populations

• Acquire care management technology that incorporates performance management and predictive analytics capabilities

• Develop new models to drive greater clinical integration by aligning incentives with community physicians

• Develop strategic partnerships that augment actual and virtual scale, leveraging shared networks and technology as enablers

• Evaluate and prioritize current health plan relationships in preparation for Exchange-based competition

• Increase outreach to employers and other institutional purchasers to drive stickiness and explore pay-for-performance

California hospitals show early signs of readiness for the future, but some face significant near-term

challenges to sustainability

• Develop initiatives to boost cost performance in preparation for additional payer and purchaser pressure on reimbursement

• Access financing to support needed infrastructure and capability investments

From Providing Care to Managing Health

Fee-for-service costs the entire health care system. When paying for volume, a sick patient is worth more than a healthy patient, and this status quo results in uncoordinated care, duplication of services, and fragmentation. After all, the more doctors and providers do, the more they get paid.

The Business Model Is Changing Because it Has to Change

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From Providing Care to Managing Health

Enrollment

Health Plan and/or TPA

Enrollment

Employer

Health Benefit Exchange

Population Manager

Population Manager

Population Manager

Government

Hospital Physicians Ancillary Pharmacy

Source: Kaufman Hall and Assoc.

Behavioral

From Providing Care to Managing Health

Source: Kaufman Hall and Assoc.

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Mega–System Formation to Manage Health

Full Integration Partial Integration

Acceleration of Number of Large Health System Transactions –

Targets Over $1 Billion in Revenue

From Providing Care to Managing Health

Source: Kaufman Hall and Assoc. and Modern Healthcare

From Providing Care to Managing Health

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From Providing Care to Managing Health

Reform Solutions — Government

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State Innovation Model

State Innovation Model

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State Innovation Model

State Innovation Model

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Medicaid Solutions

Medicaid Solutions

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DHCS 1115 WaiverThe draft list of potential waiver concepts developed by DHCS contained eight broad areas:

• Federal/State Shared Savings Initiative • Payment/Delivery Reform Incentive Programs • Safety Net Payment Reforms • FQHC Payment/Delivery Reform • Successor Delivery System Reform Incentive

Payment Program • California Children’s Services (CCS) Program

Improvements • Medicaid Funded Shelter for Vulnerable

Populations • Workforce Development

Coverage Expansion

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Coverage Expansion

New Models for a New Environment

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Characteristics of Change

• Leadership• Stakeholder Participation• Common Goal/Principles• Ambitious but Realistic Reforms• Multi-Payer (Public and Private)• Expanded Coverage• Funding and Other Investment

QUESTIONS?

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Thank YouAnne McLeod, Senior Vice President Health Policy and Innovation916-552-7536amcleod@calhospital.orgwww.calhospital.org