The payer’s role in a disrupted healthcare ecosystem

Uncovering value:

kpmg.com

The Current State of Play

Today’s payers face a unique combination of disruptive forces representing both business

opportunities and operational challenges. Points of care are shifting from hospitals to digital and retail channels. Pharmacy benefit managers are facing obsolescence. Companies are joining forces to negotiate more favorable payers for their employees. And, of course, payers themselves have become targets of mergers and acquisitions by consumer-focused companies like CVS and Walgreens. The expectation of all these innovations is improved outcomes at a lower cost to the consumer. Clearly, payers have reached a tipping point where broad business model change toward value-based care can no longer be delayed.

As boundaries between traditional players in the U.S. healthcare system blur, organizations are seeking the underlying value of greater integration. We believe that this search for value will drive pharmaceutical, medical device and diagnostics companies, as well as providers and payers, to tap into new technologies, develop new business models and create new partnerships that will ultimately transform the industry. Forward-looking payers need to consider how to tap into these trends to sustain competitive advantage in the new environment.

KPMG can assist payers with this unprecedented transition. Here are some key considerations:

- How does your organization define value, and which players in the healthcare ecosystem will assume responsibility for gathering the necessary data to analyze and report on value-based measures?

- How can data and advanced analytics be used by payers and providers to improve outcomes and lower the cost of care on both an individual patient and a population health level?

- How can non-formatted data from wearables and medical devices be securely accessed to provide insights into behavior modifications that can help consumers improve health and prevent chronic disease?

- How will new delivery channels such as retail clinics and telemedicine impact how patient care is priced and reimbursed?

- How will payers work with life sciences organizations to create value-based models for drugs and devices?

- How will payers evaluate, select and structure partnerships to enhance patient outcomes, realize operational efficiencies and ensure competitive advantage?

- Do your organization and strategic partners have appropriate cybersecurity programs and governance in place to secure patient health information and intellectual property across and beyond the enterprise?

1Uncovering value 1

Consumer Engagement:

Medical Cost Management:

Consumer engagement is a critical element in the success of future payers. As patients put more of their own dollars on the line, they are more discerning about what care they receive and where they receive it. Decisions are based on perceived value, comprising better outcomes, cost transparency, and consumer-grade patient experiences. Castlight and other

services are helping members choose the most favorable plans. Therefore, in addition to ensuring access to a roster of top-notch physicians, payers should increase their focus on behavior-based prevention and wellness offerings to help patients take a greater role in preventing chronic disease, emergency treatment and acute events.

In response to economic and regulatory pressures on the cost of healthcare, payers are beginning to look more closely at managing medical spending. A total cost of care approach requires an examination of service utilization and unit costs, as well as clinical variability across scheduling, care management, care coordination, and documentation. And, as different sectors of the healthcare value chain

converge, cost management is expected to expand to include directing patients to the most appropriate sites of care, e.g., emergency department, inpatient, ICU, ambulatory, rehabilitation center, hospice, etc. Below are some key trends in medical cost management:

Some key trends for payers

Increasedmember

costs

Increased premiums, deductibles, and cost sharing for consumers

Accountable provider relationships

Focus on wellness and engaged consumer directed care

Private exchanges to better understand and control future costs

Wellness and prevention

Accouuntable provider relationships

Private exchanges

Key trends in medical cost management

2 Uncovering value

Employer-Sponsored Payers Health plan offerings are evolving to align with healthcare reform. They now have a greater focus on wellness incentives, employee engagement, cost-effective care, and provider accountability. Payers should take care not to reduce member options so drastically, which can be achieved through new, innovative products, risk sharing with providers and cost-sharing incentives for patients.

Plans are incentivizing members to use providers deemed to be high quality low cost providers, such as centers of excellence and driving soft steerage through healthplan call centers.

Increase in the number of consumer driven health plans or account based plans such as HSA, HRA, and other high deductible plans. Plan offerings and benefits are

changing with more focus on prevention and wellness.

Greater access to care management resources for plans track spending and better manage patient care and utilization.

Tax implications and impact on employee benefits.

Plan type trends

Uncertainty around Federal Healthcare and Tax Reform Agendas

Despite multiple attempts to repeal and replace the Affordable Care Act, new health policies have been introduced, including:

– CHIP and DSH

– MACRA and MIPS

– Bundled Payments and 340B

Senate and House Tax reform bills have driven:

– Lower corporate tax rates

– Incentives for corporate repatriation

– Repeal of the individual mandate (2019)

– Insurance tax provisions

Despite uncertainty about which of these initiatives will have staying power, one thing is certain: there is a need to do more with less.

Managing risk and regulatory reforms

- ERM

- Cyber security and HIPAA

- Analyzing MACRA and the new Administration’s healthcare agenda topics

Growing the business organically and inorganically

- Using data and analytics to identify organic growth opportunities by analyzing market share leakage and improving customer retention and acquisition

- Opening the digital front door through healthcare platforms

- Acquisitions, partnerships, and joint ventures for inorganic growth

Optimizing digital and data

- Using intelligent automation

- Moving from meaningful use to meaningful insight

- Leveraging new applications

Reducing cost and improving quality

- Reducing clinical variation

- Back office transformation

- Improving internal controls over quality reporting

3Uncovering value 3

Some key trends for payers (Continued)

Heightened M&A and Consolidation Activity

Changing Role of Pharmacy Benefit Managers

New players entering the health plan market have introduced competition into the marketplace and may have enhanced bargaining power. The threat of disruption is imminent to existing payers, as new market entrants enter the sector, armed with advanced technology capabilities that could reduce healthcare costs and improve quality. Regulatory changes impacting both commercial and government payers is driving consolidation, e.g., Anthem/Humana, CIGNA/Express Scripts, CVS/Aetna mergers, and challenging the sustainability of smaller payers.

Most of the pharmacy benefit industry would be encompassed within payers’ business models if the recent wave of deals come to fruition. The combination of health plan and PBM capabilities creates a unique opportunity to use insights from both pharmacy and healthcare data to manage total cost of care; enable better cost management for specialty drugs; and provide a unique view into population health trends across patient well care, procedures, treatments, and medication protocols.

A $48 Billionmerger between Cigna and Anthem and

$37 Billion deal between Aetna and Humana were blocked last year.

Cigna to buy Express Scripts in

$52 Billion health care deal

Source: New York Times, Katie Thomas, Reed Ableson and Chad Bray (March 8, 2018).

4 Uncovering value

The KPMG advantageWe are the leading professional service firm in the healthcare sector, providing a wide range of audit, tax and advisory services to help our clients grow their business, enhance their performance, and control their risks.

KPMG and HCLS by the NumbersKPMG is one of the largest providers of professional services to Healthcare and Life Sciences organizations globally

More than 4,500 global HCLS professionals, which includes:

– 3,200 U.S.-based partners and professionals

We serve 18 of the top 20 health insurers and 20 of the state government health insurance exchanges. Additionally, we serve:

– 50% of the top 200 healthcare provider systems

– Nearly half of the academic research hospitals

– 100% of the top 25 global pharmaceutical companies and almost half of the top biotech companies

– 100% of the top 10 medical technology companies

KPMG International’s network of independent member firms operates in more than countries globally154

5Uncovering value 5

We are different from other professional services firms because we take a solutions-based approach to solving our clients’ most complex challenges. Our independence and objectivity means that we are focused on making the best choices for our clients as they search for value, not ourselves or our business partners. And our multi-disciplinary approach – bringing together best practices from across the KPMG network – ensures that we always take a 360-degree view of our clients’ challenges to help them understand the broader context of their business decisions.

Our professionals understand your business, your challenges, and the changing environment that you operate in. We combine this insight with our recognized track record in corporate transactions and restructuring, commercial model changes, regulatory compliance, and risk management to deliver practical solutions to the issues facing today’s healthcare providers.

Our commitment to the sector is clear. We have invested in developing a highly-experienced global practice. We have carefully developed a strong approach to knowledge-sharing. And we have attracted professionals with decades of hands-on experience in the healthcare provider sector. Every day, we are continuing to make capital investments into helping our clients thrive.

Most importantly in a rapidly-changing world, our forward-thinking professionals focus on the horizon as well as the here and now, anchoring our experience in today’s realities while helping healthcare provider organizations anticipate and prepare for tomorrow’s possibilities.

And that is why our clients consistently choose KPMG.

Our Success as an HCLS leader has been recognized by industry analysts and media influencers. KPMG was named:

We are committed to serving our employees, as well as our clients:

Did you know?KPMG launched a strategy practice that provides leading insights into new market development and product portfolio strategy from creation through implementation.

– #2 of the 25 largest healthcare management consulting firms by Modern Healthcare

– The leader in Information Security Consulting by Forrester Consulting, two years in a row

– A Worldwide Leader in Digital Enterprise Consulting and a leader in Business & Performance Consulting by IDC Insights

– #1 for “Organizational Change Management,” “Value-Based Care Strategy,” and “Client Satisfaction for Value-based Care Strategy” by Black Book

– Top 50 ranking for Diversity

– In Top 10 of Working Mother “100 Best Companies”

– Sustainable Firm of the Year

– Top 100 IDEAL Employers for MBAs

– Top ranking for executive women

– Board representation on the Healthcare Businesswoman’s Association

The KPMG advantage (Continued)

Key Insights for Payers

Business and operating model transformation

New disruption-based business models

At KPMG, we don’t just work with leading payers we help them shape the future of healthcare. Whether you are seeking new strategies and market insights, seeking to transform service delivery or customer experience, or modernize core and back office functions - KPMG has the capabilities, experience, and insight to help you solve business challenges and set strategies to achieve current and future success.

Disruption is driving the need for business model changes faster than organizations can respond. KPMG can help payers devise a strategic roadmap to keep up with the pace of change. Pairing our capabilities in healthcare strategy with our ability to help clients leverage more agile business, operational and technology methodologies, intelligent automation (IA) tools and advanced analytics, KPMG can help clients from shaping strategic direction through to execution.

We offer payers strategic guidance on long-term transformation to value-based operating models, health plan/provider convergence, and outcomes-based clinical decision-making. KPMG’s care system redesign approach can help payers emphasize value-based reimbursement, including defining quality and how reimbursement policies vary by entity or type of care. Our strategy practice assists payers in achieving long-term objectives, such as participating in accountable care contracting or incorporating narrow networks into an operating model. Across all initiatives, KPMG can help you determine whether strategic decisions will enhance patient access and care, reduce costs, and help your organization play a more pivotal role in accountability for outcomes. Finally, companies seeking to transform their back office and focus on IT, procurement and finance operations can avail themselves of the “KPMG Powered Enterprise,” a streamlined approach to adopting cloud-based platforms to streamline processing, analytics and reporting.

6 Uncovering value

Did you know?Forrester ranked KPMG #1 in D&A capabilities (2017), named us a top business transformation consultancy (Q3 2017) and recognized us for operating at the forefront of innovation.

Lighthouse - Advanced analytics for healthcare

Navigating new and emerging technologies

Regulatory compliance

KPMG helps payers apply longitudinal patient-claims data and advanced analytics to better understand geographic and demographic patterns for targeting patients with chronic illness, fulfilling population health needs, and

identifying optimal provider partners. Our advanced analytics and visualization capabilities help payers identify cost-reduction opportunities, operational redundancies, and profit improvement, all while improving clinical outcomes. With our acquisitions of Link Analytics, Towers Watson, and Beacon Partners, we can also help payers drive long-term growth through big data monetization, data-driven solutions, and real-time data-driven decision-making.

KPMG helps payers navigate the uncertainty of emerging and accelerating technologies, such as Blockchain, Robotic Process Automation (RPA) and Artificial Intelligence. Understanding how to manage and prioritize these innovations

can be a challenge. KPMG has developed methodologies to help clients evaluate maturity and determine where to start, whether through a proof of concept, pilot, or broader transformation through a center of excellence operating model and capability roadmap. We also leverage shorter-term methods to rapidly assess and prioritize opportunities for change through new technologies.

KPMG provides payers with integrated advice across the full life-cycle of risk and regulatory issues direct from Capitol Hill and our own Center for Healthcare Regulatory Insight. We assist clients with compliance and monitoring of new and evolving regulations; liaising with regulators to

understand future regulatory direction; and advising companies on third-party governance issues, including fraud, misconduct, and non-compliance. Whether payers need to evolve in response to HIPAA, the ACA, or other outcomes-focused regulations, KPMG is a risk and compliance partner you can count on.

Did you know?Our web-enabled integrity due diligence platform (Astrus) is widely viewed as the best in the business.

7Uncovering value 7

How we help

Embracing Emerging TechnologiesA global health insurer sought to become an industry leader in the use of Intelligent Automation (IA) by accelerating the consistent use of IA across multiple business units and shared services. The organization wanted to reduce administrative spend, increase process speed, improve customer experience, and better align talent assets by allowing key knowledge-work resources to focus on higher value activities. KPMG worked with the client to create IA governance, robotics discovery and an overall strategy. The firm developed an initial pipeline of 70+ automation opportunities with an estimated savings value of more than 1M manual process hours and delivered an implementation roadmap outlining the key activities and resources needed to stand up and mobilize the IA program to create further efficiencies into the future.

Medical cost optimizationFor a national health plan, KPMG identified opportunities for cost reduction totaling several million dollars. Areas of assistance included revised utilization management policies and precertification requirements, along with efforts to guide patients toward more cost-effective and high-quality services. The solution helped the company comply with the medical cost ratio (MCR) requirement through which payers must spend at least 80 percent of their revenue on healthcare quality improvements. Further, data and analytics, including data on the claims level, were used to pinpoint areas for reducing costs and transforming the finance function to increase profits.

Improved outcomesKPMG analyzed the total cost of care for stroke patients (pre-stroke, in hospital, rehabilitation) across various sites of service to compare costs and outcomes. Results led to justification of specialized care settings based on reduced total cost and improved outcomes analysis. Large patient-claims datasets provided the ability to look across providers on the care continuum and access the key data required for reviewing service provider relationships for strategic alignment.

Strategic and financial transformationKPMG assisted a national health plan in a large-scale transformation initiative. This included data analysis and identification of synergies across the value-based network, encompassing the medical loss ratio, and defining financial reporting roles and responsibilities. The end result was the development of a volume-to-value operational strategy, along with a supporting technology architecture and business governance framework.

New operating modelsKPMG worked with a combined health plan and physician group on a Clinically Integrated Enterprise (CIE) model. KPMG defined the technology requirements for the group’s joint venture to share patients and overall risk. This included technology architecture, investment requirements and a plan for leveraging existing technology assets such as Electronic Health Records (EHRs), Health Information Exchanges (HIEs) and claims processing platforms. The results were improved operational effectiveness, costs savings and leverage of synergies.

8 Uncovering value

We’re not just business leaders, we’re also thought leaders. KPMG professionals invest significant time in understanding trends, comparing methodologies and sharing best practices. Our people can frequently be found presenting at leading industry events and conferences and are often cited in both trade and mainstream media as experts in their field.

We continually invest in thought leadership, Centers of Excellence, research, and knowledge-share forums to help clients stay informed about industry, technical, and regulatory challenges worldwide. Our industry white papers and research span a wide range of topics that have direct relevance to the payer industry.

For particularly complex business challenges and industries, KPMG sponsors numerous industry-focused institutes that provide a wealth of relevant information, including our:

– Healthcare and Life Sciences Institute kpmg-institutes.com/institutes/healthcare-life-sciences-institute.html

– KPMG Advisory Institute kpmg-institutes.com/institutes/advisory-institute.html

– Global Enterprise Institute kpmg-institutes.com/institutes/global-enterprise-institute.html

– IFRS Institute kpmg-institutes.com/institutes/ifrs-institute.html

– Shared Services and Outsourcing Institute kpmg-institutes.com/institutes/shared-services-outsourcing-institute.html

– Tax Governance Institute kpmg-institutes.com/institutes/tax-governance-institute.html

Examples of our thinkingThe disruption challenge

The pace of disruptive healthcare deals today – and the dollar value they represent – will fundamentally change how healthcare will look in the future. For guidance on separating the real opportunities from mere distractions – and on ensuring that your organization is, ultimately, part of the solution.

Future of Finance in Healthcare

CEOs are looking to the finance function to take on a broader/deeper set of responsibilities giving CFOs the chance to leverage disruption into opportunities for competitive advantage and growth.

Advancing Payment Reform

This paper explores the evolution of APMs since the passage of MACRA, examines barriers to new APM development and adoption, and raises questions about the limits of future APM proliferation.

Healthcare’s silver lining

It’s time to give serious consideration to the Cloud. Here’s our perspective on why cloud-based systems are the key to remaining competitive in healthcare today.

Wake up call

This whitepaper highlights the urgency for healthcare organizations to consider IT as a strategic priority in order to stay afloat in the midst of unimagined disruption and the need to maximize their IT investment strategies and optimize IT assets.

9Uncovering value

Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

kpmg.com/socialmedia

Contact us:

Liam Walsh National Healthcare and Life Sciences Industry Leader 312-665-3066 lawalsh@kpmg.com

Ash Shehata National Leader of Payers and Global COE Member 513-763-2428 ashehata@kpmg.com

John Paquette Director, Healthcare Solutions 513 445 5001 jwpaquette@kpmg.com

Michael Yetter Director, Healthcare Solutions 267 256 1967 myetter@kpmg.com

Alicia Verghese Associate, Healthcare Solutions 312 665 3339 aliciaverghese@kpmg.com