I. The Emerging Era of Choice

I. The Emerging Era of Choice
Health Care Advisory Board I. The Emerging Era of Choice Restructuring Health System Strategy for the Retail Revolution II. The New Network Advantage Assembling the Scale, Scope, and Assets Needed to Secure Profitable Growth

Presentation for Carolinas Healthcare
November 6, 2014

Health Care Advisory Board
Project Director Ben Umansky Contributing Consultants Yulan Egan Nick Bartz Tom Liu Design Consultant Kevin Reardon

The Emerging Era of Choice
Health Care Advisory Board The Emerging Era of Choice Restructuring Health System Strategy for the Retail Revolution

6.5% 18.1% An Industry Built on a House of Cards
“Cord Cutters” and “Cord Nevers” Giving Up Broad Networks Paying for More Than You Use U.S. Households With Internet But No Cable, 2013 6.5% “This is the battle hymn of the cord cutter: You are paying too much for television, and you aren’t watching most of what you’re paying for.” U.S. Adults Age With Netflix or Hulu But No Cable, 2013 18.1% Farhad Manjoo, The New York Times Source: Experian Marketing Services, “Cross-Device Video Analysis,” April 17, 2014, available at: Manjoo F, “Comcast vs. the Cord Cutters,” The New York Times, February 15, 2014, available at: Health Care Advisory Board interviews and analysis.

149% 86% Revisiting a Tenuous Business Model
Most Hospitals Staying Afloat Through Cross-Subsidization Traditional Hospital Cross-Subsidy Below Cost Above Cost Commercial Insurance Public Payers Above-cost pricing Robust fee-for-service volume growth Steady price growth Only one component of our total business 149% 86% Hospital Payment-to-Cost Ratio, Private Payer, 2012 Hospital Payment-to-Cost Ratio, Medicare, 2012 Source: American Hospital Association, “Trendwatch Chartbook 2014,” available at: Health Care Advisory Board interviews and analysis.

Price-Insulated Patient
Cross-Subsidy Depends on Inefficient Markets Entrenched Payers, Insulated Patients Unlikely to Upset Status Quo Assumptions Underlying Provider Growth Strategy Entrenched Payer High employer switching costs impede competition Handful of broad networks satisfy majority of passive employers Excess cost growth easily passed on to employers through premium increases Established Provider Commercial pricing growth steady Network inclusion likely for most plans Patient volume depends largely on referral patterns Price-Insulated Patient Open access to broad provider network standard Modest cost-sharing obscures true prices Physician recommendation dominates point-of-care decisionmaking Source: Health Care Advisory Board interviews and analysis.

The Retail Revolution Four Years Post-Reform, New Paradigm Finally Becoming Clear Major Themes Reshaping Provider Strategy 1 Medicare Reforms and the Transition to Risk 2 Coverage Expansion and the Rise of Individual Insurance 3 Activist Employers and the Primacy of Value Source: Health Care Advisory Board interviews and analysis.

$260B $56B $151B Public-Payer Reimbursement Still in the Crosshairs
Medicare Reforms and the Transition to Risk Public-Payer Reimbursement Still in the Crosshairs Medicare Payment Cuts Becoming the Norm ACA’s Medicare Fee-for-Service Payment Cuts Not the End of the Story Reductions to Annual Payment Rate Increases1 “Notwithstanding recent favorable developments… Medicare still faces a substantial financial shortfall that will need to be addressed with further legislation” $260B $56B $151B Hospital payment rate cuts, Reduced Medicare and Medicaid DSH2 payments, Reduced Medicare payments due to sequestration and 2013 budget bill Office of the Actuary, CMS Source: CBO, “Letter to the Honorable John Boehner Providing an Estimate for H.R.6079, The Repeal of Obamacare Act,” July 24, 2012; CBO, “Estimated Impact of Automatic Budget Enforcement Procedures Specified in the Budget Control Act,” September 12, 2011; CBO, “Bipartisan Budget Act of 2013,” December 11, 2013, all available at: Health Care Advisory Board interviews and analysis. Includes hospital, skilled nursing facility, hospice, and home health services; excludes physician services. Disproportionate Share Hospital.

6% Steady Shift Toward Risk-Based Payment
More Mandatory Risk On the Horizon Medicare Value-Based Purchasing Program Performance Criteria Other Mandatory Risk Programs Weight in Total Performance Score Hospital-Acquired Condition Penalties Clinical Process Patient Experience Readmission Penalties Outcomes of Care No Trivial Thing Efficiency Medicare revenue at risk from mandatory pay-for-performance programs2, FY 2017 6% Source: The Advisory Board Company, “Mortality Rates Are Only One of Many VBP Changes to Come,” December 4, 2013, available at: CMS, “Request for Information on Specialty Practitioner Payment Model Opportunities,” February 2014, available at: Health Care Advisory Board interviews and analysis. Includes Value-Based Purchasing Program, Hospital Readmissions Reduction Program, and Hospital-Acquired Conditions Program.

626 20.5M 46M-52M 1 in 10 More Providers Taking the Hint
Dismal Outlook for Fee-for-Service Motivating a Look at Risk-Based Options Medicare ACO Program Entrants The Broader Picture 2012 MSSP1 Cohorts 2013 MSSP Cohort 2012 Pioneer ACO Model Total 2014 MSSP Cohort 626 20.5M Total ACO count, including commercial and Medicaid ACOs, May 2014 Americans enrolled in or attributed to Medicare, Medicaid, or commercial ACOs 46M-52M Patients treated by ACOs as of April, 2014 1 in 10 Medicare FFS beneficiaries attributed to an ACO Medicare Shared Savings Program Source: CMS, “More Partnerships Between Doctors and Hospitals Strengthen Coordinated Care for Medicare Beneficiaries,” December 23, 2013; Health Care Advisory Board interviews and analysis.

Some Pioneers Changing Course
Performance, Persistence Closely Correlated Pioneer ACO Performance 7.1% (max) Gross Savings as Percentage of Benchmark 1 First-year performance Second-year performance Dropped out after program year -5.6% (min) “The model was financially detrimental…despite favorable underlying utilization and quality performance” Alison Fleury, CEO Sharp HealthCare ACO Dropped out after second year; second-year performance not reported Source: Centers for Medicare and Medicaid Services, “San Diego-Based Sharp HealthCare Pulls Out of Pioneer ACO Program,” California Healthline, August 28, 2014; Health Care Advisory Board interviews and analysis.

$297M Medicare Shared Savings Program a Mixed Bag
Pending Program Updates Crucial for Future Participation Medicare Shared Savings Program ACO Performance Issues to Watch for in Updated Regulations First Performance Year Will second-term ACOs really have to bear downside risk? Held Spending Below Benchmark, Earned Shared Savings Payment Did Not Hold Spending Below Benchmark Will benchmarks be calculated differently? Held Spending Below Benchmark, but Did Not Earn Shared Savings Will the share of savings paid to ACOs be higher? Will beneficiaries be attributed to ACOs prospectively? Shared savings earned by MSSP ACOs in first performance year1 $297M Will ACOs have any ability to prevent network leakage? Includes one participant’s $4M repayment of shared losses Source: Centers for Medicare and Medicaid Services, “New Affordable Care Act tools and payment models deliver $372 million in savings, improve care,’ September 16, 2014; Health Care Advisory Board interviews and analysis.

Transition to Risk Hardly Stalled
Policymakers and (Some) Providers Angling for Higher-Octane Options Bill in Brief: “The ACO Improvement Act” The Bigger Question: What Should Medicare ACO Programs Be? Bipartisan bill (H.R. 5558) introduced by Representatives Diane Black (R- TN) and Peter Welch (D-VT) Key Features ACOs would receive capitated payments, not shared-savings adjustments Patients would proactively select a primary care provider rather than be retroactively attributed ACOs could discount primary care services to encourage network loyalty Permanent middle grounds between fee-for-service, capitation? Adaptive environments involving progressively more risk? Training grounds for other risk models? (e.g., Medicare Advantage) Source: H.R. 5558, Health Care Advisory Board interviews and analysis.

Medicare Advantage Gaining Momentum
Shift Signals Individualization of the Medicare Market Projected Medicare Advantage Enrollment Provider Benefits Over Shared Savings Models 29.5% of Medicare beneficiaries 19.0M Unambiguous incentive for population health management Greater provider control over network integrity 10.4M Less frequent patient churn 2009 2020 Source: Jacobson G et al., “Projecting Medicare Advantage Enrollment: Expect the Unexpected?” Kaiser Family Foundation, June 12, 2013, available at: Hollander C, “CMS to Increase Medicare Advantage Pay Rate By 0.4%,” ModernHealthcare, April 7, 2014, available at: Health Care Advisory Board interviews and analysis.

Coverage Expansion and the Rise of Individualized Insurance
ACA (and Recovery) Making a Dent in Uninsurance But Every Silver Lining Has Its Cloud Percentage of U.S. Adults Without Health Insurance 2013 Q3 2014 Q3 18.0% Insurance exchanges launch Medicaid expansion begins Employer-sponsored coverage grows 13.4% (highest on record) (lowest on record) A Bargain Still Unbalanced $5.7B $14B Reduction in uncompensated care, 2014 vs. ACA-related reductions in Medicare fee-for-service payment, 2014 Source: Gallup, “In U.S., Uninsured Rate Holds at 13.4%,” Department of Health and Human Services, “Impact of Insurance Expansion on Hospital Uncompensated Care Costs in 2014,” Health Care Advisory Board interviews and analysis.

8M1 5% 2.4% Medicaid Expansion Contentious—and Consequential
23 States Still Foregoing Expansion State Participation in Medicaid Expansion Financial Impact As of October 2014 “For-profit health systems…report far better financial returns through the first half of the year than expected, owed in large part to expanded Medicaid” PricewaterhouseCoopers Participating Not Currently Participating 8M1 5% 2.4% Increase in Medicaid, CHIP2 enrollment, October 2013-July 2014 Average Medicaid enrollment increase across non-expansion states Advisory Board estimate of impact of Medicaid expansion on typical hospital’s 10-year operating margin projection Estimate- does not include CT or ME. Children’s Health Insurance Program. Source: The Advisory Board Company, “Where the States Stand on Medicaid Expansion,” September 4, 2014, available at: CMS, “Medicaid and CHIP: July 2014 Monthly Applications, Eligibility Determinations and Enrollment Report,” September ; HHS, “Health Insurance Marketplace: Summary Enrollment Report for the Initial Annual Open Enrollment Period,” May 1, 2014; PricewaterhouseCoopers, “Medicaid 2.0: Health System Haves and Have Nots,” Health Care Advisory Board interviews and analysis.

Expanding or Not, States Pushing Medicaid Innovation
Responsibility Migrating to Payers, Providers, Patients Competing Philosophies on Medicaid Reform Full Medicaid Managed Care E.g., Florida’s Statewide Medicaid Managed Care Program Provider-Led Care Management E.g., Oregon’s “Coordinated Care Organizations” Traditional State- Run Program Exchange-Based Privatization E.g., Arkansas’ “Private Option” Source: Health Care Advisory Board interviews and analysis.

$778M Arkansas Turning to Private Market
Exchange-Based Medicaid Drawing Interest, But Broader Uptake Uncertain Arkansas’s “Private Option” CMS Wary of Other Modifications 1 Pennsylvania application for similar waiver denied over inclusion of work requirements Arkansas residents eligible for expanded Medicaid coverage select plans on exchange Arkansas proposal to require individual health savings account contributions still pending 2 Using federal matching funds, State pays full cost of silver plan; beneficiary pays no premium Program Likely Not Budget-Neutral 3 Increase in cost of expansion under exchange system relative to GAO estimate of cost under traditional Medicaid $778M Beneficiary holds private insurance; cost sharing based on existing Medicaid rules Source: Kaiser Family Foundation, “Medicaid Expansion in Arkansas,” October 8, 2014; Government Accountability Office, “Medicaid Demonstrations: HHS’s Approval Process for Arkansas’s Medicaid Expansion Waiver Raises Cost Concerns,” August 8, 2014; Health Care Advisory Board interviews and analysis.

7.0M (Original CBO Projection)
Insurance Exchanges One Year In, Insurance Exchanges Generally on Track Aggregate Numbers in Line With Expectations; Enrollee Mix Older Initial Public Exchange Enrollment1 91% 7.0M (Original CBO Projection) Of enrollees still enrolled as of September 2014 25M Projected exchange enrollment by 2018 28% Enrollees aged 18-34 Numbers do not add precisely due to rounding. Source: HHS, “Health Insurance Marketplace: Summary Enrollment Report for the Initial Annual Open Enrollment Period,” May 1, 2014; Cheney K and Haberkorn J, “Obama: 8 Million Enrolled Under ACA,” Politico, April 17, 2014, available at: Cheney K and Norman B, “Insurers See Brighter Obamacare Skies,” Politico, April 15, 2014, available at: Health Care Advisory Board interviews and analysis.

Individuals Gravitating Toward Leaner Plans
Premium Sensitivity Manifest at Two Levels Level 1: Choice of Metal Tier Level 2: Plan Choice Within Metal Tier All Metal Levels1 Gold Platinum Catastrophic Lowest-Cost Plan Any Other Plan Bronze Silver Second-Lowest-Cost Plan Factors Influencing Metal Level Premium Levers Beyond Benefit Design Deductible Non-Essential Services Covered Scope of Non-Essential Benefits Copays Network Composition Negotiated Payment Rates to Providers Out-of-Pocket Maximum Negotiated Rates Utilization Patterns, Trends Data from federally-facilitated exchanges only. Source: HHS, “Health Insurance Marketplace: Summary Enrollment Report for the Initial Annual Open Enrollment Period,” May 1, 2014; Health Care Advisory Board interviews and analysis.

$2,500 $6,250 High Deductibles Dominating Exchange Markets
Aggressive Cost Sharing Potentially Troublesome for Provider Strategy Individual Deductibles Offered On Public Exchanges Challenges for Providers 2014 High out-of-pocket costs discourage appropriate utilization $2,500 $6,250 Median Maximum Individual Deductibles Chosen on eHealth Individual Marketplace Large patient obligations lead to more bad debt, charity care <$1,000 $6,000+ $1,000-$2,999 Price-sensitive patients more likely to seek lower- cost options $3,000-$5,999 Source: Breakaway Policy Strategies, “Eight Million and Counting: A Deeper Look at Premiums, Cost Sharing and Benefit Design in the New Health Insurance Marketplaces,” May 2014; eHealth, “Health Insurance Price Index Report for Open Enrollment and Q1 2014,” May 2014; Health Care Advisory Board interviews and analysis.

26% Premium Sensitivity Supporting Narrow Networks
Payers Betting Individual Consumers Value Affordability Over Broad Choice Average Percent of PPO Network Specialists Included in Exchange Plan Networks1 Breadth of Hospital Networks in Exchange Plans Anthem BlueCross BlueShield, 2014 20 Urban Markets, December 2013 100% PPO Network Breadth Broad “Ultra-Narrow” “Narrow” Exclude 30% of 20 largest hospitals Exclude 70% of 20 largest hospitals 26% Median premium reduction directly attributable to network narrowing2 “Pathway X” bronze plans compared to leading PPO plan offering across nine states. Comparing products by the same carrier of the same tier, across 7 carriers. Source: Gottleib S, “Hard Data On Trouble You’ll Have Finding Doctors in Obamacare,” Forbes, March 8, 2014, available at: McKinsey & Company, “Hospital Networks: Configurations on the Exchange and Their Impact on Premiums,” December 2013; Health Care Advisory Board interviews and analysis.

2% 58% Proper Risk Pricing Still Essential
Is It Worth Winning Share With Unsustainable Premiums? Low Premiums Moving the Market… …but Perhaps Not the Right One 2013: 2014: PreferredOne offers lowest Silver plan premium in country; wins massive market share on Minnesota exchange (MNsure) PreferredOne exits exchange Will still offer individual coverage through other successful channels with different risk profile 2% 58% “Continuing to provide this coverage through MNsure is not sustainable.” Market share in 20121 Market share in 2014 Marcus Merz CEO, PreferredOne Pre-exchange individual market Source: Crostby J, “Top Selling Insurer on MNsure Won’t Be Back This Year,” Minneapolis Star Tribune, September 16, 2014; Health Care Advisory Board interviews and analysis.

Issuers Offering Qualified Health Plans
What Next for the Exchanges? Increased Insurer Participation Driving Competition Robust Marketplaces Beginning to Develop “We had a very modest footprint in We do have a bias to increase that participation in […] The size of the overall market is positive.” Issuers Offering Qualified Health Plans Gail Boudreaux, EVP UnitedHealth Group Competition At Work 4% Estimated reduction in second-lowest-cost silver premium of one new issuer entering market Source: “UnitedHealth to Expand Exchange Presence as Profits Dip,” ModernHealthcare, April 17, 2014; Department of Health And Human Services, “Health Insurance Marketplace Will Have 25 Percent More Issuers in 2015,” September 23, 2014; Health Care Advisory Board interviews and analysis.

What to Watch for on the Exchanges
Second Round of Open Enrollment Will Reveal True Dynamics Trends We’ll Be Watching: 1 Enrollment: Are the technical glitches really fixed? Will higher individual mandate penalties change anyone’s mind? Will the young and healthy turn out in force? 2 Choice and Mobility: How will automatic reenrollment affect consumer behavior? Will last year’s bargain hunters regret choosing high deductibles and narrow networks? Can plans that raise premiums maintain market share? 3 Market Reaction: How aggressively will providers court the newly insured? Will employers dump workers onto the exchanges?

Shift to Private Exchange Convert to Self-Funding
Activist Employers and the Primacy of Value Employer-Sponsored Insurance at a Crossroads Will Employers Maintain Coverage, and How? Spectrum of Options for Controlling Health Benefits Expense “Abdication” “Activation” Drop Coverage Shift to Private Exchange Convert to Self-Funding Pros: Escape from cycle of rising premium costs Cons: Employer mandate penalty Labor market disadvantage Pros: Responsiveness to employee preference Predictable, defined contributions Cons: Disruption to benefit design Risk employees may underinsure Pros: Close control over network design Exemption from minimum benefits requirements Cons: Greater financial risk Network assembly challenging Source: Health Care Advisory Board interviews and analysis.

172 Huge Growth Forecast for Private Exchanges
Low-Wage Employers Most Active Today, but Skilled Industries in the Wings Potential Growth Path for Private Exchange Enrollment 172 Private exchange operators as of October, 2014 Prominent Employers Using Private Exchanges For Active Employees: For Retirees: (Medicare Advantage, Medigap plans) Source: Accenture, “Are You Ready? Private Health Insurance Exchanges are Looming;” privatehealthexchange.com; Health Care Advisory Board interviews and analysis.

Beyond the Buzzword Understanding Why Private Exchanges Matter
Crucial Differences Between Private Exchanges, Traditional Group Markets Individuals can switch networks, insurance carriers on their own On a private exchange, In the group market, Changes in network or carrier may require employer-level decisions Provider networks must be broad enough to serve entire workforce Defined benefit plans insulate employees from differences in cost Narrow networks can appeal to specific employee segments Defined contribution plans expose employees to cost differences Source: Health Care Advisory Board interviews and analysis.

26% Self-Funded Strategies Steadily Gaining Ground
Small Employers Also Beginning to Show Interest Percentage of Covered Workers in Self-Funded Plans ACA Benefits Standards Avoidable Through Self-Funding Essential Health Benefits Guaranteed Issue and Renewability Modified Community Rating Medical Loss Ratio Requirements 26% of small employers’1 brokers have discussed with them the possibility of self-insurance Source: Gabel JR et al., “Small Employer Perspectives On The Affordable Care Act’s Premiums, SHOP Exchanges, And Self-Insurance,” Health Affairs, 32(11): ; Health Care Advisory Board interviews and analysis. 3 to 50 FTEs.

Hands-On Network Management Increasingly Feasible
Custom Network Builders Offering Local Solutions IHS1 “Custom Provider Network” Solution Self-funded employer submits list of physicians, hospitals, and ancillary care “Working with the TPA and employer, we replace the ‘one size fits all’ network with a cost-effective customized network created around the needs of your business and your employees.” IHS negotiates cost-effective provider agreements using Medicare-based pricing IHS continually evaluates network providers to “ensure competitive price contracts” Case in Brief: Innovative Healthware Services Private company based in Arnold, Maryland that markets software solutions for PPOs, TPAs, providers, and payers “Custom Provider Network” limits a self-funded employer’s network to selected list of hospitals, physicians, and ancillary care Innovative Healthware Services Source: Innovative Healthware Services, Inc., Arnold, MD; Health Care Advisory Board interviews and analysis.

Aggregators Pooling Employers, Providers
Exporting Walmart’s Centers of Excellence Program Case in Brief: Health Design Plus “It would be prohibitive for a small employer…When you spread the administrative costs over a number of employers, it becomes more attractive.” Third-party administrator based in Hudson, Ohio that creates Centers of Excellence (COE) programs for self- funded employers Assembled Walmart’s centers of excellence bundled payment network Bruce Sherman Medical Director, Employers Health Coalition Two New Employer Coalition Partnerships Pacific Business Group on Health (San Francisco, California) 60 large employer members Employees in all 50 states 10M covered lives Employers Health Coalition (Canton, Ohio) 300+ employer members with employees in all 50 states 3M covered lives Source: Walmart, “Walmart, Lowe’s And Pacific Business Group On Health Announce A First Of Its Kind National Employers Centers Of Excellence Network,” October 8, 2013; Health Design Plus, “Health Design Plus & Employers Health Announce National Centers of Excellence Initiative,” June 11, 2013; Chen C, “Providers Using Bundled Payments, Quality to Entice Employers,” Health Data Management, March 11, 2014,; Health Care Advisory Board interviews and analysis.

5,400 $8-10M Some Providers Taking Lead in Network Assembly
Intel-Presbyterian Partnership 5,400 Covered lives in contract Customized Care Offerings Addition of depression screening into customary provider workflow Infrastructure for Care Management Conversion of Intel’s on-site clinic into full service patient-centered medical home Narrowing of Health Plan Options Intel reducing number of health plan options from 8 to 4; two remaining plans are narrow networks of PHS1 providers Shared Accountability Upside and downside risk for health care spending compared to projected target $8-10M Projected savings, Case in Brief: Intel Corporation Large multinational employer headquartered in Santa Clara, California Entered into narrow-network contract with Presbyterian Healthcare Services, an 8-hospital system in New Mexico, for employees at Rio Rancho plant Presbyterian Healthcare Services. Source: Intel Corporation, “Employer-Led Innovation for Healthcare Delivery and Payment Reform: Intel Corporation and Presbyterian Healthcare Services,” Santa Clara, California; Evans M, “Slimming Options,” Modern Healthcare, July 13, 2013, available at: Health Care Advisory Board interviews and analysis.

Providers Must Win Share at Two Points of Sale
Multiple Opportunities to Appeal to Decision-Makers Decision Processes Shaping Provider Choice 1 2 Secure Enrolled Lives Win Share of Volumes Network Assembly Network Selection Care Decision Being chosen by payers, employers, exchange operators, custom network builders, and accountable physician entities to be offered as a network option Being chosen by individuals during plan enrollment Being chosen by patients, referring physicians at the point of care Source: Health Care Advisory Board interviews and analysis.

Traditional Growth Channels
Recognizing New Channels for Growth Key Decision-Makers in Traditional and New Growth Channels Secure Enrolled Lives Win Share of Volumes Traditional Growth Channels Entrenched Payer Relationship-Based Referring Physician Established Provider New Growth Channels Custom Network Builder Activated Employer Cost-Conscious Referring Physician Vulnerable Payer Exchange Operator Care Delivery Network Price-Sensitive Consumer Accountable Physician Entity Individual Insurance Shopper Source: Health Care Advisory Board interviews and analysis.

1 2 3 4 5 All Signs Point to a Retail Market
New Dynamics Unfamiliar in Health Care, But Not in Broader Economy Traditional Market Retail Market Growing number of buyers 1 Passive employer, price-insulated employee Activist employer, price-sensitive individual Proliferation of product options 2 Broad, open networks Narrow, custom networks Increased transparency 3 No platform for apples-to- apples plan comparison Clear plan comparison on exchange platforms Reduced switching costs 4 Disruptive for employers to change benefit options Easy for individuals to switch plans annually Constant employee premium contribution, low deductibles Greater consumer cost exposure 5 Variable individual premium contribution, high deductibles Source: Health Care Advisory Board interviews and analysis.

Desirable Network Attributes
Redefining the Value Proposition Delivering Desirable Network Attributes at Low Cost Four Imperatives for Health Systems Low Cost Desirable Network Attributes Competitive Unit Prices Strategic Imperatives: Avoid reactive position vis-a-vis price cuts, transparency Radically restructure cost structures to sustain lower unit prices Total Cost Control Strategic Imperatives: Develop population health model to control cost trend Clearly communicate total cost advantage to potential purchasers Geographic Reach and Clinical Scope Strategic Imperatives: Match service portfolios, footprints to target purchasers Explore partnership strategies that strengthen market presence Clinical and Service Quality Strategic Imperatives: Present unimpeachable clinical credentials to wholesale buyers Emphasize access, experience advantages to individual consumers Source: Health Care Advisory Board interviews and analysis.

Low Premiums Shaping More than Network Selection
Care Choices, Network Assembly Dynamics Driven by Premium Pressure Consequences of Premium Sensitivity Price Sensitivity at Point of Care Premium Sensitivity at Point of Coverage Total Cost Scrutiny in Network Assembly “Our price is now given by the market. Our business is changing from cost-based pricing to price-based costing.” Health Care Executive Source: Health Care Advisory Board interviews and analysis.

Price Sensitivity at the Point of Care
Cost-Conscious Behavior Affecting Pillars of Profitability Consumers Paying More Out-of-Pocket MRI Price Variation Across Washington, DC Fall within HDHP deductible2 $2,183 $730 Fall within PPO deductible3 $411 $900 $1,269 Price-sensitive shoppers will be acutely aware of price variation MRI prices range from $400 to $2,183 High-deductible health plan. $2,086; based on KFF report of average HDHP deductible. $733; based on KFF report of average PPO deductible. Source: KFF, “2012 Employer Health Benefits Survey,” available at: New Choice Health, “New Choice Health Medical Cost Comparison,” available at: Healthcare Blue Book, “Healthcare Pricing,” available at: Kliff S, “How much does an MRI cost? In D.C., anywhere from $400 to $1,861,” Washington Post, March 13, 2013, available at: Health Care Advisory Board interviews and analysis.

$4 $40 130M 150M Walmart Bringing Everyday Low Prices to Health Care
Low-Cost Access Potentially Just the Beginning Care Clinic Model Probably Worth Paying Attention Pricing: $4 For Walmart employees $40 “Our goal is to be the number one health-care provider in the industry.” For Walmart customers Hours: Labeed Diab President of Health & Wellness Walmart Weekdays 8AM-8PM Saturday 8AM-5PM Sunday 10AM-6PM Service: 130M 150M Two nurse practitioners provider primary care services on site Clinic refers to external specialists, hospitals as appropriate Annual emergency department visits Weekly visits to Walmart stores Source: Canales MW, “Wal-Mart Opening Clinic in Cove,” Killeen Daily Herald, April 18, 2014, available at: Health Care Advisory Board interviews and analyais.

Broadening Our Concept of Cost Advantage
Network Assemblers Looking at More Than Unit Price Two Cost-Focused Strategies for Appealing to Network Assemblers Low Unit Price Total Cost Control Price Cut Improve efficiency to offer lower fee schedule Trend Control Implement care management to control cost growth trend Degree of Cost Control Source: Health Care Advisory Board interviews and analysis.

CareFirst PCMH Total Cost Incentive Model
Creating Cost-Conscious PCPs CareFirst PCMH Total Cost Incentive Model Total cost target set by trending baseline risk-adjusted PMPM cost by average regional cost growth Risk-adjusted PMPM1 Cost PMPM Cost Target Actual PMPM Cost Panel shares in savings if risk- adjusted PMPM cost is below target “Virtual panel” of PCPs Case in Brief: CareFirst BlueCross BlueShield 1M Members covered by PCMH program Not-for-profit health services company serving 3.4 million members in Maryland, D.C., and northern Virginia In 2011, launched PCMH program providing opportunities for virtual panels of PCPs to earn bonuses based on quality and total cost metrics Provides PCPs with color-coded rankings of specialists based on risk-adjusted PMPM costs 80% Eligible PCPs participating Average pay increase for PCPs receiving bonuses 29% Source: Overland D, “CareFirst Medical Home Saves More in Second Year,” FierceHealthPayer, June 7, 2013, available at: Health Care Advisory Board interviews and analysis. Per member per month.

Specialists Color-Coded By Total Cost
Steering Care to Most Efficient Specialists Total Cost Transparency Key to Referral Changes Specialists Color-Coded By Total Cost Difference in risk-adjusted PMPM cost between top- and bottom-quartile PCPs 27% PCP Virtual Panels 66% Percent of panels earning bonuses, 2012 $98M Savings from PCMH program, 2012 “We’re seeing that [the data] changes the patterns. There’s a hubbub among the panels to see what their choices are, and what it costs them.” Employed Specialist A (Red) Employed Specialist B (Yellow) Independent Specialist C (Green) Hospital A Hospital B Chet Burrell President & CEO CareFirst BlueCross BlueShield Source: Health Care Advisory Board interviews and analysis.

30-50% The Value of a Second Opinion Discerning When Not to Operate
Large Employers and Hospitals Participating in Centers of Excellence Programs Pepsi Co. In 2011, offered employees free cardiac and complex joint replacement surgery at Johns Hopkins Medicine Walmart In 2013, expanded Centers of Excellence program to cover cardiac, spine, and hip/knee replacement surgery Lowe’s In 2010, offered employees free heart surgery at Cleveland Clinic 30-50% Of referred patients do not undergo surgery Source: The Advisory Board Company, “Commercial Bundled Payment Tracker,” October 9, 2013, available at: Health Care Advisory Board interviews and analysis.

Making the Case for Care Management Capabilities
Assuring Employers of Ability to Manage Future Costs Powerful Ways to Signal Care Management Capabilities Investment in Data Analytics Shows capability to assess patient risk and pinpoint interventions Clinical and Claims Data Integration Illustrates advantage over traditional health plan Demand for Out-of- Network Claims Data Shows commitment to continuously manage care for attributed population Telehealth Platforms and Programs Demonstrates ability to keep low-acuity cases in most appropriate care site “In our market, there is plenty of talk about ‘accountable care’, but we are differentiating with the organizational commitment and the infrastructure investment to sustain a new economic model.” Chief Marketing Officer Large Health System Source: Health Care Advisory Board interviews and analysis.

10% Promising Total Cost Savings to Employers
Savings Guaranteed Off Of Projected Costs Two Separate Products with Different Payer Partners Baseline spending projected using three years’ historical spending 1 Aetna Whole Health (Aetna) Guaranteed Savings Employer Health Spending 2 Blue Priority (Anthem Blue Cross and Blue Shield) Roundy’s Supermarkets, Inc. was first large employer client Time Case in Brief: Aurora Health Care 10% 15-hospital, not-for-profit health system based in Milwaukee, Wisconsin Announced separate narrow network products with Aetna and Anthem Blue Cross and Blue Shield that offer employers guaranteed savings over three years Average savings guaranteed to employers over three years Source: Commins J, “Aurora Health Offers Employers a Savings Guarantee,” HealthLeaders Media, July 30, 2012, available at: Aurora Health Care, “Roundy’s Offers Employees Innovative Health Care Plan Through Anthem’s Blue Priority & Aurora Accountable Care Network,” October 24, 2012, available at: Health Care Advisory Board interviews and analysis.

Which Would You Choose? Broad Geographic Reach…
…or Deep Clinical Scope? Network in Brief: Crescent Health1 Network in Brief: Silica Healthcare1 National hospital provider with hospital campuses across the country Despite broad geography, limited clinical depth at local level 6-hospital system in the Midwest with employed physician network Care sites concentrated in roughly half of single metropolitan area Pseudonym. Source: Health Care Advisory Board interviews and analysis.

Full Care Continuum Important for Payer Partners
Four Reasons PinnacleHealth System Selected for Risk-Based Product Sample Clinical Services Primary Care Pediatric Care Imaging Cardiovascular Care Orthopedics Physical Therapy and Rehab Inpatient Care Favorable Pricing Structure Comprehensive Clinical Scope Broad Provider Geographic Footprint 6-12 Months’ Experience Under Performance Incentives Case in Brief: CareConnect Point of Service Accountable care narrow network plan for mid-sized employers, created around PinnacleHealth System and offered by Capital BlueCross in central Pennsylvania Network is open for specialty and inpatient care but narrowed to PinnacleHealth System’s PCPs for primary care Will be expanded to individual market in 2015 Source: Health Care Advisory Board interviews and analysis.

St. Elizabeth Healthcare
Combining Geographies to Match Purchaser Footprint Addressing Individual Limits in Geographic Reach Partnering to Expand Geographic Reach Network in Brief: Healthcare Solutions Network Cincinnati-based employers have employees living on both sides of river TriHealth Joint venture collaboration between Cincinnati, Ohio- based TriHealth and Edgewood, Kentucky- based St. Elizabeth Healthcare Offers health insurers access to a unified, high- quality, low-cost network that covers the entire Tristate region Both organizations offering the network to their current employees and dependents Ohio Kentucky St. Elizabeth Healthcare Neither Organization Able to Offer Adequate Geographic Coverage Alone Source: Health Care Advisory Board interviews and analysis.

Geographic and Clinical Demands Intertwined
National and Hyper-Local Competition Reshaping Notions of Sufficiency Purchasers’ Geographic Preferences for Clinical Services Balancing an Increasing Demand for Convenience with an Increasing Willingness to Travel Alternative access points (e.g. retail, urgent care) E-visits, remote monitoring Home health Disease management, care navigation Digestive health Women’s midlife Sports medicine Midwifery Transplants Neurosurgery Complex cardiac (e.g. TAVR1) Clinical trials Potential Differentiators Primary care Pediatrics Imaging Ambulatory surgery Radiation therapy Medical oncology Emergency Routine orthopedics Dialysis Rehab SNF Stroke Pediatric specialty Cardiology Oncology OB/Gyn Cardiac surgery Technology- intensive procedures Core Services Neighborhood Conveniences Local Offerings Regional/National Destinations Transcatheter Aortic Valve Replacement. Source: Health Care Advisory Board interviews and analysis.

“Quality” Means Different Things for Different People
Quality Demands of Network Assemblers and Individuals Network Assemblers Individuals Network Selection Care Decision Facility-level clinical process, outcome measures Network-level quality, access, service ratings Actual ease of access, care experience Source: Health Care Advisory Board interviews and analysis.

Custom Network Builders Scrutinizing Performance
Steering Care Toward High-Quality Providers Provider Evaluation Process at Imagine Health Case in Brief: Imagine Health National Top Quartile Clinical Performance Step 1: Evaluation of Clinical Performance Data Company based in Cottonwood Heights, Utah that builds custom, high-performance provider networks for self-funded employers Selects participating provider systems using clinical performance data and an RFP process Steers volumes to in- network providers through benefit design and employee education 1 Step 2: RFP Evaluation of Additional Factors Per capita cost of care Efficiency of care utilization Care experience programs Sample metrics include mortality rate, complication rate, and readmissions rate. Source: Health Care Advisory Board interviews and analysis.

Providers Must Also Deliver on Ease of Access
Winning Contracts By Meeting Access Demands Case in Brief: Providence-Swedish Health Alliance Boeing’s Access Requirements Alliance between Providence Health Systems, Swedish Health Services in Seattle, WA Awarded contract to serve as Boeing’s narrow ACO network option Same-day PCP appointment (acute conditions) 3-day PCP appointment (any condition) 10-day specialist appointment Extended hours of operations Extended urgent care hours Centralized number at ACO level with care navigators for triage and advocacy Member website Phone apps “[Geographic] access is critical. But we can’t lose sight of the patient experience. Health care consumers need to see a positive change in how they are able to access healthcare. Chris Gorey Chief Marketing Officer Providence Health Systems Source: Health Care Advisory Board interviews and analysis.

Online Access Becoming the New Baseline
An Expected Part of the Patient Experience Consumers Demanding Portal Features KP.org Portal Key Features n = 1,000 U.S. Consumers Communicate with physician Assign proxy access View medical record Fill prescriptions Schedule appointments View lab results Access to Medical Records Online Appointment Booking Prescription Refill Requests Receiving /Text Reminders Case in Brief: Kaiser Permanente Northern California Nation’s largest not-for-profit health plan based in Oakland, California; serves 9 million members nationwide and 3.3 million in Northern California Began offering online health services in 1996; fully deployed KP.org patient portal in 2007 Source: Terry K, “Patients Seek More Online Access to Medical Records,” InformationWeek, September 17, 2013, available at: Silvestre, et al., “If You Build It, Will They Come? The Kaiser Permanente Model of Online Health Care,” Health Affairs, March/April 2009: ; Health Care Advisory Board interviews and analysis.

Welcome to the Renewals Business
Patient Experience Vital For Securing Purchaser Choice Year Over Year Network Selection and Ongoing Experience Annual network selection in fluid insurance market implies consistent reevaluation of network performance Day 1 Day 365 Patient Experience Care Decision Care Decision Clinical interactions represent repeated opportunities to reinforce patient preference through superior experience Care Decision Care Decision Source: Health Care Advisory Board interviews and analysis.

Expanding Arena of Competition
Recipe for Success Becoming Far More Complex Not Immediately Obvious Which Advantages Will Dominate Network Assemblers Individual Consumer Network Assembly Network Selection Care Decision All providers included in nearly all networks; only compete on price negotiations Employees have little choice of networks Most decisions made by referring physician Low total per-member cost Promise of total cost savings Low premium Low employee contribution Low out-of-pocket cost Broad geographic footprint Comprehensive clinical scope Inclusion of preferred physicians Proximity to access points High clinical process, outcomes performance Adherence to evidence-based care On-demand access options Centralized navigation services Prompt appointment times Extended hours High population health quality ratings High member satisfaction ratings Positive brand association Great care experience Traditional Market Threshold Factors Cost Retail Market Reach and Scope Differentiating Factors Clinical and Service Quality Expanding Arena of Competition Source: Health Care Advisory Board interviews and analysis.

$6.5B Consolidation on the March
Strategic Advantage #1: Scale Consolidation on the March Search for Financial, Geographic Scale Driving Hospital M&A Case in Brief: Advocate NorthShore Health Partners Combined system’s expected annual revenue 16-hospital merger of Advocate Health Care, NorthShore University HealthSystem Creates strong clinical, geographic presence in Chicago area $6.5B Other Notable Hospital M&A Activity “Combined, we will create economies of scale that will allow us to reduce the trend of rising health care costs.” Baylor + Scott and White Mount Sinai + Continuum Health Partners Beaumont + Botsford + Oakwood Michele Richardson Advocate Board Chair Source: “Advocate and NorthShore Combine to Create Preeminent Health Care System,” Northshore University Health System; Herman B, “Advocate-NorthShore merger continues trend toward regional supersystems,” Modern Helathcare, Spetember 12, 2014; Health Care Advisory Board interviews and analysis.

Aggregation Always Subject to Regulatory Scrutiny
Policy Tensions Remain Between Integration, Competitiveness Allowances for Effective Coordination… …But Market Power Still a Red Flag Bundled payment programs open door to gainsharing with Medicare revenues April 2014: U.S. Court of Appeals orders ProMedica to unwind its acquisition of St. Luke’s Hospital Clinical Integration safe harbors allow joint contracting between independent physicians January 2014: Federal judge blocks merger of St. Luke’s Health System and Saltzer Medical Group CMS incentivizes, promotes ACO programs January 2014: FTC rules CHS must divest two hospitals to complete HMA acquisition Source: Health Care Advisory Board interviews and analysis.

Vivity Betting on Coordination over Consolidation
Strategic Advantage #2: Integration Vivity Betting on Coordination over Consolidation Insurer, Seven Competing Systems Offer Market-Wide Solution “What we are recognizing is that the most effective delivery model is an integrated delivery model. We can reduce waste, improve quality of care, provide people access to the top facilities in the nation, frankly, and do that in an integrated way.” Anthem Blue Cross UCLA Health PIH Health Cedars- Sinai Medical Center 7 health systems 14 hospitals 6,000 physicians Huntington Memorial Hospital Good Samaritan Hospital Torrance Memorial Health MemorialCare Health System Pam Kehaly Anthem Blue Cross Source: “Anthem, Seven California Health Systems Team Up To Form HMO,“ California Healthline, September 17, 2014; Commins J, “Anthem Blue Cross, 7 CA Health Systems Create New Challenger, Business Model,” HealthLeaders Media, September 18, 2014; Health Care Advisory Board interviews and analysis.

New Partnerships Aim at Integration Without M&A
But Will Less-Intensive Arrangements Yield Sufficient Gains? Four health systems form regional alliance Health Innovations Ohio Five health systems ally to form accountable care initiative Quality Health Solutions Seven systems in NY, NJ, MA, and PA form Allspire Network Six hospitals form BJC Collaborative: Five health systems join Vanderbilt Health Affiliate Network Four health systems ally to form Noble Health Alliance 14 systems ally to form Stratus Health Care Five SC systems form cost saving Initiant Healthcare Collaborative Two Systems form Georgia Health Collaborative Source: Health Care Advisory Board interviews and analysis.

The Community Hospital Resurgent?
Strategic Advantage #3: Efficiency The Community Hospital Resurgent? Born Out of Necessity, No-Frills Approach Suddenly Compelling Common Challenges Potential Advantages The Community Hospital Initiative Medicare, Medicaid- heavy payer mix Already managing to public-payer margins Dedicated research and service effort included within Health Care Advisory Board membership Focuses on issues facing Smaller organizations Independent hospitals Rural facilities For more information, contact Ben Umansky at Limited service portfolio Fewer unjustifiable fixed costs Physician shortages Early experience with team- based care, telemedicine Rural or exurban setting Labor costs lower than urban competitors Smaller patient population More focused patient engagement efforts Source: Health Care Advisory Board interviews and analysis.

The New Network Advantage
Health Care Advisory Board The New Network Advantage Assembling the Scale, Scope, and Assets Needed to Secure Profitable Growth

Leverage Beyond Price The New Network Advantage
Charting an Intentional Corporate Strategy

Insecurity Abounds BIGGEST Consolidation Dominating Industry Mindshare
What Was Your Reaction? $10 Billion or Bust? “Any health system is going to need $10 billion in revenue to survive in tomorrow’s market” August 5, 2013 Overheard at 2014 J.P. Morgan Healthcare Conference SURVIVAL BIGGEST OF THE The End of Independence? CHS-HMA merger puts more pressure on stand-alones to seek partners -Page 6 “We want to stay independent. But when I look at where things are going, I just don’t see how we can compete without being part of something bigger.” CEO, standalone 200-bed hospital Source: Health Care Advisory Board interviews and analysis.

New Partnerships Aim at Integration Without M&A
But Will Less-Intensive Arrangements Yield Sufficient Gains? Four health systems form regional alliance Health Innovations Ohio Five health systems ally to form accountable care initiative Quality Health Solutions Seven systems in NY, NJ, MA, and PA form Allspire Network Six hospitals form BJC Collaborative Five health systems join Vanderbilt Health Affiliate Network Four health systems ally to form Noble Health Alliance 14 systems ally to form Stratus Health Care Five SC systems form cost saving Initiant Healthcare Collaborative Two Systems form Georgia Health Collaborative Source: Health Care Advisory Board interviews and analysis.

No Shortage of Alternative Models
Five Major Varieties of Provider Partnership Merger or Acquisition Clinically-Integrated Hospital Network Accountable Care Organization Regional Collaborative Clinical Affiliation Description Formal purchase of one organization’s assets by another, or the combination of two organizations’ assets into a single entity Collection of hospitals contracting jointly in order to support improved coordination, outcomes; modeled after physician CI networks Independent entity, owned by one or several independent organizations, that accepts risk-based contracts and distributes shared savings Flexible umbrella structure, often encompassing many independent organizations of similar geography, that may serve as foundation for further integration Typically bilateral agreement to cooperate around a particular initiative or service line; may involve local or national partners Examples Baylor Scott and White Community Health Systems/Health Management Associates Trinity Health/Catholic Healthcare East Tenet/Vanguard Long Island Health Network Vanderbilt Health Affiliated Network Quality Health Solutions (WI) Arizona Care Network Accountable Care Alliance Allspire Health Partners Stratus Healthcare BJC Collaborative Noble Health Alliance Health Innovations Ohio Evergreen Healthcare with Virginia Mason Mayo Clinic Care Network Cleveland Clinic Affiliate Program Source: Health Care Advisory Board interviews and analysis.

Protection Not the Right Motivation
Defenses Around Old Business Model Unlikely to Hold Typical Advantages of Market Power Size confers price leverage Higher prices charged to payers Lower prices paid to suppliers Diminishing Returns to Traditional Strategy Regulators scrutinizing any arrangement conferring undue market power Volume-based negotiating strategies like GPOs nearing their limit Increasingly competitive markets punishing inflexible, high-cost providers Source: Health Care Advisory Board interviews and analysis.

Leverage Beyond Price the Key to Success
Partnerships Must Drive Market Advantage Product Advantage Cost Advantage Influence on Network Assembly Control Over Underlying Cost Structures Impact on Entire Care Continuum Winning Preference Through Clinical Scope and Geographic Reach Lowering Unit Prices Through Operational Scale Reducing Total Costs Through Population Health Degree of Market Advantage Time to Maximum Benefit Source: Health Care Advisory Board interviews and analysis.

Product Advantage Cost Advantage I II III Winning Preference Through Clinical Scope and Geographic Reach Lowering Unit Prices Through Operational Scale Reducing Total Costs Through Population Health Driving Network Assembly Comprehensive Network Product Appealing to Network Assemblers Portfolio-Enhancing Clinical Partnerships Leveraging Low-Price Care Sites Top-of-site Referral Partnerships Slimming Underlying Cost Structures Clinical Footprint Rationalization Next-Generation Shared Services Overcoming Financial Barriers Jointly-Financed Infrastructure Investment Breaking Down Information Silos Continuum-Wide Data Transparency Hardwiring Mutual Accountability Network-Enabled Performance Incentives Source: The Advisory Board Company interviews and analysis.

Potential Elements of Provider Integration
Meaningful Integration About More than the Model Discrete Elements of Partnership Support Specific Goals Potential Elements of Provider Integration Potential Benefits Payer Contracting Strengthens negotiating position, allows access to larger purchasers Brand/Identity Confers reputational benefits, signals strength of integration Strategic Plan Allows rationalized investments/divestitures Governance Ensures stability and implementation of other shared elements Operations Enables process efficiencies, knowledge exchange Clinical IT Broadens perspective over care continuum; reveals opportunities for reducing total cost of care Care Model Reduces fragmentation in care delivery; improves outcomes Expertise Flattens learning curves; promotes best practices Source: Health Care Advisory Board interviews and analysis.

Questions for Every Partnership
Concrete Decisions Beyond Legal Structure Choice of Model Only Determines Environment for Pursuing Integration Questions for Every Partnership Contracting Brand/Identity Independence Collaboration Expertise Strategic Plan Which strategic and operational functions should be included in your organization’s partnership strategy? For each function: Is it better to centralize the function by combining it with that of a partner, or is it better to collaborate with a partner while maintaining separate but aligned versions of the same function? Does the legal structure of an existing or proposed partnership facilitate the appropriate degree of integration for each function? Centralization Care Model Governance Clinical IT Operations Source: Health Care Advisory Board interviews and analysis.

Leverage Beyond Price The New Network Advantage Charting an Intentional Corporate Strategy

Winning Preference Through Clinical Scope and Geographic Reach
Driving Network Assembly Comprehensive Network Product Appealing to Network Assemblers Portfolio-Enhancing Clinical Partnerships

Broad Geographic Reach… …or Deep Clinical Scope?
Which Would You Choose? Broad Geographic Reach… …or Deep Clinical Scope? Network in Brief: Crescent Health1 Network in Brief: Silica Healthcare1 National hospital provider with hospital campuses across the country Despite broad geography, limited clinical depth at local level 6-hospital system in the Midwest with employed physician network Care sites concentrated in roughly half of single metropolitan area Pseudonym. Source: Health Care Advisory Board interviews and analysis.

A Multi-Layered Approach to Network Development
Developing a Targeted Network Strategy (or Three) Flexible Approach Meets the Demands of a Wide Range of Purchasers A Multi-Layered Approach to Network Development Network in Brief: Whitehaven Health1 Partnership-driven Integrated health delivery system in the Midwest Segments market strategy by geography Health system footprint is sufficient for appealing to local purchasers; regional and super-regional networks assembled through partnership Super-Regional Geographic Reach Discussing possibility of additional partnerships to form state-wide network able to contract with state employers Regional Local Partnership with like-minded, geographically contiguous health system provides flexibility to sign larger regional contracts Individual footprint sufficient to appeal to small employers in local market Number of contracting possibilities Pseudonym. Source: Health Care Advisory Board interviews and analysis.

Deciding Whether to Take the Lead
A Key Decision at Every Level Local Small employers Local payers Regional Large employers National payers Super-Regional State/national employers International purchasers What is your organization’s network strategy? Driving Network Assembly Appealing to Network Assemblers Source: Health Care Advisory Board interviews and analysis.

Leveraging Partnership to Appeal to Purchasers
Collaboration Provides a Financially-Sustainable, Proactive Approach Driving Network Assembly Appealing to Network Assemblers Build or Buy Brand Marketing Committed to Independence Pitfall: Extremely slow and capital- intensive; may require moving away from core competencies Pitfall: Increasingly difficult for all but niche providers to confidently position organization as “must-have” 1 2 Comprehensive Network Product Portfolio-Enhancing Clinical Partnerships Open to Collaboration Source: Health Care Advisory Board interviews and analysis.

Partnering to Expand Geographic Scope St. Elizabeth Healthcare
Combining Geographies to Match Purchaser Footprint Addressing Individual Limits in Geographic Reach Partnering to Expand Geographic Scope Network in Brief: Healthcare Solutions Network Cincinnati-based employers have employees living on both sides of river TriHealth Joint venture collaboration between Cincinnati, Ohio- based TriHealth and Edgewood, Kentucky- based St. Elizabeth Healthcare Offers health insurers access to a unified, high- quality, low-cost network that covers the entire Tristate region Both organizations offering the network to their current employees and dependents Ohio Kentucky St. Elizabeth Healthcare Neither Organization Able to Offer Adequate Geographic Coverage Alone Source: Health Care Advisory Board interviews and analysis.

Using Expanded Reach to Target Local Employers
Selling Narrow Network Product Through Commercial Insurers Creating a Purchaser-Focused Network Solution Insurer sells HSN as a narrow network product Combined geography sufficient to support large Cincinnati employers TriHealth Local Employers Healthcare Solutions Network St. Elizabeth’s Public Payers Key Partnership Elements Historical Relationship Previous collaboration around insurance products key to ensuring mutual trust Governance Organization CEOs serve as Co-CEOs with support of existing management teams Quality Alignment Aligning quality targets to work towards demonstrable quality improvements Source: Health Care Advisory Board interviews and analysis.

Beginning with Cardiac and Neuroscience Care
Aligning to Expand Clinical Scope Creating a Comprehensive High-Value Network Through Partnership Beginning with Cardiac and Neuroscience Care Virginia Mason Virginia Mason quaternary facility EvergreenHealth tertiary facility EvergreenHealth Gains access to home care services and fills gap of secondary facilities east of Seattle with a partner with a proven reputation for value Gains access to quaternary facility with proven clinical outcomes and access to expanded geography EvergreenHealth home care Virginia Mason clinics Network in Brief: EvergreenHealth and Virginia Mason EvergreenHealth is a 318-bed medical center and integrated health system based in Kirkland, Washington; Virginia Mason is a 336-bed medical center and group practice based in Seattle In 2012, partnered to create a broader network of care in the Puget Sound region with the purpose of continuous improvement in quality and safety, reduction in cost of care, improving patient experience, and shared recruitment to avoid oversupply of physicians Partnership leverages strengths of both organizations and broadens each partner’s scope of services and expanded geographic reach Source: Health Care Advisory Board interviews and analysis.

Linking a Network Without an LLC
Ensure A Cohesive Bond Built on a Foundation of Shared Vision Linking a Network Without an LLC Develop a Long-Term Vision Contractual partnership agreement spans 20 years, ensuring both parties are fully committed to partnership Ensure Physician Support Both partners demonstrate clinical quality and outcomes “We set out to form an extremely durable and long-term partnership that allows us to come together and create a high-value network of care. To do that, we forged a board- driven, 20-year agreement that ensures the partnership’s strength and stability, ultimately increasing the quality and value of care available in our community.” Secure Support Steering committee contains equal representation from both partners (CEOs, CMOs, COOs) Track Performance Quality dashboards track progress on clinical areas; partnership dashboard tracks progress on priority activities aligned with strategic partnership goals Gary Kaplan MD, CEO, Virginia Mason Bob Malte, CEO, EvergreenHealth Source: Health Care Advisory Board interviews and analysis.

Systems and AMCs Also Seeking to Enhance Portfolios
Tactic #2: Portfolio-Enhancing Clinical Partnerships Bringing High-End Expertise to the Local Market Telemedicine Partnerships Allow Complex Care to Remain In-House Systems and AMCs Also Seeking to Enhance Portfolios Network in Brief: Mayo Clinic Care Network 26-member network; partnership model that extends Mayo physicians and expertise to members In addition to direct access to clinical expertise, members are able to brand themselves as members of Mayo Clinic Care Network eConsult: Specialists can connect with Mayo Clinic experts when they want additional input on complex patient care AskMayoExpert: Web-based system allows members to access Mayo perspective on hundreds of medical conditions Source: Health Care Advisory Board interviews and analysis; Mayo Clinic Care Network, available at:

Competitive Dynamics Threaten Local Partnerships
Conflicting Incentives a Risk When Partnering Regionally Case in Brief: Nielsen Park Hospital1 Multi-Layered Collaboration Promises Benefit… Small, rural community hospital in the South Partnered with large tertiary system to enable local access to high-end specialty services such as cardiology, oncology Despite promising start to partnership, competition for volumes between partners threatening sustainability of affiliation Co-branding Community hospital able to brand itself as affiliate of tertiary hub Telemedicine Allows community physicians to consult with specialists in real-time Shared Staff Physicians from tertiary hub travel to community hospital …Tensions Over Referrals Threatens Affiliation Tertiary hub looking to draw as many referrals as possible from community partner Community hospital trying to retain as many volumes as possible within local community Pseudonym. Source: Health Care Advisory Board interviews and analysis

Consider Local Partner if…. Consider National Partner if….
Weighing a Local or National Partner Ideal Geography a Key Tension in Clinical Affiliation Decisions Consider Local Partner if…. Consider National Partner if…. Local providers with same service gap are interested in collaboration Local providers that currently offer service are interested in partnering for mutual benefit Demand for service is low enough that local providers are willing to share staff, equipment Patients value brand familiarity over national reputation Ultimate aim of partnership is joint contracting or shared population health management Local competition for volumes in targeted service area is high Local demand for service is insufficient to justify full-time staff Targeted service may easily be provided through telemedicine or virtual physician-to-physician consults Patients recognize and value national reputation National providers have significant quality advantage over any local partnership options Source: Health Care Advisory Board interviews and analysis.

Key Takeaways Winning Preference Through Clinical Scope and Geographic Reach Shared vision and strategy key to partnership around network product It is difficult to make the necessary investments to ensure network growth without a shared vision and a significant amount of trust among network partners. Creation of a health plan may be a component of network strategy, but should not be the sole strategy The most successful networks ensure flexibility in contracting options; achieving this means leading with a provider network that can also contract with commercial payers. Certain models faster at bringing a network together but may restrict contracting ability M&A and CI joint contracting arrangements are slower to market, but allow for tighter network integration than faster models such as regional alliances and clinical affiliations. Competitive tendencies can threaten the success of regional clinical affiliations Competition for volumes can undermine regional affiliations; clear referral protocols are necessary to ensure each partner retains appropriate volumes. Source: Health Care Advisory Board interviews and analysis

Weighing the Models Model Comprehensive Network Product
Portfolio-Enhancing Clinical Partnerships Comments Merger or Acquisition M&A clearly expands geographic reach and clinical scope; however, it is a much slower and more capital-intensive approach than other models. Clinically-Integrated Hospital Network CI is probably the most common means of pursuing joint contracting; this model will be essential for those organizations looking to partner around a narrow network offering. Accountable Care Organization Sharing risk is probably the quickest way to enable joint contracting; however, starting an ACO involves costs and cultural shift. Regional Collaborative Collaboratives often involve more members so there is greater potential to expand reach and scope; however, attempts to contract jointly will likely invite significant regulatory scrutiny. Clinical Affiliation Agreement These, typically bi-lateral agreements, are well-suited to filling a specific clinical gap; however, they often span large geographies and thus tend to limit opportunities to contract jointly. Source: Health Care Advisory Board interviews and analysis.

Five Characteristics of the Ideal Partner
Ideal Partners Five Characteristics of the Ideal Partner Complementary Clinical Assets Complementary Geography Strong Brand Name Shared Strategic Vision Willingness to Share Referrals Partners that span a different part of the care continuum are ideal for bringing new capabilities to the network For the purposes of expanding reach or sharing referrals, partners with contiguous geography are ideal; national partners ideal for telemedicine partnerships Consider whether patients value national brands or prefer a local partner (i.e. the “best hospital in town” or the hospital that they have been to before) Particularly important for those organizations looking to jointly own and sell a market-facing network; affiliations of this nature require long-term commitment Clinical affiliations in particular require clarity around referral protocols and where volumes will be retained to ensure competitive tensions do not undermine partnership Source: Health Care Advisory Board interviews and analysis.

Lowering Unit Costs Through Operational Scale
Leveraging Low-Price Care Sites Top-of-Site Referral Partnerships Slimming Underlying Cost Structures Clinical Footprint Rationalization Next-Generation Shared Services

High Fixed Cost Production Model Low-Cost Narrow-Focus Care Sites
High Cost Driving Price Rigidity Limited Ability to Compete Against Low-Cost Providers High Fixed Cost Production Model Struggling to offset expensive fixed cost base Difference in Average Price for Common Imaging Procedures1 HOPD2 vs. Freestanding Imaging Facilities, 2011 Lack of back-office efficiency 57% lower vs. Low-Cost Narrow-Focus Care Sites Facilities with low-fixed costs Streamlined focus on narrow set of services MRI, CT, Radiography, Nuclear Medicine, Ultrasound, Mammography, and PET. Hospital Outpatient Department. Source: Regents Health Resources, “Imaging Market File,” Radiology Business Journal , April 2011; Health Care Advisory Board interviews and analysis.

Leveraging Low-Price Care Sites Slimming Underlying Cost Structures
Use Networks to Build Operational Scale Three Tactics for Increasing Price Flexibility Leveraging Low-Price Care Sites Slimming Underlying Cost Structures 3 4 5 Top-of-Site Referral Partnerships Clinical Footprint Rationalization Next-Generation Shared Services Source: Health Care Advisory Board interviews and analysis.

Re-envisioning Top-of-Site Care
Tactic #3:Top-of-Site Referral Partnerships Re-envisioning Top-of-Site Care Sending Patients to the Right Site, at the Right Cost An Expanding Network of Low- Acuity Partners Three Main No-Regrets Focus Areas for Volume Shifts Urgent Care Pediatric Urgent Care Pediatric After Hours Women’s Clinic Tertiary Hospital to Community Hospital 1 Chronic Disease Clinic Full Worksite Clinic Emergency Department to Urgent Care Provider 2 Medical Home Mental Health Urgent Care Retail Clinic E-Visits 3 Primary Care Office to Retail Clinic School Clinic Advanced Care Center Source: Health Care Advisory Board interviews and analysis.

Attractive Strategy In Negotiations with Purchasers
More Than Just Theoretical Faulkner’s Stubbornly Low Prices Show Benefit of Strategy Proving the Point Brigham and Women’s Faulkner Hospital 13.7% General admissions shifted from BWH to Faulkner since 2005 Merged 19% Lower commercial prices at Faulkner vs. BWH, as of 2012 2013 Case Mix Index 1.38 0.80 Attractive Strategy In Negotiations with Purchasers BWH contracts with local multispecialty group (Harvard Vanguard Medical Group) came up for renegotiation HVMG received attractive terms from another local hospital BWH able to retain contract by offering to shift more lower-acuity volumes to Faulkner at lower unit price Source: Sussman et al, “Integration of an Academic Medical Center and a Community Hospital: The Brigham and Women’s/Faulkner Hospital Experience,” Journal of Academic Medicine, 2005; Health Care Advisory Board interviews and analysis. Came together under common corporate parent

More Than Just Theoretical (cont.)
Case in Brief: Brigham and Women’s/Faulkner Hospital Common parent entity for the comprehensive affiliation agreement between Brigham and Women’s Hospital and Faulkner; subsidiary of Partners Healthcare, the largest integrated delivery network in MA Initiated “Faulkner 500” efficiency effort to shift 500 General Medical admissions per year from Brigham and Women’s Hospital to Faulkner Hospital to optimize capacity at both sites Signed agreement with Harvard Vanguard Medical Group to treat community-hospital-level admissions at Faulkner with reduced rates, and reserve high-intensity cases for BWH Source: Health Care Advisory Board interviews and analysis.

Co-branding Opportunity
Removing Obstacles to Volume Reallocation Integration of Clinical Programs Needed to Encourage Top-of-Site Care Key Elements of the Brigham and Women’s-Faulkner Volume Reallocation Effort Integrated Teaching Programs Brigham surgery and medicine residents perform a portion of training at Faulkner Joint Clinical Programs Due to limited operating room availability at Brigham, unfilled rooms at Faulkner made available to BWH surgeons Co-branding Opportunity Patient Convenience Less travel, availability of private rooms, better parking all seen as improving the patient experience Cross-Branding Opportunity Combining the two organization’s name resonated with patient focus groups and held pushback at bay from both entities Source: Sussman et al, “Integration of an Academic Medical Center and a Community Hospital: The Brigham and Women’s/Faulkner Hospital Experience,” Journal of Academic Medicine, 2005; Health Care Advisory Board interviews and analysis.

Significant Opportunity for Savings in Reducing Excess Bed Capacity
Tactic #4: Clinical Footprint Rationalization Right-Sizing Facility Footprint a Clear Opportunity Most Markets Far From Rationalized Despite Reductions in Hospital Beds, Most Organizations Still Have Excess Capacity U.S. Inpatient Beds, Occupancy Rate Significant Opportunity for Savings in Reducing Excess Bed Capacity Estimated Cost Savings from Eliminating Expectedly Empty Beds in Rhode Island1 $25-106K Per bed when removing beds piecemeal, includes reduction in supply and staff expenses $580K Per bed when closing entire facilities, includes facility, supply, and staffing cost reductions Calculated by taking 18% of the average cost per bed, by bed type, from the 2009 and 2010 Medicare Cost Report Data, inflated at 2% annually to reflect natural price growth. Source: Alicia Caramenico, “Council: Eliminate excess hospital beds to save $116M,” Fierce Healthcare, May 2013; Health Care Advisory Board interviews and analysis.

Avoids Duplication of Services within Shared Market
First, Do No Harm Strategic Alignment Allows for More Efficient Planning for Future Capacity Avoids Duplication of Services within Shared Market Northwest Metro Alliance Combined Planning Process Example: HealthPartners and Allina Health are joint owners of two outpatient imaging centers in the market Alliance creates guiding principles and rules Shared incentives under HealthPartners’ health plan encourages cooperation Allows for collaborative planning across the entire population Network in Brief: Northwest Metro Alliance Partnership between Bloomington-based HealthPartners and Minneapolis-based Allina Health, centered in northwest suburbs of Minneapolis Joint planning done through alliance reduces duplicative efforts Source: HealthPartners and Allina Hospitals and Clinics, available at: accessed 3 May 2014; Health Care Advisory Board interviews and analysis

Address All Stakeholder Incentives
Consolidation of More Lucrative Services May Require Financial Alignment HSHS-Prevea Partnership Finds Opportunity to Rationalize Duplicative Imaging Capacity in Wisconsin Components of Alignment Necessary to Execute on Capacity Rationalization Cultural Alignment Long working relationship since 1995 Strategic Alignment Shared vision of regional growth Launched three-way joint venture with Dean Health Collaborating on a number of population health management projects Financial Alignment Agreed to sign PSA with Prevea physicians ensuring physician compensation at fair market value Source: Health Care Advisory Board interviews and analysis.

Address All Stakeholder Incentives (cot’d)
Case in Brief: Hospital Sisters Health System 13-hospital health system based in Springfield, Illinois; geography spans Illinois and Wisconsin HSHS Eastern WI Division partnered with Prevea Health, a multispecialty group in the Green Bay area, since 1995 Over time, HSHS and Prevea have increased level of financial integration to improve network efficiency Source: Health Care Advisory Board interviews and analysis.

Decision to Consolidate Duplicative CV Services at Byron Health1
Limit to What Can Be Achieved Without Full Merger Byron1 Merger Showcases Potential of Full-Service Line Consolidation Decision to Consolidate Duplicative CV Services at Byron Health1 Bells Medical Center1 900 cases/year Large campus with excess capacity Clarkes Hospital1 200 cases/year Capacity constraints for other services Large Profitability Differential Bells program clearly more profitable than Clarkes program Close Geographic Proximity Programs within 5 miles of each other, serving same population Operational Gains Potential cost savings from consolidated staffing, space Staffing Cost Savings 0% 25% Loss in market-share after consolidation Reduction in number of Cardio-Pulmonary Perfusionists needed Pseudonym. Source: Health Care Advisory Board interviews and analysis.

Limit to What Can Be Achieved Without Full Merger
Network in Brief: Byron Health1 2-hospital health system based in the East Combined open-heart programs at two facilities within the system with the intention of generating cost reductions and improving operational efficiency Source: Health Care Advisory Board interviews and analysis.

Attributes of a Top-Performing Shared Services Organization
Tactic #5: Next-Generation Shared Services Creating Advantage Through ‘Internal Outsourcing’ Applying the “Shared Services” Concept to Health Care Attributes of a Top-Performing Shared Services Organization Treats operational units as clients, competes for business vs. outside vendors Strategy, functionality driven by needs at operational unit level Focus on process standardization and continuous improvement Transfer of insight from high-performing units to low performing units Concept in Brief: Shared Services Organization Single service organization performs selection of business support activities on behalf of multiple operating units “Shared” processes moved out of individual operating units and into separately managed shared services organization (SSO) An SSO has same expectations, responsibilities and accountabilities as external vendor does to its clients, making it more than just a centralization function Source: Health Care Advisory Board interviews and analysis.

Savings Reallocation Options for Hypothetical Medium-Size U.S Hospital
Translating Cost Savings into Competitive Pricing Significant Opportunity to Improve Network Attractiveness Savings Reallocation Options for Hypothetical Medium-Size U.S Hospital 1 Margin Improvement Improve margins from 6.5% to 9% New Investments e.g. Two new 1.5 T MRI Scanners e.g. Four new 64 Slice CT scanners e.g. One new IMRT1 Machine 2 150-bed hospital carries out successful cost-savings initiative Manages to cut $2 million from operating expenses Universal Price Reductions Reduce prices overall by up to 5.9% while still maintaining existing margins 3 4 Service-Specific Price Reductions e.g. reduce outpatient imaging prices up to 35% while still maintaining existing margins Intensity Modulated Radiation Therapy Source: Health Care Advisory Board interviews and analysis.

Key Takeaways Lowering Unit Costs Through Operational Scale
Scale no guarantee of cost savings Regardless of the model chosen, successful consolidation requires an investment in a dedicated cross- organizational consolidation function. No model guarantees such a function. Cross-organizational transparency necessary to unlock full benefits of consolidation Though non-merger models have the ability to centralize and consolidate costs, mergers provide an extra level of cross-organizational transparency and therefore a greater opportunity to cut costs. Integration of clinical programs necessary to promote top-of-site volume allocation Models that encourage clinical alignment will facilitate more efficient volume reallocation. Rationalization of underutilized capacity historically elusive Potential merger savings based on consolidation and closure of facilities should be highly scrutinized. Source: Health Care Advisory Board interviews and analysis.

Weighing the Models Model Top-of-Site Referral Partnerships
Clinical Footprint Rationalization Next Generation Shared Services Comments Merger or Acquisition Greatest possibility for consolidation of business functions, rationalization of referrals and clinical capacity though success requires partnership beyond financial integration. Clinically-Integrated Hospital Network Contracting leverage gained through CI offers incentive for clinical collaboration but little incentive for operational consolidation and rationalization. Accountable Care Organization Huge incentive for rationalization of referrals, though less for consolidation of operations; strategic alignment offers possibility to prevent duplication of future clinical investment. Regional Collaborative Potential, though limited, to consolidate and centralize business operations, and gain leverage over vendors, suppliers. Clinical Affiliation Agreement Focus on operational alignment limits potential to consolidate business operations, though may help to rationalize referral patterns, prevent future duplication of investment. Source: Health Care Advisory Board interviews and analysis.

Five Characteristics of the Ideal Partner
Ideal Partners Five Characteristics of the Ideal Partner Complementary Case Mix Low Cost Structure Willingness to Consolidate Cultural Closeness Existing Capabilities Partnerships between organizations that have complementary service capabilities provide opportunity for mutual benefit by reallocating volumes between sites. Organizations with a low existing cost structure represent good opportunities to expand low-price sites of care. Consolidation requires commitment and close cooperation; ideal partners are committed to executing on centralization and consolidation possibilities. Consolidation and centralization are highly political process; a high degree of cultural alignment is necessary across all organizational levels to prevent significant pushback. Partners with already highly efficient operational functions provide best opportunity for consolidation as scaling existing functions is easier than building anew. Source: Health Care Advisory Board interviews and analysis.

Reducing Total Costs Through Population Health
Overcoming Financial Barriers Jointly-Financed Infrastructure Investment Breaking Down Information Silos Continuum-Wide Data Transparency Hardwiring Mutual Accountability Network-Enabled Performance Incentives

Providers Judged by Ability to Reduce Utilization
Controlling Unit Costs Only Part of the Equation Three Provider Strategies to Appeal to Network Assemblers on Cost Low Unit Price Total Cost Control Price Cut Improve efficiency to offer lower fee schedule Utilization Management Rationalize utilization to secure referral preference Trend Control Implement care management to control cost growth trend Degree of Cost Control Source: Health Care Advisory Board interviews and analysis.

Attaining Financial Success From Patient Management
A Clear Path for Improvement Steps To Total Cost Management Well Established Attaining Financial Success From Patient Management High Risk Patients Rising-Risk Patients Low-Risk Patients Trade high-cost services for low-cost management Avoid unnecessary higher-acuity, higher-cost spending Keep patient healthy, loyal to the system Study in Brief: Playbook for Population Health Study summarizes the key leadership and care model capabilities needed for financial success under population health Available at advisory.com/pophealthplaybook Source: Health Care Advisory Board interviews and analysis.

Breaking Down Information Silos
Population Health a Difficult Ambition Acting Alone Partnership Offers a Path Forward Problem #1: Insufficient financial capital Breaking Down Information Silos 7 Continuum-Wide Data Transparency Problem #2: Fragmented data and expertise Problem #3: Lack of shared accountability Reducing Financial Barriers Hardwiring Mutual Accountability 6 8 Jointly-Financed Infrastructure Investment Network-Enabled Performance Standards Source: Health Care Advisory Board interviews and analysis.

Population Health Requires Extensive Investment
Tactic #6: Jointly-Financed Infrastructure Investment Population Health Requires Extensive Investment Common Areas of Investment An Undeniable Financial Burden Care management staffing Disease Registry Electronic Medical Record Post-Acute Care network $12M Patient-Centered Medical Home Management resources AHA’s1 estimate of ACO start-up costs fora 5-hospital system Legal and consulting support Predictive analytics $14.1M Health Information Exchange PCP recruitment AHA’s estimate of ongoing annual ACO costs for a 5-hospital system Specialist network Patient engagement tools American Hospital Association. Source: American Hospital Association, “Activities and Costs to Develop an Accountable Care Organization,” available at: accessed May 5, 2014; Health Care Advisory Board interviews and analysis.

Partnership Reduces Individual Financial Burden
Shared Care Management Investment Through ACO Arizona Care Network Shared Staffing Model Abrazo Health Shared Investment Areas Care management teams (RN, community resource specialist, pharmacist) Physician support staff (e.g. for quality training) IT infrastructure Arizona Care Network Dignity Health Arizona Jointly-owned physician- led ACO and CI network Network in Brief: Arizona Care Network Physician-led ACO and CI network; jointly-owned by Abrazo Health and Dignity Health Arizona Population health infrastructure investments made at network level, allowing Abrazo and Dignity to share costs of resources such as staffing, IT Source: Health Care Advisory Board interviews and analysis.

Regional Utilization Trends Reveal Top Population Health Opportunities
Tactic #7: Continuum-Wide Data Transparency Pool Data Across Network to Pinpoint Efforts Partners Benefitting from Master Patient Index Regional Utilization Trends Reveal Top Population Health Opportunities Network in Brief: Dallas-Fort Worth Hospital Council Foundation 80 area hospitals feed patient utilization data into enterprise data warehouse Consortium of 156 hospital and associate members in Northern Texas Provides educational programs, collaborative efforts, strategic alliances, and advocacy with the local and state governments Discovered that 25% of readmitted patients in the region did not return to their original hospital for care, making it difficult to accurately predict readmission rates Master patient index matches patient records across facilities and organizations Data is fed into analytic tools that provide insight into regional trends in utilization Paying members receive access to quality dashboard that helps pinpoint population health efforts Source: Healthcare Financial Management Association, “Dallas-Fort Worth Hospitals Share Data for Dramatic Improvements,” available at: accessed May 5, 2014; Health Care Advisory Board interviews and analysis.

12% 9% 16% 12% 20% Putting the Master Patient Index into Practice
Ensures Management of Riskiest Population Segments Real-Time Data Enables Targeted Resource Deployment at One Member Hospital 1 2 z 12% 9% Examination of region- wide, cross-facility utilization patterns reveals readmissions as area of opportunity Analytic tools reveal clinical, demographic trends among patients who had been readmitted in the past Reduction in 30-day acute myocardial infarction readmission rate at one member hospital 16% 12% 4 3 Reduction in 30-day pneumonia readmission rate at one member hospital z Aggressive case management of identified patients leads to reduction in readmissions Member hospital uses population-level insight to identify patients at increased risk for readmission 20% Reduction in readmissions across all member hospitals Source: Healthcare Financial Management Association, “Dallas-Fort Worth Hospitals Share Data for Dramatic Improvements,” available at: accessed May 5, 2014; Health Care Advisory Board interviews and analysis.

Drilling Down to the Individual Patient Level
Four Approaches to Real-Time Data Sharing Among Network Partners Manual Data-Sharing Agreements Key to Partnership: Consensus on how often to proactively push data Example: Visiting Nurse Service of New York sends home health assessment to three hospital partners every day EMR Look-Ups Key to Partnership: Shared or linked EMR systems Example: Through their partnership in the Northwest Metro Alliance, Allina and HealthPartners have read only-access to each other’s Epic systems ADT1 Feed Key to Partnership: Ideal partner has access to out-of-system utilization data Example: Blue Shield of California provides real-time utilization data with provider partners through CalPERS ACO Regional HIE Key to Partnership: Shared funding to ensure financial sustainability Example: Medical Home Network in Chicago has set up a regional HIE that provides participants with last 90 days of patient data Source: Chicago Tribune, available at: accessed October 1, 2012 ; Health Affairs, “Four Years Into A Commercial ACO For CalPERS: Substantial Savings And Lessons Learned,”; HealthPartners and Allina Hospitals and Clinics, available at: accessed 3 May 2014 Health Care Advisory Board interviews and analysis. Admission, Discharge, Transfer.

Consolidating Risk Scores First Step to Aligned Care Management
Establish a Common Network Language Shared Processes Eliminate Gaps in Stand-Alone Efforts Consolidating Risk Scores First Step to Aligned Care Management Analysis of Top 1,000 Riskiest Patients Revealed: Each individual algorithm failed to identify some high-risk patients Inconsistent identification reduced ability to prevent: ER visits Admissions from ER Inpatient readmissions Prior to creation of CalPERS ACO, each participant had individual risk scoring process Risk scores consolidated into single process and single IT platform Source: Blue Shield of California, “An Accountable Care Organization Pilot: Lessons Learned,” available at: accessed 3 May 2014; Health Care Advisory Board interviews and analysis.

Establish a Common Network Language (cont.)
Network in Brief: CalPERS ACO Northern California-based ACO composed of Blue Shield of California, Hill Physicians Medical Group, and Dignity Health serving 42,000 CalPERS employees and dependents Before ACO, each entity had its own risk scoring methodology As first step in population health efforts, recognized need for a unified risk segmentation From , the ACO has generated gross savings of $105M with the majority of savings returned as lower premiums Achieved 15% reduction in length of stay and 16% reduction in total inpatient days over first four years of ACO Source: Blue Shield of California, “An Accountable Care Organization Pilot: Lessons Learned,” available at: accessed 3 May 2014; Health Care Advisory Board interviews and analysis.

Hardwiring Mutual Accountability
Tactic #8: Network-Enabled Performance Incentives Hardwiring Mutual Accountability Two Promising Strategies to Hold Partners Accountable Formal Shared Risk Membership-Based Incentive Including partners in formal risk-based arrangements (e.g. shared savings, global payment contracts) Candidates: Hospital ACO partners Employed physicians Ancillary providers Positioning membership in the network itself as performance incentive (e.g., preferred referral network) Candidates: Clinical Integration Network Post-Acute Care Providers Source: Health Care Advisory Board interviews and analysis.

5% Extend Shared Risk Beyond Hospital and Physicians
Bringing Ancillary Providers to the Table Through Shared Savings MMC Physician-Hospital Organization ACO Home Health Included because of high Medicare utilization SNF Included because of high Medicare utilization PHO has worked with each provider to identify relevant performance metrics; focusing specifically on 33 metrics from MSSP to promote performance against value-based metrics across sites Lab Included due to relevance for any population Behavioral Health Included in case of expansion to Medicaid Network in Brief: MMC Physician-Hospital Organization 5% PHO composed of 1,100 physicians from the Community Physicians of Maine and the seven MaineHealth hospitals; based in southern and coastal Maine As part of participation in the Medicare Shared Savings Program, will be sharing savings with ancillary providers based on value performance measures Portion of savings that will be distributed to “other providers”, i.e. not hospitals, PCPs, or specialists Source: MMC Physician-Hospital Organization, available at: accessed May 3, 2014; Health Care Advisory Board interviews and analysis;

Creating Motivation to Meet Network Standard
Creating the Incentive to Keep Up Implementing Lessons from Physician CI1 Creating Motivation to Meet Network Standard Threat of Probation Incents Improvement Benefits to Network Inclusion All physicians must meet a minimal performance threshold on “CI score” Physicians who score below minimum threshold placed on probation for one year Favorable payer rates from joint contracting Access to IT infrastructure Network in Brief: Cronulla Health Care2 Clinically integrated physician network affiliated with six Cronulla Health Care hospitals in the Midwest Instituted CI score, non-negotiable membership requirements to improve unity, quality of physician partners in network Clinical integration. Pseudonym. Source: Health Care Advisory Board interviews and analysis.

Requiring Monthly Reporting to Ensure Continuous Performance
Extending Network Exclusivity to the PAC World Promise of Increased Referrals Creates Performance Incentive for PACs Setting Out Strict Quality Standards to Achieve and Maintain Preferred Status Requiring Monthly Reporting to Ensure Continuous Performance SNF Standards Monthly SNF Scorecard Overall rating of four or five stars Quality rating of three, four, or five stars Registered nurses on-site 24/7 Ability to start IV lines 24/7 Ability to admit patients within two hours _____ Long-term care mortality rate _____ Long-term hospitalization index _____ Total readmission rate within 30 days _____ Total readmission rate within 72 hours Network in Brief: OSF Healthcare Network in Brief: North Shore-LIJ Eight-hospital, not-for-profit health system based in Peoria, Illinois As part of Pioneer ACO strategy, created a preferred SNF network limited to 17 facilities who met target criteria 16-hospital, not-for-profit health system based in Great Neck, New York In 2008, created a SNF affiliate network of 19 from list of potential 266 Source: Healthcare Financial Management Association, “Bridging Acute and Post-Acute Care,” available at: accessed May 3, 2014; Health Care Advisory Board interviews and analysis.

>50% Preferred Networks Prove Ability to Reduce Total Cost
Promote Continuous Improvement Through Focused Partnership Reducing Hospitalizations at OSF’s Preferred Network Heart Failure Rehospitalization Rate All-Cause Readmission Rate Reducing Readmissions and ED Visits at North Shore-LIJ’s Affiliates Readmissions From Affiliated SNFs >50% Reduction in ED visits from affiliated SNFs Source: Healthcare Financial Management Association, “Bridging Acute and Post-Acute Care,” available at: accessed May 3, 2014; Health Care Advisory Board interviews and analysis.

Mutual Benefit Necessary to Create Incentive
Critical Elements of Preferred PAC Network Key PAC Benefit Key Health System Benefit Access to Operational Resources Health systems may provide access to functionalities like their GPOs1 or IT systems that PAC2 providers would be unable to access on their own Data Transparency Regular data reports from PAC partners ensure that performance continues to meet high-bar; highlights areas where additional support may be needed Areas of Mutual Benefit Shared Care Pathways and Training Health systems and PAC providers have different areas of expertise and may share protocols and training resources to improve network as a whole Shared Staff PAC providers may be able to expand hospital capacity by taking on complex patients; health systems may send staff to monitor high-risk patients at PAC sites Group Purchasing Organizations. Post-Acute Care. Source: Health Care Advisory Board interviews and analysis.

Key Takeaways Reducing Total Costs Through Population Health
Alignment models that allow flexibility in partner choice create inherent performance incentives Joint contracting networks, alliances, and ACOs offer greater ability to switch out low-performing partners than full-asset mergers Standardizing care according to best practice requires tight financial alignment Though looser collaborations may allow members to pinpoint best practices, standardizing care according to best practice will require partnership models that bring tighter financial alignment between partners Adding more partners reduces financial burden, but also any potential reward Adding more partners to population health efforts can lower financial costs, and improve care management, but it can also spreads potential savings across greater number of organizations Easier to contract for risk through single entity Difficulties in analyzing and valuing risk are exacerbated when multiple parties are negotiating and signing separate contracts with payers Source: Health Care Advisory Board interviews and analysis.

Weighing the Models Merger or Acquisition
Jointly-Financed Infrastructure Investment Continuum-Wide Data Transparency Network-Enabled Performance Standards Comments Merger or Acquisition Long development time for mergers lowers flexibility of partner selection, though full financial alignment allows greater clinical alignment Clinically- Integrated Hospital Network Investment in CI tends to focus on joint contracting for fee-for-service contracts, rather than population health management Accountable Care Organization Though financial incentives are aligned to support population health coordination, lack of strategic alignment precludes more helpful consolidation of resources Regional Collaborative Though number of partners may support greater economies of knowledge, little incentive to collaborate on population health Clinical Affiliation Agreement May incentivize collaboration on specific clinical objectives, but broader alignment vehicle necessary to facilitate population health coordination Source: Health Care Advisory Board interviews and analysis.

Ideal Partners Three Characteristics of the Ideal Partner
Common Patient Population Complementary Population Health Assets Access to Claims Data Organizations that share a patient population benefit when they partner to coordinate transitions and population health, whether they are working under fee for service or risk- arrangements All partnerships should involve some division of accountability, or efficient allocation of resources. Partnerships that bring together complementary assets can reduce new expenditures, minimize the need to rationalize existing assets Provider organizations that have access to patient claims data, either through an owned health plan, or an existing relationship with a payer, represent ideal partners in population health Organizations should ensure that they negotiate access to claims data when setting up any risk- based arrangement with a commercial payer Source: Health Care Advisory Board interviews and analysis.

Charting an Intentional Corporate Strategy
Leverage Beyond Price The New Network Advantage Charting an Intentional Corporate Strategy

Partnerships Must Drive Market Advantage
Leverage Beyond Price the Key to Success Product Advantage Cost Advantage I II III Winning Preference Through Clinical Scope and Geographic Reach Lowering Unit Prices Through Operational Scale Reducing Total Costs Through Population Health Degree of Market Advantage Leveraging Low-Price Care Sites Slimming Underlying Cost Structures Overcoming Financial Barriers Breaking Down Information Silos Hardwiring Mutual Accountability Driving Network Assembly Appealing to Network Assemblers Time to Maximum Benefit Source: Health Care Advisory Board interviews and analysis.

Models Set Ground Rules… ...But Underlying Challenges Remain
Model Choice No Guarantee of Success Models Set Ground Rules… ...But Underlying Challenges Remain Legal Ability to Cooperate Models like M&A, clinical integration, and shared risk provide legal framework that enables collaboration Integration Planning Legal framework only the enabler; benefits of collaboration only realized through integration Alignment of Governance Partnership creates formal governance structure; leaders may be new or pulled from partner organizations Stakeholder Buy-In Governance structure no guarantee of buy-in from key stakeholders such as physicians and board members Shared Identity Partnership creates unified identify, whether through formal legal structure or informal collaboration Cultural Alignment Identity may be in name-only; true cultural alignment requires robust communication plan, extensive training Source: Health Care Advisory Board interviews and analysis.

Five Characteristics of Intentional Corporate Strategy
Network Strategy Must Be More Than Just a Hobby Success Depends on Focused, Intentional Strategy and Execution Five Characteristics of Intentional Corporate Strategy 1 2 3 Clarity of Purpose Professionally Managed Pipeline Transactional Discipline Intentional corporate strategy starts with well-formed, clearly articulated organizational purpose Partnership function should be an organized, routine process, not an episodic activity Robust due diligence process prevents “partnership for the sake of partnership” 4 5 Scientific Approach to Cultural Fit Integration as Core Competency Cultural affinities and possible contradictions explored in parallel to financial due diligence Integration planning begins long before partnership is finalized and continuous indefinitely through rigorous monitoring Source: Health Care Advisory Board interviews and analysis.

I. The Emerging Era of Choice

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