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Health Care Advisory Board I. The Emerging Era of Choice Restructuring Health System Strategy for the Retail Revolution II. The New Network Advantage Assembling.

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Presentation on theme: "Health Care Advisory Board I. The Emerging Era of Choice Restructuring Health System Strategy for the Retail Revolution II. The New Network Advantage Assembling."— Presentation transcript:

1 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

2 ©2014 The Advisory Board Company advisory.com Presentation for Carolinas Healthcare November 6, 2014

3 LEGAL CAVEAT The Advisory Board Company has made efforts to verify the accuracy of the information it provides to members. This report relies on data obtained from many sources, however, and The Advisory Board Company cannot guarantee the accuracy of the information provided or any analysis based thereon. In addition, The Advisory Board Company is not in the business of giving legal, medical, accounting, or other professional advice, and its reports should not be construed as professional advice. In particular, members should not rely on any legal commentary in this report as a basis for action, or assume that any tactics described herein would be permitted by applicable law or appropriate for a given member’s situation. Members are advised to consult with appropriate professionals concerning legal, medical, tax, or accounting issues, before implementing any of these tactics. Neither The Advisory Board Company nor its officers, directors, trustees, employees and agents shall be liable for any claims, liabilities, or expenses relating to (a) any errors or omissions in this report, whether caused by The Advisory Board Company or any of its employees or agents, or sources or other third parties, (b) any recommendation or graded ranking by The Advisory Board Company, or (c) failure of member and its employees and agents to abide by the terms set forth herein. The Advisory Board is a registered trademark of The Advisory Board Company in the United States and other countries. Members are not permitted to use this trademark, or any other Advisory Board trademark, product name, service name, trade name, and logo, without the prior written consent of The Advisory Board Company. All other trademarks, product names, service names, trade names, and logos used within these pages are the property of their respective holders. Use of other company trademarks, product names, service names, trade names and logos or images of the same does not necessarily constitute (a) an endorsement by such company of The Advisory Board Company and its products and services, or (b) an endorsement of the company or its products or services by The Advisory Board Company. The Advisory Board Company is not affiliated with any such company. Health Care Advisory Board Project Director Ben Umansky Contributing Consultants Yulan Egan Nick Bartz Tom Liu Design Consultant Kevin Reardon

4 IMPORTANT: Please read the following. The Advisory Board Company has prepared this report for the exclusive use of its members. Each member acknowledges and agrees that this report and the information contained herein (collectively, the “Report”) are confidential and proprietary to The Advisory Board Company. By accepting delivery of this Report, each member agrees to abide by the terms as stated herein, including the following: 1. The Advisory Board Company owns all right, title and interest in and to this Report. Except as stated herein, no right, license, permission or interest of any kind in this Report is intended to be given, transferred to or acquired by a member. Each member is authorized to use this Report only to the extent expressly authorized herein. 2. Each member shall not sell, license, or republish this Report. Each member shall not disseminate or permit the use of, and shall take reasonable precautions to prevent such dissemination or use of, this Report by (a) any of its employees and agents (except as stated below), or (b) any third party. 3. Each member may make this Report available solely to those of its employees and agents who (a) are registered for the workshop or membership program of which this Report is a part, (b) require access to this Report in order to learn from the information described herein, and (c) agree not to disclose this Report to other employees or agents or any third party. Each member shall use, and shall ensure that its employees and agents use, this Report for its internal use only. Each member may make a limited number of copies, solely as adequate for use by its employees and agents in accordance with the terms herein. 4. Each member shall not remove from this Report any confidential markings, copyright notices, and other similar indicia herein. 5. Each member is responsible for any breach of its obligations as stated herein by any of its employees or agents. 6. If a member is unwilling to abide by any of the foregoing obligations, then such member shall promptly return this Report and all copies thereof to The Advisory Board Company.

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

6 © 2014 The Advisory Board Company advisory.com 28603A 6 “Cord Cutters” and “Cord Nevers” Giving Up Broad Networks 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.www.experian.comwww.nytimes.com An Industry Built on a House of Cards Paying for More Than You Use “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.” Farhad Manjoo, The New York Times U.S. Households With Internet But No Cable, % U.S. Adults Age With Netflix or Hulu But No Cable, %

7 © 2014 The Advisory Board Company advisory.com 28603A 7 Most Hospitals Staying Afloat Through Cross-Subsidization Source: American Hospital Association, “Trendwatch Chartbook 2014,” available at: Health Care Advisory Board interviews and analysis.www.aha.org Revisiting a Tenuous Business Model Hospital Payment-to-Cost Ratio, Private Payer, % Hospital Payment-to-Cost Ratio, Medicare, % Above-cost pricing Robust fee-for-service volume growth Steady price growth Only one component of our total business Commercial InsurancePublic Payers Below CostAbove Cost Traditional Hospital Cross-Subsidy

8 © 2014 The Advisory Board Company advisory.com 28603A 8 Entrenched Payers, Insulated Patients Unlikely to Upset Status Quo Source: Health Care Advisory Board interviews and analysis. Cross-Subsidy Depends on Inefficient Markets Established Provider Commercial pricing growth steady Network inclusion likely for most plans Patient volume depends largely on referral patterns 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 Price-Insulated Patient Open access to broad provider network standard Modest cost-sharing obscures true prices Physician recommendation dominates point-of-care decisionmaking Assumptions Underlying Provider Growth Strategy

9 © 2014 The Advisory Board Company advisory.com 28603A 9 Four Years Post-Reform, New Paradigm Finally Becoming Clear Source: Health Care Advisory Board interviews and analysis. The Retail Revolution Medicare Reforms and the Transition to Risk Coverage Expansion and the Rise of Individual Insurance Activist Employers and the Primacy of Value Major Themes Reshaping Provider Strategy

10 © 2014 The Advisory Board Company advisory.com 28603A 10 Medicare Payment Cuts Becoming the Norm Medicare Reforms and the Transition to Risk 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.www.cbo.gov 1)Includes hospital, skilled nursing facility, hospice, and home health services; excludes physician services. 2)Disproportionate Share Hospital. Public-Payer Reimbursement Still in the Crosshairs ACA’s Medicare Fee-for-Service Payment Cuts Reductions to Annual Payment Rate Increases 1 $260B Hospital payment rate cuts, Office of the Actuary, CMS “Notwithstanding recent favorable developments… Medicare still faces a substantial financial shortfall that will need to be addressed with further legislation” Not the End of the Story $56B$151B Reduced Medicare and Medicaid DSH 2 payments, Reduced Medicare payments due to sequestration and 2013 budget bill

11 © 2014 The Advisory Board Company advisory.com 28603A 11 More Mandatory Risk On the Horizon 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.www.advisory.com 1)Includes Value-Based Purchasing Program, Hospital Readmissions Reduction Program, and Hospital-Acquired Conditions Program. Steady Shift Toward Risk-Based Payment Clinical Process Patient Experience Outcomes of Care Efficiency Medicare Value-Based Purchasing Program Performance Criteria 6% Other Mandatory Risk Programs Hospital-Acquired Condition Penalties Readmission Penalties No Trivial Thing Weight in Total Performance Score Medicare revenue at risk from mandatory pay-for-performance programs 2, FY 2017

12 © 2014 The Advisory Board Company advisory.com 28603A 12 Dismal Outlook for Fee-for-Service Motivating a Look at Risk-Based Options Source: CMS, “More Partnerships Between Doctors and Hospitals Strengthen Coordinated Care for Medicare Beneficiaries,” December 23, 2013; Health Care Advisory Board interviews and analysis. More Providers Taking the Hint Medicare ACO Program Entrants 1 in 10 Medicare FFS beneficiaries attributed to an ACO 2012 MSSP 1 Cohorts 2013 MSSP Cohort 2012 Pioneer ACO Model Total 2014 MSSP Cohort The Broader Picture 20.5M Americans enrolled in or attributed to Medicare, Medicaid, or commercial ACOs 46M-52M Patients treated by ACOs as of April, Total ACO count, including commercial and Medicaid ACOs, May )Medicare Shared Savings Program

13 © 2014 The Advisory Board Company advisory.com 28603A 13 Performance, Persistence Closely Correlated 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. 1)Dropped out after second year; second-year performance not reported Some Pioneers Changing Course Pioneer ACO Performance First-year performance Second-year performance Dropped out after program year Gross Savings as Percentage of Benchmark % (min) 7.1% (max) Alison Fleury, CEO Sharp HealthCare ACO “The model was financially detrimental…despite favorable underlying utilization and quality performance”

14 © 2014 The Advisory Board Company advisory.com 28603A 14 Pending Program Updates Crucial for Future Participation 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. 1)Includes one participant’s $4M repayment of shared losses Medicare Shared Savings Program a Mixed Bag Medicare Shared Savings Program ACO Performance First Performance Year $297M Shared savings earned by MSSP ACOs in first performance year 1 Held Spending Below Benchmark, Earned Shared Savings Payment Held Spending Below Benchmark, but Did Not Earn Shared Savings Did Not Hold Spending Below Benchmark Will ACOs have any ability to prevent network leakage? Issues to Watch for in Updated Regulations Will second-term ACOs really have to bear downside risk? Will beneficiaries be attributed to ACOs prospectively? Will benchmarks be calculated differently? Will the share of savings paid to ACOs be higher?

15 © 2014 The Advisory Board Company advisory.com 28603A 15 Policymakers and (Some) Providers Angling for Higher-Octane Options Source: H.R. 5558, Health Care Advisory Board interviews and analysis. Transition to Risk Hardly Stalled The Bigger Question: What Should Medicare ACO Programs Be? Training grounds for other risk models? (e.g., Medicare Advantage) Adaptive environments involving progressively more risk? Permanent middle grounds between fee-for-service, capitation? Bill in Brief: “The ACO Improvement Act” 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

16 © 2014 The Advisory Board Company advisory.com 28603A 16 Shift Signals Individualization of the Medicare Market 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.www.kff.org Medicare Advantage Gaining Momentum Projected Medicare Advantage Enrollment 29.5% of Medicare beneficiaries 10.4M 19.0M Unambiguous incentive for population health management Provider Benefits Over Shared Savings Models Greater provider control over network integrity Less frequent patient churn

17 © 2014 The Advisory Board Company advisory.com 28603A 17 But Every Silver Lining Has Its Cloud Coverage Expansion and the Rise of Individualized Insurance 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. ACA (and Recovery) Making a Dent in Uninsurance 18.0% (highest on record) 13.4% (lowest on record) 2013 Q32014 Q3 Percentage of U.S. Adults Without Health Insurance Employer-sponsored coverage grows Medicaid expansion begins Insurance exchanges launch $5.7B Reduction in uncompensated care, 2014 A Bargain Still Unbalanced $14B ACA-related reductions in Medicare fee-for-service payment, 2014 vs.

18 © 2014 The Advisory Board Company advisory.com 28603A States Still Foregoing Expansion Medicaid Expansion 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.www.advisory.com 1)Estimate- does not include CT or ME. 2)Children’s Health Insurance Program. Medicaid Expansion Contentious—and Consequential Increase in Medicaid, CHIP 2 enrollment, October 2013-July M 1 Advisory Board estimate of impact of Medicaid expansion on typical hospital’s 10-year operating margin projection 2.4% State Participation in Medicaid Expansion ParticipatingNot Currently Participating As of October % Average Medicaid enrollment increase across non-expansion states PricewaterhouseCoopers “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” Financial Impact

19 © 2014 The Advisory Board Company advisory.com 28603A 19 Responsibility Migrating to Payers, Providers, Patients Source: Health Care Advisory Board interviews and analysis. Expanding or Not, States Pushing Medicaid Innovation Provider-Led Care Management E.g., Oregon’s “Coordinated Care Organizations” Exchange-Based Privatization E.g., Arkansas’ “Private Option” Full Medicaid Managed Care E.g., Florida’s Statewide Medicaid Managed Care Program Traditional State- Run Program Competing Philosophies on Medicaid Reform

20 © 2014 The Advisory Board Company advisory.com 28603A 20 Exchange-Based Medicaid Drawing Interest, But Broader Uptake Uncertain 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. Arkansas Turning to Private Market Arkansas residents eligible for expanded Medicaid coverage select plans on exchange Arkansas’s “Private Option” Using federal matching funds, State pays full cost of silver plan; beneficiary pays no premium Beneficiary holds private insurance; cost sharing based on existing Medicaid rules Program Likely Not Budget-Neutral $778M Increase in cost of expansion under exchange system relative to GAO estimate of cost under traditional Medicaid CMS Wary of Other Modifications Pennsylvania application for similar waiver denied over inclusion of work requirements Arkansas proposal to require individual health savings account contributions still pending

21 © 2014 The Advisory Board Company advisory.com 28603A 21 Aggregate Numbers in Line With Expectations; Enrollee Mix Older Insurance Exchanges 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.www.politico.com 1)Numbers do not add precisely due to rounding. One Year In, Insurance Exchanges Generally on Track Initial Public Exchange Enrollment M (Original CBO Projection) 91% Of enrollees still enrolled as of September M Projected exchange enrollment by 2018 Enrollees aged %

22 © 2014 The Advisory Board Company advisory.com 28603A 22 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. 1)Data from federally-facilitated exchanges only. Individuals Gravitating Toward Leaner Plans Bronze Level 1: Choice of Metal Tier Gold Platinum Catastrophic Silver Premium Sensitivity Manifest at Two Levels Factors Influencing Metal Level Deductible Copays Out-of-Pocket Maximum Non-Essential Services Covered Network Composition Level 2: Plan Choice Within Metal Tier Any Other Plan Lowest- Cost Plan Second-Lowest-Cost Plan All Metal Levels 1 Scope of Non-Essential Benefits Negotiated Payment Rates to Providers Utilization Patterns, Trends Premium Levers Beyond Benefit Design Negotiated Rates

23 © 2014 The Advisory Board Company advisory.com 28603A 23 Aggressive Cost Sharing Potentially Troublesome for Provider Strategy 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. High Deductibles Dominating Exchange Markets $6,000+ $3,000-$5,999 Individual Deductibles Offered On Public Exchanges 2014 Median $1,000- $2,999 <$1,000 Individual Deductibles Chosen on eHealth Individual Marketplace $2,500$6,250 Maximum High out-of-pocket costs discourage appropriate utilization Challenges for Providers Large patient obligations lead to more bad debt, charity care Price-sensitive patients more likely to seek lower- cost options

24 © 2014 The Advisory Board Company advisory.com 28603A 24 Payers Betting Individual Consumers Value Affordability Over Broad Choice 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.www.forbes.com 1)“Pathway X” bronze plans compared to leading PPO plan offering across nine states. 2)Comparing products by the same carrier of the same tier, across 7 carriers. Premium Sensitivity Supporting Narrow Networks Median premium reduction directly attributable to network narrowing 2 26% Breadth of Hospital Networks in Exchange Plans 20 Urban Markets, December 2013 Exclude 30% of 20 largest hospitals Average Percent of PPO Network Specialists Included in Exchange Plan Networks 1 Anthem BlueCross BlueShield, 2014 “Ultra-Narrow” “Narrow” Broad Exclude 70% of 20 largest hospitals 100% PPO Network Breadth

25 © 2014 The Advisory Board Company advisory.com 28603A 25 Is It Worth Winning Share With Unsustainable Premiums? 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. 1)Pre-exchange individual market Proper Risk Pricing Still Essential Low Premiums Moving the Market……but Perhaps Not the Right One 2% Market share in % Market share in 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 2014: Marcus Merz CEO, PreferredOne “Continuing to provide this coverage through MNsure is not sustainable.” 2013:

26 © 2014 The Advisory Board Company advisory.com 28603A 26 Robust Marketplaces Beginning to Develop What Next for the Exchanges? 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. Increased Insurer Participation Driving Competition Issuers Offering Qualified Health Plans Estimated reduction in second-lowest-cost silver premium of one new issuer entering market Gail Boudreaux, EVP UnitedHealth Group “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.” Competition At Work 4%

27 © 2014 The Advisory Board Company advisory.com 28603A 27 Second Round of Open Enrollment Will Reveal True Dynamics What to Watch for on the Exchanges Trends We’ll Be Watching: 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? 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? Market Reaction: How aggressively will providers court the newly insured? Will employers dump workers onto the exchanges? 1 2 3

28 © 2014 The Advisory Board Company advisory.com 28603A 28 Will Employers Maintain Coverage, and How? Activist Employers and the Primacy of Value Employer-Sponsored Insurance at a Crossroads “Activation”“Abdication” Convert to Self-Funding Pros: Close control over network design Exemption from minimum benefits requirements Cons: Greater financial risk Network assembly challenging Shift to Private Exchange Pros: Responsiveness to employee preference Predictable, defined contributions Cons: Disruption to benefit design Risk employees may underinsure Spectrum of Options for Controlling Health Benefits Expense Drop Coverage Pros: Escape from cycle of rising premium costs Cons: Employer mandate penalty Labor market disadvantage Source: Health Care Advisory Board interviews and analysis.

29 © 2014 The Advisory Board Company advisory.com 28603A 29 Low-Wage Employers Most Active Today, but Skilled Industries in the Wings Source: Accenture, “Are You Ready? Private Health Insurance Exchanges are Looming;” privatehealthexchange.com; Health Care Advisory Board interviews and analysis. Huge Growth Forecast for Private Exchanges Potential Growth Path for Private Exchange Enrollment Private exchange operators as of October, Prominent Employers Using Private Exchanges For Active Employees:For Retirees: (Medicare Advantage, Medigap plans)

30 © 2014 The Advisory Board Company advisory.com 28603A 30 Understanding Why Private Exchanges Matter Beyond the Buzzword 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.

31 © 2014 The Advisory Board Company advisory.com 28603A 31 Small Employers Also Beginning to Show Interest 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. 1)3 to 50 FTEs. Self-Funded Strategies Steadily Gaining Ground ACA Benefits Standards Avoidable Through Self-Funding Modified Community Rating Essential Health Benefits Guaranteed Issue and Renewability Medical Loss Ratio Requirements 26% of small employers’ 1 brokers have discussed with them the possibility of self-insurance Percentage of Covered Workers in Self-Funded Plans

32 © 2014 The Advisory Board Company advisory.com 28603A 32 Custom Network Builders Offering Local Solutions Source: Innovative Healthware Services, Inc., Arnold, MD; Health Care Advisory Board interviews and analysis. Hands-On Network Management Increasingly Feasible 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 Self-funded employer submits list of physicians, hospitals, and ancillary care IHS negotiates cost-effective provider agreements using Medicare-based pricing IHS continually evaluates network providers to “ensure competitive price contracts” IHS 1 “Custom Provider Network” Solution Innovative Healthware Services “ 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.”

33 © 2014 The Advisory Board Company advisory.com 28603A 33 Exporting Walmart’s Centers of Excellence Program 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. Aggregators Pooling Employers, Providers Case in Brief: Health Design Plus 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 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 Bruce Sherman Medical Director, Employers Health Coalition “It would be prohibitive for a small employer…When you spread the administrative costs over a number of employers, it becomes more attractive.”

34 © 2014 The Advisory Board Company advisory.com 28603A 34 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. 1)Presbyterian Healthcare Services. Some Providers Taking Lead in Network Assembly 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 5,400 Covered lives in contract $8-10M Projected savings, Intel-Presbyterian Partnership 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 PHS 1 providers Shared Accountability Upside and downside risk for health care spending compared to projected target

35 © 2014 The Advisory Board Company advisory.com 28603A 35 Multiple Opportunities to Appeal to Decision-Makers Source: Health Care Advisory Board interviews and analysis. Providers Must Win Share at Two Points of Sale Network SelectionCare DecisionNetwork Assembly Decision Processes Shaping Provider Choice Being chosen by payers, employers, exchange operators, custom network builders, and accountable physician entities to be offered as a network option Being chosen by patients, referring physicians at the point of care Being chosen by individuals during plan enrollment Secure Enrolled LivesWin Share of Volumes 12

36 © 2014 The Advisory Board Company advisory.com 28603A 36 Source: Health Care Advisory Board interviews and analysis. Recognizing New Channels for Growth Established Provider Care Delivery Network Relationship-Based Referring Physician Cost-Conscious Referring Physician Price-Sensitive Consumer Entrenched Payer Vulnerable Payer Activated Employer Exchange Operator Custom Network Builder Secure Enrolled LivesWin Share of Volumes Traditional Growth Channels Key Decision-Makers in Traditional and New Growth Channels Individual Insurance Shopper Accountable Physician Entity New Growth Channels

37 © 2014 The Advisory Board Company advisory.com 28603A 37 New Dynamics Unfamiliar in Health Care, But Not in Broader Economy Source: Health Care Advisory Board interviews and analysis. All Signs Point to a Retail Market Traditional MarketRetail Market Growing number of buyers 1 Proliferation of product options 2 Increased transparency 3 Reduced switching costs 4 Greater consumer cost exposure 5 Passive employer, price-insulated employee Activist employer, price-sensitive individual Broad, open networksNarrow, custom networks No platform for apples-to- apples plan comparison Clear plan comparison on exchange platforms Disruptive for employers to change benefit options Easy for individuals to switch plans annually Constant employee premium contribution, low deductibles Variable individual premium contribution, high deductibles

38 © 2014 The Advisory Board Company advisory.com 28603A 38 Delivering Desirable Network Attributes at Low Cost Source: Health Care Advisory Board interviews and analysis. Redefining the Value Proposition 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 Low CostDesirable Network Attributes Four Imperatives for Health Systems

39 © 2014 The Advisory Board Company advisory.com 28603A 39 Delivering Desirable Network Attributes at Low Cost Source: Health Care Advisory Board interviews and analysis. Redefining the Value Proposition 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 Low CostDesirable Network Attributes Four Imperatives for Health Systems

40 © 2014 The Advisory Board Company advisory.com 28603A 40 Care Choices, Network Assembly Dynamics Driven by Premium Pressure Source: Health Care Advisory Board interviews and analysis. Low Premiums Shaping More than Network Selection Premium Sensitivity at Point of Coverage Price Sensitivity at Point of Care Total Cost Scrutiny in Network Assembly Consequences of Premium Sensitivity Health Care Executive “Our price is now given by the market. Our business is changing from cost-based pricing to price-based costing. ”

41 © 2014 The Advisory Board Company advisory.com 28603A 41 Cost-Conscious Behavior Affecting Pillars of Profitability 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.www.kff.orgwww.newchoicehealth.com 1)High-deductible health plan. 2)$2,086; based on KFF report of average HDHP deductible. 3)$733; based on KFF report of average PPO deductible. Price Sensitivity at the Point of Care Consumers Paying More Out-of-Pocket Fall within HDHP deductible 2 $730 $900 $1,269 $2,183 $411 Price-sensitive shoppers will be acutely aware of price variation MRI prices range from $400 to $2,183 MRI Price Variation Across Washington, DC Fall within PPO deductible 3

42 © 2014 The Advisory Board Company advisory.com 28603A 42 Low-Cost Access Potentially Just the Beginning Source: Canales MW, “Wal-Mart Opening Clinic in Cove,” Killeen Daily Herald, April 18, 2014, available at: Health Care Advisory Board interviews and analyais.www.kdhnews.com Walmart Bringing Everyday Low Prices to Health Care Two nurse practitioners provider primary care services on site Clinic refers to external specialists, hospitals as appropriate Service: Pricing: $4$40 For Walmart employees For Walmart customers Hours: Care Clinic Model Weekdays 8AM-8PM Saturday 8AM-5PM Sunday 10AM-6PM Labeed Diab President of Health & Wellness Walmart “Our goal is to be the number one health-care provider in the industry.” 130M150M Annual emergency department visits Weekly visits to Walmart stores Probably Worth Paying Attention

43 © 2014 The Advisory Board Company advisory.com 28603A 43 Network Assemblers Looking at More Than Unit Price Source: Health Care Advisory Board interviews and analysis. Broadening Our Concept of Cost Advantage Price Cut Improve efficiency to offer lower fee schedule Trend Control Implement care management to control cost growth trend Degree of Cost Control Two Cost-Focused Strategies for Appealing to Network Assemblers Low Unit PriceTotal Cost Control

44 © 2014 The Advisory Board Company advisory.com 28603A 44 Source: Overland D, “CareFirst Medical Home Saves More in Second Year,” FierceHealthPayer, June 7, 2013, available at: Health Care Advisory Board interviews and analysis.www.fiercehealthpayer.com 1)Per member per month. Creating Cost-Conscious PCPs Case in Brief: CareFirst BlueCross BlueShield 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 Eligible PCPs participating 80% Members covered by PCMH program 1M Average pay increase for PCPs receiving bonuses 29% “Virtual panel” of PCPs Panel shares in savings if risk- adjusted PMPM cost is below target PMPM Cost Target Actual PMPM Cost Total cost target set by trending baseline risk-adjusted PMPM cost by average regional cost growth CareFirst PCMH Total Cost Incentive Model Risk-adjusted PMPM 1 Cost

45 © 2014 The Advisory Board Company advisory.com 28603A 45 Total Cost Transparency Key to Referral Changes Source: Health Care Advisory Board interviews and analysis. Steering Care to Most Efficient Specialists Specialists Color-Coded By Total Cost PCP Virtual Panels Employed Specialist A (Red) Employed Specialist B (Yellow) Independent Specialist C (Green) Hospital AHospital B Percent of panels earning bonuses, % Difference in risk-adjusted PMPM cost between top- and bottom-quartile PCPs 27% Savings from PCMH program, 2012 $98M Chet Burrell President & CEO CareFirst BlueCross BlueShield “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.”

46 © 2014 The Advisory Board Company advisory.com 28603A 46 Discerning When Not to Operate Source: The Advisory Board Company, “Commercial Bundled Payment Tracker,” October 9, 2013, available at: Health Care Advisory Board interviews and analysis.www.advisory.com The Value of a Second Opinion Of referred patients do not undergo surgery 30-50% 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 Pepsi Co. In 2011, offered employees free cardiac and complex joint replacement surgery at Johns Hopkins Medicine Large Employers and Hospitals Participating in Centers of Excellence Programs

47 © 2014 The Advisory Board Company advisory.com 28603A 47 Assuring Employers of Ability to Manage Future Costs Source: Health Care Advisory Board interviews and analysis. Making the Case for 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 Powerful Ways to Signal Care Management Capabilities Chief Marketing Officer Large Health System “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.”

48 © 2014 The Advisory Board Company advisory.com 28603A 48 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.www.healthleadersmedia.comwww.aurorahealthcare.org Promising Total Cost Savings to Employers Average savings guaranteed to employers over three years 10% Savings Guaranteed Off Of Projected Costs Case in Brief: Aurora Health Care 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 Two Separate Products with Different Payer Partners Time Employer Health Spending Guaranteed Savings Baseline spending projected using three years’ historical spending 1 2 Blue Priority (Anthem Blue Cross and Blue Shield) Aetna Whole Health (Aetna) Roundy’s Supermarkets, Inc. was first large employer client

49 © 2014 The Advisory Board Company advisory.com 28603A 49 Delivering Desirable Network Attributes at Low Cost Source: Health Care Advisory Board interviews and analysis. Redefining the Value Proposition 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 Low CostDesirable Network Attributes Four Imperatives for Health Systems

50 © 2014 The Advisory Board Company advisory.com 28603A 50 Source: Health Care Advisory Board interviews and analysis. 1)Pseudonym. Which Would You Choose? Broad Geographic Reach… Network in Brief: Crescent Health 1 National hospital provider with hospital campuses across the country Despite broad geography, limited clinical depth at local level …or Deep Clinical Scope? Network in Brief: Silica Healthcare 1 6-hospital system in the Midwest with employed physician network Care sites concentrated in roughly half of single metropolitan area

51 © 2014 The Advisory Board Company advisory.com 28603A 51 Source: Health Care Advisory Board interviews and analysis. Full Care Continuum Important for Payer Partners Four Reasons PinnacleHealth System Selected for Risk-Based Product Favorable Pricing Structure 6-12 Months’ Experience Under Performance Incentives Broad Provider Geographic Footprint Comprehensive Clinical Scope Sample Clinical Services Primary Care Pediatric Care Imaging Cardiovascular Care Orthopedics Physical Therapy and Rehab Inpatient Care 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

52 © 2014 The Advisory Board Company advisory.com 28603A 52 Addressing Individual Limits in Geographic Reach Source: Health Care Advisory Board interviews and analysis. Combining Geographies to Match Purchaser Footprint Network in Brief: Healthcare Solutions Network Cincinnati-based employers have employees living on both sides of river 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 Partnering to Expand Geographic Reach St. Elizabeth Healthcare TriHealth Neither Organization Able to Offer Adequate Geographic Coverage Alone Ohio Kentucky

53 © 2014 The Advisory Board Company advisory.com 28603A 53 National and Hyper-Local Competition Reshaping Notions of Sufficiency Source: Health Care Advisory Board interviews and analysis. Geographic and Clinical Demands Intertwined Neighborhood Conveniences Potential Differentiators Disease management, care navigation Digestive health Women’s midlife Sports medicine Midwifery Transplants Neurosurgery Complex cardiac (e.g. TAVR 1 ) Clinical trials Primary care Pediatrics Imaging Ambulatory surgery Radiation therapy Medical oncology Core Services Local Offerings Regional/National Destinations Emergency Dialysis Rehab Stroke Cardiology OB/Gyn Routine orthopedics SNF Pediatric specialty Oncology Alternative access points (e.g. retail, urgent care) E-visits, remote monitoring Home health Purchasers’ Geographic Preferences for Clinical Services Balancing an Increasing Demand for Convenience with an Increasing Willingness to Travel Cardiac surgery Technology- intensive procedures 1)Transcatheter Aortic Valve Replacement.

54 © 2014 The Advisory Board Company advisory.com 28603A 54 Delivering Desirable Network Attributes at Low Cost Source: Health Care Advisory Board interviews and analysis. Redefining the Value Proposition 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 Low CostDesirable Network Attributes Four Imperatives for Health Systems

55 © 2014 The Advisory Board Company advisory.com 28603A 55 Source: Health Care Advisory Board interviews and analysis. “Quality” Means Different Things for Different People Network AssemblersIndividuals Facility-level clinical process, outcome measures Actual ease of access, care experience Network-level quality, access, service ratings Network SelectionCare Decision Quality Demands of Network Assemblers and Individuals

56 © 2014 The Advisory Board Company advisory.com 28603A 56 Steering Care Toward High-Quality Providers Source: Health Care Advisory Board interviews and analysis. 1)Sample metrics include mortality rate, complication rate, and readmissions rate. Custom Network Builders Scrutinizing Performance Step 1: Evaluation of Clinical Performance Data Provider Evaluation Process at Imagine Health National Top Quartile Clinical Performance Step 2: RFP Evaluation of Additional Factors Per capita cost of care Efficiency of care utilization Care experience programs 1 Case in Brief: Imagine Health 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

57 © 2014 The Advisory Board Company advisory.com 28603A 57 Chris Gorey Chief Marketing Officer Providence Health Systems Boeing’s Access Requirements Winning Contracts By Meeting Access Demands Source: Health Care Advisory Board interviews and analysis. Providers Must Also Deliver on Ease of Access  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 Case in Brief: Providence-Swedish Health Alliance Alliance between Providence Health Systems, Swedish Health Services in Seattle, WA Awarded contract to serve as Boeing’s narrow ACO network option “[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.

58 © 2014 The Advisory Board Company advisory.com 28603A 58 An Expected Part of the Patient Experience 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.www.informationweek.com Online Access Becoming the New Baseline 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 KP.org Portal Key Features View medical record Schedule appointments Fill prescriptions Assign proxy access View lab results Communicate with physician Consumers Demanding Portal Features n = 1,000 U.S. Consumers Access to Medical Records Online Appointment Booking Prescription Refill Requests Receiving /Text Reminders

59 © 2014 The Advisory Board Company advisory.com 28603A 59 Patient Experience Vital For Securing Purchaser Choice Year Over Year Source: Health Care Advisory Board interviews and analysis. Welcome to the Renewals Business Day 1 Day 365 Care Decision Network Selection and Ongoing Experience Care Decision Clinical interactions represent repeated opportunities to reinforce patient preference through superior experience Annual network selection in fluid insurance market implies consistent reevaluation of network performance Patient Experience

60 © 2014 The Advisory Board Company advisory.com 28603A 60 Not Immediately Obvious Which Advantages Will Dominate Source: Health Care Advisory Board interviews and analysis. Recipe for Success Becoming Far More Complex Network AssemblyNetwork SelectionCare 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 On-demand access options Great care experience On-demand access options Prompt appointment times Extended hours Cost Reach and Scope Clinical and Service Quality Network AssemblersIndividual Consumer Retail Market Traditional Market Threshold Factors DifferentiatingFactors Expanding Arena of Competition

61 © 2014 The Advisory Board Company advisory.com 28603A 61 Search for Financial, Geographic Scale Driving Hospital M&A Strategic Advantage #1: Scale 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. Consolidation on the March Other Notable Hospital M&A Activity $6.5B Combined system’s expected annual revenue Baylor + Scott and White Mount Sinai + Continuum Health Partners Beaumont + Botsford + Oakwood “Combined, we will create economies of scale that will allow us to reduce the trend of rising health care costs.” Michele Richardson Advocate Board Chair Case in Brief: Advocate NorthShore Health Partners 16-hospital merger of Advocate Health Care, NorthShore University HealthSystem Creates strong clinical, geographic presence in Chicago area

62 © 2014 The Advisory Board Company advisory.com 28603A 62 Policy Tensions Remain Between Integration, Competitiveness Source: Health Care Advisory Board interviews and analysis. Aggregation Always Subject to Regulatory Scrutiny January 2014: Federal judge blocks merger of St. Luke’s Health System and Saltzer Medical Group April 2014: U.S. Court of Appeals orders ProMedica to unwind its 2010 acquisition of St. Luke’s Hospital January 2014: FTC rules CHS must divest two hospitals to complete HMA acquisition …But Market Power Still a Red FlagAllowances for Effective Coordination… Bundled payment programs open door to gainsharing with Medicare revenues Clinical Integration safe harbors allow joint contracting between independent physicians CMS incentivizes, promotes ACO programs

63 © 2014 The Advisory Board Company advisory.com 28603A 63 Insurer, Seven Competing Systems Offer Market-Wide Solution Strategic Advantage #2: Integration 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. Vivity Betting on Coordination over Consolidation Anthem Blue Cross Cedars- Sinai Medical Center Good Samaritan Hospital PIH Health MemorialCare Health System UCLA Health Torrance Memorial Health Huntington Memorial Hospital 7 health systems 14 hospitals 6,000 physicians “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.” Pam Kehaly Anthem Blue Cross

64 © 2014 The Advisory Board Company advisory.com 28603A 64 But Will Less-Intensive Arrangements Yield Sufficient Gains? Source: Health Care Advisory Board interviews and analysis. New Partnerships Aim at Integration Without M&A Seven systems in NY, NJ, MA, and PA form Allspire Network Six hospitals form BJC Collaborative: 14 systems ally to form Stratus Health Care Two Systems form Georgia Health Collaborative Four health systems form regional alliance Health Innovations Ohio Four health systems ally to form Noble Health Alliance Five health systems ally to form accountable care initiative Quality Health Solutions Five SC systems form cost saving Initiant Healthcare Collaborative Five health systems join Vanderbilt Health Affiliate Network

65 © 2014 The Advisory Board Company advisory.com 28603A 65 Born Out of Necessity, No-Frills Approach Suddenly Compelling Strategic Advantage #3: Efficiency Source: Health Care Advisory Board interviews and analysis. The Community Hospital Resurgent? Rural or exurban setting Medicare, Medicaid- heavy payer mix Limited service portfolio Physician shortages Smaller patient population Labor costs lower than urban competitors Already managing to public-payer margins Fewer unjustifiable fixed costs Early experience with team- based care, telemedicine More focused patient engagement efforts Common ChallengesPotential Advantages The Community Hospital Initiative 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

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

67 © 2014 The Advisory Board Company advisory.com Road Map Charting an Intentional Corporate Strategy Leverage Beyond Price The New Network Advantage

68 © 2014 The Advisory Board Company advisory.com 28603A 68 Consolidation Dominating Industry Mindshare Source: Health Care Advisory Board interviews and analysis. Insecurity Abounds The End of Independence? “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 $10 Billion or Bust? “Any health system is going to need $10 billion in revenue to survive in tomorrow’s market” Overheard at 2014 J.P. Morgan Healthcare Conference What Was Your Reaction? CHS-HMA merger puts more pressure on stand-alones to seek partners -Page 6 SURVIVAL BIGGEST OF THE August 5, 2013

69 © 2014 The Advisory Board Company advisory.com 28603A 69 But Will Less-Intensive Arrangements Yield Sufficient Gains? Source: Health Care Advisory Board interviews and analysis. New Partnerships Aim at Integration Without M&A Seven systems in NY, NJ, MA, and PA form Allspire Network Six hospitals form BJC Collaborative 14 systems ally to form Stratus Health Care Two Systems form Georgia Health Collaborative Four health systems form regional alliance Health Innovations Ohio Four health systems ally to form Noble Health Alliance Five health systems ally to form accountable care initiative Quality Health Solutions Five SC systems form cost saving Initiant Healthcare Collaborative Five health systems join Vanderbilt Health Affiliate Network

70 © 2014 The Advisory Board Company advisory.com 28603A 70 Five Major Varieties of Provider Partnership Source: Health Care Advisory Board interviews and analysis. No Shortage of Alternative Models Merger or Acquisition Clinically- Integrated Hospital Network Accountable Care Organization Regional Collaborative Clinical Affiliation DescriptionFormal 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 ExamplesBaylor 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

71 © 2014 The Advisory Board Company advisory.com 28603A 71 Defenses Around Old Business Model Unlikely to Hold Source: Health Care Advisory Board interviews and analysis. Protection Not the Right Motivation Higher prices charged to payers Lower prices paid to suppliers Typical Advantages of Market Power Regulators scrutinizing any arrangement conferring undue market power Increasingly competitive markets punishing inflexible, high-cost providers Size confers price leverage Volume-based negotiating strategies like GPOs nearing their limit Diminishing Returns to Traditional Strategy

72 © 2014 The Advisory Board Company advisory.com 28603A 72 Partnerships Must Drive Market Advantage Source: Health Care Advisory Board interviews and analysis. Leverage Beyond Price the Key to Success Cost Advantage Winning Preference Through Clinical Scope and Geographic Reach Lowering Unit Prices Through Operational Scale Reducing Total Costs Through Population Health Influence on Network Assembly Control Over Underlying Cost Structures Impact on Entire Care Continuum Product Advantage Degree of Market Advantage Time to Maximum Benefit

73 © 2014 The Advisory Board Company advisory.com 28603A 73 Overcoming Financial Barriers 6.Jointly-Financed Infrastructure Investment Breaking Down Information Silos 7.Continuum-Wide Data Transparency Hardwiring Mutual Accountability 8.Network-Enabled Performance Incentives Source: The Advisory Board Company interviews and analysis. The New Network Advantage III Winning Preference Through Clinical Scope and Geographic Reach III Cost AdvantageProduct Advantage Reducing Total Costs Through Population Health Lowering Unit Prices Through Operational Scale Leveraging Low-Price Care Sites 3.Top-of-site Referral Partnerships Slimming Underlying Cost Structures 4.Clinical Footprint Rationalization 5.Next-Generation Shared Services Driving Network Assembly 1.Comprehensive Network Product Appealing to Network Assemblers 2.Portfolio-Enhancing Clinical Partnerships

74 © 2014 The Advisory Board Company advisory.com 28603A 74 Discrete Elements of Partnership Support Specific Goals Source: Health Care Advisory Board interviews and analysis. Meaningful Integration About More than the Model Potential Elements of Provider Integration Payer Contracting Brand/Identity Strategic Plan Governance Operations Clinical IT Care Model Expertise Strengthens negotiating position, allows access to larger purchasers Confers reputational benefits, signals strength of integration Allows rationalized investments/divestitures Enables process efficiencies, knowledge exchange Broadens perspective over care continuum; reveals opportunities for reducing total cost of care Reduces fragmentation in care delivery; improves outcomes Flattens learning curves; promotes best practices Ensures stability and implementation of other shared elements Potential Benefits

75 © 2014 The Advisory Board Company advisory.com 28603A 75 Choice of Model Only Determines Environment for Pursuing Integration Source: Health Care Advisory Board interviews and analysis. Concrete Decisions Beyond Legal Structure Contracting Brand/Identity Strategic Plan Expertise Care Model Clinical IT Operations Governance Centralization Collaboration Independence Questions for Every Partnership 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?

76 © 2014 The Advisory Board Company advisory.com Road Map Charting an Intentional Corporate Strategy Leverage Beyond Price The New Network Advantage

77 77 Winning Preference Through Clinical Scope and Geographic Reach Driving Network Assembly 1.Comprehensive Network Product Appealing to Network Assemblers 2.Portfolio-Enhancing Clinical Partnerships

78 © 2014 The Advisory Board Company advisory.com 28603A 78 Source: Health Care Advisory Board interviews and analysis. 1)Pseudonym. Which Would You Choose? Broad Geographic Reach… Network in Brief: Crescent Health 1 National hospital provider with hospital campuses across the country Despite broad geography, limited clinical depth at local level …or Deep Clinical Scope? Network in Brief: Silica Healthcare 1 6-hospital system in the Midwest with employed physician network Care sites concentrated in roughly half of single metropolitan area

79 © 2014 The Advisory Board Company advisory.com 28603A 79 Individual footprint sufficient to appeal to small employers in local market Flexible Approach Meets the Demands of a Wide Range of Purchasers Source: Health Care Advisory Board interviews and analysis. Developing a Targeted Network Strategy (or Three) Regional Network in Brief: Whitehaven Health 1 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 Discussing possibility of additional partnerships to form state-wide network able to contract with state employers Partnership with like-minded, geographically contiguous health system provides flexibility to sign larger regional contracts Local Super-Regional Partnership-driven Geographic Reach Number of contracting possibilities A Multi-Layered Approach to Network Development 1)Pseudonym.

80 © 2014 The Advisory Board Company advisory.com 28603A 80 Local Small employers Local payers Regional Large employers National payers Super-Regional State/national employers International purchasers Source: Health Care Advisory Board interviews and analysis. Deciding Whether to Take the Lead What is your organization’s network strategy? Driving Network Assembly Appealing to Network Assemblers A Key Decision at Every Level

81 © 2014 The Advisory Board Company advisory.com 28603A 81 Collaboration Provides a Financially-Sustainable, Proactive Approach Source: Health Care Advisory Board interviews and analysis. Leveraging Partnership to Appeal to Purchasers Brand Marketing Build or Buy Driving Network Assembly Appealing to Network Assemblers Committed to Independence Open to Collaboration Pitfall: Increasingly difficult for all but niche providers to confidently position organization as “must-have” Pitfall: Extremely slow and capital- intensive; may require moving away from core competencies Comprehensive Network Product 1 Portfolio-Enhancing Clinical Partnerships 2

82 © 2014 The Advisory Board Company advisory.com 28603A 82 Addressing Individual Limits in Geographic Reach Source: Health Care Advisory Board interviews and analysis. Combining Geographies to Match Purchaser Footprint Network in Brief: Healthcare Solutions Network Cincinnati-based employers have employees living on both sides of river 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 Partnering to Expand Geographic Scope St. Elizabeth Healthcare TriHealth Neither Organization Able to Offer Adequate Geographic Coverage Alone Ohio Kentucky

83 © 2014 The Advisory Board Company advisory.com 28603A 83 Selling Narrow Network Product Through Commercial Insurers Source: Health Care Advisory Board interviews and analysis. Using Expanded Reach to Target Local Employers TriHealth St. Elizabeth’s Healthcare Solutions Network Public Payers Local Employers Insurer sells HSN as a narrow network product Combined geography sufficient to support large Cincinnati employers Creating a Purchaser-Focused Network Solution Governance Organization CEOs serve as Co-CEOs with support of existing management teams Quality Alignment Aligning quality targets to work towards demonstrable quality improvements Historical Relationship Previous collaboration around insurance products key to ensuring mutual trust Key Partnership Elements

84 © 2014 The Advisory Board Company advisory.com 28603A 84 Network in Brief: EvergreenHealth and Virginia Mason Creating a Comprehensive High-Value Network Through Partnership Source: Health Care Advisory Board interviews and analysis. Aligning to Expand Clinical Scope EvergreenHealth Gains access to quaternary facility with proven clinical outcomes and access to expanded geography Virginia Mason Gains access to home care services and fills gap of secondary facilities east of Seattle with a partner with a proven reputation for value 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 Beginning with Cardiac and Neuroscience Care Virginia Mason quaternary facility EvergreenHealth home care EvergreenHealth tertiary facility Virginia Mason clinics

85 © 2014 The Advisory Board Company advisory.com 28603A 85 Built on a Foundation of Shared Vision Source: Health Care Advisory Board interviews and analysis. Ensure A Cohesive Bond Bob Malte, CEO, EvergreenHealth Linking a Network Without an LLC “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.” 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 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

86 © 2014 The Advisory Board Company advisory.com 28603A 86 Telemedicine Partnerships Allow Complex Care to Remain In-House Tactic #2: Portfolio-Enhancing Clinical Partnerships Source: Health Care Advisory Board interviews and analysis; Mayo Clinic Care Network, available at: Bringing High-End Expertise to the Local Market 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 1.eConsult: Specialists can connect with Mayo Clinic experts when they want additional input on complex patient care 2.AskMayoExpert: Web- based system allows members to access Mayo perspective on hundreds of medical conditions Systems and AMCs Also Seeking to Enhance Portfolios

87 © 2014 The Advisory Board Company advisory.com 28603A 87 Conflicting Incentives a Risk When Partnering Regionally Source: Health Care Advisory Board interviews and analysis 1)Pseudonym. Competitive Dynamics Threaten Local Partnerships Case in Brief: Nielsen Park Hospital 1 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 Multi-Layered Collaboration Promises Benefit… Shared Staff Physicians from tertiary hub travel to community hospital Telemedicine Allows community physicians to consult with specialists in real-time Co-branding Community hospital able to brand itself as affiliate of tertiary hub …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

88 © 2014 The Advisory Board Company advisory.com 28603A 88 Ideal Geography a Key Tension in Clinical Affiliation Decisions Source: Health Care Advisory Board interviews and analysis. Weighing a Local or National Partner 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

89 © 2014 The Advisory Board Company advisory.com 28603A 89 Winning Preference Through Clinical Scope and Geographic Reach Source: Health Care Advisory Board interviews and analysis Key Takeaways 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.

90 © 2014 The Advisory Board Company advisory.com 28603A 90 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.

91 © 2014 The Advisory Board Company advisory.com 28603A 91 Source: Health Care Advisory Board interviews and analysis. Ideal Partners Complementary Clinical Assets Complementary Geography Strong Brand Name Shared Strategic Vision Willingness to Share Referrals Five Characteristics of the Ideal Partner 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

92 92 Lowering Unit Costs Through Operational Scale Leveraging Low-Price Care Sites 3.Top-of-Site Referral Partnerships Slimming Underlying Cost Structures 4.Clinical Footprint Rationalization 5.Next-Generation Shared Services

93 © 2014 The Advisory Board Company advisory.com 28603A 93 Limited Ability to Compete Against Low-Cost Providers Source: Regents Health Resources, “Imaging Market File,” Radiology Business Journal, April 2011; Health Care Advisory Board interviews and analysis. 1)MRI, CT, Radiography, Nuclear Medicine, Ultrasound, Mammography, and PET. 2)Hospital Outpatient Department. High Cost Driving Price Rigidity High Fixed Cost Production Model Low-Cost Narrow-Focus Care Sites Difference in Average Price for Common Imaging Procedures 1 HOPD 2 vs. Freestanding Imaging Facilities, % lower Struggling to offset expensive fixed cost base Lack of back-office efficiency Facilities with low-fixed costs Streamlined focus on narrow set of services vs.

94 © 2014 The Advisory Board Company advisory.com 28603A 94 Three Tactics for Increasing Price Flexibility Source: Health Care Advisory Board interviews and analysis. Use Networks to Build Operational Scale Slimming Underlying Cost Structures 4 Next-Generation Shared Services Leveraging Low-Price Care Sites Top-of-Site Referral Partnerships 35 Clinical Footprint Rationalization

95 © 2014 The Advisory Board Company advisory.com 28603A 95 Sending Patients to the Right Site, at the Right Cost Tactic #3:Top-of-Site Referral Partnerships Source: Health Care Advisory Board interviews and analysis. Re-envisioning Top-of-Site Care Tertiary Hospital to Community Hospital Emergency Department to Urgent Care Provider Primary Care Office to Retail Clinic School Clinic Urgent Care Pediatric After Hours Women’s Clinic Pediatric Urgent Care Medical Home E-Visits Full Worksite Clinic Mental Health Urgent Care Advanced Care Center Retail Clinic Chronic Disease Clinic An Expanding Network of Low- Acuity Partners Three Main No-Regrets Focus Areas for Volume Shifts 1 2 3

96 © 2014 The Advisory Board Company advisory.com 28603A 96 Faulkner’s Stubbornly Low Prices Show Benefit of Strategy 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. 1)Came together under common corporate parent More Than Just Theoretical Brigham and Women’s Proving the Point Lower commercial prices at Faulkner vs. BWH, as of 2012 General admissions shifted from BWH to Faulkner since % 13.7% 2013 Case Mix Index Faulkner Hospital 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 Attractive Strategy In Negotiations with Purchasers Merged

97 © 2014 The Advisory Board Company advisory.com 28603A 97 Source: Health Care Advisory Board interviews and analysis. 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

98 © 2014 The Advisory Board Company advisory.com 28603A 98 Integration of Clinical Programs Needed to Encourage Top-of-Site Care 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. Removing Obstacles to Volume Reallocation Joint Clinical Programs Due to limited operating room availability at Brigham, unfilled rooms at Faulkner made available to BWH surgeons 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 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

99 © 2014 The Advisory Board Company advisory.com 28603A 99 Most Markets Far From Rationalized Tactic #4: Clinical Footprint Rationalization Source: Alicia Caramenico, “Council: Eliminate excess hospital beds to save $116M,” Fierce Healthcare, May 2013; Health Care Advisory Board interviews and analysis. Right-Sizing Facility Footprint a Clear Opportunity Per bed when removing beds piecemeal, includes reduction in supply and staff expenses $25-106K Per bed when closing entire facilities, includes facility, supply, and staffing cost reductions $580K Despite Reductions in Hospital Beds, Most Organizations Still Have Excess Capacity U.S. Inpatient Beds, Occupancy Rate )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. Significant Opportunity for Savings in Reducing Excess Bed Capacity Estimated Cost Savings from Eliminating Expectedly Empty Beds in Rhode Island 1

100 © 2014 The Advisory Board Company advisory.com 28603A 100 Northwest Metro Alliance Combined Planning Process Strategic Alignment Allows for More Efficient Planning for Future Capacity Source: HealthPartners and Allina Hospitals and Clinics, available at: b_ pdf, accessed 3 May 2014; Health Care Advisory Board interviews and analysis First, Do No Harm 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 Alliance creates guiding principles and rules Shared incentives under HealthPartners’ health plan encourages cooperation Allows for collaborative planning across the entire population Example: HealthPartners and Allina Health are joint owners of two outpatient imaging centers in the market Avoids Duplication of Services within Shared Market

101 © 2014 The Advisory Board Company advisory.com 28603A 101 Consolidation of More Lucrative Services May Require Financial Alignment Source: Health Care Advisory Board interviews and analysis. Address All Stakeholder Incentives 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 Components of Alignment Necessary to Execute on Capacity Rationalization HSHS-Prevea Partnership Finds Opportunity to Rationalize Duplicative Imaging Capacity in Wisconsin

102 © 2014 The Advisory Board Company advisory.com 28603A 102 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 multi- specialty group in the Green Bay area, since 1995 Over time, HSHS and Prevea have increased level of financial integration to improve network efficiency

103 © 2014 The Advisory Board Company advisory.com 28603A 103 Byron 1 Merger Showcases Potential of Full-Service Line Consolidation Source: Health Care Advisory Board interviews and analysis. 1)Pseudonym. Limit to What Can Be Achieved Without Full Merger Bells Medical Center cases/year Large campus with excess capacity Clarkes Hospital cases/year Capacity constraints for other services Decision to Consolidate Duplicative CV Services at Byron Health 1 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 25% Loss in market-share after consolidation 0% Reduction in number of Cardio- Pulmonary Perfusionists needed

104 © 2014 The Advisory Board Company advisory.com 28603A 104 Source: Health Care Advisory Board interviews and analysis. Limit to What Can Be Achieved Without Full Merger Network in Brief: Byron Health 1 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

105 © 2014 The Advisory Board Company advisory.com 28603A 105 Applying the “Shared Services” Concept to Health Care Tactic #5: Next-Generation Shared Services Source: Health Care Advisory Board interviews and analysis. Creating Advantage Through ‘Internal Outsourcing’ Attributes of a Top-Performing Shared Services Organization Treats operational units as clients, competes for business vs. outside vendors 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 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

106 © 2014 The Advisory Board Company advisory.com 28603A 106 Significant Opportunity to Improve Network Attractiveness Source: Health Care Advisory Board interviews and analysis. 1)Intensity Modulated Radiation Therapy Translating Cost Savings into Competitive Pricing 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 IMRT 1 Machine Service-Specific Price Reductions e.g. reduce outpatient imaging prices up to 35% while still maintaining existing margins Universal Price Reductions Reduce prices overall by up to 5.9% while still maintaining existing margins 150-bed hospital carries out successful cost-savings initiative Manages to cut $2 million from operating expenses Savings Reallocation Options for Hypothetical Medium-Size U.S Hospital

107 © 2014 The Advisory Board Company advisory.com 28603A 107 Lowering Unit Costs Through Operational Scale Source: Health Care Advisory Board interviews and analysis. Key Takeaways 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.

108 © 2014 The Advisory Board Company advisory.com 28603A 108 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.

109 © 2014 The Advisory Board Company advisory.com 28603A 109 Ideal Partners Complementary Case Mix Low Cost Structure Willingness to Consolidate Cultural Closeness Existing Capabilities Five Characteristics of the Ideal Partner 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.

110 110 Reducing Total Costs Through Population Health Overcoming Financial Barriers 6.Jointly-Financed Infrastructure Investment Breaking Down Information Silos 7.Continuum-Wide Data Transparency Hardwiring Mutual Accountability 8.Network-Enabled Performance Incentives

111 © 2014 The Advisory Board Company advisory.com 28603A 111 Controlling Unit Costs Only Part of the Equation Source: Health Care Advisory Board interviews and analysis. Providers Judged by Ability to Reduce Utilization 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 Three Provider Strategies to Appeal to Network Assemblers on Cost Low Unit PriceTotal Cost Control

112 © 2014 The Advisory Board Company advisory.com 28603A 112 Steps To Total Cost Management Well Established Source: Health Care Advisory Board interviews and analysis. A Clear Path for Improvement Keep patient healthy, loyal to the system Avoid unnecessary higher- acuity, higher-cost spending Trade high-cost services for low-cost management High- Risk Patients Rising-Risk Patients Low-Risk Patients 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 Attaining Financial Success From Patient Management

113 © 2014 The Advisory Board Company advisory.com 28603A 113 Partnership Offers a Path Forward Source: Health Care Advisory Board interviews and analysis. Population Health a Difficult Ambition Acting Alone Reducing Financial Barriers 6 Jointly-Financed Infrastructure Investment Hardwiring Mutual Accountability 8 Network-Enabled Performance Standards Problem #3: Lack of shared accountability Problem #1: Insufficient financial capital Breaking Down Information Silos 7 Continuum-Wide Data Transparency Problem #2: Fragmented data and expertise

114 © 2014 The Advisory Board Company advisory.com 28603A 114 Population Health Requires Extensive Investment Source: American Hospital Association, “Activities and Costs to Develop an Accountable Care Organization,” available at: aco.pdf, accessed May 5, 2014; Health Care Advisory Board interviews and analysis. Tactic #6: Jointly-Financed Infrastructure Investment 1)American Hospital Association. An Undeniable Financial Burden AHA’s 1 estimate of ACO start-up costs fora 5-hospital system $12M Care management staffing Electronic Medical Record Common Areas of Investment Patient-Centered Medical Home Disease Registry Post-Acute Care network Management resources AHA’s estimate of ongoing annual ACO costs for a 5-hospital system $14.1M Legal and consulting support Health Information Exchange Predictive analytics PCP recruitment Specialist network Patient engagement tools

115 © 2014 The Advisory Board Company advisory.com 28603A 115 Shared Care Management Investment Through ACO Source: Health Care Advisory Board interviews and analysis. Partnership Reduces Individual Financial Burden Arizona Care Network Shared Staffing Model Arizona Care Network Dignity Health Arizona Care management teams (RN, community resource specialist, pharmacist) Physician support staff (e.g. for quality training) IT infrastructure Abrazo Health 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 Jointly-owned physician- led ACO and CI network Shared Investment Areas

116 © 2014 The Advisory Board Company advisory.com 28603A 116 Partners Benefitting from Master Patient Index Tactic #7: Continuum-Wide Data Transparency Source: Healthcare Financial Management Association, “Dallas-Fort Worth Hospitals Share Data for Dramatic Improvements,” available at: https://www.hfma.org/Content.aspx?id=22078, accessed May 5, 2014; Health Care Advisory Board interviews and analysis. Pool Data Across Network to Pinpoint Efforts Network in Brief: Dallas-Fort Worth Hospital Council Foundation 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 Regional Utilization Trends Reveal Top Population Health Opportunities 80 area hospitals feed patient utilization data into enterprise data warehouse 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

117 © 2014 The Advisory Board Company advisory.com 28603A 117 Ensures Management of Riskiest Population Segments Source: Healthcare Financial Management Association, “Dallas-Fort Worth Hospitals Share Data for Dramatic Improvements,” available at: https://www.hfma.org/Content.aspx?id=22078, accessed May 5, 2014; Health Care Advisory Board interviews and analysis. Putting the Master Patient Index into Practice 20% Reduction in readmissions across all member hospitals Real-Time Data Enables Targeted Resource Deployment at One Member Hospital Reduction in 30-day acute myocardial infarction readmission rate at one member hospital 12%9% 16%12% Reduction in 30-day pneumonia readmission rate at one member hospital 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 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 z 12 34

118 © 2014 The Advisory Board Company advisory.com 28603A 118 Drilling Down to the Individual Patient Level Four Approaches to Real-Time Data Sharing Among Network Partners 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. 1)Admission, Discharge, Transfer. 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 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 ADT 1 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

119 © 2014 The Advisory Board Company advisory.com 28603A 119 Shared Processes Eliminate Gaps in Stand-Alone Efforts Establish a Common Network Language 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 Analysis of Top 1,000 Riskiest Patients Revealed: Consolidating Risk Scores First Step to Aligned Care Management Source: Blue Shield of California, “An Accountable Care Organization Pilot: Lessons Learned,” available at: https://www.blueshieldca.com/employer/documents/knowledge- center/features/EKH_ACO%20Lessons%20Learned%20Case%20Study.pdf, accessed 3 May 2014; Health Care Advisory Board interviews and analysis.

120 © 2014 The Advisory Board Company advisory.com 28603A 120 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: https://www.blueshieldca.com/employer/documents/knowledge- center/features/EKH_ACO%20Lessons%20Learned%20Case%20Study.pdf, accessed 3 May 2014; Health Care Advisory Board interviews and analysis.

121 © 2014 The Advisory Board Company advisory.com 28603A 121 Two Promising Strategies to Hold Partners Accountable Tactic #8: Network-Enabled Performance Incentives Source: Health Care Advisory Board interviews and analysis. Hardwiring Mutual Accountability Including partners in formal risk-based arrangements (e.g. shared savings, global payment contracts) Candidates: Hospital ACO partners Employed physicians Ancillary providers Formal Shared Risk Membership-Based Incentive Positioning membership in the network itself as performance incentive (e.g., preferred referral network) Candidates: Clinical Integration Network Post-Acute Care Providers

122 © 2014 The Advisory Board Company advisory.com 28603A 122 Bringing Ancillary Providers to the Table Through Shared Savings Source: MMC Physician-Hospital Organization, available at: accessed May 3, 2014; Health Care Advisory Board interviews and analysis; Extend Shared Risk Beyond Hospital and Physicians Network in Brief: MMC Physician-Hospital Organization 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 Home Health Included because of high Medicare utilization Lab Included due to relevance for any population 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 SNF Included because of high Medicare utilization Behavioral Health Included in case of expansion to Medicaid Portion of savings that will be distributed to “other providers”, i.e. not hospitals, PCPs, or specialists 5% MMC Physician-Hospital Organization ACO

123 © 2014 The Advisory Board Company advisory.com 28603A 123 Implementing Lessons from Physician CI 1 Source: Health Care Advisory Board interviews and analysis. 1)Clinical integration. 2)Pseudonym. Creating the Incentive to Keep Up Network in Brief: Cronulla Health Care 2 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 All physicians must meet a minimal performance threshold on “CI score” Physicians who score below minimum threshold placed on probation for one year Creating Motivation to Meet Network Standard Threat of Probation Incents Improvement Benefits to Network Inclusion Favorable payer rates from joint contracting Access to IT infrastructure

124 © 2014 The Advisory Board Company advisory.com 28603A 124 Promise of Increased Referrals Creates Performance Incentive for PACs Source: Healthcare Financial Management Association, “Bridging Acute and Post-Acute Care,” available at: Acute_Care, accessed May 3, 2014; Health Care Advisory Board interviews and analysis. Extending Network Exclusivity to the PAC World Setting Out Strict Quality Standards to Achieve and Maintain Preferred Status Network in Brief: OSF Healthcare 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 SNF Standards  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 Requiring Monthly Reporting to Ensure Continuous Performance Network in Brief: North Shore-LIJ 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 Monthly SNF Scorecard _____ Long-term care mortality rate _____ Long-term hospitalization index _____ Total readmission rate within 30 days _____ Total readmission rate within 72 hours

125 © 2014 The Advisory Board Company advisory.com 28603A 125 Promote Continuous Improvement Through Focused Partnership Preferred Networks Prove Ability to Reduce Total Cost 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 Reduction in ED visits from affiliated SNFs >50% Source: Healthcare Financial Management Association, “Bridging Acute and Post-Acute Care,” available at: Acute_Care, accessed May 3, 2014; Health Care Advisory Board interviews and analysis.

126 © 2014 The Advisory Board Company advisory.com 28603A 126 Source: Health Care Advisory Board interviews and analysis. 1)Group Purchasing Organizations. 2)Post-Acute Care. Mutual Benefit Necessary to Create Incentive Areas of Mutual Benefit Access to Operational Resources Health systems may provide access to functionalities like their GPOs 1 or IT systems that PAC 2 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 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 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 Key Health System BenefitKey PAC Benefit Critical Elements of Preferred PAC Network

127 © 2014 The Advisory Board Company advisory.com 28603A 127 Reducing Total Costs Through Population Health Source: Health Care Advisory Board interviews and analysis. Key Takeaways 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

128 © 2014 The Advisory Board Company advisory.com 28603A 128 Source: Health Care Advisory Board interviews and analysis. Weighing the Models Model 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

129 © 2014 The Advisory Board Company advisory.com 28603A 129 Source: Health Care Advisory Board interviews and analysis. Ideal Partners Common Patient Population 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 Complementary Population Health Assets 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 Access to Claims Data 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 Three Characteristics of the Ideal Partner

130 © 2014 The Advisory Board Company advisory.com Road Map Charting an Intentional Corporate Strategy Leverage Beyond Price The New Network Advantage

131 © 2014 The Advisory Board Company advisory.com 28603A 131 Leverage Beyond Price the Key to Success Source: Health Care Advisory Board interviews and analysis. Partnerships Must Drive Market Advantage Winning Preference Through Clinical Scope and Geographic Reach Lowering Unit Prices Through Operational Scale Reducing Total Costs Through Population Health Cost Advantage IIIIII Product Advantage Degree of Market Advantage Time to Maximum Benefit Driving Network Assembly Appealing to Network Assemblers Leveraging Low-Price Care Sites Slimming Underlying Cost Structures Overcoming Financial Barriers Breaking Down Information Silos Hardwiring Mutual Accountability

132 © 2014 The Advisory Board Company advisory.com 28603A 132 Source: Health Care Advisory Board interviews and analysis. Model Choice No Guarantee of Success Legal Ability to Cooperate Models like M&A, clinical integration, and shared risk provide legal framework that enables collaboration Shared Identity Partnership creates unified identify, whether through formal legal structure or informal collaboration Models Set Ground Rules… Cultural Alignment Identity may be in name-only; true cultural alignment requires robust communication plan, extensive training Stakeholder Buy-In Governance structure no guarantee of buy-in from key stakeholders such as physicians and board members 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...But Underlying Challenges Remain

133 © 2014 The Advisory Board Company advisory.com 28603A 133 Success Depends on Focused, Intentional Strategy and Execution Network Strategy Must Be More Than Just a Hobby Integration as Core Competency Scientific Approach to Cultural Fit Transactional DisciplineClarity of PurposeProfessionally Managed Pipeline 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” 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 Five Characteristics of Intentional Corporate Strategy Source: Health Care Advisory Board interviews and analysis.

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