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State of the Industry Market Trends at the Intersection of Philanthropy and Health Care NACCDO April 25, 2013 Michael Philanthropy.

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Presentation on theme: "State of the Industry Market Trends at the Intersection of Philanthropy and Health Care NACCDO April 25, 2013 Michael Philanthropy."— Presentation transcript:

1 State of the Industry Market Trends at the Intersection of Philanthropy and Health Care NACCDO April 25, 2013 Michael Philanthropy Leadership Council

2 © 2011 THE ADVISORY BOARD COMPANY ADVISORY.COM

3 Project Directors Cynthia Schaal Ben Umansky Philanthropy Leadership Council Contributing Consultants Helen Lin Laura Wolkoff Rivka Friedman Rob Lazerow Christine Casey Design Consultants Sarah Avery Keith Morgan Executive Directors Steven Berkow Tom Cassels Matthew Eirich Christopher Kerns

4 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. 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 © 2011 THE ADVISORY BOARD COMPANY 23321A Giving on a Slow Rebound? Source: Giving USA 2011: The Numbers; “U.S. charitable giving shows modest uptick in 2010 following two years of declines,” June 20, 2011, available at: GUSA.aspx; Philanthropy Leadership Council analysis. 1)Adjusted for inflation. 2)Includes clinics, hospitals, health related research facilities, disease-specific organizations for research or patient/family support, mental health services or research, and health policy centers. Change in Charitable Contributions 1 Overall 5 To Health Organizations

6 © 2011 THE ADVISORY BOARD COMPANY 23321A The Real Picture Source: Giving USA 2011: The Numbers; “U.S. charitable giving shows modest uptick in 2010 following two years of declines,” June 20, 2011, available at: GUSA.aspx; Philanthropy Leadership Council analysis. 1)Adjusted for inflation. 2)Includes clinics, hospitals, health related research facilities, disease-specific organizations for research or patient/family support, mental health services or research, and health policy centers. Change in Charitable Contributions Indexed to 2007 To Health Organizations

7 © 2012 THE ADVISORY BOARD COMPANY 25355A Three Flashpoints in Health Care Policy 7 Source: Advisory Board interviews and analysis. June 2012: Individual mandate upheld Medicaid expansion upheld, but states may “opt out” without impact on existing Medicaid funds November 2012: Economy issues central to elections Medicaid budgets influence state elections Potential House & Senate majorities shift Supreme Court Ruling2012 ElectionsEnd-of-Year Budget Debate December 2012: “Doc fix” worth $18B set to expire Bush tax cuts set to expire Federal government hits debt ceiling limit of $16.39T $1.2T Sequester cuts take effect, including 2% cuts to Medicare Debt ceiling deal further cuts spending Event Timeline

8 © 2011 THE ADVISORY BOARD COMPANY 23321A Health Care Likely On the Chopping Block 8 But Little Agreement on How Source: Health Care Advisory Board interviews and analysis. 1)Includes spending for Medicare, Medicaid, CHIP, substance abuse and mental health services, National Institutes of Health, and Food and Drug Administration. Distribution of Spending in 2012 Budget (Estimate) Health Care 1 Defense Social Security Interest on Debt Other Possible Approaches to Reducing Health Care Spending Decreased supplemental payments Eligibility changesProvider rate cuts Payment model overhaul (i.e. voucher system) Fraud, waste reduction Cost shifting to beneficiaries

9 © 2011 THE ADVISORY BOARD COMPANY 23321A Hardly a More Critical Time of Need 9 Hospitals and Health Systems Under Immense Margin Pressure Source: Daily Briefing, “Moody's: Hospital revenue growth at 20-year low, in 'critical condition‘, August 10, 2011, Briefing/2011/08/10/Moodys-Hospital-revenue-growth-at-20-year-low-in-critical-condition; Daily Briefing, “Moody's: Hospital downgrades return to credit crisis levels,” July 18, 2011, Moody’s Investor Service, “Moody's: Not-for-profit hospitals face revenue reductions across the board,” August 9, 2011, available at: research/Moodys- Not-for-profit-hospitals-face-revenue-reductions-across-the?lang=en&cy=global&docid=PR_224301#; Advisory Board analysis. Hospital Operating Margins Moody’s Rated Hospitals 0% – 5% > 5% < 0%

10 © 2011 THE ADVISORY BOARD COMPANY 23508A Decelerating Price Growth Continuing Cost Pressure Shifting Payer Mix Deteriorating Case Mix Medical demand from aging population threatens to crowd out profitable procedures Incidence of chronic disease, multiple comorbidities rising No sign of slower cost growth ahead Drivers of new cost growth largely non-accretive Baby Boomers entering Medicare rolls Coverage expansion boosting Medicaid eligibility Most demand growth over the next decade comes from publicly insured patients Federal, state budget pressures constraining public payer price growth Payments subject to quality, cost-based risks Commercial cost shifting stretched to the limit Four Forces Shaping Future Margins 10 Financial, Clinical Profiles Shifting Dramatically Source: Health Care Advisory Board interviews and analysis.

11 © 2011 THE ADVISORY BOARD COMPANY 23508A New Baseline Already Challenging 11 Affordable Care Act Significantly Reduces Public Payments Source: US House of Representatives, “Amendment in the Nature of a Substitute to H.R. 4872, as Reported,” accessed March 18, 2010; US Senate, The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act,” accessed December 24, 2009; Health Care Advisory Board interviews and analysis. Decelerating Price Growth Impact of Affordable Care Act on Provider Rates Cumulative Federal Revenue from Decreased Medicare and Medicaid DSH Payments $110 B Cuts to Medicare Fee-For-Service rates $36 B Cuts to Disproportionate Share Hospital (DSH) payments $22.0 B $14.0 B $500 M $0 B $3.6 B $12.6 B $7.6 B $17.0 B $8.4 B $3.5 B $1.7 B $1.1 B

12 © 2011 THE ADVISORY BOARD COMPANY 23508A Cost-Shifting Possible, But For How Long? 12 Commercial Subsidy Under Ever-Greater Pressure Source: American Hospital Association Chartbook, available at: accessed April 26, 2011; Health Care Advisory Board interviews and analysis. 1)Includes Medicaid Disproportionate Share Hospital payments. Payment-to-Cost Ratios, by Payer 1 Private Payer Medicaid Medicare 2009 Ratio 90.1% 89.0% % Decelerating Price Growth Running on Empty “If we could squeeze more out of our payers, we would. But I don’t think there’s much left to squeeze.” CEO ”

13 © 2011 THE ADVISORY BOARD COMPANY 23508A Deceleration in Private Payer Pricing Likely 13 Source: Health Care Advisory Board interviews and analysis. Decelerating Price Growth Pressures on Commercial Pricing 4 Quality performance risk increasingly prevalent 5 New payment models demanding utilization management Regulatory scrutiny of premium increases intensifying Exchange-based coverage diluting average commercial price Employers increasingly willing to restrict choice 132

14 © 2011 THE ADVISORY BOARD COMPANY 23508A Long-Term Cost Growth Continuing 14 Market, Regulatory, Demographic Pressures Mounting Source: American Hospital Association Chartbook, available at: accessed April 29, 2011; Health Care Advisory Board interviews and analysis. Continuing Cost Pressure Expenses per Adjusted AdmissionDrivers of Continued Cost Growth: Market pressures pushing up unit costs of labor, other inputs Overhead expenses swelling as new IT mandates take hold Aging, sicker population requiring increasingly complex, costly care pathways $6,509 $10,045 $4,588 Cost Growth, : 3.6% Cost Growth, : 4.4%

15 © 2011 THE ADVISORY BOARD COMPANY 23508A Baby Boomer Surge Beginning 15 Medicare Rolls in Line to Increase Dramatically Source: U.S. Census Bureau, available at: accessed on September 13, 2011; Kaiser Family Foundation, available at: accessed on September 13, 2011; Health Care Advisory Board interviews and analysis. Shifting Payer Mix 2011 US Population Distribution By Age ~7,000/day Newly eligible Medicare beneficiaries 23% Percentage of population covered by Medicare in M Baby Boomers

16 © 2011 THE ADVISORY BOARD COMPANY 23508A Moving Ever Closer to Single Payer 16 Medicare to Constitute Majority of Discharges by 2021 Source: Health Care Advisory Board interviews and analysis. Shifting Payer Mix Inpatient Volume by Payer Class Medicaid Commercial Self Pay Medicare 0.3% Medicaid Commercial Self Pay Medicare

17 © 2011 THE ADVISORY BOARD COMPANY 23508A Future Demand Will Not Fund Capacity Expansion 17 Even at Current Prices, Public Payments Fail to Cover Total Costs 1)Fully-allocated costs. 2)Includes Medicaid Disproportionate Share Hospital payments. Average Payment Relative To Cost 1 By Payer Medicare, Medicaid volume growth unable to finance capacity expansion 100% Commercial Medicare Medicaid 2 Source: American Hospital Association Chartbook, available at accessed April 26, 2011; Health Care Advisory Board interviews and analysis. Shifting Payer Mix

18 © 2011 THE ADVISORY BOARD COMPANY 23321A More Medicine On the Horizon 18 Public Payer Volumes Composed of Predominantly Medical Cases Source: Health Care Advisory Board interviews and analysis. Deteriorating Case Mix Medical and Surgical Shares of Volume, by Payer Medical Surgical CommercialMedicareMedicaid

19 © 2011 THE ADVISORY BOARD COMPANY 23321A Chronic Disease Growth Outpacing Population Growth 19 Source: Milken Institute, available at: pdf/chronic_disease_report.pdf, accessed April 27, 2011; Health Care Advisory Board interviews and analysis. Deteriorating Case Mix Projected Increase in Chronic Disease Cases %: Projected population growth,

20 © 2011 THE ADVISORY BOARD COMPANY 23321A Shift in Case Mix Posing Powerful Margin Threat 20 Destabilizing our Second Pillar of Cross-Subsidy Source: Medicare Cost Reports; Health Care Advisory Board interviews and analysis. Deteriorating Case Mix 1)Top quartile by share of inpatient discharges paid by Medicare or Medicaid. Inpatient Contribution Income Weighted Per-Case Average

21 © 2011 THE ADVISORY BOARD COMPANY 23321A Key Characteristics Welcome to Pleasantville 21 Average Care for Average People Source: Health Care Advisory Board interviews and analysis. Case in Brief: Pleasantville Hospital Health Care Advisory Board model hospital Revenue, cost, and operational inputs based on national averages Inputs adjusted to forecast impact on future financial performance Offers insight into relative opportunity of pulling various margin improvement levers 300 Number of beds 2.2% Operating margin 73% Medical share of case mix

22 © 2012 THE ADVISORY BOARD COMPANY 25646B The Unsustainable Acute Care Enterprise 22 An Untenable Future Without Major Improvements Source: Health Care Advisory Board interviews and analysis. Case in Brief: Pleasantville Hospital Health Care Advisory Board model hospital Revenue, cost, and operational inputs based on national averages Inputs adjusted to forecast impact on future financial performance Offers insight into relative opportunity of pulling various margin improvement levers 300 Number of beds 2.2% Operating margin 73% Medical share of case mix Key Characteristics Overall Impact of Market Forces at Pleasantville %: Total Gap-to-Goal Current Margin Projected Operating Margin, 2022 Goal Includes effects of: Price growth trends Cost growth trends Payer mix shift Case mix deterioration

23 © 2011 THE ADVISORY BOARD COMPANY 23321A Achieving the New Performance Standard 23 Inaction Not an Option Source: Health Care Advisory Board interviews and analysis. Nine Imperatives for Achieving the New Performance Standard 1.Maximize Revenue Capture 2.Excel Under Performance Risk 3.Bend Labor Cost Curves 4.Standardize Clinical Care Pathways 5.Redesign Inpatient Care Models 6.Build Effective Capacity 7.Reassess Supply of Less Profitable Services 8.Deflect Demand of Less Profitable Services 9.Secure Surgical Market Share More relevant implications for health care philanthropy

24 © 2011 THE ADVISORY BOARD COMPANY 23321A Demand Growth to Outpace Physical Capacity 24 Long-term Capacity Constraints In Play as Demand Grows Imperative #6: Build Effective Capacity Capacity Crunch at Pleasantville Projected Occupancy Without Capacity Expansion 5,118 uncaptured discharges Practical limit of average occupancy Source: Health Care Advisory Board interviews and analysis.

25 © 2011 THE ADVISORY BOARD COMPANY 23321A It Makes Sense To Fill the Bed… 25 Growth is Good, as Long as You Have a Place for It Contribution Profit per CaseEffect of Demand Growth Without Capacity Constraints Source: Health Care Advisory Board interviews and analysis. Impact of Fully Captured Demand (3%) Change in inpatient revenue per case 38%33% Change in inpatient volume Change in total inpatient revenue Hospital significantly below maximum occupancy; able to absorb all new demand Volume growth mitigates negative impact of worsening case mix By Payer

26 © 2011 THE ADVISORY BOARD COMPANY 23321A …But Not to Build the Bed 26 Improved Throughput Most Feasible Way to Capture Excess Demand Pleasantville Capacity Crunch Option 2: Overloading Current Resources Option 3: Expediting Patient Throughput Option 1: Constructing New Facilities Incurs significant capital expense Future prices less able to pay fixed costs Extra beds must be staffed, supplied No space for above- average census days Raises serious patient safety concerns Generates unsustainable workload Creates capacity for more discharges without raising number of patient days Requires investment in better care pathways, but does not explicitly raise fixed, variable costs Action: Build 85 New BedsAction: Operate at 104% Average Occupancy Action: Lower Average LOS to 3.7 Days Staffed Beds: 300 Average LOS: 4.8 days Average Occupancy Limit: 80% Excess Demand: 5,118 discharges Source: Health Care Advisory Board interviews and analysis.

27 © 2011 THE ADVISORY BOARD COMPANY 23321A The End of the Cornerstone Capital Project? 27 Source: Philanthropy Leadership Council Member Topic Poll 2011, interviews and analysis. Comprehensive Capital 42% 46% Mini-Campaign 5% 7% Other n=76 Percent of Council Members Currently Conducting Campaigns, by Type Jeopardizing Our Primary Campaign Priorities Impact on Representative Comprehensive Campaign Priorities: 1.New Patient Tower 2.Cancer Center Pavilion 3.Nursing Scholarships 4.Endowed Chairs 5.Research Goal: $100 M Timeline: 6 years

28 © 2011 THE ADVISORY BOARD COMPANY 23321A Optimal Service Portfolio Not Just About the Money 28 Many Factors to Consider When Assessing Service Offerings Source: Health Care Advisory Board interviews and analysis. Imperative #7: Reassess Supply of Less Profitable Services 1)Pseudonym. Service Line Evaluation Process at Bassoon Health System 1 Financial Criteria (10 points each): EBITDA Net Income Overall Financial Strength Scorecard: <20 Points: Seriously consider divestiture Points: Borderline case, attempt to reposition >30 Points: Keep and maintain Case in Brief: Bassoon Health System Four-hospital health system located in the South Employs standard template to evaluate viability of “non-core” service line offerings Identifies services that must be kept, can be divested, or should be repositioned for growth Financial performance, strategic considerations, practical factors all considered Non-Financial Criteria (5 points each): Strategic Necessity Mission/Community Benefit Brand Internal Politics Risk Factors Management Resource Requirements

29 © 2011 THE ADVISORY BOARD COMPANY 23321A Service Offerings Not on a Lightswitch 29 Community Pressures, Core Business Restrict Supply-Side Options Community ObligationDiffuse Responsibility Source: Health Care Advisory Board interviews and analysis. Q: If you wanted to avoid treating diabetic complications, what service line would you cut? CFO Non-negotiable services Not specific to diabetes If Not Us, Then Whom? “We have to have some unprofitable services because we’re a public hospital and there is no one else who wants to offer them. You can divest from services if you’re in a market where there is someone else to offer them, but we don’t have that luxury.” CFO ” Inpatient Medicine? Emergency Department? General Surgery? Hospitalist Program?

30 © 2011 THE ADVISORY BOARD COMPANY 23321A Establishing the Medical Perimeter 30 Extensive Ambulatory Care Network Addresses Medical Demand Source: Health Care Advisory Board interviews and analysis. Medical Management Investments Health Information Exchanges Electronic Medical Records Medical Home Infrastructure Primary Care Access Population Health Analytics Patient Activation Post-Acute Alignment Disease Management Programs

31 © 2011 THE ADVISORY BOARD COMPANY 23321A A New Breed of Funding Priorities 31 Can We Make the Case for Reducing Demand? Information Technology Electronic medical records Health information exchanges Patient online portals Programmatic Support Disease management programs Prevention initiatives Community partnerships Primary Care Infrastructure Medical homes Outpatient offices Off-campus clinics Source: Philanthropy Leadership Council interviews and analysis. VISION 2020

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