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Health Care Advisory Board Health System Strategy at the Tipping Point Forces Shaping Provider Strategy in the New Health Care Economy.

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Presentation on theme: "Health Care Advisory Board Health System Strategy at the Tipping Point Forces Shaping Provider Strategy in the New Health Care Economy."— Presentation transcript:

1 Health Care Advisory Board Health System Strategy at the Tipping Point Forces Shaping Provider Strategy in the New Health Care Economy

2 ©2013 The Advisory Board Company advisory.com

3 Health Care Advisory Board Project Director Ben Umansky Design Consultant Christina Lin Managing Director 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 Health System Strategy at the Tipping Point Forces Shaping Provider Strategy in the New Health Care Economy Health Care Advisory Board

6 © 2013 The Advisory Board Company 27497A 2 3 1 Road Map 6 The Rise of Productive Growth The New Logic of Choice A Crumbling Cross-Subsidy

7 © 2013 The Advisory Board Company 27497A Not the Smoothest of Starts Federal Exchange Slow to Answer the Bell

8 © 2013 The Advisory Board Company 27497A Some State Exchanges Faring Better 8 Enrollment Slow, But Most Websites Working Source: Kaiser Family Foundation, “State Decisions for Creating Health Insurance Exchanges, as of May 28, 2013,” available at: www.kff.org; CNBC, “One Washington gets Obamacare Right,” available at: http://www.cnbc.com/id/101096445, Kentucky Governor’s Office, “2.6 Million Page Views on Kynect for Affordable Health Insurance,” available at: http://migration.kentucky.gov/newsroom/governor/20131005kynect.htm; Health Care Advisory Board interviews and analysis.www.kff.orghttp://www.cnbc.com/id/101096445http://migration.kentucky.gov/newsroom/governor/20131005kynect.htm State Decisions on Exchange Participation 16 States, District of Columbia Running Own Exchanges State-Based Exchange Federal Exchange Partnership Exchange State Exchange Enrollment Within First Week of Launch >40,000 Completed applications in New York 16,311 Completed applications in California 326 Completed applications in Maryland 12,955 Completed applications in Kentucky

9 © 2013 The Advisory Board Company 27497A Post-Subsidy Premiums Within Reach for Many 9 But Penalties Still Smaller than Cost of Coverage Observation #1: Affordable Premiums YearAnnual Penalty 2014 $95 or 1% of income 2015 $325 or 2% of income 2016 $695 or 2.5% of income Penalties for Non-compliance Annual Penalty Income: $30,000 Source: Kaiser Family Foundation, “Kaiser Health Tracking Poll,” March 2013, available at: kff.org; PwC, “Health Insurance Exchanges: Long on Options, Short on Time,” October 2012, available at: www.pwc.com; Health Care Advisory Board interviews and analysis.kff.orgwww.pwc.com Weighted Average Monthly Premiums for Adult Individual Aged 27 For Second Cheapest Silver Plan, by State, 2014, Pre and Post subsidy 1 for Income of $30,000

10 © 2013 The Advisory Board Company 27497A Trading Price for Volume on the Public Exchanges 10 Reimbursement Information Still Anecdotal, but Rates Not Generous Source: Mathews AW and Kamp J, “Another Big Step in Reshaping HealthCare,” Wall Street Journal, February 28, 2013, available at: www.online.wsj.com;; Health Care Advisory Board interviews and analysis.www.online.wsj.com Observation #2: Low Reimbursement 1)Pseudonym. Anticipated Provider Reimbursement Rates for Exchange Plans Catholic Health Initiatives Modest discounts from commercial rates Tenet Healthcare Up to 10% below commercial rates Meriwether Hospital 1 5% below commercial rates WellPoint Inc. Between Medicare and Medicaid rates Meyers Health 1 10% above Medicare rates Millern Medical Center 1 20% below commercial rates

11 © 2013 The Advisory Board Company 27497A Lower Prices through Narrower Networks 11 Source: Covered California, “Health Plans & Rates for 2014: Making the Individual Market in California Affordable, May 23, 2013, available at: www.coveredca.com; Kliff S, “California Obamacare premiums: No ‘rate shock’ here,” Washington Post, May 23, 2013, available at: www.washingtonpost.com; Terhune C, “Insurers limit doctors, hospitals in state-run exchange plans,” LA Times, May 24, 2013, available at: www.articles.latimes.com; Health Care Advisory Board interviews and analysis.www.coveredca.comwww.washingtonpost.comwww.articles.latimes.com Observation #3: Narrow Networks 1)Silver plan premiums for 40-year old individual, before subsidy; actual rates represent HMO plans in Northern Los Angeles. Monthly Health Insurance Premiums Cedars-Sinai Medical Center not participating in any exchange plan networks UCLA Health System participating in only one exchange plan network Prominent Health Systems Largely on the Sidelines 36%80%13 Blue Shield of California network physicians in payer’s exchange plans California physicians, hospitals participating in at least one exchange plan Insurers offering plans on Covered California exchange 5M Individuals expected to be eligible for Covered California exchange, 2014 Actual Premiums Select California Exchange Plans, 2014 1

12 © 2013 The Advisory Board Company 27497A Still Time to Work Out the Kinks 12 Six Months of Open Enrollment Ahead (And More Every Year) Source: Health Care Advisory Board interviews and analysis. October 1, 2013 Exchange websites officially open March 31, 2014 Open enrollment period ends Individuals still uninsured subject to tax penalty in 2014 filing January 1, 2014 Exchange-purchased coverage goes into effect Individuals without insurance have three months to purchase coverage, avoid penalty October 15, 2014 2015 open enrollment period begins Open enrollment period Insurance Exchange Enrollment Timeline An overview of the federal health insurance exchanges with questions, implications for providers; available at advisory.com Publication in Brief: Navigating Health Insurance Exchanges, October 2013

13 © 2013 The Advisory Board Company 27497A Enrollment Support an Immediate Imperative 13 Potential Benefit to Providers Depends on Uninsured Turnout Source: Congressional Budget Office, “CBO's February 2013 Estimate of the Effects of the Affordable Care Act on Health Insurance Coverage,” available at: www.cbo.gov; PwC, “Health Insurance Exchanges: Long on Options, Short on Time,” available at: www.pwc.com, accessed March 3, 2013; Health Care Advisory Board interviews and analysis.www.cbo.govwww.pwc.com New Money Flowing Into System $40B Projected premium revenue from exchanges in 2014 86% Percentage of exchange enrollees projected to qualify for subsidies Projected Federal Subsidies 1 CBO 2 Projections, 2014-2022 2014 average $5,150 per subsidized enrollee Possible Provider Tactics for Facilitating Enrollment On-site or community- based information booths Awareness campaigns, advertising Existing infrastructure for Medicaid eligibility checks Certified Application Counselor status Financial support to cover post-subsidy premiums

14 © 2013 The Advisory Board Company 27497A The Bigger Danger: Collapse of the Cross-Subsidy 14 Assumptions About Future Growth Beginning to Falter Source: Health Care Advisory Board interviews and analysis. Three Axioms of Hospital Economics Robust Employer- Sponsored Coverage New Danger: Cost concerns, innovative options driving employers to restructure benefits; changes unlikely to yield health system advantage Predictable Volume Channels New Danger: Falling utilization rates coupled with non-traditional competition narrowing potential volume streams Steady Public-Payer Pricing Growth New Danger: Medicare rate cuts, contingent payments widening gap to goal for feasible cross- subsidization

15 © 2013 The Advisory Board Company 27497A Employer-Sponsored Coverage at a Crossroads 15 Employers Choosing Between Abdication, Activation Faltering Assumption #1: Robust Employer-Sponsored Coverage “Activation”“Abdication” Self-Funded Benefits No Health Benefits Pros: Full control over networks Exemption from minimum benefits requirements Cons: Greater exposure to unexpected expenditures Complex network negotiations Defined Contribution/ Private Exchange Pros: Health benefits still part of compensation package Predictable, controllable cost growth Cons: Fundamental disruption in benefit design Employees may under- insure Pros: Total escape from cycle of rising premium costs Cons: Fine for violating employer mandate Loss of important labor market differentiator Spectrum of Options for Controlling Health Benefits Expense Source: Health Care Advisory Board interviews and analysis.

16 © 2013 The Advisory Board Company 27497A Employers Already Scaling Back Coverage 16 Erosion of Employer-Sponsored Coverage Well Underway Sources: Sonier J, et al., “State-Level Trends in Employer-Sponsored Health Insurance,” Robert Wood Johnson Foundation, April 2013, available at: www.rwjf.org; Collins R, et al., “Insuring the Future,” The Commonwealth Fund, April 2013, available at: www.commonwealthfund.org; Towers Watson, “Reshaping Health Care,” 2013, available at: www.towerswatson.com; Health Care Advisory Board interviews and analysis.www.rwjf.orgwww.commonwealthfund.orgwww.towerswatson.com Individuals Covered by ESI 1 23% Employers planning to offer CDHP 2 as only plan option, 2014 25% Insured non-elderly adults with deductibles $1,000 or higher, 2012 Non-elderly Population 11.5M fewer individuals Contribution to Insurance Premiums 1)Employer-sponsored insurance. 2)Consumer-directed health plan. Option 1: Drop Coverage Coverage for Family of Four 20022012 Employer 20022012 Worker 95% growth 102% growth

17 © 2013 The Advisory Board Company 27497A Some Employers Dodging Their Mandate 17 Despite Delay, Employers Finding Ways to Avoid Insurance Requirement Source: Reynolds J and Merin J, “Business Leaders Give 2013 Outlook Mixed Reviews,” International Franchise Association, January 2013, available at: www.franchise.org; Mercer, “Health Reform Poses Biggest Challenges to Companies with the Most Part-Time and Low-Paid Employees,” August 8, 2012, available at: www.mercer.com; “Regal Entertainment Group Cuts Employee Hours, Explicitly Blames Obamacare in Memo: Report,” The Huffington Post, April 17, 2013, available at: www.huffingtonpost.com; Health Care Advisory Board interviews and analysis.www.franchise.orgwww.mercer.comwww.huffingtonpost.com 1)Full-time equivalents. 2)n=72 franchisees, all industries. 3)n=1,203 employers. Case in Brief: Regal Entertainment Group In March 2013, reduced number of work shifts for non-salaried employees to ensure part-time status First public company to institute policy 31% Franchisees that plan to cut jobs to stay under 50-employee threshold 2 32% Retail and hospitality companies that plan to “change workforce strategy” to avoid penalties 3 Strategies to Avoid ACA Penalties Cut jobs to remain under 50 FTEs 1 Convert full-time employees to part-time status Hire all new employees at part-time status Split into smaller companies with fewer than 50 FTEs Memo to Managers To comply with the Affordable Care Act, Regal had to increase our health care budget to cover those newly deemed eligible based on the law's definition of a full time employee. To manage this budget, all other employees will be scheduled in accord with business needs and in a manner that will not negatively impact our health care budget…

18 © 2013 The Advisory Board Company 27497A New Path for Employer Cost Shifting 18 Private Health Insurance Exchanges Open for Business Source: Towers Watson, “18 th Annual Towers Watson Employer Survey on Purchasing Value in Health Care,” 2013, available at: www.towerswatson.com; Wall JK, “Mercer Courts Employers with Private Exchange,” Indianapolis Business Journal, April 22, 2013, available at: www.ibj.com; Health Care Advisory Board interviews and analysis.www.towerswatson.comwww.ibj.com Option 2: Private Health Insurance Exchanges Responding to Market Demands “The high-caliber carrier participation in Mercer’s private benefits exchange matches the increasing interest displayed by our clients and prospects.” Julio A. Portalatin President and CEO, Mercer ” 15% Employers considering private exchange model for 2014 Private Health Insurance Exchanges Over 100,000 employees enrolled in Aon Hewitt’s private health insurance exchange in fall 2012 Benefits offered by nine national, regional carriers Launching private health insurance exchange in nine states Expect to serve employers covering approximately 30,000 individuals Offering suite of exchange offerings to employers Will include coverage from 10 major insurers

19 © 2013 The Advisory Board Company 27497A The Future of Employer-Sponsored Insurance? 19 Private Exchanges Poised For Rapid Growth Projected Private Exchange Enrollment 27% Percentage of consumers receiving employer-sponsored coverage today projected to receive benefits through private exchanges in 2018 Factors Influencing Move to Private Exchange Models Logistical difficulty of benefit renegotiations Internal politics of benefit changes Attractiveness of other options Source: Accenture, “One-in-Four Consumers Will Receive Employer Health Benefits Through Insurance Exchanges in Five Years, Accenture Research Shows,” available at: http://newsroom.accenture.com/news/one-in-four-consumers-will-receive-employer-health-benefits-through- insurance-exchanges-in-five-years-accenture-research-shows.htm, Health Care Advisory Board interviews and analysis.http://newsroom.accenture.com/news/one-in-four-consumers-will-receive-employer-health-benefits-through- insurance-exchanges-in-five-years-accenture-research-shows.htm

20 © 2013 The Advisory Board Company 27497A Igniting a Race to the Bottom 20 Exchange Shoppers Trading Premiums for Deductibles Source: Mathews AW, “To Save, Workers Take On Health-Cost Risk,” Wall Street Journal, March 17 th, 2013, available at: www.wsj.com; Health Care Advisory Board interviews and analysis. www.wsj.com 1)Preferred provider organization. 2)Health maintenance organization. Case in Brief: Sears, Darden Restaurants For 2013 open enrollment, self-insured large employers redesigned benefits to reduce health spend through defined contribution model Employers offered employees lump sum credit to choose coverage in Aon Hewitt’s online marketplace 12 42% Employees on Aon Hewitt health insurance exchanges selecting plans less rich than the previous year Results of Open Enrollment Process

21 © 2013 The Advisory Board Company 27497A Not the Commercial Insurance We’re Used To 21 Individually-Purchased Coverage No Longer an Afterthought Projected Individual Market Size, Composition 31M 65M 87M Implications of Shift to Individually-Purchased Insurance Price Sensitivity at Point of Coverage Lower premiums Narrower networks Higher deductibles, copays Price Sensitivity at Point of Care Ascendance of cost to patient as competitive differentiator constrains pricing strategy Continued, even intensified, imperative for effective collections threatens revenue outlook Patient reluctance to seek non-essential care undermines volumes and population health efforts Source: Congressional Budget Office, May 2013 Estimate of the Effects of the Affordable Care Act on Health Insurance Coverage, available at: http://www.cbo.gov/sites/default/files/cbofiles/attachments/44190_EffectsAffordableCareActHealthInsuranceCoverage_2.pdf, Health Care Advisory Board interviews and analysis. http://www.cbo.gov/sites/default/files/cbofiles/attachments/44190_EffectsAffordableCareActHealthInsuranceCoverage_2.pdf

22 © 2013 The Advisory Board Company 27497A Significant Shift Toward Self-Funding 22 Employers Bearing More Risk, Turning to Providers as Allies Source: Kaiser Family Foundation, “2012 Employer Health Benefits Survey,” available at: www.kff.org; Towers Watson, “18 th Annual Towers Watson Employer Survey on Purchasing Value in Health Care,” 2013, available at: www.towerswatson.com; Health Care Advisory Board interviews and analysis.www.kff.orgwww.towerswatson.com Option 3: Self-Funded Benefits Percentage of Self-Insured Employers Partially or Completely Self-Insured Adopt new accountable payment models Contract directly with hospitals, physicians, ACOs Offer incentives for care coordination Offer performance- based payments In Place in 2013 Planned for 2014 Employer Interest in Provider-Oriented Strategies

23 © 2013 The Advisory Board Company 27497A Self-Insurance Looking More and More Attractive 23 Self-Funded Status Shelters Groups From Many ACA Requirements Source: US Department of Health and Human Services, “rights and Protections,” available at http://www.healthcare.gov/law/features/rights/index.html; Calsyn M and Lee EO, “The Threat of Self-Insured Plans Among Small Businesses,” Center for American Progress, June 19, 2013; Health Care Advisory Board interviews and analysis.http://www.healthcare.gov/law/features/rights/index.html Consumer Protection Under Affordable Care Act Applies to fully insured small- group plans Applies to self- funded small- group plans Bans annual and lifetime plan limits Bans rescissions by insurers Bans discrimination against patients with pre- existing conditions Requires coverage of dependent children up to age 26 Requires coverage of preventive services with no cost sharing Requires plans to maintain 80:20 medical loss ratio Requires insurers to use modified community rating Requires plan to offer minimum package of essential health benefits in 10 categories Requires guaranteed issue and renewability Average employee base typically required to justify a self-funded insurance plan 1000-2000 Self-funded employers exempt from many ACA mandates

24 © 2013 The Advisory Board Company 27497A Public Payer Reimbursement Already a Prime Target 24 Medicare Payment Cuts Becoming the Norm Faltering Assumption #2: Steady Public Payer Pricing Growth 1)Includes hospital, skilled nursing facility, hospice, and home health services; excludes physician services. 2)Disproportionate Share Hospital. ACA’s Medicare Fee-for-Service Payment Cuts Reductions to Annual Payment Rate Increases 1 $415B in total fee-for-service cuts, 2013-2022 $260B Hospital payment rate cuts, 2013-2022 $56B Reduced Medicare and Medicaid DSH 2 payments, 2013-2022 Source: CBO, “Letter to the Honorable John Boehner Providing an Estimate for H.R.6079, The Repeal of Obamacare Act,” July 24, 2012, available at: www.cbo.gov; Health Care Advisory Board interviews and analysis. www.cbo.gov

25 © 2013 The Advisory Board Company 27497A No Question About Further Cuts, Just Methods 25 Medicare Cuts Central to Long-Term Deficit Reduction Plans Source: Bowles E and Simpson A, “A Bipartisan Path Forward to Securing America’s Future,” Moment of Truth Project, April 2013, available at: www.momentoftruthproject.org; Daschle T, et al., “A Bipartisan Rx for Patient-Centered Care and System-Wide Cost Containment,” Bipartisan Policy Center, April 18, 2013, available at: bipartisanpolicy.org; Antos J, et al., “Bending the Curve: Person-Centered Health Care Reform,” Brookings Institution, April 2013, available at: www.brookings.edu; Health Care Advisory Board interviews and analysis.www.momentoftruthproject.orgbipartisanpolicy.orgwww.brookings.edu $560B Total estimated health care savings, 2013-2023 A Bipartisan Rx for Patient- Centered Care and System- Wide Cost Containment April 2013 Bipartisan Policy Center Establish ACO-like “Medicare Networks,” create strong incentives for participation Establish mandatory bundled payments nationally Equalize office visit payments A Bipartisan Path Forward to Securing America’s Future April 2013 Simpson-Bowles Commission Increase Medicare eligibility age from 65 to 67 Reduce payments for hospital, post-acute care, and drugs Expand bundled payments and pay-for-performance Bending the Curve: Person- Centered Health Care Reform April 2013 Brookings Institution Transition to “Medicare Comprehensive Care” organizations that receive global capitation payment Cap Medicare payment growth to per capita GDP rate $585B Total estimated health care savings, 2013-2023 $360B Total estimated health care savings, 2013-2023

26 © 2013 The Advisory Board Company 27497A Contingent Payment Models Becoming the Norm 26 Reimbursement Increasingly Tied to Performance Source: CMS, Bundled Payments for Care Improvement Initiative, 2012, available at: innovation.cms.gov; Source: The Advisory Board Company Daily Briefing, “Clement: What Medicare is doing to limit observation status,” May 28,2013, Washington, DC; Jaffe S, “Medicare Seeks to Limit Number of Seniors Placed In Hospital Observation Care,” Kaiser Health News, May 3, 2013, available at: www.kaiserhealthnews.org; Gengler A, “The Painful New Trend in Medicare,” CNN Money, August 7, 2012, available at: money.cnn.com; Health Care Advisory Board interviews and analysis.innovation.cms.govClement: What Medicare is doing to limit observation status www.kaiserhealthnews.orgmoney.cnn.com 25% Hospitals mandated to face hospital-acquired condition penalty Mandatory Medicare Pay-for- Performance Programs Maximum Payment Penalty Hospital Value-Based Purchasing Program Hospital Readmissions Reduction Program Hospital-Acquired Condition Penalty Potential Chest Pain Treatment Paths Medicare Payment Rates RAC Reaction Spilling Over to Volume 1.6M Observation stays nationwide, 2011 69% Increase in number of Medicare beneficiaries under observation, 2006- 2011

27 © 2013 The Advisory Board Company 27497A Volumes Still Soft Post-Downturn 27 Consumers Still Tightening their Belts Source: Martin A, et al., “Recession Contributes to Slowest Annual Rate of Increase in Health Spending in Five Decades,” Health Affairs, 2011, 30: 11-22; Johnson A, Rockoff J, & Mathews A, “Americans Cut Back on Visits to Doctor,” Wall Street Journal, July 29, 2010; Health Insurance, “With or Without Health Insurance, Americans Skipping Doctors Visits, Surgeries,” available at: http://www.insureme.com/health-insurance/or- without-health-insurance-americans-skipping-doctor-visits-surgeries, accessed September 21, 2011; Thomson Reuters, “Thomson Reuters Study Finds More Patients Postponing Medicare Care Due to Cost,” available at: http://thomsonreuters.com, accessed September 21, 2011; Health Care Advisory Board interviews and analysis. Faltering Assumption #3: Predictable Volume Channels 95% Percentage of primary care physicians reporting that patients rationing or forgoing medications, treatments due to financial concerns “We have a very weak economy and it’s just a different environment for the elective parts of healthcare. This could go beyond the recession. Being a less aggressive consumer of healthcare is here to stay.” Paul Ginsburg, Economist, Center for Studying Health System Change Households Postponing or Cancelling Medical Care 2006 2009 …Or Is It An Enduring Trend?Is it Cyclical… “In 2009, despite the economic downturn, the number of prescription drugs dispensed rebounded to prerecession rates of growth.” Health Affairs, 2011

28 © 2013 The Advisory Board Company 27497A Population Health Efforts Shaping Volume Outlook 28 Utilization Patterns Difficult to Predict Inpatient Volume Under Different Population Health Assumptions Quite a Difference 7.6% Total inpatient volume growth, 2012-2022, with no additional population health management effort 1.1% Total inpatient volume growth, 2012-2022, with aggressive population health management efforts Source: Health Care Advisory Board interviews and analysis.

29 © 2013 The Advisory Board Company 27497A New Competitors Emerging in Ripest Markets 29 Walgreens Entering the Care Management Industry Source: Japsen B, “How Flu Shorts Became Big Sales Booster for Walgreen, CVS,” Forbes, February 8, 2013, available at: www.forbes.com; “Take Care Clinics at Select Walgreens Expand Service Offerings,” Reuters, May 31, 2012, available at: www.reuters.com; Murphy T, “Drugstore Clinics Expand Care into Chronic Illness,” The Salt Lake Tribune, April 4, 2013, available at: www.sltrib.com, Walgreens, “Company Overview,” available at: www.walgreens.com; Health Care Advisory Board interviews and analysis. www.forbes.comwww.reuters.comwww.sltrib.comwww.walgreens.com 2009: Launches flu vaccine campaign Simple Acute Services Vaccinations and Physicals Chronic Disease Monitoring Chronic Disease Diagnosis and Management 2013: Launches three ACOs; begins diagnosing and managing chronic disease Case in Brief: Walgreen Co. Largest drug retail chain in the United States, with 372 Take Care Clinics In April 2013, became first retail clinic to offer diagnosis and treatment of chronic diseases 2007: Acquires Take Care Health Systems 2012: Offers three new chronic disease tests Not Just a Drugstore “Our vision is to become ‘My Walgreens’ for everyone in America by transforming the traditional drugstore into a health and daily living destination...” Walgreen Co. Overview ”

30 © 2013 The Advisory Board Company 27497A Savvy Providers Targeting Growing Market Segments 30 Medicare-Focused Providers Offering Compelling Specialized Service Source: Crossroads News, “JenCare Mecical One-Stop Center Caters Wholly to Seniors,” available at: http://crossroadsnews.com/news/2013/sep/20/jencare-medical-one-stop-center-caters-wholly- seni/, Health Care Advisory Board interviews and analysis.http://crossroadsnews.com/news/2013/sep/20/jencare-medical-one-stop-center-caters-wholly- seni/ Case in Brief: JenCare Neighborhood Medical Centers Senior-oriented physician practices in Georgia, Kentucky, Virginia, Illinois, and Louisiana operated by Florida-based ChenMed Practices focus on rapidly-growing market for Medicare-insured primary care services JenCare Neighborhood Medical Centers opens new clinic in Atlanta metro region 12,000-square-foot space caters to low-, moderate-income Medicare beneficiaries 38% Reduction in inpatient days for senior ChenMed patients Adults Aged 45-64, DeKalb County, Georgia JenCare’s Recent Expansion

31 © 2013 The Advisory Board Company 27497A “Integrated Care Center” A Giant Finding Its Footing 31 BigCo Poised to Disrupt Referral Chains Source: Health Care Advisory Board interviews and analysis. 1)Pseudonym. BigCo’s 1 Migration into Primary Care Space Leased to Provider Partners Self-run Screenings, Wellness Services Case in Brief: BigCo Large corporation with over 4,000 retail stores in the United States Phasing out current retail clinic model, extending primary care access through virtual and in-store delivery channels Limited success through non-owned retail clinics Valuable experience gained Screenings, educational services offered through in- store clinics Patient engagement Full primary care services Referrals to selected provider partners 13 2

32 © 2013 The Advisory Board Company 27497A Nearing the Limits of Extractive Growth Strategies 32 Legacy Growth Levers Increasingly Time-Limited Source: Health Care Advisory Board interviews and analysis. Traditional Hospital Growth Strategy Demand Price Increases Emerging Limitations: Dilution of traditional commercial coverage Market pressures intensifying price competition Direct, indirect cuts to public payer reimbursement widening gap to goal Consolidate Market Position Emerging Limitations: High degree of existing consolidation in major markets Heightened scrutiny of hospital mergers Limited appetite for full acquisitions Lock Up Referral Streams Emerging Limitations: Increasingly competitive battlefield for physician affiliations Physician cost accountability calling historical system loyalties into question Languid overall demand Rise of disruptive competition

33 © 2013 The Advisory Board Company 27497A Tomorrow’s Growth All About Winning Share 33 Securing Preference from Purchasers, Physicians, Patients System Growth Wholesale Purchasers (Payers, Employers) Referring Providers Consumers Three Key Decision-Makers Source: Health Care Advisory Board interviews and analysis.

34 © 2013 The Advisory Board Company 27497A 2 3 1 Road Map 34 The Rise of Productive Growth The New Logic of Choice A Crumbling Cross-Subsidy

35 © 2013 The Advisory Board Company 27497A Understanding the New Logic of Choice 35 Three Groups Responsible for Allocating Market Share Source: Health Care Advisory Board interviews and analysis. Decision Makers and Their Priorities Wholesale Purchasers (Payers, Employers) Today’s Priority: Low total cost of care for entire populations Provider Wishlist: Comprehensive network Proven population health management capabilities Referring Providers Today’s Priority: High-quality, low-cost episodic care Provider Wishlist: Best-in-class outcomes Data access, connectivity Cross-continuum collaboration Consumers Today’s Priority: Affordability, on-demand access, and tailored service Provider Wishlist: Multifunctional range of access options Appropriate match of price level to service quality

36 © 2013 The Advisory Board Company 27497A Commercial Payers Demanding More Value 36 Taking Measures to Keep Employers in the Game Commercial Payers Case in Brief: Benefits Value Advisor Program Program offered by Health Care Service Corp., operator of BCBS plans in four states Health care expert uses data, cost estimators, provider-finders to help consumers choose low-cost alternatives 90% Benefits Value Advisor program participants eligible for savings by choosing alternative provider $2K Average savings per claim Source: Hostetter M and Klein S, “Health Care Price Transparency: Can It Promote High-Value Care?”, The Commonwealth Fund, April/May 2012, available at: www.commonwealthfund.org; Appleby J, “HMO-Like Plans May Be Poised to Make Comeback in Online Insurance Markets,” Kaiser Health News, January 22, 2013, available at: www.kaiserhealthnews.org; Health Care Service Corporation, “Health Care Consumers Realize Significant Cost Savings Through Benefits Value Advisor Program,” April 17, 2013, available at: www.hcsc.com; Health Care Advisory Board interviews and analysis.www.commonwealthfund.orgwww.kaiserhealthnews.orgwww.hcsc.com Commercial Payer Cost Control Initiatives Price Transparency Tools Health Care Service Corp. Benefits Value Advisor program UnitedHealthcare’s myHealthcare Cost Estimator Bundled Payment BCBS of Western NY, Kaleida Health cardiac surgery bundle ConnectiCare, St. Francis Hospital hip and knee replacement bundle Narrow Networks, Steerage Harvard Pilgrim Focus Network Anthem BCBS Compass SmartShopper Program

37 © 2013 The Advisory Board Company 27497A Shared Accountability Necessary for Success 37 Best Performing Employers Collaborate Closely with Providers Source: Towers Watson, “18 th Annual Towers Watson/National Business Group on Health, Employer Survey on Purchasing Value in Health Care: Reshaping Health Care Best Performers Leading the Way,” available at: www.towerswatson.com, accessed March 15, 2013; Health Care Advisory Board interviews and analysis. www.towerswatson.com Employers Study in Brief: 18 th Annual Towers Watson/National Business Group on Health Employer Survey Annual survey tracks employers’ strategies to manage health benefits and their results Identified “best performers” as employers who held cost growth below median benchmarks for at least four consecutive years Best performers more likely to use supply-side strategies, share total cost responsibility with providers Pricing and benefit design tactics did not differentiate employers Average Annual Employer Health Cost Growth Adopt new accountable payment models Contract directly with hospitals, physicians, ACOs Offer incentives for care coordination Offer performance- based payments Best PerformersLow Performers Best Performers More Likely to Focus on Provider Strategies

38 © 2013 The Advisory Board Company 27497A Shopping Carefully for Acute Care Services 38 Walmart Steering Employees to Preferred Providers for Surgical Care Source: Walmart News, “Walmart Expands Health Benefits to Cover Heart and Spine Surgeries at No Cost to Associates,” October 12, 2012, available at: www.news.walmart.com; Health Care Advisory Board interviews and analysis. www.news.walmart.com Case in Brief: Walmart Centers of Excellence Walmart entered into bundled payment agreements with six health systems covering heart, spine, and transplant surgeries Program launched in January 2013; includes 1.1 million covered lives Providers selected based on convenience, quality, and potential for cost savings Walmart Centers of Excellence Partners Cleveland Clinic Geisinger Medical Center Mayo Clinic Mercy Hospital Springfield Scott & White Memorial Hospital Virginia Mason Medical Center

39 © 2013 The Advisory Board Company 27497A Rewarding Care Management Expertise 39 Large Employer Contracts Directly with Health System 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: www.modernhealthcare.com; Health Care Advisory Board interviews and analysis.Employer-Led Innovation for Healthcare Delivery and Payment Reform: Intel Corporation and Presbyterian Healthcare Serviceswww.modernhealthcare.com 1)Presbyterian Healthcare Services. 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 through contract, 2013-2017 Key Components of 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

40 © 2013 The Advisory Board Company 27497A Demonstrate Network Reliability 40 Provider Value Proposition Must Match Employer Need Source: Health Care Advisory Board interviews and analysis. Adequate Geographic Scope Sufficient network coverage for all employees Convenient access points to ensure timely utilization, promote continuous engagement Flexible Relationship Model Staged implementation based on employer’s readiness, provider’s ability to earn trust Incremental path to exclusive relationship Three Employer Prerequisites Comprehensive Care Capability Diverse suite of clinical services within health system Reliable access to network of specialty providers Effective coordination across continuum

41 © 2013 The Advisory Board Company 27497A Physicians Still at the Center of Referral Decisions 41 Specialist, Hospital Choices Especially Physician-Driven Source: Tu HT and Lauer JR, “Word of Mouth and Physician Referrals Still Drive Health Care Provider Choice,” Center for Studying Health System Change, December 2008; Health Care Advisory Board interviews and analysis. Physicians 1)Survey respondents given option to “select all that apply.” Information Sources Used to Select a Specialist Physician 1 2008 Information Sources Used to Select a Facility for a Procedure 1 2008 58% rely solely on referral from PCP 69% rely solely on referring doctor n=13,500

42 © 2013 The Advisory Board Company 27497A Physicians Increasingly Responsible for Cost, Quality 42 CMS, Third-Party Aggregators Providing Financial Tailwind Source: Centers for Medicare and Medicaid Services, available at www.cms.org; Health Affairs, “Continued Growth Of Public And Private Accountable Care Organizations,” available at: http://healthaffairs.org; Universal American Corp.; Health Care Advisory Board interviews and analysis.www.cms.orghttp://healthaffairs.org 1)Medicare Shared Savings Program. Physician Groups Hospital Systems Other As of October, 2013 Financial Support for Physician ACOs Health insurer specializing in Medicare Advantage plans, partners with providers to establish MSSP 1 ACOs Currently operates 31 Medicare ACOs with 2,000+ physician partners; covers ~300,000 Medicare beneficiaries in 13 states 35 participants in Advance Payment ACO Model Provides upfront and ongoing financial support to independent physician ACOs Accountable Care Organizations, by Sponsoring Entity

43 © 2013 The Advisory Board Company 27497A Re-evaluating Historical Referral Decisions 43 Physicians Actively Destroying and Directing Demand Source: Song Z, et al, "The ‘Alternative Quality Contract,’ Based On A Global Budget, Lowered Medical Spending And Improved Quality." Health Affairs, 31:8 (2012): 1885-1894; Health Care Advisory Board interviews and analysis. Demand Direction as Important as Destruction 50% Percentage of total savings attributed to lower cost referrals for organizations participating in BCBS Massachusetts’ Alternative Quality Contract Retain Utilization Within Network Specialty referrals Imaging Physician Group Prevent Utilization through Medical Management Heart failure Pneumonia Direct Unavoidable Utilization to Low-Cost, High-Quality Partner Inpatient, outpatient procedures Select inpatient medical care 1 2 3 Three Options for Accountable Providers

44 © 2013 The Advisory Board Company 27497A Guarantee Continued Influence Over Care Pathway Deliver Superior Acute Care Outcomes Assemble Reliable Specialist Network Provide Real-Time Utilization Feedback Securing Preference from Accountable Decisionmakers 44 Contingent Upon Continuous Collaboration, Clinical Excellence Source: Health Care Advisory Board interviews and analysis. Delivering on Accountable Decisionmakers’ Top Priorities Input into treatment decisions, care protocols, referral partners Oversight of post-discharge care management responsibilities Seamless access to comprehensive specialty expertise Shared commitment to episodic cost control, collaborative workflow Consistent low-cost, high-quality clinical performance Proven results from reducing readmissions, error rates Immediate knowledge of patient admission, discharge, transfer Access to patient records during inpatient stay

45 © 2013 The Advisory Board Company 27497A Seeking a Collaborative Partner 45 New Preferred Partnership Driven by Shared Vision Source: Health Care Advisory Board interviews and analysis. Case in Brief: Atrius Health, Beth Israel Deaconess Medical Center Atrius Health, an independent alliance of six physician groups and one home health/hospice provider in eastern and central Massachusetts; Beth Israel Deaconess Medical Center (BIDMC), a 649-bed academic medical center located in Boston, MA Atrius Health issued request for proposal for tertiary hospital partner to collaborate on Triple Aim goals with emphasis on care coordination, cost control Designed partnership contract around shared care coordination goals Atrius Health Ideal Partner Dedicated resources for care coordination initiatives Development, adoption of unified care standards Seamless patient integration Targeted focus on episodic cost control Coordinated leadership, governance Principled referral decisions Partner on Care Coordination Collaborate on Total Cost Management Partnership Goals

46 © 2013 The Advisory Board Company 27497A Ensuring Enterprise-Wide Coordination 46 New Partners Collaborate Across Clinical, Operational Processes Source: Health Care Advisory Board interviews and analysis. Commitments to Delivering High Value Care Real-time utilization feedback for PCPs; can dictate patient transfer to Atrius Health facility Interoperability between physician, hospital IT systems Atrius Health care managers on-site, collaborate with floor RNs; responsible for care management, follow-up Mutually-defined standards of care Atrius Health-preferred network honored PCP notified of patient discharge, collaborates on discharge care plan “Care Continuation” office manages care transitions based on patient history, Atrius Health-preferred providers Data Sharing Discharge Planning Strategic Alignment Dedicated seats for Atrius staff on multiple BIDMC committees Co-investments for planning, development of service expansions Atrius Health- BIDMC Partnership Care Coordination

47 © 2013 The Advisory Board Company 27497A Anticipating the “Activated” Patient 47 Consumer Role in Decision Making Increasingly Important Source: Collins R, et al., “Insuring the Future,” The Commonwealth Fund, April 2013, available at: www.commonwealthfund.org; Altarum Institute, “Altarum Institute Survey of Consumer Health Care Opinions,” Fall 2012, available at: www.altarum.org; Health Care Advisory Board interviews and analysis. www.commonwealthfund.orgwww.altarum.org Consumers 1)From 2003 to 2012. Consumer Viewpoint on Role in Care Decision Making n=2,071 26% High-Deductible Health Plan Enrollment Individuals with Deductible of $1000 or More 43% Decline in proportion of individuals with a deductible under $500 1 33% Respondents age 25 to 34 preferring fully active role in care decision making Doctor is completely in charge of treatment decisions Doctor makes the decisions with some input from patient Patient is completely in charge of treatment decisions Doctor and patient make a join treatment decision Patient makes final decision with some input from their doctor

48 © 2013 The Advisory Board Company 27497A Price Shopping Abetted by Transparency 48 Free Apps, Tools Offer Platform for Comparison Shopping Source: MedCityNews, “PokitDok Makes Cash Payments Easier for Doctors and Patients,” April 17, 2013, available at: www.medcitynews.com; Health Care Advisory Board interviews and analysis.www.medcitynews.com Innovation in Brief: PokitDok Website, mobile app marketed to individuals with high-deductible health plans Offers database of over three million providers Taking “Consumer-Driven” to the Next Level “What Castlight Health is to people with employer-provided health insurance, PokitDok is to people with high-deductible plans. The new ‘set your price’ service for basic healthcare services may be what ‘consumer-driven healthcare’ needs to become a realistic option.” MedCity News ” Service: Carpal Tunnel Surgery Location: TravelSurgeryUSA, Charleston, SC Budget: $ 4,000 Payment Type: CashHSAInsurance Request Quote Negotiate

49 © 2013 The Advisory Board Company 27497A Convenience a Critical Element of Choice 49 Patients Seeking Alternatives to the Standard Office Visit Source: The Advisory Board Company Daily Briefing, “Retail clinic visits soar, especially after hours,” August 17,2012, Washington, DC; PwC Health Research Institute, “The new gold rush: Prospectors are hoping to mine opportunities from the health industry,” available at: www.pwc.com; One Medical Group, “Our Services,” available at: www.onemedical.com; Health Care Advisory Board interviews and analysis.Retail clinic visits soar, especially after hourswww.pwc.comwww.onemedical.com Case in Brief: One Medical Group 90-physician network based in San Francisco, California Patients pay $149 to $199 for annual membership 1.5M 6.0M Rising Popularity of Retail Clinic Visits On-Demand Services Attracting Patients Same-day appointment booking online, through mobile app Physician email consultations for minor illnesses, ongoing management Coordinated tests, treatments, specialist referrals, hospitalizations 42% Consumers age 18 to 24 preferring independent, retail pharmacy for primary care Top Reasons for Increase in Retail Clinic Use Nearby Location Reduced Wait Times Service, Price Transparency

50 © 2013 The Advisory Board Company 27497A Finding Care the Way You Find Dinner 50 Suddenly Subject to the Marketplace of Opinion Source: PwC, “Scoring Healthcare: Navigating Customer Experience Ratings,” “The New Gold Rush: Prospectors are Hoping to Mine Opportunities from the Health Industry,” both available at: www.pwc.com; Health Care Advisory Board interviews and analysis.www.pwc.com Resources That Rate Physicians and Hospitals Health-Related Video Games Health Apps or Programs Consumer Willingness to Spend Out-of-Pocket for Health-Related Tools Marcus Welby, MD General Practice 497 reviews (read below) Wave of Tools to Search Health Care Consumer Ratings 48% Consumers reading health-related reviews online 33% Consumers using health- related online reviews to decide where to get care Other available apps, websites: Consumer Reports HealthGrades RateMDs Vitals ZocDoc PatientsLikeMe

51 © 2013 The Advisory Board Company 27497A 2 3 1 Road Map 51 The Rise of Productive Growth The New Logic of Choice A Crumbling Cross-Subsidy

52 © 2013 The Advisory Board Company 27497A Understanding the New Logic of Choice 52 Are We Prepared to Meet the Market’s Demands? Source: Health Care Advisory Board interviews and analysis. Decision Makers and Their Priorities Wholesale Purchasers (Payers, Employers) Today’s Priority: Low total cost of care for entire populations Provider Wishlist: Comprehensive network Proven population health management capabilities Referring Providers Today’s Priority: High-quality, low-cost episodic care Provider Wishlist: Best-in-class outcomes Data access, connectivity Cross-continuum collaboration Consumers Today’s Priority: Affordability, on-demand access, and tailored service Provider Wishlist: Multifunctional range of access options Appropriate match of price level to service quality

53 © 2013 The Advisory Board Company 27497A Competing Under Distinct Identities 53 Carving a New Growth Path Source: Health Care Advisory Board interviews and analysis. Best-in-Class Acute Care Destination Consumer-Oriented Ambulatory Network Full-Service Population Health Manager Financially-Integrated Delivery System Assumes full risk by offering health plan to subscribers Unifies care financing and delivery into single coordinated care enterprise Maintains extensive network of outpatient care sites Offers convenient primary care, diagnostic, procedural services at competitive prices Assumes delegated risk from payers and/or employers Prioritizes care management, coordination to limit avoidable demand Consistently delivers efficient, effective acute care episodes Ensures reliable coordination, communication, data sharing across the care continuum Four Emerging Provider Identities

54 © 2013 The Advisory Board Company 27497A Scrambling to Assemble Attractive Assets 54 Providers Seeking Capital, Geographic Reach, Clinical Scope, and More Baylor Scott and White Health Merges adjacent markets for greater geographic scale Cleveland Clinic, Community Health Systems Affiliation spreads Cleveland Clinic brand, clinical expertise Dignity Health, U.S. Healthworks Dignity expands ambulatory care foundations in new markets Long Island Health Network Hospital alliance contracts jointly without need for formal merger or acquisition SSM Health Care, Dean Clinic SSM strengthens physician base; Dean bolsters financial, clinical foundations Source: Health Care Advisory Board interviews and analysis. Wide Range of Partnership Activity

55 © 2013 The Advisory Board Company 27497A Developing an Intentional Corporate Strategy 55 Haphazard, Reactive Dealmaking Unlikely to Support Strategic Aims Source: Health Care Advisory Board interviews and analysis. Day One Integration Planning Scientific Approach to Cultural Fit Distinct Criteria for Deal SourcingDefined Ends Pluralistic Means Opportunities assessed on the basis of how they help build a more valuable product to sell to consumers Spectrum of partnership vehicles considered before M&A, including affiliations, joint ventures Strategy and criteria for assessing prospective partnerships written, communicated, and clear Financial assessment complemented with battery of analyses to assess cultural fit Integration planning integrated into strategy and criteria for partnerships, continues throughout negotiation process Well-Reasoned AmbitionRigorous AssessmentProactive Execution Five Signs of Effective Corporate Strategy

56 © 2013 The Advisory Board Company 27497A Toward an Economics of Value 56 Adapting to New Rules of Competition Source: Health Care Advisory Board interviews and analysis. Health System Strategy, c. 2003 “Price-Extractive Growth” Health System Strategy, 2013-2023 “Value-Based Growth” Description Grow by being bigger: Leverage market dominance to secure prime pricing, network status Grow by being better: Leverage cost, quality, service advantage to attract key decision makers Key Success Factors Expand market share Strengthen service lines Exert pricing leverage Solidify referrals Secure physicians Increase utilization Expand covered lives Compete on outcomes Minimize total cost Assemble network Offer convenience Expand access Target of Strategy Commercial payers Government purchasers PhysiciansEmployers Individuals Population health managers Performance Metrics Discharges Service line share Fee-for-service revenue Pricing growth Occupancy rate Process quality Share of lives Geographic reach Risk-based revenue Share of wallet Outcomes quality Total cost of care Competitive Dynamics Service line competition Centers of excellence Referral channels Physician loyalty Comprehensive care Patient engagement Clinical quality Service quality Critical Infrastructure Inpatient capacity Outpatient imaging centers Clinical technology Ambulatory surgery centers Primary care capacity Care management staff and systems IT analytics Post-acute care network Key Leaders CEO CFO COO CMO CNO Board CEO CFO COO CMO CNO Board CPE 1 CTO 2 CIO 3 1)Chief physician executive. 2)Chief transformation officer. 3)Chief integration officer.

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