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Health System Strategy at the Tipping Point

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Presentation on theme: "Health System Strategy at the Tipping Point"— Presentation transcript:

1 Health System Strategy at the Tipping Point
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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3 Health Care Advisory Board
Project Director Ben Umansky Design Consultant Christina Lin Managing Director Christopher Kerns

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

6 A Crumbling Cross-Subsidy
The New Logic of Choice The Rise of Productive Growth

7 Not the Smoothest of Starts
Federal Exchange Slow to Answer the Bell

8 Some State Exchanges Faring Better
Enrollment Slow, But Most Websites Working State Decisions on Exchange Participation 16 States, District of Columbia Running Own Exchanges State Exchange Enrollment Within First Week of Launch State-Based Exchange >40,000 Completed applications in New York Federal Exchange 16,311 Completed applications in California Partnership Exchange 12,955 Completed applications in Kentucky 326 Completed applications in Maryland Source: Kaiser Family Foundation, “State Decisions for Creating Health Insurance Exchanges, as of May 28, 2013,” available at: CNBC, “One Washington gets Obamacare Right,” available at: Kentucky Governor’s Office, “2.6 Million Page Views on Kynect for Affordable Health Insurance,” available at: Health Care Advisory Board interviews and analysis.

9 Post-Subsidy Premiums Within Reach for Many
Observation #1: Affordable Premiums Post-Subsidy Premiums Within Reach for Many But Penalties Still Smaller than Cost of Coverage Weighted Average Monthly Premiums for Adult Individual Aged 27 Penalties for Non-compliance Year Annual Penalty 2014 $95 or 1% of income 2015 $325 or 2% of income 2016 $695 or 2.5% of income For Second Cheapest Silver Plan, by State, 2014, Pre and Post subsidy1 for Income of $30,000 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: Health Care Advisory Board interviews and analysis.

10 Trading Price for Volume on the Public Exchanges
Observation #2: Low Reimbursement Trading Price for Volume on the Public Exchanges Reimbursement Information Still Anecdotal , but Rates Not Generous Anticipated Provider Reimbursement Rates for Exchange Plans Catholic Health Initiatives Modest discounts from commercial rates WellPoint Inc. Between Medicare and Medicaid rates Millern Medical Center1 20% below commercial rates Meyers Health1 10% above Medicare rates Tenet Healthcare Up to 10% below commercial rates Meriwether Hospital1 5% below commercial rates Pseudonym. Source: Mathews AW and Kamp J, “Another Big Step in Reshaping HealthCare,” Wall Street Journal, February 28, 2013, available at: Health Care Advisory Board interviews and analysis.

11 Lower Prices through Narrower Networks
Observation #3: Narrow Networks Lower Prices through Narrower Networks Monthly Health Insurance Premiums Prominent Health Systems Largely on the Sidelines Select California Exchange Plans, 20141 Actual Premiums Cedars-Sinai Medical Center not participating in any exchange plan networks UCLA Health System participating in only one exchange plan network 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 Source: Covered California, “Health Plans & Rates for 2014: Making the Individual Market in California Affordable, May 23, 2013, available at: Kliff S, “California Obamacare premiums: No ‘rate shock’ here,” Washington Post, May 23, 2013, available at: Terhune C, “Insurers limit doctors, hospitals in state-run exchange plans,” LA Times, May 24, 2013, available at: Health Care Advisory Board interviews and analysis. Silver plan premiums for 40-year old individual, before subsidy; actual rates represent HMO plans in Northern Los Angeles.

12 Still Time to Work Out the Kinks
Six Months of Open Enrollment Ahead (And More Every Year) Insurance Exchange Enrollment Timeline 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 October 1, 2013 Exchange websites officially open March 31, 2014 Open enrollment period ends Individuals still uninsured subject to tax penalty in 2014 filing Open enrollment period Publication in Brief: Navigating Health Insurance Exchanges, October 2013 An overview of the federal health insurance exchanges with questions, implications for providers; available at advisory.com Source: Health Care Advisory Board interviews and analysis.

13 Enrollment Support an Immediate Imperative
Potential Benefit to Providers Depends on Uninsured Turnout Projected Federal Subsidies1 Possible Provider Tactics for Facilitating Enrollment CBO2 Projections, 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 2014 average $5,150 per subsidized enrollee New Money Flowing Into System $40B Projected premium revenue from exchanges in 2014 86% Percentage of exchange enrollees projected to qualify for subsidies Source: Congressional Budget Office, “CBO's February 2013 Estimate of the Effects of the Affordable Care Act on Health Insurance Coverage,” available at: PwC, “Health Insurance Exchanges: Long on Options, Short on Time,” available at: accessed March 3, 2013; Health Care Advisory Board interviews and analysis.

14 The Bigger Danger: Collapse of the Cross-Subsidy
Assumptions About Future Growth Beginning to Falter 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 Steady Public-Payer Pricing Growth New Danger: Medicare rate cuts, contingent payments widening gap to goal for feasible cross- subsidization Predictable Volume Channels New Danger: Falling utilization rates coupled with non-traditional competition narrowing potential volume streams Source: Health Care Advisory Board interviews and analysis.

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

16 Employers Already Scaling Back Coverage
Option 1: Drop Coverage Employers Already Scaling Back Coverage Erosion of Employer-Sponsored Coverage Well Underway Individuals Covered by ESI1 Contribution to Insurance Premiums Non-elderly Population Coverage for Family of Four 11.5M fewer individuals 2002 2012 Employer Worker 95% growth 102% growth 23% Employers planning to offer CDHP2 as only plan option, 2014 25% Insured non-elderly adults with deductibles $1,000 or higher, 2012 Employer-sponsored insurance. Consumer-directed health plan. Sources: Sonier J, et al., “State-Level Trends in Employer-Sponsored Health Insurance,” Robert Wood Johnson Foundation, April 2013, available at: Collins R, et al., “Insuring the Future,” The Commonwealth Fund, April 2013, available at: Towers Watson, “Reshaping Health Care,” 2013, available at: Health Care Advisory Board interviews and analysis.

17 Some Employers Dodging Their Mandate
Despite Delay, Employers Finding Ways to Avoid Insurance Requirement Strategies to Avoid ACA Penalties 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… Cut jobs to remain under 50 FTEs1 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 Case in Brief: Regal Entertainment Group 31% Franchisees that plan to cut jobs to stay under 50-employee threshold2 32% Retail and hospitality companies that plan to “change workforce strategy” to avoid penalties3 In March 2013, reduced number of work shifts for non-salaried employees to ensure part-time status First public company to institute policy Full-time equivalents. n=72 franchisees, all industries. n=1,203 employers. Source: Reynolds J and Merin J, “Business Leaders Give 2013 Outlook Mixed Reviews,” International Franchise Association, January 2013, available at: Mercer, “Health Reform Poses Biggest Challenges to Companies with the Most Part-Time and Low-Paid Employees,” August 8, 2012, available at: “Regal Entertainment Group Cuts Employee Hours, Explicitly Blames Obamacare in Memo: Report,” The Huffington Post, April 17, 2013, available at: Health Care Advisory Board interviews and analysis.

18 New Path for Employer Cost Shifting
Option 2: Private Health Insurance Exchanges New Path for Employer Cost Shifting Private Health Insurance Exchanges Open for Business 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 Responding to Market Demands 15% “The high-caliber carrier participation in Mercer’s private benefits exchange matches the increasing interest displayed by our clients and prospects.” Employers considering private exchange model for 2014 Julio A. Portalatin President and CEO, Mercer Source: Towers Watson, “18th Annual Towers Watson Employer Survey on Purchasing Value in Health Care,” 2013, available at: Wall JK, “Mercer Courts Employers with Private Exchange,” Indianapolis Business Journal, April 22, 2013, available at: Health Care Advisory Board interviews and analysis.

19 The Future of Employer-Sponsored Insurance?
Private Exchanges Poised For Rapid Growth Projected Private Exchange Enrollment Factors Influencing Move to Private Exchange Models Logistical difficulty of benefit renegotiations Internal politics of benefit changes 27% Attractiveness of other options Percentage of consumers receiving employer-sponsored coverage today projected to receive benefits through private exchanges in 2018 Source: Accenture, “One-in-Four Consumers Will Receive Employer Health Benefits Through Insurance Exchanges in Five Years, Accenture Research Shows,” available at: Health Care Advisory Board interviews and analysis.

20 Igniting a Race to the Bottom
Exchange Shoppers Trading Premiums for Deductibles Results of Open Enrollment Process 1 2 42% Employees on Aon Hewitt health insurance exchanges selecting plans less rich than the previous year 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 Preferred provider organization. Health maintenance organization. Source: Mathews AW, “To Save, Workers Take On Health-Cost Risk,” Wall Street Journal, March 17th, 2013, available at: Health Care Advisory Board interviews and analysis.

21 Not the Commercial Insurance We’re Used To
Individually-Purchased Coverage No Longer an Afterthought Projected Individual Market Size, Composition Implications of Shift to Individually-Purchased Insurance 87M Price Sensitivity at Point of Coverage Lower premiums Narrower networks Higher deductibles, copays 65M 31M 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: Health Care Advisory Board interviews and analysis.

22 Significant Shift Toward Self-Funding
Option 3: Self-Funded Benefits Significant Shift Toward Self-Funding Employers Bearing More Risk, Turning to Providers as Allies Percentage of Self-Insured Employers Partially or Completely Self-Insured Employer Interest in Provider-Oriented Strategies 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 Source: Kaiser Family Foundation, “2012 Employer Health Benefits Survey,” available at: Towers Watson, “18th Annual Towers Watson Employer Survey on Purchasing Value in Health Care,” 2013, available at: Health Care Advisory Board interviews and analysis.

23 Self-Insurance Looking More and More Attractive
Self-Funded Status Shelters Groups From Many ACA Requirements 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 Self-funded employers exempt from many ACA mandates Source: US Department of Health and Human Services, “rights and Protections,” available at 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.

24 Public Payer Reimbursement Already a Prime Target
Faltering Assumption #2: Steady Public Payer Pricing Growth Public Payer Reimbursement Already a Prime Target Medicare Payment Cuts Becoming the Norm ACA’s Medicare Fee-for-Service Payment Cuts Reductions to Annual Payment Rate Increases1 $415B in total fee-for-service cuts, $260B Hospital payment rate cuts, $56B Reduced Medicare and Medicaid DSH2 payments, Includes hospital, skilled nursing facility, hospice, and home health services; excludes physician services. Disproportionate Share Hospital. 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: Health Care Advisory Board interviews and analysis.

25 No Question About Further Cuts, Just Methods
Medicare Cuts Central to Long-Term Deficit Reduction Plans 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 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 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 $560B $360B Total estimated health care savings, Total estimated health care savings, Total estimated health care savings, Source: Bowles E and Simpson A, “A Bipartisan Path Forward to Securing America’s Future,” Moment of Truth Project, April 2013, available at: 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: Health Care Advisory Board interviews and analysis.

26 Contingent Payment Models Becoming the Norm
Reimbursement Increasingly Tied to Performance Mandatory Medicare Pay-for- Performance Programs Medicare Payment Rates Potential Chest Pain Treatment Paths Maximum Payment Penalty Hospital Value-Based Purchasing Program Hospital Readmissions Reduction Program Hospital-Acquired Condition Penalty RAC Reaction Spilling Over to Volume 25% 1.6M 69% Hospitals mandated to face hospital-acquired condition penalty Observation stays nationwide, 2011 Increase in number of Medicare beneficiaries under observation, 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: 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.

27 Volumes Still Soft Post-Downturn
Faltering Assumption #3: Predictable Volume Channels Volumes Still Soft Post-Downturn Consumers Still Tightening their Belts Households Postponing or Cancelling Medical Care 95% Percentage of primary care physicians reporting that patients rationing or forgoing medications, treatments due to financial concerns 2006 2009 Is it Cyclical… …Or Is It An Enduring Trend? “In 2009, despite the economic downturn, the number of prescription drugs dispensed rebounded to prerecession rates of growth.” “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.” Health Affairs, 2011 Paul Ginsburg, Economist, Center for Studying Health System Change 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: accessed September 21, 2011; Thomson Reuters, “Thomson Reuters Study Finds More Patients Postponing Medicare Care Due to Cost,” available at: accessed September 21, 2011; Health Care Advisory Board interviews and analysis.

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

29 New Competitors Emerging in Ripest Markets
Walgreens Entering the Care Management Industry 2013: Launches three ACOs; begins diagnosing and managing chronic disease 2009: Launches flu vaccine campaign Simple Acute Services Vaccinations and Physicals Chronic Disease Monitoring Chronic Disease Diagnosis and Management 2007: Acquires Take Care Health Systems 2012: Offers three new chronic disease tests Case in Brief: Walgreen Co. Not Just a Drugstore 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 “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 Source: Japsen B, “How Flu Shorts Became Big Sales Booster for Walgreen, CVS,” Forbes, February 8, 2013, available at: “Take Care Clinics at Select Walgreens Expand Service Offerings,” Reuters, May 31, 2012, available at: Murphy T, “Drugstore Clinics Expand Care into Chronic Illness,” The Salt Lake Tribune, April 4, 2013, available at: Walgreens, “Company Overview,” available at: Health Care Advisory Board interviews and analysis.

30 Savvy Providers Targeting Growing Market Segments
Medicare-Focused Providers Offering Compelling Specialized Service JenCare’s Recent Expansion Adults Aged 45-64, DeKalb County, Georgia JenCare Neighborhood Medical Centers opens new clinic in Atlanta metro region 12,000-square-foot space caters to low-, moderate-income Medicare beneficiaries 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 38% Reduction in inpatient days for senior ChenMed patients Source: Crossroads News, “JenCare Mecical One-Stop Center Caters Wholly to Seniors,” available at: Health Care Advisory Board interviews and analysis.

31 A Giant Finding Its Footing
BigCo Poised to Disrupt Referral Chains BigCo’s1 Migration into Primary Care 1 2 3 Space Leased to Provider Partners Self-run Screenings, Wellness Services “Integrated Care Center” 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 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 Pseudonym. Source: Health Care Advisory Board interviews and analysis.

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

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

34 The New Logic of Choice A Crumbling Cross-Subsidy
The Rise of Productive Growth

35 Understanding the New Logic of Choice
Three Groups Responsible for Allocating Market Share Decision Makers and Their Priorities Wholesale Purchasers (Payers, Employers) Referring Providers Consumers Today’s Priority: Low total cost of care for entire populations Provider Wishlist: Comprehensive network Proven population health management capabilities Today’s Priority: High-quality, low-cost episodic care Provider Wishlist: Best-in-class outcomes Data access, connectivity Cross-continuum collaboration 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 Source: Health Care Advisory Board interviews and analysis.

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

37 Shared Accountability Necessary for Success
Employers Shared Accountability Necessary for Success Best Performing Employers Collaborate Closely with Providers Average Annual Employer Health Cost Growth Study in Brief: 18th 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 Best Performers More Likely to Focus on Provider Strategies Adopt new accountable payment models Contract directly with hospitals, physicians, ACOs Offer incentives for care coordination Offer performance- based payments Best Performers Low Performers Source: Towers Watson, “18th 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: accessed March 15, 2013; Health Care Advisory Board interviews and analysis.

38 Shopping Carefully for Acute Care Services
Walmart Steering Employees to Preferred Providers for Surgical Care Walmart Centers of Excellence Partners Cleveland Clinic Geisinger Medical Center Mayo Clinic Mercy Hospital Springfield Scott & White Memorial Hospital Virginia Mason Medical Center 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 Source: Walmart News, “Walmart Expands Health Benefits to Cover Heart and Spine Surgeries at No Cost to Associates,” October 12, 2012, available at: Health Care Advisory Board interviews and analysis.

39 Rewarding Care Management Expertise
Large Employer Contracts Directly with Health System 5,400 Covered lives in contract $8-10M Projected savings through contract, 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 PHS1 providers Shared Accountability Upside and downside risk for health care spending compared to projected target Case in Brief: Intel Corporation Large, multinational employer headquartered in Santa Clara, California Entered into narrow-network contract with Presbyterian Healthcare Services, an 8-hospital system in New Mexico, for employees at Rio Rancho plant Presbyterian Healthcare Services. Source: Intel Corporation, “Employer-Led Innovation for Healthcare Delivery and Payment Reform: Intel Corporation and Presbyterian Healthcare Services,” Santa Clara, California; Evans M, “Slimming Options,” Modern Healthcare, July 13, 2013, available at: Health Care Advisory Board interviews and analysis.

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

41 Physicians Still at the Center of Referral Decisions
Specialist, Hospital Choices Especially Physician-Driven Information Sources Used to Select a Specialist Physician1 Information Sources Used to Select a Facility for a Procedure1 2008 2008 n=13,500 n=13,500 58% rely solely on referral from PCP 69% rely solely on referring doctor Survey respondents given option to “select all that apply.” 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.

42 Physicians Increasingly Responsible for Cost, Quality
CMS, Third-Party Aggregators Providing Financial Tailwind Accountable Care Organizations, by Sponsoring Entity Financial Support for Physician ACOs As of October, 2013 Health insurer specializing in Medicare Advantage plans, partners with providers to establish MSSP1 ACOs Currently operates 31 Medicare ACOs with 2,000+ physician partners; covers ~300,000 Medicare beneficiaries in 13 states Hospital Systems Physician Groups 35 participants in Advance Payment ACO Model Provides upfront and ongoing financial support to independent physician ACOs Other Medicare Shared Savings Program. Source: Centers for Medicare and Medicaid Services, available at Health Affairs, “Continued Growth Of Public And Private Accountable Care Organizations,” available at: Universal American Corp.; Health Care Advisory Board interviews and analysis.

43 Re-evaluating Historical Referral Decisions
Physicians Actively Destroying and Directing Demand Three Options for Accountable Providers Prevent Utilization through Medical Management Heart failure Pneumonia 1 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 2 Direct Unavoidable Utilization to Low-Cost, High-Quality Partner Inpatient, outpatient procedures Select inpatient medical care 3 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): ; Health Care Advisory Board interviews and analysis.

44 Securing Preference from Accountable Decisionmakers
Contingent Upon Continuous Collaboration, Clinical Excellence Delivering on Accountable Decisionmakers’ Top Priorities Provide Real-Time Utilization Feedback Guarantee Continued Influence Over Care Pathway Immediate knowledge of patient admission, discharge, transfer Access to patient records during inpatient stay Input into treatment decisions, care protocols, referral partners Oversight of post-discharge care management responsibilities Assemble Reliable Specialist Network Deliver Superior Acute Care Outcomes 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 Source: Health Care Advisory Board interviews and analysis.

45 Seeking a Collaborative Partner
New Preferred Partnership Driven by Shared Vision Partnership Goals Partner on Care Coordination Collaborate on Total Cost Management 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 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 Source: Health Care Advisory Board interviews and analysis.

46 Ensuring Enterprise-Wide Coordination
New Partners Collaborate Across Clinical, Operational Processes Commitments to Delivering High Value Care Data Sharing Care Coordination 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 Atrius Health-BIDMC Partnership Discharge Planning Strategic Alignment PCP notified of patient discharge, collaborates on discharge care plan “Care Continuation” office manages care transitions based on patient history, Atrius Health-preferred providers Dedicated seats for Atrius staff on multiple BIDMC committees Co-investments for planning, development of service expansions Source: Health Care Advisory Board interviews and analysis.

47 Anticipating the “Activated” Patient
Consumers Anticipating the “Activated” Patient Consumer Role in Decision Making Increasingly Important High-Deductible Health Plan Enrollment Consumer Viewpoint on Role in Care Decision Making 26% Individuals with Deductible of $1000 or More n=2,071 Doctor is completely in charge of treatment decisions Doctor makes the decisions with some input from patient Doctor and patient make a join treatment decision Patient makes final decision with some input from their doctor Patient is completely in charge of treatment decisions 43% 33% Decline in proportion of individuals with a deductible under $5001 Respondents age 25 to 34 preferring fully active role in care decision making From 2003 to 2012. Source: Collins R, et al., “Insuring the Future,” The Commonwealth Fund, April 2013, available at: Altarum Institute, “Altarum Institute Survey of Consumer Health Care Opinions,” Fall 2012, available at: Health Care Advisory Board interviews and analysis.

48 Price Shopping Abetted by Transparency
Free Apps, Tools Offer Platform for Comparison Shopping Taking “Consumer-Driven” to the Next Level Innovation in Brief: PokitDok Service: Carpal Tunnel Surgery Location: TravelSurgeryUSA, Charleston, SC Website, mobile app marketed to individuals with high-deductible health plans Offers database of over three million providers Budget: $ 4,000 Negotiate Payment Type: Cash HSA Insurance Request Quote “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 Source: MedCityNews, “PokitDok Makes Cash Payments Easier for Doctors and Patients,” April 17, 2013, available at: Health Care Advisory Board interviews and analysis.

49 Convenience a Critical Element of Choice
Patients Seeking Alternatives to the Standard Office Visit Rising Popularity of Retail Clinic Visits On-Demand Services Attracting Patients 1.5M 6.0M 42% Consumers age 18 to 24 preferring independent, retail pharmacy for primary care Same-day appointment booking online, through mobile app Physician consultations for minor illnesses, ongoing management Coordinated tests, treatments, specialist referrals, hospitalizations Top Reasons for Increase in Retail Clinic Use Case in Brief: One Medical Group Nearby Location Reduced Wait Times Service, Price Transparency 90-physician network based in San Francisco, California Patients pay $149 to $199 for annual membership 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: One Medical Group, “Our Services,” available at: Health Care Advisory Board interviews and analysis.

50 Finding Care the Way You Find Dinner
Suddenly Subject to the Marketplace of Opinion Wave of Tools to Search Health Care Consumer Ratings Consumer Willingness to Spend Out-of-Pocket for Health-Related Tools Marcus Welby, MD Health Apps or Programs General Practice Resources That Rate Physicians and Hospitals 497 reviews (read below) Other available apps, websites: Health-Related Video Games Consumer Reports HealthGrades RateMDs Vitals ZocDoc PatientsLikeMe Consumers reading health-related reviews online Consumers using health-related online reviews to decide where to get care 48% 33% 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: Health Care Advisory Board interviews and analysis.

51 The Rise of Productive Growth
A Crumbling Cross-Subsidy The New Logic of Choice The Rise of Productive Growth

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

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

54 Scrambling to Assemble Attractive Assets
Providers Seeking Capital, Geographic Reach, Clinical Scope, and More Wide Range of Partnership Activity 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 Dignity Health, U.S. Healthworks Dignity expands ambulatory care foundations in new markets Cleveland Clinic, Community Health Systems Affiliation spreads Cleveland Clinic brand, clinical expertise Baylor Scott and White Health Merges adjacent markets for greater geographic scale Source: Health Care Advisory Board interviews and analysis.

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

56 Toward an Economics of Value
Adapting to New Rules of Competition Health System Strategy, c. 2003 “Price-Extractive Growth” Health System Strategy, “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 Physicians Employers 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 CPE1 CTO2 CIO3 Chief physician executive. Chief transformation officer. Chief integration officer. Source: Health Care Advisory Board interviews and analysis.

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