1. Value-Based Health Care Delivery Health Care Conference Aruba June 2, 2015 Derek Haas, Project Director for Value-Based Health Care Delivery at Harvard Business School and CEO of Avant-garde Health

2. 2 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Disclosures Avant-garde Health

3. 3 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Agenda How Not to Cut Health Care Costs Value-Based Health Care Delivery Reimbursement/Payment

4. 4 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission 5 common cost reduction mistakes

5. 5 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission 5 common cost reduction mistakes Cutting back on support staff Underinvesting in space and equipment Focusing narrowly on procurement prices Maximizing patient throughput Failing to benchmark and standardize #1 #2 #3 #4 #5

6. 6 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Mistake #1: Cutting back on support staff Large variation in cost rates across types of staff members Data are illustrative

7. 7 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Mistake #2: Underinvesting in space and equipment Space & equipment costs are much lower than personnel costs Personnel Shoulder surgery at Hospital A Cardiac surgery at Hospital B Knee surgery at Hospital C Equipment Space $25/min $20/min $.25/min $1.30/min $.25/min $.35/min $.40/min $.55/min Data are illustrative Operating Room Cost per Minute of Time

8. 8 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Mistake #3: Focusing narrowly on procurement prices Indexed Bone Cement Cost per Knee Replacement for U.S. Hospitals in 2014 Joint Replacement Program 17x Ratio of 90 th to 10 th Percentile Organization in Cost 10 th percentile 25 th percentile 90 th percentile 75 th percentile Median Supply Expense: Function of Price per Unit, Quantity Used, and Product Type

9. 9 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Mistake #4: Maximizing patient throughput Options for Starting Dialysis Patient Starts Optimally Peritoneal (at home) Fistula Graft Patient Starts Optimally Peritoneal (at home) Fistula Graft or Patient Starts Sub-Optimally Via a catheter Note: Some patients are able to receive a pre-emptive kidney transplant and do not need dialysis Less than 50% of patients today start optimally Source: Wikipedia

10. 10 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Mistake #4: Maximizing patient throughput

11. 11 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Schön Klinik is the 5 th largest private hospital group in Germany Orthopedics is its largest specialty (~1/3 of its care) Provides orthopedic care in 5 acute care hospitals and 4 rehab clinics In 2010 facing cost pressure, Schön began cost and outcomes analysis for knee replacements looking at both acute and rehab care at below hospitals Neustadt Located along Baltic Has dedicated orthopedic facilities About 1,100 total knee replacements (TKR)/year (6 th highest volume in Germany) München Harlaching Located in Munich Began as part of a university hospital system About 200 TKR/year Mistake #5 Failing to benchmark and standardize Schön Klinik analyzed knee replacements at two hospitals

12. 12 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Agenda How Not to Cut Health Care Costs Value-Based Health Care Delivery Reimbursement/Payment

13. 13 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission The central goal in health care must be value for patients, not access, volume, convenience, quality, or cost containment Value = Health outcomes Costs of delivering the outcomes The “unit of analysis” for VBHC is the complete cycle of care for treating a patient’s medical condition. Value-based health care delivery (VBHC)

14. 14 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Creating a Value-Based Health Care Delivery System The Strategic Agenda 1.Re-organize Care into Integrated Practice Units (IPUs) around Patient Medical Conditions −For primary and preventive care, IPUs serve distinct patient segments 2.Measure Outcomes and Costs for Every Patient 3.Move to Bundled Payments for Care Cycles 4.Integrate Multi-site Care Delivery Systems 5.Expand Geographic Reach In Areas of Excellence 6.Build an Enabling Information Technology Platform M. Porter and T. Lee, “The Strategy that will Fix Health Care,” Harvard Business Review (October 2013)

15. 15 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Measuring Outcomes (M. Porter) Survival Degree of health/recovery Time to recovery and return to normal activities Sustainability of health /recovery and nature of recurrences Disutility of the care or treatment process (e.g., diagnostic errors and ineffective care, treatment-related discomfort, complications, or adverse effects, treatment errors and their consequences in terms of additional treatment) Long-term consequences of therapy (e.g., care- induced illnesses) Tier 1 Tier 2 Tier 3 Health Status Achieved or Retained Process of Recovery Sustainability of Health Source: NEJM Dec 2010 Mortality Achieved clinical status Achieved functional status Time to care completion and recovery Care-related pain/discomfort Complications Reintervention/Readmission Long-term clinical status Long-term functional status Long-term consequences of therapy

16. 16 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission 5 year survival rate The Outcome Measures Hierarchy for Prostate Cancer Continence (1 year) Erectile function (1 year) Other quality of life Time to diagnosis Time to treatment Length of inpatient stay Time to return to work Survival Degree of recovery / health Time to recovery or return to normal activities Sustainability of recovery or health over time Disutility of care or treatment process (e.g., treatment-related discomfort, complications, adverse effects, diagnostic errors, treatment errors) Long-term consequences of therapy (e.g., care-induced illnesses) Bleeding Thrombosis Short-term continence (1 week, 3 months) Short-term erectile function (3 months) Biochemical recurrence Metastatic progression Radiation-induced complications of intestine, bladder, bones, skin

17. 17 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Hoag Orthopedic Institute publishes an annual Outcomes Book. This book is HOI’s entire marketing program.

18. 18 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Time-Driven Activity-Based Costing (TDABC) What activities are performed over the care cycle for a medical condition? Who is performing each activity? How long does each activity take? Determine the Care Process What is the cost per unit of time for each type of personnel? Calculate Cost Rates What materials, supplies, and drugs are consumed during the care cycle? Account for Consumables 1 2 3

19. 19 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Surgical consult Pre-op testing and evaluation Surgical prep Operation Dis- charge Follow- up visit Rehab Measure Outcomes and Costs Patient problem: Knee pain Initial MD visit Treatment: medications, diet, exercise Recommend surgery Inpatient post-op care An acute medical condition’s complete cycle of care

20. 20 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission TDABC Step 1: Clinical and administrative teams work collaboratively to identify: Process-Steps: All the administrative and clinical process-steps used over a patient’s complete cycle of care for a medical condition Resources: personnel, equipment, consumable medicines and supplies – used at each process step Time Estimates: The personnel and equipment time used at each process step for that patient

21. 21 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission TDABC Step 2: Financial personnel calculate each resource’s Capacity Cost Rate Costs: All the costs (salary, fringe benefits, occupancy, support resources) associated with having that person (or piece of equipment) available to treat patients Capacity: The capacity (time) that each resource (personnel, equipment) has available for treating and caring for patients Capacity Cost Rate = Resource Cost/ Resource Capacity

22. 22 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Calculate the Capacity Cost Rates (CCR) Data are illustrative

23. 23 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Compute total patient care costs by multiplying resource capacity cost rate by process times & summing across each patient’s cycle of care Initial consultation MinutesCost/ minute *Total MDX1X1 Y1Y1 136.13 RNX2X2 Y2Y2 68.04 CAX3X3 Y3Y3 6.17 ASRX4X4 Y4Y4 15.74 $266.08 Surgical procedure MDX1X1 Y1Y1 584.99 Anes.X2X2 Y2Y2 603.89 RNX3X3 Y3Y3 136.29 TechX4X4 Y4Y4 97.82 ORX5X5 Y5Y5 329.16 $1752.15 Follow-up or post-operative visit MDX1X1 Y1Y1 55.19 RNX2X2 Y2Y2 13.61 CAX3X3 Y3Y3 3.09 ASRX4X4 Y4Y4 1.77 $73.66 Source: Meg Abbott, MD & John Meara, MD Boston Children’s Hospital

24. 24 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Surgery costs across patients by type of clinician

25. 25 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission The financial opportunity from using best practices to improve: Joint Replacement Program Total Personnel and Consumable Costs Moving to next bracket produces an annual savings of > $1 million for an organization performing 800 TJRs Percentage Savings ImprovementTKATHA 90th to 75th15%14% 75th to 50th8%16% 50th to 25th13% 25th to 10th12%

26. 26 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Strong results from 2014 Joint Replacement Program Joint Replacement Program Participants Rating of Experience Organization A: Developed a new implant management system that lowered cost/patient by $1,500 Organization B: Increased percentage of patients being discharged home from 60% to 90% Organization C: Reduced rate of readmissions from 4.2% to 2.2% Organization D: Changed mix of cement types saving $170/patient Examples of Year 1 Results 96% Rate Experience as Excellent or Good

27. 27 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Cost measurement & management project areas Anticoagulation Bariatric surgery Bone marrow transplants Cervical spine surgery Child birth and pregnancy Colonoscopies and EGDs Heart valve replacements and repairs Head and neck cancers Hysterectomies Interventional radiology Mastectomies Joint replacements Neurosurgical procedures Observation patients Prostate cancer surgeries and radiation treatments Rotator cuff repairs Tonsils & adenoids Episodic CareChronic and Primary Care Ancillary and Indirect Radiology Billing Pharmacy Chronic kidney disease Care transitions/preventing readmissions Congestive heart failure Diabetes Frail elderly Palliative care Primary and psychiatric care for patients with intellectual disabilities

28. 28 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission How not to make the 5 common cost reduction mistakes Common Mistakes Successful Strategies  1 Cutting back on support staff Enable people to work at the top of their license  2 Underinvesting in space and equipment Invest in capital to allow high skilled personnel to be fully utilized  3 Focusing narrowly on procurement prices Examine supply spend holistically  4 Maximizing patient throughput Optimize care over the full treatment cycle  5 Failing to benchmark and standardize Measure outcomes and costs to ID and drive adoption of best practices

29. 29 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Agenda How Not to Cut Health Care Costs Value-Based Health Care Delivery Reimbursement/Payment

30. 30 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Bundled payments Definition: A single payment that provides a positive margin above the costs incurred by efficient and effective providers for treating a patient with a specific medical condition across a full cycle of care. The payment is contingent upon achieving good patient outcomes, with both the payment and outcome targets risk-stratified by the complexity of a provider group’s patient population. Surgical consult Pre-op testing and evaluation Surgical prep Operation Dis- charge Follow- up visit Rehab Measure Outcomes and Costs Patient problem: Knee pain Initial MD visit Treatment: medications, diet, exercise Recommend surgery Inpatient post-op care

31. 31 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Fosters integrated care delivery (Integrated Practice Units) for specific medical conditions Payment aligned with areas the provider can control Promotes provider accountability for the quality of care at the medical condition level Creates strong incentives to improve value and reduce avoidable complications Aligns reimbursement with value creation while allowing payers, not providers, to assume the risks inherent in a patient population Bundled payment reimbursement

32. 32 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Joint Replacements in County of Stockholm Swedish Health System Single payer (supplemented by self-pay out-of-pocket payments) Complete patient choice about where to seek care Global Provider Budgets Hospitals reimbursed on prospective patient volumes and mix Hospital payments not linked to quality, outcomes or cost Salaried physicians

33. 33 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission Fixed fee to cover physician fees, all other personnel costs, occupancy in hospital, drugs, tests, other supplies Risk adjustment: Low risk surgeries (ASA 1 and 2, ~80% of all patients) would be reimbursed under the bundle. Surgeries on ASA 3 and 4 patients remained under the previous system Warranty or guarantee for two year cycle of care (extended to 5 years if complication within 2 years) Exclude care for non joint-replacement conditions; hip dislocation New bundled payment introduced for total joint replacements

34. 34 Copyright © Harvard Business School and Derek Haas, 2015Do not reproduce without written permission In one year, % of patients waiting at least 90 days for treatment declined from 33% to 13%. Average pre-operative sick leave decreased from 50 days (2008) to 39 days (2009) Surgery queue disappeared by 2011 Per-procedure cost for joint replacements had declined by 17% in 2011 compared to 2008. Complication rate dropped from 6.3% to < 4%. Patient waiting time decreased and costs decreased