1. Health Care Industry Convergence It’s a Small(er) World After All Mitchell Morris, MD September 23, 2013

2. Copyright © 2013 Deloitte Development LLC. All rights reserved. Industry issues and trends Industry response Future impact on the industry Agenda

3. Industry issues and trends

4. Copyright © 2013 Deloitte Development LLC. All rights reserved. Today’s operating models may no longer be up to the task of financing and delivering the most effective and efficient health care as required by health care reform Silo-based health care Wrong incentives Patient connection Data disconnect Sector-specific solutions

5. Copyright © 2013 Deloitte Development LLC. All rights reserved. Given market needs and disruption taking place with reform, the level of mergers and acquisitions, affiliations, alliances, and joint ventures continues to escalate Health care consolidation on the rise 1,063 deals completed in 2012 Source: Irving Levin M&A data for LSHC

6. Copyright © 2013 Deloitte Development LLC. All rights reserved. Many of these transactions are done not just to build scale or grow market share New technologies New solutions New approaches

7. Industry response

8. Copyright © 2013 Deloitte Development LLC. All rights reserved. Vertical and Horizontal Growth and Integration Payers/Employers Post-Acute

9. Copyright © 2013 Deloitte Development LLC. All rights reserved. Most physicians foresee increased consolidation of physicians into larger organizations Source: Deloitte Survey of U.S. Physicians, 2013 66% of all physicians Percent responding very likely/likely that physicians and hospitals will become more integrated in the next 1-3 years Primary care providers Surgical specialists Non-surgical specialists Other

10. Copyright © 2013 Deloitte Development LLC. All rights reserved. Medical group acquisition deals by hospitals/IDS grew 139% from 2010-2011. Hospitals/IDS represented 51% of medical group acquirers in 2012. Hospitals/IDS focused their medical group acquisitions on the following: Cardiology: Financially attractive Hospitalist/internal medicine: ACO/integrated care model building blocks Hospitals buying Doctors Medical group acquisitions by acquirer: Number of Transactions Source: The Health Care Services Acquisition Report, Nineteenth Edition, Irving Levin Associates, Inc. March 2013 Note: Only includes deals > $1M. Other acquirers include medical groups, health plans, etc. Medical group acquisitions by top specialties, 2011 Source: The Health Care Services Acquisition Report, Eighteenth Edition, Irving Levin Associates, Inc. March 2012 Note: Only includes deals > $1M. Acquisitions are by all acquirers. All specialties/deals are not listed.

11. Copyright © 2013 Deloitte Development LLC. All rights reserved. Acute sector consolidation is likely to accelerate as hospitals seek sustainability Hospital consolidation Increased margin pressures Increased regulatory compliance costs Increased responsibility for public transparency Increased operational integration Payment reforms Increased implementation of clinical improvements Source: Data from Modern Healthcare, January 28, 2013. Acute hospital deal flow 2007-2012 The acute sector is under stress

12. Copyright © 2013 Deloitte Development LLC. All rights reserved. For a health system to achieve transformational growth, it will have to both expand the footprint of its core services and seek new partners Three channels for integration delivery system growth Organic Growth Strategic Acquisitions Leveraged Growth Improving market position and penetration of existing lines of business Targeted M&A focused on priority markets & continuum development Positioning as an environment where others ‘plug/play’ and hold financial/operational risk for growth 5% growth @ 10% margin30% growth @ 3.5% margin 2% growth @ 20% margin Balanced, Aligned & Integrated to Create Synergistic Results CoreNewAdjacent

13. Copyright © 2013 Deloitte Development LLC. All rights reserved. The insurance industry is heavily regulated and capital intense; the margins in its core business — managing health — are thin Health plan consolidation: fewer players with wider reach Drivers of the increased “urge to merge” Increased costs of operations Downward pressure on premiums Local brands vs. national In 2011, 20 managed care M&A transactions took place, totaling nearly $8 billion Source: Deloitte Center for Health Solutions, “The future of health care insurance: What’s ahead?” 2013 The impact for HIX adoption is still unknown

14. Copyright © 2013 Deloitte Development LLC. All rights reserved. Recent uptick in activity with increase anticipated Health plan M&A Source: Deloitte Center for Health Solutions, “Unlocking Value in Health Plan M&A?” 2012 * Data taken from a 6 month period, annualized 49 40 29 21 29 36 36*

15. Copyright © 2013 Deloitte Development LLC. All rights reserved. Provider acquisitions of health plans –Major health systems are being spurred by market reforms toward forming insurance companies and creating their own full risk plans — even as they continue to partner with insurers on other products. –Nationwide, about 100 provider sponsored health plans are owned by hospitals or health systems, Approximately 20 more health systems are in the process of getting licensed to offer their own plans –These likely will be implemented within the next 18 months or so for at least a 20% increase over that time period –Although providers have assumed greater risk, few provider owned health plans will participate in exchanges next year, Health plan acquisitions of providers –The jury is still out, but this is not expected to become a major national trend –Represents only a small portion of insurance companies’ efforts to transform the delivery of health care –Goal is to get providers to take on more financial risk for care of patients. Various types of relationships between health plans and providers will emerge as part of collaborative/integrated/ACO care models and efforts. Health plan and provider convergence Source: Hospitals, Health Systems Quicken Pace to Own Insurers, Full Risk Health Plans, AIS Health, August 2013

16. Copyright © 2013 Deloitte Development LLC. All rights reserved. Shifting patients away from hospital emergency rooms and into retail-based and urgent care walk-in clinics can significantly lower healthcare costs and improve access to care. Providers are able to extend their reach in the community through retail clinics with flexible hours, locations, services to flex around the needs of the patient. Retail clinics are making a real impact Source: Retail Clinics at Tipping Point: Pharmacies, chains answering demand for access and affordability, Modern Healthcare, May 2013 Health plans view retail clinics as a powerful tool to reducing costs incurred through expensive ER visits Top 10 Hospital Operators Operator No. of Clinics Clinic BrandRetail Partner Alegent Health6Quick CareHy-Vee Geisinger3Care WorksKings Mercy Health Systems3Quick CareDahls MemorialCare3HealthExpressAlbertsons Sutter Health3Express CareRite Aid UMC Health System3Living Well ExpressUnited Supermarkets Atlantic General2ImmediacareRite Aid Avera McKennan2CuraQuickHy-Vee Fairview Health System2Express CareCoborn’s Gundersen Lutheran2Express CareFestival Foods Total in U.S.210

17. Copyright © 2013 Deloitte Development LLC. All rights reserved. CVS and Walgreens dominate the market with 624 and 366 clinics in operation, respectively Two operators dominate the current retail clinic market Source: Insurers turn to retail, urgent care clinics to keep members out of emergency rooms, DrugStoreNews.com, March 2013

18. Future impact on the industry

19. Copyright © 2013 Deloitte Development LLC. All rights reserved. Changing the paradigm: the possibilities of innovation through convergence Innovation through convergence Growth in the use of health information technologies Patient care moving to the internet 24-hour 7-day a week health care system Reducing costsIncreasing access Better care

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