New Models for Care Delivery in the Reform Era 9.27.2012

1. New Models for Care Delivery in the Reform Era 9.27.2012

2. Agenda Key Challenges of the Reform Era Hospital and Physician Alignment Drivers New Models of Care Delivery Co-Management – A Transitional Model 1 2 3 4

3. Key Challenges of the Reform Era

4. US National Debt at $15.9 Trillion Each pallet equals $100 million dollars, full of $100 dollar bills Unless the U.S. government fixes the budget, US National debt (credit card bill) will topple $16 trillion this fall and rise to $22.1 Trillion within 4 years. US national debt passes 20% of the entire world’s combined GDP.

5. A New Dialog Annual Increase Total Spend: 7.0% Medicare Spend: 6.8% Private Insurance Spend: 7.1% November 16, 2010 Source: “U.S. Healthcare Costs” KaiserEDU.org

6. Federal Programs Going BROKE! Source: Chicago Tribune – “Trustees Warn of Looming Insolvency for Social Security, Medicare” (4/25/12) Social Security • Projected to be insolvent by 2033 Medicare • 2012 – 50 million people (80 million by 2030) • In the red in its largest fund in 2024 • Trust fund that pays for disability benefits is projected to run out of money in just 4 years Cost-cutting steps have been successful and growth in Medicare spending per person has slowed markedly in recent years, but the situation is dire unless changes are made.

7. Spending Not Related to Quality or Value 84 82 80 78 76 74 72 Life Expectancy in Years 0 2,000 4,000 6,000 8,000 Health Spending Per Capita (USD PPP) Source: OECD Health Data 2009

8. Reform Initiatives PPACA / HCERA Center for Medicare/Medicaid Innovation (CMI) CMS Payment Cuts & Penalties CMS Triple Aim Pilots and Demonstrations Legislative Battles and Reform Funding

9. Legislative Reform Defining New Paradigms PPACA (March 2010) • Improve Quality • Increase Access • Reduce Costs GOALS • Adopt New Models of Care Delivery • Shift Accountability and Risk to Providers • Redirect and Shrink the Dollars • Provide Coverage for the Uninsured OBJECTIVES • Physician Alignment • Provider Integration • New Model Adoption • Electronic Health Records PREREQUISTES

10. Supreme Court Clearing the Way for Reform High Court Decision Ends Constitutional Uncertainty Three Key Decisions Arguments Supporting Individual Mandate Constitutional Discussion Individual Mandate:Can the federal government compel individuals to purchase health insurance? Medicaid Expansion:Is the ACA’s Medicaid expansion a violation of states’ rights? Severability:Should the remainder of the ACA stand if a portion is struck down? Supreme Court Decision Upheld under Congress’ power to impose taxes Medicaid expansion upheld; federal government may not withhold existing Medicaid funds if states forgo expansion The remainder of the law can stand Source: Advisory Board

11. “would reduce Medicaid spending by $771B over 10 years and $30B from Medicare” p6

12. Early On, Revenue Implications…. Reductions Reductions Readmission Readmission Program in place

13. Then, Delivery Implications ACO’s Value Based Bundling Program in place Pilot or Demonstration Period

14. Integration Accelerating Across the Continuum Source: Sg2

15. Insights from the Front Lines of Change. . . Access Point Strategy Clinical Integration Hospital Efficiency Program Orthopedic Institute Clinical Co-Management (Spine & Transplant) Women’s Services Co-Management Payor Strategic Plan Comprehensive Cardiology Alignment Training Directorship Safety Net Hospital Crisis

16. Hospital and Physician Alignment Drivers

17. Caregiver Supply Not Meeting Demand PCP Supply vs. Demand (in thousands) 350 300 250 200 337 • Deficits … PCP = 66,000 • Specialist = 79,000 316 298 282 271 267 260 244 229 215 Demand Supply 2000 2005 2010 2015 2020 Source: SHP/VHA 2009 | Merritt Hawkins 2007

18. Caregiver Supply Not Meeting Demand National Supply and Demand Projections for FTE Registered Nurses (2000 – 2020) 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 Demand Supply 2000 2006 2012 2020 Source: Bureau of Health Professions, RN Supply & Demand Projections

19. Volume Growth Widening the Gap Projected Ten Year Volume Growth With and Without Reform 8.5% 8.1% INPATIENT DISCHARGES 23.1% 19.1% OUTPATIENT VISITS 7.4% 7.3% MEDICAL ADMISSIONS With Reform Without Reform 11.2% 10.2% SURGERIES Source: Sg2

20. Hospital Margins At Risk Reimbursement At Risk Oct 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Value-Based Purchasing 1% 2% 30-Day Readmissions 1% 2% 3% Hospital Acquired Conditions 1% 2% 3% 5% 6% TOTAL Source: Sg2 20

21. Hospital Drivers for Alignment $ Lower Costs “The biggest potential income streams for both hospitals and physicians may reside in sharing savings from providers. To do that, hospitals and physicians must manage care together.” – PwC “Physician orders are directly responsible for 80% of U.S. healthcare spending.” – Deloitte Center for Health Solutions Better Quality “Better quality will finally pay off for hospitals but they need physicians to deliver it.” – PwC New Payment Systems “Hospitals need to partner with physicians as a means of participating in ACO’s and other new payment arrangements.” – PwC Expand Base, Increase Volume, Grow Market Share “High end expensive procedures are at risk unless we can expand the referral base.”– Michael Sachs, Sg2 Source: PricewaterhouseCoopers | Deloitte | Sg2

22. Physician Drivers for Alignment Operating Expense Administrative Burden Assessment / Audit Risk Alignment with Hospitals Professional Fees Ancillary Revenue Leverage with Payors Profitability & Personal Income

23. Practice Trends Percentages of U.S. Physician Practices Owned by Physicians and by Hospitals, 2002-2010 Physician-owned 80 60 40 20 0 U.S. Physician Practice Ownership (%) Hospital-owned 2002 2004 2006 2008 2010 Source: Physician Compensation and Production Survey, MGMA, 2003-2009

24. Payment Reform Models Emerging High Insurance product Global capitation ACO Clinical integration program Disease-specific capitation Degree of Complexity Bundled episodes (pre- and postcare included) Bundled episodes (inpatient only) P4P/value-based purchasing Inpatient case rates (DRGs) Fee for service Low High Scope of Risk Source: Sg2

25. New Models of Care Delivery

26. The Old Model

27. The New Model

28. Market Dynamics Accelerating New Models More Care (32M uninsured, Baby Boomers, Chronic Disease) Higher Quality (P4P, Shared Savings, Core Measures) Less Money ($240B Cuts, $90B Penalties) “Bottom line, if you attempt to use the same care delivery model moving forward, faced with the magnitude of reductions in forecasted revenue, you will go out of business.”Michael Sachs, Sg2

29. Shifting Risk FFS Reimbursement Cuts Global Payments / Capitation Shared Savings Pay-for-Performance Value-Based Purchasing Bundled Payments Consumers Employers Health Plans Government Payors Physicians Medical Groups Hospitals Other Providers Risk Shift Source: PricewaterhouseCoopers | DHG

30. Payment Reform Accelerating New Models FFS Reimbursement Cuts Global Payments / Capitation Shared Savings Pay-for-Performance Value-Based Purchasing Bundled Payments All Providers Accountability Integration Alignment Independent Payers Source: PricewaterhouseCoopers

31. Variety of Alignment Options High % of Medical Staff Involved Clinic Model Small (<10% of the medical staff) Full Integration ~25% of the medical staff Foundation Models ~50% of the medical staff Clinical integration PHO ~75% or more of the medical staff Traditional Employment Complexity and Durability Co-management Traditional PHO Joint Ventures Gainsharing MSO IT subsidy IPA Next-generation PSA Call coverage agreements Medical directorships Voluntary model High Low Level of Integration Source: Sg2 2012

32. Hospitals and Health Systems React Question Posed of 279 Hospital and Health System Leaders: Which of the following initiatives is your organization likely to be pursuing within three years? Source: Health Leaders Media ,September 2012

33. Clinically Integrated Models Proposed ACO Structure Readmission Risk/Penalties Co-Management $ Other Providers (CAH) Primary Care Physicians Specialists Post-Acute Care Acute Care Hospital $ CIN PCMH Proposed Bundled Payment Initiatives Patient Centered Medical Home (PCMH): Primary care approach that supports comprehensive, team based care, improved patient access and engagement; serves as “hub” of care coordination; focuses on chronic disease management Clinical Integration Network (CIN): Acute care hospital, multispecialty physician network and other providers committed to quality and cost improvement, with support from joint negotiated commercial contracts Accountable Care Organization (ACO): Model to promote accountability for a patient population by improving care coordination, encouraging investment in infrastructure, and redesigning the care continuum around quality Co-Management: Model to align physician incentives around quality, cost and satisfaction with fair market compensation Source: The Advisory Board

34. Clinically Integrated Network (CIN or IPN) Private Practice Physicians CI Entity Health System Employed Medical Group CIN is commonly defined as an integrated health network using proven protocols and measures to improve patient care, decrease cost, and demonstrate value to the market. After demonstrating value, the CIN negotiates with payers and large employers to support the network with incentives based on demonstrated value and achieved results. Employee Health Plan Ambulatory Care Centers Hospitals

35. CIN Components

36. CIN Infrastructure • The CIN is a Separate Business Entity with … • Distinct leadership structure and staff • Independent budget and financial statements • Participating agreements with providers • Sustainable source of revenue $ Physician Investment/ Dues $ $ Health System Investment/ Dues Market Sources (Payers, Employers) Clinically Integrated Network

37. CIN Legal Structures PHO IPA Health System Subsidiary Participating Physicians Participating Physicians Participating Physicians Health System Health System Health System Subsidiary PHO IPA 100% 50% 50% Participating Agreement 100% Participating Agreements Payers / Employers Payers / Employers Payers / Employers

38. Hospital Efficiency Program (HEP) Health System • Validate Savings from HEP Performance • Clinical Supply and Pharmacy • Medical Claims per Employee • Throughput and Average LOS • Define Fair Market Value Compensation for HEP Initiatives • Base Fee (administration) • Incentive Component (performance) services HEP Agreement Physician Org. (PHO, IPA, Sub) Design Compensation Methodology for Participating Physicians

39. CIN / HEP Benefits

40. Patient Centered Medical Home (PCMH) • Defined in pilot programs in 44 states • Built on 7 fundamental principles • Focuses on comprehensive patient management • Focuses on treatment and management of chronic conditions • Manages expense of high cost, perpetual patients (Diabetes, COPD, Hypertension, Asthma) • Increases access by leveraging physician extenders • Qualifies for additional incentive based payments Safety and Quality Coordinated Care Whole Person Orientation Enhanced Access Physician Directed Practice Personal Physician Payment for Added Value Cornerstone of Accountable Care Organizations

41. PCMH Care Redesign Traditional PCMH Patients are registered in the medical home PCMH systematically assesses all patient health needs to plan care Care is determined by a proactive plan to meet patient’s needs (with our without an office visit) Care is consistent with evidence-based guidelines A prepared team of professionals coordinates all patient care Acute care is delivered by open-access and non-visit contacts PCMH tracks tests, consultations, ED visits, hospital visits and follow-up care A multidisciplinary team works to serve patients Patients make appointments Patients’ chief symptoms or reasons for visit determine care Care is determined by today’s problem and time available today Care varies by provider Patients are responsible for coordinating their own care Acute care is delivered during the next available appointment and to walk-ins Patient must tell caregiver what happened Operations center on physician’s schedule Source: Central Ohio PCMH Project

42. The PCMH is a health care approach that facilitates partnerships between patients, their families and personal physicians (and/or extenders). The PCMH follows a set of standards around care coordination and data monitoring that leads to demonstrated quality outcomes at reduced costs. PCMH Benefits and Risks Benefits • Increases quality and reduces cost of chronic patient care • Enhances access and continuity of care • Aligns PCP physicians around care delivery • Focuses on integrated care management • Patient survey results help drive quality improvement • Presents opportunity for enhanced reimbursement • Creates possible competitive advantage Risks • ROI uncertain and difficult to measure • Demands increased administrative support • Requires (significant) IT investment • Creates significant change in culture and practice patterns • Requires progressive use of technology and other models of patient interaction Source: NCQA, 2011

43. Accountable Care Organization (ACO) Hospital: Lower admissions and re-admissions; more appropriate use of ED; integration with physicians; enhanced reimbursement(?) Specialists: Increased level of integration with PCPs, increased efficiency, focus on reducing re-admissions Hospital Community Payer Specialists Primary Care Provider: Increased focus on patient health, greater access to information, increased use of quality metrics, better reimbursement, Primary Care Provider Social Worker Payer: Improved member satisfaction, lower costs, opportunity for new business models Other Caregivers Nurse Patient Government: Lower healthcare costs, healthier population Employer Government Patient: Less costly, more convenient care; coordinated services, productive long-term relationship with all physicians Pharmaceutical Manufacturer Employer: Lower costs, more productive workforce, improved employee satisfaction

44. ACO Structure Source: CMS

45. ACO Participants *Under Method II a CAH bills for both facility and professional services, which provides CMS with the data needed to perform various programmatic functions What is an ACO Professional? MD or DO Practitioner (PA, nurse practitioner, clinical nurse specialist) Who Can Participate in an ACO? ACO professionals in group practice arrangement Networks of individual practices of ACO professionals Partnerships between hospitals and ACO professionals Hospitals employing ACO professionals Critical Access Hospitals (CAHs) that bill under Method II* Federally Qualified Health Centers (FQHCs) Rural Health Clinics (RHCs) Source: CMS

46. ACO Mechanics 3 4 1 5 2 Source: CMS

47. Key Imperatives for Success Manage Utilization Risk Maintain Exceptional Quality Operate Under Elevated Transparency • Develop quality care standards • Create care pathways across providers • Coordinate care across sites of care, over time • Adopt IT systems that allow for data capture and use • Continue to provide data to ACO partners and CMS • Develop communication strategy amongst participants • Develop and utilize ambulatory network • Appropriately utilize pre and post acute care providers • Reduce preventable acute care episodes • Avoid unnecessary readmissions Source: The Advisory Board Company

48. ACO Care Redesign Traditional ACO Source: AMGA

49. Where the ACOs Are Source: The Advisory Board Company

50. Co-Management