Where Have All the Inpatients Gone? A Regional Case Study With National Implications

1. Where Have All the Inpatients Gone?A Regional Case Study With National Implications Columbia, South Carolina | July 23, 2014

2. Introduction and Context Setting

3. Healthcare Has Experienced Two Inflection Points in the Underlying Business Model… Inflection Point 1.0 Inflection Point 2.0 • Began in earnest following the financial crisis of 2007-2009 • Driven by escalating federal and state fiscal problems and insupportable healthcare cost • Accelerated by provider innovation and successful experiments with a new/ different value-based business model • Advanced through concepts and principles rooted in the Affordable Care Act • Employer/ insurer market transformation • Healthcare as a retail transaction • Population health management becomes the business problem and opportunity of the day • Declining utilization • Accelerated partnership • New competitors emerging 2006 2007 2008 2009 2010 2011 2012 2013

4. … and the Pace of Change Is Quickening in 2014 Emerging Issues of 2014-2015 • Employer/ insurer market transformation • Healthcare as a retail transaction • Population health management becomes the business problem and opportunity of the day • Flat to declining utilization • Accelerated partnership • New competitors emerging Price transparency driving consumer activism Ambulatory sensitive admissions in the crosshairs Hardening networks are affecting payer mix Large employers engaging in bundled pricing More Disruptive Forces on the Horizon 2013 2014 2015

5. The Chicago Area Case Study

6. The Chicagoland Region Seven Counties in Illinois

7. Utilization Declined by 47K between 2010 and 2012Declines Were Across All Age Groups Inpatient Utilization Rates per 1,000 % Change by Age Group, 2010-2012 Note: Excludes MS-DRG 795 Normal Newborns. Sources: Proprietary market and client data; U.S. Census Bureau Population.

8. Use Rate Change by Service Line: 2010-2012 -9% Note: Excludes MS-DRG 795 Normal Newborns; Services with discharges less than 5,500 in the market are not shown. Labels less than 2% not shown. Sources: Proprietary market and client data; U.S. Census Bureau Population.

9. Similar Findings in Markets Around the Country 2010-2012 Change in Inpatient Utilization: Three Markets Source: Studies of inpatient utilization 2010-2012 conducted by Tufts Medical Center (Eastern MA), Barnabas Health (Newark), and Community Health Network (Central Indiana).

10. Research Questions of Interest • Is the economy having an impact on reduced utilization? • What is the impact of increased observation stays? • Is improved patient management driving the reduction in inpatient care? • What is the preliminary impact on admissions from accountable care-style care?

11. 1 Is the Economy Having an Impact? OB and Psych Discharges, Chicago, 2010-2012 -5% -4% 2010 2012 2010 2012

12. 1 Is the Economy Having an Impact? (continued) Inpatient Utilization Rates per 1,000 % Change by Adult Age Group, 2010-2012

13. 2 Do “Observation Stays” and Increased Use of Outpatient Settings for What Used to Be a One-Day Stay Account for a Large Portion of the Utilization Drop? Drops in one-day LOS patients between 2010 and 2012 accounted for only 9 percent of the total drop in medical/ surgical volume 3,434 Cases 9 % of Total Decline 33,256 Cases 91% of Total Decline

14. 3 Are We Starting to See Improvements in Patient Care Management? • Look at “Ambulatory Care Sensitive Admissions” (ACSAs) • These are patient admissions which should have been prevented with good outpatient care related to underlying chronic conditions, such as: • Adult asthma • Diabetes • Congestive heart failure • Sixteen Ambulatory Care Sensitive Conditions (ACSCs) have been defined by the Agency for Healthcare Research and Quality (AHRQ) Sources: AHRQ Quality Indicators: Guide to Prevention Quality Indicators. AHRQ, 2001; Milliman: Ambulatory-Care-Sensitive Admission Rates: A Key Metric in Evaluating Health Plan Medical-Management Effectiveness. Milliman, 2009.

15. The Illinois Example:ACSAs Are Dropping Faster than Non-ACSA Cases in Many Service Lines, Often Twice as Fast 2010-2012 Change ACSA Utilization Drops vs. All Other Cases Note: ACSA categories from AHRQ applied using primary diagnosis code. Sources: Proprietary market and client data.

16. 4 ACO-Style Care Outperformed the Market in Reducing Ambulatory Sensitive Admissions and Lengths of Stay 2010-2012 Change: ACSA Utilization Drops Note: Diabetes includes Long Term, Short Term, and uncontrollable. Kidney Failure includes Kidney Failure, Renal Failure, and Dehydration. All Other includes Angina, Cystic Fibrosis, and Sickle Cell. ACSA categories from AHRQ applied using primary diagnosis code. ACO data based on Mapping of Medicare national provider ID to attending/ admitting physicians. Sources: Proprietary market and client data.

17. The Accelerated Inpatient Use-Rate Drops Continued in 2013; Since 2007 Cook County and the Chicagoland Area Have Decreased by 14% and 13% Respectively Inpatient Use Rate Trends (per 1K population) % Change (2007-2013) -14% -13% Note: Excludes MS-DRG 795 Normal Newborns. *2013 annualized based on 1st Quarter 2013 data. Source: Proprietary market and client data; U.S. Census Bureau Population.

18. The Pace Has Accelerated Over the Past Years Note: Excludes MS-DRG 795 Normal Newborns. *2013 annualized based on 1st Quarter 2013 data. Sources: Proprietary market and client data; U.S. Census Bureau Population.

19. On the Horizon: Outpatient Volume

20. Healthcare as an (More) Efficient Market • Implications • Market where all pertinent information is available to all participants at the same time, and where prices respond immediately to available information • Empowered consumers with “skin in the game” • Fixed dollar benefit from employers/ government • High-deductible health plans with health savings accounts • Consumer choice remains, but with limited provider access and/or economic consequences for going out of network • Healthcare becomes price elastic “Over the next decade, we are likely to see a shift in health insurance in the U.S.: So-called defined-contribution plans will gradually take over the market, shifting the residual risk of incurring high health care costs from employers to workers.” -Peter Orszag Former Director of Office of Management and Budget Source: Orszag, P.: “Defined Contributions Define Health-Care Future.” Bloomberg News, Dec. 9, 2011.

21. Healthcare as an (More) Efficient Market (continued) • Consumer Driven Health Plans (CDHPs) cost approximately 20% less than PPO and HMO coverage per employee • According to PwC, 44% of large employers are considering offering high-deductible health plans as the only option to their employees in 2014 Source: Mercer, “Mercer’s National Survey of Employer-Sponsored Health Plans, MTEBC,” February 2013.

22. Price Transparency Driving Consumer Activism

23. Price Transparency Driving Consumer Activism (continued) Reported Savings for Esterline Percentage Savings for Castlight Shoppers • Esterline in Brief • Esterline is an aerospace manufacturer in Bellevue, WA • Launched Castlight in Jan 2012 • 51% of beneficiaries enrolled • Castlight shoppers saved 33% in overall medical spending compared to a 1% increase in medical spending for non-Castlight shoppers Source: United States Securities and Exchange Commission Washington, DC 20549 “Amendment No.1 to Form S-1 Registration Statement Under the Securities Act of 1933”, Castlight, Inc.

24. Purchasers Increasingly Focused on Reducing Costs Through Retail Medicine Diagnostic MRI CT X-Ray Ultrasound Lab OP Surgery Colonoscopy Reimbursement Per Case (000s) Client Client Client Client Diagnostic Procedural Reimbursement Per Case (000s) Reimbursement Per Case (000s) Client Client Client

25. Next Steps to Take

26. What Does This Mean for Hospitals and Health Systems? • Business as usual is out the window – a new problem must be solved – learning to manage population health and justify your prices • The basis of competition has changed – who you compare yourself to matters and comparing your organization to other hospitals may be the wrong benchmark • More and bigger consolidation will be necessary to remain relevant, assemble the intellectual and financial capital required to succeed, and absorb and manage risk • Many organizations will attempt to position themselves closer to the premium dollar • Big investments in IT and care management will be essential • The Hospital/ Healthcare delivery system will need to fundamentally restructure away from a hospital/ site centric world to an ambulatory/ electronic/ in-home delivery orientation • Core competencies will need to evolve along with the market

27. Next Steps: Understand Your Market’s Evolution and Your Position and Opportunities within that Context ValueBased • The Market Has Outrun Us • Can we remain relevant in this market and how? • Do we need to look to partners to advance our position? • The New Era Is Here • Are we appropriately capitalizing on value based care? • What Is All the Fuss About? • What do we prioritize to build readiness for the future? • When will the market start to turn and how quickly? • We Are Ready, Now What? • Are there opportunities to shape the market to our benefit? • Do we look to add scale and build on our foundation? Market Evolution Traditional Value Based Organization Capability

28. Next Steps: Shift Your Mindset to Think Beyond the Inpatient Centric Planning Context and Revenue Model Managed Care/ Purchaser Relationships The legacy inpatient model falls apart without development of the bottom pyramid and hardwired relationships to purchasers Tertiary/Quaternary Care Primary/Secondary Acute Care Ambulatory Network Gap to fill Specialists Gap to fill Gap to fill (employment, contracted, clinically integrated, Medicare ACO, etc. all means for alignment to close the gap) PCPs