HFMA SOUTHERN CALIFORNIA EDUCATIONAL WEBINAR October 4, 2012

1. REGIONAL & OPERATIONAL EFFECTS ON HOSPITAL PRICING & STRATEGIC RESPONSES FOR PRICE DEFENSE HFMA SOUTHERN CALIFORNIA EDUCATIONAL WEBINAR October 4, 2012 Presented by: Jamie Cleverley Cleverley + Associates

2. Why pricing? 1 GROWTH IN HOSPITAL COSTS/CHARGES National Health Expenditures (top five areas – millions)

3. Why pricing? 1 GROWTH IN HOSPITAL COSTS/CHARGES Annualized Change in National Health Expenditures by Area Source: CMS

4. Why pricing? 1 GROWTH IN HOSPITAL COSTS/CHARGES Inflationary Changes by Metric & Year

5. Why pricing? 1 GROWTH IN HOSPITAL COSTS/CHARGES Rate Increase Median Limit Value 5.0% 5.0% 6.0% 5.0%

6. Why pricing? 2 INCREASED GOVERNMENT/LEGAL ATTENTION Hospitals, SEIU-UHW Reach Visionary Agreement on Future of Health Care Policy, Relationships in California May 2, 2012 The California Hospital Association and SEIU-United Healthcare Workers West have reached a comprehensive, strategic agreement to jointly take on the many challenges facing the health care system, including rising costs, burgeoning levels of chronic disease, and the need to provide the highest quality of care for the people of California. Reached after two months of meetings and conversations to discuss issues of mutual interest, the agreement calls for SEIU-UHW and CHA to work in good faith, along with other key stakeholders, to find practical solutions that can replace or improve the current hospital pricing system and protect the neediest patients by addressing uncompensated care in hospitals in a manner that accounts for low Medicare and Medi-Cal payments. Issued jointly by CHA and SEIU-UHW

7. Why pricing? 2 INCREASED GOVERNMENT/LEGAL ATTENTION What is driving the need for transparency?

8. Why pricing? 3 GROWTH IN HSA/HDHP AND CONSUMER-DIRECTED HEALTHCARE Growth in HSA/HDHP Plans by Year (thousands) Source: Center for Policy & Research, America’s Health Insurance Plans

9. Why pricing? 3 GROWTH IN HSA/HDHP AND CONSUMER-DIRECTED HEALTHCARE

10. Today’s Objectives Understand the relationships of operating environment factors on hospital price through a national data studyWHAT INFLUENCES HOSPITAL PRICING? Assess current price position with critical performance metrics for inpatient and outpatient areasHOW DO WE COMPARE PRICES? Defend hospital pricing in light of unique operating environments by implementing appropriate policies and strategic modelsHOW DO WE DEFEND PRICES?

11. WHAT INFLUENCES HOSPITAL PRICE?

12. Three spheres of influence on price • DesiredNet Income • Sustainable growth determines reasonablenessof target What influences hospital pricing? • CompetitivePosition • Quality • Cost • Market Share • Capital Intensity • Payer Mix • MarketStructure • Buyers/Sellers • Barriers to Entry • Price Elasticity PRICE

13. Testing price variables Who is likely to have the highest charges among hospitals that are: • Urban vs Rural • For-Profit vs Non-Profit • Large vs Small • High Market Share vs Low Market Share • High Medicaid vs Low Medicaid • High Cost vs Low Cost What influences hospital pricing? $

14. Urban/Rural Status by Hospital Charge Index® Quartiles What influences hospital pricing?

15. Organization Type by Hospital Charge Index® Quartiles What influences hospital pricing?

16. Median Net Patient Revenue (millions) by Hospital Charge Index® Quartiles What influences hospital pricing?

17. Median Market Share Percentage by Hospital Charge Index® Quartiles What influences hospital pricing?

18. Median Medicaid Days Percentage by Hospital Charge Index® Quartiles What influences hospital pricing?

19. Median Collection Percentage From Self-Pay By Year What influences hospital pricing?

20. Median Hospital Cost Index® by Hospital Charge Index® Quartiles What influences hospital pricing?

21. Median Operating Margin by Hospital Charge Index® Quartiles What influences hospital pricing? What influences hospital pricing?

22. Median Payer Environment by Hospital Charge Index® Quartiles What influences hospital pricing? What influences hospital pricing? Payer Environment: Markup Ratio/Deductions %

23. Regional differences in hospital pricing Regional Divisions Used by the United States Census Bureau What influences hospital pricing?

24. Median Hospital Charge Index® by Regional Divisions What influences hospital pricing? 88.3 94.9 119.7 110.6

25. Urban/Rural Status by Regional Divisions What influences hospital pricing?

26. Organization Type by Regional Divisions What influences hospital pricing?

27. Median Net Patient Revenue (millions) by Regional Divisions What influences hospital pricing? 151 110 121 78

28. Median Market Share Percentage by Regional Divisions What influences hospital pricing? 18.6 41.5 13.6 50.7

29. Median Medicaid Days Percentage by Regional Divisions What influences hospital pricing? 13.3 13.8 18.0 15.3

30. Median Collection Percentage From Self-Pay by Regional Divisions IP: 6.0 OP: 7.6 What influences hospital pricing? IP: 2.7 OP: 3.0 IP: 5.0 OP: 5.0 IP: 2.7 OP: 2.9

31. Median Hospital Cost Index® by Regional Divisions What influences hospital pricing? 96.8 102.8 101.8 100.5

32. Median Operating Margin by Regional Divisions What influences hospital pricing? What influences hospital pricing? -0.58 1.41 2.74 1.13

33. Median Payer Environment by Regional Divisions What influences hospital pricing? What influences hospital pricing? 4.20 4.26 4.84 4.48 Payer Environment: Markup Ratio/Deductions %

34. PAYMENT IS KEY IN HOSPITAL PRICING

35. Analysis of Payer Environment & Hospital Price Average Cost per Patient = $100 Payment key in hospital pricing ??? Required Payment from Five Remaining Patients = $270 ($1,350/5)

36. Analysis of Payer Environment & Hospital Price Pricing Requirements Payment key in hospital pricing • Average costs • Losses on patients who pay less than cost • Discounts to charge patients • Uninsured • Commercial • Reasonable return on investment • Sustainable growth

37. Analysis of Payer Environment & Hospital Price Pricing Model Payment key in hospital pricing Use this model for price-setting at facility level: Price must increase when: Average cost increases Net income requirementsincrease (NI + fixed pay loss) avg cost + Price = charge volume Losses from fixed pay businessincreases (1 - charge discount) The percentage of charge paying patients decreases The discount from charges increases

38. Analysis of Payer Environment & Hospital Price Pricing Model – Payer Impact on Pricing Payment key in hospital pricing

39. Analysis of Payer Environment & Hospital Price Pricing Model – Pricing Sensitivity Analysis Payment key in hospital pricing

40. HOW DO WE COMPARE HOSPITAL PRICES?

41. Levels of hospital price comparison How do we compare prices? Level of Detail Bundling Bundling CPT® is a registered trademark of the American Medical Association. All rights reserved.

42. Facility-level price comparison Facility-level charge measure: Hospital Charge Index® How do we compare prices? Outpatient Charges Outpatient Charge Index Formula: Your Medicare Charge per Visit (RW/WI adj) US Median Medicare Charge per Visit (RW/WI adj) Inpatient Charges Inpatient Charge Index Formula: Your Medicare Charge per Discharge (CMI/WI adj) US Median Medicare Charge per Discharge (CMI/WI adj)

43. Department-level price comparison Department/Family Analysis “Lab Tests – Microbiology” How do we compare prices? CPT® is a registered trademark of the American Medical Association. All rights reserved.

44. Inpatient/Outpatient/Procedure-level price comparison How do we compare prices? CPT® is a registered trademark of the American Medical Association. All rights reserved.

45. HOW DO WE DEFEND HOSPITAL PRICES?

46. Three approaches to hospital price defense How do we defend prices? 2 3 1 Peer Position Cost Markup ROI Model

47. Return on Investment Model 1 Relating pricing to ROI: the public-utility approach Public utilities have used a Return on Investment (ROI) model to justify price increases to rate regulatory boards. The approach isolates the price variable from the ROI formula (below) and “tests” the remaining elements. If it can be proved that ROI, Cost, and Investment are not excessive, then price must also not be excessive. In the following pages, we present these tests. How do we defend prices? Tests Is ROI excessive? Is cost excessive? Is investment excessive? If “no” to all three, price is not excessive. ROI FormulaROI = (volume x price) - (volume x cost) investment

48. Return on Investment Model 1 How do we defend prices? ROE: Excess of Revenue over Expenses/Net Assets Tests • Is ROI excessive? • Is investment excessive? • Is cost excessive?

49. Return on Investment Model 1 How do we defend prices? Average Age of Plant: Accumulated Depreciation/Depreciation Expense Fixed Asset Turnover: Total Revenue/Net Fixed Assets Tests • Is ROI excessive? • Is investment excessive? • Is cost excessive?

50. Return on Investment Model 1 How do we defend prices? Facility-level cost measure: Hospital Cost Index® Outpatient Costs Outpatient Cost Index Formula: Your Medicare Cost per Visit (RW/WI adj) US Median Medicare Cost per Visit (RW/WI adj) Inpatient Costs Inpatient Cost Index Formula: Your Medicare Cost per Discharge (CMI/WI adj) US Median Medicare Cost per Discharge (CMI/WI adj)