Jon Burroughs, MD, MBA, FACHE, FACPE September 25, 2014

1. Healthcare Financial Management Association Autumn Institute Dayton, Ohio “Innovative Disruptive Healthcare Business Models-Are you Ready?” Jon Burroughs, MD, MBA, FACHE, FACPE September 25, 2014

2. Thought leaders who have paved the way… O.D. Fjeldstad, Norwegian School of Management Charles Stabell, GeoKnowledge Regina Herzlinger, Harvard Business School Clayton Christensen, Harvard Business School Jerome Grossman, Harvard Kennedy School of Health Care Delivery/Policy Jason Hwang, Innosight

3. What’s the problem and what is the root cause? • We spend almost twice as much as every other industrialized nation ($9,200 per capita) with relatively weak quality metrics to show for it (37th in overall health, 39th infant mortality, 36th life expectancy* etc.) • We tolerate an unacceptable variation in quality, safety, service, and cost (up to 1000%) • Our national debt is $15.2 trillion with a virtual debt of $65 trillion (24% SS, 16% interest on debt, 14% Medicare, 9% Medicaid) • GAO: To balance the budget by 2040-cut federal spending by 60% or raise taxes 2.5 times *Source: NEJM 2010: 362:98-99.

4. Adults receive about half of recommended care 54.9% = Overall care 54.9% = Preventive care 53.5% = Acute care 56.1% = Chronic care Quality shortfalls: Getting it right 50% of the time Source: McGlynn E.A., et al., “The Quality of Health Care Delivered to Adults in the United States,” New England Journal of Medicine, Vol. 348, No. 26, June 26, 2003, pp. 2635–2645.

5. Life expectancy at birth and health spending per capita, 2011 (OECD)

6. Unsustainable Costs… • IOM: $765 B in waste ($310 B inefficient delivery, $210 B unnecessary services, $190 B excess administrative, $55 B missed prevention opportunities) • Healthcare costs up 28% over past five years for large employers • >25% of family income will go to healthcare (2015) • >75% of healthcare spending from chronic diseases based upon behavioral issues (50%)(exercise, eating, smoking, drinking, compliance with EBPs)

7. Disproportionate Costs… • Top 1% make up 23% of healthcare costs (critical care and dying) • Top 5% make up 49% of healthcare costs (multiple chronic diseases) • Top 10% make up 64% of healthcare costs (chronic diseases) • Bottom 50% make up 3% of healthcare costs (healthy population)

8. What is the essence of healthcare reform? World Class Quality and Low Cost! • Global competition for world class quality, safety, service at the lowest possible cost • Medical Tourism is the fastest growing industry in healthcare (2006-2012: $20 billion to $120 billion and expected to double every two years) • Resources: Woodman, Josef, “Patients Beyond Borders: Everybody’s Guide to Affordable World Class Medical Travel”, 2013, www.patientsbeyondborders.com

9. Typical story: Paul H., Texas: Executive needing meniscus surgery of knee. Couldn’t find facility to do it under $32,000 or with epidural. Went to JCI accredited hospital in Monterrey, Mexico and paid $6,200 (including first class travel/accommodations/nursing) for Texas trained surgeon/anesthesiologist to perform procedure under epidural What do you consider your service area? Iowa/Illinois, the Mid-West, or the world?

10. Large employers are moving forward: • Greater cost sharing from defined benefit to defined contribution towards purchase on public/private insurance exchanges • Create and contract through narrow/tiered networks for high quality/low cost providers • Provide disease management programs for high risk pool and health wellness programs for all to reduce costs and enhance productivity • Reference based prices for high cost procedures/care • Utilize navigators/registries to guide employees through the system • Create and contract through ‘centers of ‘excellence bundled payment program

11. Domestic medical tourism: Walmart’s “Centers of Excellence” for all heart, spine, and transplant surgeries for its 2.2 million associates ($466.1 billion in revenues): • Cleveland Clinic, Cleveland, OH • Geisinger Medical Center, Danville, PA • Mayo Clinic in Rochester, MN/Scottsdale, AZ/Jacksonville, FL • Mercy Hospital Springfield, Springfield, MO • Scott and White Memorial Hospital, Temple, TX • Virginia Mason Medical Center, Seattle, WA

12. Is there a difference in performance when physicians and staff work together?

13. Third party payers are moving forward What AETNA did when it saw this data: 1. Requested to negotiate a new contract with MHMD 2. Offered a 8% increase in FFS payment with a guarantee of 3% next year minimum 3. With 10% movement of ‘share’ to the system, committed $7.5 million to physician pool and $8.0 million to system pool in bonuses 4. Committed to invest in a comprehensive marketing program to compete with United and BCBS

14. Third party payers are partnering with healthcare organizations • Models of Partnership between Healthcare Systems and Insurers: • Full ownership (e.g. Geisinger Health System) • Partial ownership (e.g. Baystate Health + Health New England) • Partnership (e.g. North Shore Long Island Jewish Health System + United Health Group) • Contractual arrangement (e.g. Bronx-Lebanon Hospital Center + Healthfirst) • United Health will increase payments contingent on quality and cost-effectiveness from $20 B to $50B within the next five years

15. How third party payers incentivize beneficiaries: Anthem Blue Cross and Blue Shield Compass Smart Shopper 800 Line (NH): CT of the abdomen with contrast ($750-$2,839) MRI of the knee ($681-$3,597) Digital mammography ($231-$818) Ultrasound of the pelvis ($177-$741) Pick a low cost option, Aetna pays the beneficiary $75-$150 Pick a higher cost option, beneficiary pays the total cost up to the deductible/co-payment

16. How third party payers incentivize beneficiaries: Anthem Blue Cross and Blue Cross Site of Service Benefit (NH): Get surgery at an ambulatory surgical center (ASC), the beneficiary pays $75-$100 total Get surgery at a hospital, the beneficiary pays the cost up to the deductible and co-payment Get laboratory services at Quest Diagnostics/LabCorp/Converge Diagnostic Services/NorDx, the beneficiary pays $10 Get laboratory services at a hospital, the beneficiary pays the cost up to the deductible and co-payment

17. What’s the challenge? People generally seek to protect the ‘status quo’-Everett Rogers, “The Dissemination of Change” (1962) • 2.5% innovators (outsiders open to new ideas) • 13.5% early adopters (insiders open to new ideas) • 33.5% early majority (imitators of new ideas that work)(the tipping point) • 33.5% late majority (resistors that must go along) • 17% laggards (‘Holy Crusaders’)

18. The Pace of Change • Time 2054 (singularity) • Source: Peter Russell, “Waking Up in Time: Finding Inner Peace in Times of • Accelerating Change (Origin Press, 1998)

19. The Doubling Time of Healthcare Information: 1900: 150 years 1950: 50 years 1960: 10 years 1975: 7 years 2010: 3 years 2020: 0.2 years Current doubling: every 18 months; hence the transition from ‘eminence’ to ‘evidence based’ healthcare

20. Clayton Christensen: The Disruptive Innovation Model • The cost of innovation (‘high quality and high cost’) outpaces the public’s ability and willingness to pay • Less demanding customers find lower cost and simpler options with easier access that are ‘good enough’ • “Good Enough” services diffuse throughout the system and become the new norm, displacing the original service • What are the major enablers of disruptive innovation?

21. Major Enablers of Disruptive Innovation • Technology to simplify rule based processes that once required intuitive experimentation • Business Model Innovations to provide 24/7 access to high quality/low cost services that generate a healthy margin (understand the job, not the product or service) • Value Based Network that links interdependent commercial enterprises to provide a viable economic model

22. What do these Disruptive Enablers Require? The evolution of healthcare from….. • Intuitive Medicine (Expert) (medical problem solving through intuitive experimentation and pattern recognition) to…. • Empirical Medicine (Process) (patterns emerge to provide credible guidance to manage more predictably) to…. • Precision Medicine (Outcome)(evidence based rules that provide an optimum outcome)

23. Intuitive Medicine requires “Solution Shops” • Business model that supports the evaluation and diagnosis of unstructured problems • Coordinated access to ‘experts’ who solve complex and intuitive problems based upon subtle pattern recognition • Diagnosis results in the creation of recommended ‘solutions’ • What is the problem with the way that hospitals and physicians traditionally organize ‘solution shops?’

24. 20th Century “Solution Shops” • Independent autonomous physician model with hospital as ‘workshop’ • Lack of integration and alignment between specialties with fragmentation and inefficiencies • Lack of integrated information network • Expensive, cumbersome, with high probability of error (e.g. multiple hand-offs) and delayed diagnosis/treatment • Reimbursement based upon units of service or cost (volume)

25. 21st Century “Solution Shops” • Integrated and organized healthcare network • Completely aligned physicians working in collaborative multispecialty teams • Evidence based approaches and processes (Watson decision analysis support) • Lower cost with high reliability and more rapid and efficient development of diagnostic plan (e.g. solution) • Reimbursement based upon a cost effective and successful ‘solution’/plan (value) • Examples: Mayo Clinic (coherent solution shop) and Cleveland Clinic (clinical institutes)

26. Precision Medicine requires “Value Added Processes (VAPs)” • Solutions require an evidence based process to optimize outcomes • All elements of a VAP are standardized with the prerogative of physicians to customize when ‘necessary’ (always audited) • Reimbursement based upon a predictable and optimum outcome

27. 20th Century “Value Added Processes (VAPs)” • Each physician provides a unique customized approach to manage a given diagnosis (solution) • ‘Preference cards’ with wide variation in cost, quality, and outcomes (value) • Institutional tolerance for significant variation based upon need for volume/revenue

28. 21st Century “Value Added Processes (VAPs)” • One collaborative and standardized evidence based approach for every significant diagnostic and therapeutic entity • Value analysis committee (multidisciplinary) to minimize and simplify vendors, suppliers, and technology • Emergence of new information, evidence, innovation, technology stimulates real time collaborative modification of the VAP • Example: London Hernia Center, Heart Center (Cleveland Clinic)

29. The Exponential Rise of Chronic Diseases • Intuitive and empirical diseases (undefined) are acute by definition • Diseases rapidly evolve to ‘chronic’ once they can be diagnosed and treated with greater precision (e.g. diabetes, asthma, hypertension) • Chronic diseases increase significantly with extended life (90% of elderly) (e.g. dementia, chronic pain) • 75% of direct medical costs in US

30. The Current Healthcare Business Model cannot support the care of Chronic Diseases • FFS codes (ICD-9/10, CPT) are based upon sicknesses • There are NO codes for clinical improvement, wellness, or health • Solution shops are not relevant (pre-diagnosed) • VAPs don’t address the majority of care/interventions needed and are expensive • Most chronic diseases require significant behavioral change/motivation (non-dependence on a practitioner)

31. Chronic Diseases require “Facilitated Networks” • Participants with a common clinical condition who share information, guidance, and support (e.g. AA, weight watchers etc.) • Rely heavily on behavioral modification (e.g. smoking, eating, exercise, medications etc.) • Business model based upon facilitation and operation of the network with membership fees (e.g. capitation) • The traditional hospital/physician based practice counter productive

32. Innovative “Facilitated Networks” • Websites (dLife for diabetes, WEBMD, weight watchers with personal caloric calculators) • Self-insured employer sponsored disease management contracts with OptumHealth, Healthways etc. • Integrated fixed fee providers (Kaiser, Geisinger) that provide peer based networks • Ingenix health scores with modulated premiums based upon adherence to evidence based approaches

33. Components of a Value Based Network (commercial ecosystem) • Hospitals and independent physician practices (limited) • Comprehensive ‘solution shops’ • Outpatient VAP venues • Facilitated patient networks (chronic diseases) • Integrated networks (capitated fee providers) • HIEs with personal electronic health records • High deductible policies with health savings accounts

34. What must the ‘Hospital’ do to survive? • De-couple its diagnostic solution shops (high cost), therapeutic VAPs (moderate cost), and health maintenance facilitated networks (low cost) to focus on value through ‘focused factories’ (business within a business) • Lower overhead burden rate = overhead cost/direct labor cost (focus on the JOB!) • Manage costs (labor, supply chain, direct variable) in real time through business analytics • Focus on domestic and international medical tourism (market share for high quality/low cost) • Take the solution to the patient!

35. 80% of Healthcare Services will be Cloud Based! • For $49, a doctor will see you now – online (Boston Globe, December 6, 2013) • American Well unveils a new service that connects consumers directly to physicians through their mobile devices for advice -- and sometimes even for diagnoses and prescriptions.

36. Laboratory Testing: • Theranos Laboratory Testing (“We require less of you”) • One drop of blood at any Walgreens Wellness Center with immediate on line reporting of results to patient and any requested practitioner. • Sample costs: • CBC with diff and smear = $5.35 • Fasting Glucose = $2.70 • Complete electrolytes = $4.82 • Cholesterol = $2.99 • Lipid panel = $9.21

37. Most of healthcare will take place at home: • Wireless monitoring (vital signs, key laboratory values) to centralized facility • Implantable monitoring devices (heart, glucose, respiratory, • Web based services (24/7) • Behavioral psychology (diet, exercise, nicotine/alcohol dependence, compliance with evidence based recommendations) • APNs follow evidence based protocols and algorithms for home based visits and referrals

38. Patient Centered Care will get very personal! • Genomic testing with screening for specific genetic markers • Proteomic testing with screening for specific cell proteins • Microbiomic testing with screening for specific micro-organism profiles • Result: A customized healthcare maintenance and prevention program based upon an individual’s unique biologic profile.

39. What must the Physician Based Practice do to survive? • Leverage the physician’s license! (Overhead burden rate) • Mid-level practitioners for solution shop with simple algorithms and VAPs • Cloud based technology for transactional services and facilitated networks • Outsource behavioral based interventions (chronic diseases) to existing facilitated networks (www.PatientsLikeMe.com)

40. Everyone will be Disrupted! • Hospitals to ambulatory VAPs and retail outlets (e.g. MinuteClinic) • Physicians (specialists to generalists) to mid-level practitioners and web-based services • US based services to international medical tourism • Commercial indemnity carriers to captive/self insurance programs with private exchanges • Low end to high end disruption • Centralized to decentralized (home based tele-monitoring wireless care) • Patient/consumer centered and driven with 24/7 on demand access

41. Segmented Services for Different Populations: • Healthy individuals with transactional healthcare issues: on line services • Healthy individuals with minor acute issues: 24/7 retail clinics staffed by APNs (50,000 by 2020) • Individuals with chronic medical conditions: PCMHs to facilitated networks and home based tele-health monitoring services • Individuals with complex undiagnosed problems: Integrated solution shops • Individuals with significant conditions: Evidence based VAPs • Terminally ill individuals: Outpatient palliative care

42. Are you ready for “revolution” rather than “evolution”? • Leaders with clinical, operational, and financial vision working together • Separate solution shops, VAPs, and facilitated networks and rebuild into a value based network • Reformulate and renegotiate ALL payment contracts based upon solutions (diagnosis), optimized outcomes (evidence based VAPs), and the optimization of health (membership fees)

43. A sobering thought…. • “If you don’t like change, you are going to like irrelevance even less.” • ----General Eric Shinseki, • Former Chief of Staff, US Army and Secretary of Veteran Affairs, VA Hospital System

44. Questions and Discussion

45. Thank You for Joining Us! Jon Burroughs, MD, MBA, FACHE, FACPE jburroughs@burroughshealthcare.com; 603-733-8156