July 29, 2010

1. 2010 Northeast Ohio HFMA Managed Care Meeting (Cleveland, OH) July 29, 2010 Strategically Re-Positioning Your Organization in an Restructured Regulatory and Reimbursement Environment: Emerging Business Models Christopher J. Kalkhof, FACHE Director, Healthcare Industry Group (New York Office)

2. Presentation Agenda • Overview of Evolving Federal and State Regulatory Landscape and Impact on Hospital Revenues • Emerging Provider Business/Financing Models-Options and Considerations • Clinical Integration as a Better Model for Managed Care Contracting • Lessons Learned

3. Presentation Agenda • Overview of Evolving Federal and State Regulatory Landscape and Impact on Hospital Revenues • Emerging Provider Business/Financing Models-Options and Considerations • Clinical Integration as a Better Model for Managed Care Contracting • Lessons Learned

4. Evolving Market Environment: The Big Picture I. Overview of Evolving Federal and State Regulatory Landscape and Impact on Hospital Revenues Upshot of the Great Recession & Healthcare Reform Legislation: • Budget shortfalls in 48 States • States blocking Payer rate hikes • Demand for demonstrable value • Government and payers under pressure from premium increases • What if… • Fed/State deficits grow? • Reform costs > $1 trillion? • Access diminishes? • Hospitals fail? • Payer par networks change? • Double digit $bb Medicare deficits • Unresolved Medicare SGR payment-adjustment for physicians • EHR meaningful use penalties • RAC expansion into other payers • Continual CMS threat to reduce payments • New risk-based payment models • Need for clinical integration/physician alignment and IT/operational support • Increased uncertainty and revenue risk Potential Sea Change in the Payer Market… 80% or more of patient revenues may come from payer contracts!

5. Enter Healthcare Reform I. Overview of Evolving Federal and State Regulatory Landscape and Impact on Hospital Revenues • What willthe impact of H.R. 3590 (Patient Protection Act and Affordable Healthcare Act) and H.R. 4872 (Health Care and Education Reconciliation Act of 2010) be on provider-payer rates as a result of… • Insurance reforms and insurance exchanges? • Employer cost management strategies? • CMS move towards value-based purchasing as well as bundled pricing for Medicare and Medicaid? • Medicare Advantage and Managed Medicaid changes? • Eventual decline in temporary federal funding increases for State Medicaid programs? • CMS’s support for ACO business models? • Primary care reimbursement increases? • GME and DSH funding changes?

6. Cost Shifting Among Different Financial Classes I. Overview of Evolving Federal and State Regulatory Landscape and Impact on Hospital Revenues • In the 2010 – 2012+ time period, can you continue to shift costs and if so… to who.. for how long…how will you justify it? • When will cost shifting reach a threshold level with private payers? In our current F-F-S pricing, volume-driven system, different payers compete with one another in shifting the cost of covering healthcare services to other payers.

7. Closing a Patient Care Revenue Margin Gap? I. Overview of Evolving Federal and State Regulatory Landscape and Impact on Hospital Revenues • If you currently have or anticipate patient revenue margin gaps in the future… will you close it through… • Increased reimbursement from State Medicaid? • Increased reimbursement from Medicare? • Increased reimbursement from managed care payers? • Better collections from the uninsured? • Revenue cycle “transformation?” • Overall organizational performance improvement? Will you be able to increase your revenues from the above sources… or… can you develop a better business model to manage existing revenue sources?

8. Strategic Options facing Physicians and Hospitals I. Overview of Evolving Federal and State Regulatory Landscape and Impact on Hospital Revenues • Market forces are converging and driving physicians and hospitals to choose among three basic paths: • Which strategic direction will your organization take?

9. Presentation Agenda • Overview of Evolving Federal and State Regulatory Landscape and Impact on Hospital Revenues • Emerging Provider Business/Financing Models-Options and Considerations • Clinical Integration as a Better Model for Managed Care Contracting • Lessons Learned

10. Evolving Market Environment: The Big Picture II. Emerging Provider Business/Financing Models-Options and Considerations • How have Hospitals faired over the last 2 years? • Less than 50% of hospitals in the U.S. had a net gain from patient revenues, across all financial classes. • Many hospitals in OH experienced declining financial performance on either their Net Patient Service Revenue (NPSR) or Net Income… or both in 2008 – 2009. • How many hospitals will attain a 2.5%+ NPSR in 2010? • For other hospitals… the situation was much worse… e.g., • In areas such as in NYC, CT and NJ… near crisis state. • DSH hospitals across the U.S., absent some type of subsidization, generally lost money… AZ cut 100% DSH. Will the next 2 years be better or worse?

11. Snapshot – NYC Hospitals: 2008 Financial Performance II. Emerging Provider Business/Financing Models-Options and Considerations Your Hospital’s Patient Operating Margins… 2008, 2009, 2010, 2011+? • Sustainability? • Future under OH budget deficits? • Future under healthcare reform? • If F-F-S is replaced… what is next? • Options for providers?

12. Our To Be Implemented “New” Health System II. Emerging Provider Business/Financing Models-Options and Considerations X

13. Healthcare Delivery System Transitions – HFMA View II. Emerging Provider Business/Financing Models-Options and Considerations • To succeed under payment reform, providers can begin today to build their competencies in three key areas: • Integration:The ultimate success of payment reform will depend heavily on collaboration among stakeholders across the care continuum. Business model transformation will require hospitals, physicians, and other providers from across the care continuum to work together. • Risk Management:Payment reform may shift financial risk to providers. Success under payment reform will require that providers be able to manage patient quality, efficiency and utilization risks under payment reform. • Pricing: Under payment reform, providers will need to set prices for brand new bundles of services at levels that allow them to recoup costs (both direct and indirect), include some measure of the risk involved in providing the service, and incorporate a margin. Source: Excerpted from HFMA’s Healthcare Payment Reform: A Call to Action, June 2009.

14. Emerging Provider Business Models and Payments II. Emerging Provider Business/Financing Models-Options and Considerations What is your organization’s plan for responding to a restructured regulatory and reimbursement environment?

15. Emerging Provider Business Models: Physician Integration II. Emerging Provider Business/Financing Models-Options and Considerations How will your organization address physician alignment and integration?

16. Emerging Provider Business Models and Payments II. Emerging Provider Business/Financing Models-Options and Considerations Continuum of Financial/Clinical Integration The degree of provider integration and alignment of financial incentives across the care continuum, will determine the ability of providers to accept risk/reward based payments, while remaining financially viable. Your Organization?

17. Emerging Provider Business Models and Payments II. Emerging Provider Business/Financing Models-Options and Considerations • HR 3590 and HR 4872 – Accountable Care Organizations * • A group of providers organized for the purpose of providing high quality and efficient health care services and sharing incentive payments. • Foundation of primary care physicians. • ACO can include hospitals and ancillary care providers. • Reports on quality measures as specified by the payer. • Strategy for quality improvement, care coordination, and operational efficiency. • Utilizes patient-centered processes of care, including those that emphasize patient and caregiver involvement in planning and monitoring of ongoing care management plan. • Emphasis on accountability of the providers for the cost and quality of the care. (*) Note: Above is excerpted/summarized information and does not represent a legal opinion. At present, no FTC/DOJ rules on ACOs and clinical integration is not required.

18. Emerging Provider Business Models and Payments II. Emerging Provider Business/Financing Models-Options and Considerations • HR 3590 and HR 4872 – Accountable Care Organizations * • Other Structural Issues: • Focus is on Medicare Part A and Part B beneficiaries. • PCPs with 5,000 or more Medicare beneficiaries and PCPs can only affiliate with one ACO, specialists can affiliate with multiple ACOs. • “Secretary shall determine an appropriate Medicare method to assign fee-for-service beneficiaries to an ACO based on their utilization of primary care services. • Note: Initial indications that CMS will make assignment determination based on existing referral patterns between PCPs, specialist and hospitals. (*) Note: Above is excerpted/summarized information and does not represent a legal opinion.

19. Emerging Provider Business Models and Payments II. Emerging Provider Business/Financing Models-Options and Considerations • HR 3590 and HR 4872 – Accountable Care Organizations * • ACO Payment Methodologies • Performance Target Model/Shared Savings Model: • Fee-for-service payments with incentive based on achieving annual quality and performance targets. • Incentive payment is a portion of the savings achieved below a target spending level or target rate of growth. • Partial Capitation Model: • Financial risk for some, but not all, of the items and services delivered to beneficiaries. • Bundled Payments for Episodes of Care: • Under new law, Secretary is authorized to develop other payment methodologies. • Methodology being explored by private payers. (*) Note: Above is excerpted/summarized information and does not represent a legal opinion.

20. BCBS MA Alternative Quality Contract (Implemented) II. Emerging Provider Business/Financing Models: Options and Considerations • The Model • Global payment to cover all health care services • Performance incentives based on quality and safety metrics • Up to 10% above global payment • Protection against withholding of needed care • Savings opportunities by addressing underuse, misuse and overuse within global payment level • Inflation factor derived from CPI • At controlled and predictable level Source: BCBS MA - Blue Cross Blue Shield of Massachusetts: The Alternative Quality Contract

21. Provider Business Models: Current State II. Emerging Provider Business/Financing Models-Options and Considerations Traditional Fee-For-Service System “Payments and referrals not linked to value” “No direct linkage to cost, quality or outcomes”

22. Provider Business Models: ACO-PHO Framework II. Emerging Provider Business/Financing Models-Options and Considerations Value Driven, Fixed Price, Population Management • If Tertiary & Quatern-ary hospitals subcon-tract to an ACO... • What will sub-contractors be paid when the ACO is at financial risk? • Who will be included and excluded as par? • What criterion will determine referrals? • How will referral and payment processes be managed? Accountable Care Organization

23. Cost of Care Drivers: Insurance Vs. Performance Risk II. Emerging Provider Business/Financing Models-Options and Considerations Breaking Down An Episode of Care and Associated Costs Insurance Risk – How sick or well patients are… providers have no control over this. Capitation models in the 1990s contained insurance and performance risk, which caused major financial performance challenges for many providers. Performance Risk – Once a patient has an illness or condition and enters the healthcare system for treatment, it is appropriate for providers to be held accountable for their performance in delivering care, the quality of the care and the cost of the care. • Payer cost containment through price, payment rules and utilization controls accomplishes little with respect to quality or volume of care provided.

24. Integration Into Revenue Mgmt. & Clinical Operations Registration Post Care and HIM Billing & Payment Compliance II. Emerging Provider Business/Financing Models-Options and Considerations Scheduling and Pre-Registration Care Management Collections and Revenue Recovery • Demographics • Insurances • Provider Credentials • Eligibility • Pre-Authorizations • Denial Prevention • Medical Necessity/Setting • Care Planning & Coverage • Charge Capture • Disease Mgt. + P-4-P • LOS Mgmt./CM/UM • Denial Prevention • DNFB & Late Charges • Bill to Payment Match/payment rules • Clean Claim Scrub & Timely Filing • Secondary Billing • Credit Balances & Self Pay • Denial/Downgrade Prevention Under clinical integration and varied risk payments… how will operations change? • Re-Validate Eligibility, Coverage & Insurances • Authorizations • POS Cash Collections • Financial Counseling & ABNs (for all payers) • Denial Prevention • HIM, Documentation, Coding, Charge Capture & CDM Pricing • Payment Rules • Denial Prevention • Billing/Remittance Match • Cash Collection and Acceleration • A/R Management • 3rd Party Payer Appeals • Payment Compliance & Revenue Recovery Front-End Accuracy and Denial Prevention Focused + Effective Collection and Payment Compliance

25. Integration of New Care Delivery and Payment Models II. Emerging Provider Business/Financing Models-Options and Considerations • Redesigned care delivery and financing processes =redesigned administrative and operational support infrastructure. • E.G., IT alone includes Financial, clinical and EMR applications along with patient registries/clinical data ware-houses and interoperatability linkages between all providers in the clinically integrated network. • Many payer operational issues. • Consumer and purchaser issues. CapEx Funding?

26. Presentation Agenda • Overview of Evolving Federal and State Regulatory Landscape and Impact on Hospital Revenues • Emerging Provider Business/Financing Models-Options and Considerations • Clinical Integration as a Better Model for Managed Care Contracting • Lessons Learned

27. Provider Business Models: Clinical Integration III. Clinical Integration as a Better Model for Managed Care Contracting • Clinical Integration • 1996 Department of Justice and Federal Trade Commission Statements of Antitrust Enforcement Policy in Health Care • "[A]n active and ongoing program to evaluate and modify practice patterns by the network's physician participants and create a high degree of interdependence and cooperation among the physicians to control costs and ensure quality." (*) Note: Above is excerpted/summarized information and does not represent a legal opinion.

28. Provider Business Models: Clinical Integration III. Clinical Integration as a Better Model for Managed Care Contracting • Financial Integration: General Definition * • Provider organization Members must share "substantial" financial risk. • Budget-based withholds/surplus opportunities are typically part of the structure, which can be linked to a variety of targets such as medical loss ratio, PMPM costs, etc.: • Note: Such financial risk often needs to be => than 15% or more of the aggregate payer contract revenue at risk. • P-4-P may qualify as financial risk if it equals at least 15% of aggregate payer provider contract revenue. (*) Note: Above is excerpted/summarized information and does not represent a legal opinion.

29. Provider Business Models: Clinical Integration III. Clinical Integration as a Better Model for Managed Care Contracting • FTC & DOJ Statements of Antitrust Enforcement Policy in Healthcare * • The FTC provides general considerations on the framework/organizational structure… if provider contracts do not involve a substantial financial risk. • Compliance with FTC requirements is critical for the successful development of a C.I. network model. • Many other regulatory and compliance considerations (e.g., Stark, Anti-Kickback, Corp Comp., etc.). (*) Note: Above is excerpted/summarized information and does not represent a legal opinion.

30. Provider Business Models: Clinical Integration III. Clinical Integration as a Better Model for Managed Care Contracting • Some structural considerations or indicators of what the FTC looks for in “clinical integration,” relative to provider network pursuit of joint contracting: • Joint contracting is essential to achieve integration goals/results. • Same measures across all payers… Same network for all payers. • Common procedures at practice level for all contracted plans. • Stable networks… Non-exclusive… Efficiency in credentialing. • Mechanisms to monitor and control utilization, costs and assure quality of care. • Selectively choosing CI physicians to further these objectives. • Significant investment of human and financial capital to realize efficiencies. (*) Note: Above is excerpted/summarized information and does not represent a legal opinion.

31. Provider Business Models: Clinical Integration III. Clinical Integration as a Better Model for Managed Care Contracting Market Conditions Favorable for Clinical Integration • Traditional F-F-S and managed care payment sources are looking to slow growth-freeze-reduce provider payment levels. • Increasingly difficult to the sustain traditional business models. • Technology has become a key factor for remaining competitive… clinical and administrative. • Major purchasers of healthcare are demanding evidence of improved quality, cost controls and utilization efficiency. Managed care health plans are increasingly expected to do more for less money, which will also impact payments to providers. • Practice economics are declining and physicians are looking for alternatives.

32. Provider Business Models: Clinical Integration III. Clinical Integration as a Better Model for Managed Care Contracting Market Conditions Favorable for Clinical Integration • Quality is perceived as mediocre and there is much variation in practice patterns among physicians. • Very little meaningful coordination of inpatient/outpatient/ ambulatory/chronic care services across the care continuum. • Decreased cooperation between hospitals and physicians with increased competition between both with each other… i.e., both going after the same fixed piece of the pie vs. looking to work together to increase the size of the pie piece. • Provider organizations best positioned in future state market environments will be those organizations which can effectively attract and retain patients.

33. Provider Business Models: Clinical Integration III. Clinical Integration as a Better Model for Managed Care Contracting • Core Considerations: Clinical Integration Business Model • Clinical integration and the reasons for pursuing this business strategy, should first and foremost be about improving… Care Delivery, Quality, Patient Safety and Organizational Efficiency/ Effectiveness. • Obtaining higher reimbursements should not be viewed as the “primary goal.” • Clinical integration requires a multi-venue care continuum, which is supported and enabled through clinical/financial information and financial incentives. • Think vertical integration & population management.

34. Provider Business Models: Clinical Integration III. Clinical Integration as a Better Model for Managed Care Contracting • Core Considerations: Clinical Integration Business Model • Clinical integration business models use technology and interdisciplinary care management processes to facilitate improving the physician-patient experience, clinical and service quality outcomes and operational/financial performance. • The development process requires new and expanded relationships which align incentives between all provider participants and key payers. • Successful development and implementation of a clinical integration business model requires a fundamental change in corporate culture and working relationships.

35. Provider Business Models: Clinical Integration III. Clinical Integration as a Better Model for Managed Care Contracting • All of the current and anticipated market changes have a common theme relative to what the purchasers want… • Value-Driven Care: Effective, efficient, accessible, patient-centric, patient safe, accountable and high quality services (applies to general payer and carve-out contracts). The latter impacts your… • Payer strategy… Contracting cycle… Physician alignment/integration strategies… Service line strategies… and Operational processes.

36. Provider Business Models: Clinical Integration III. Clinical Integration as a Better Model for Managed Care Contracting Clinical Integration Development Process • Development and Organization • Clinical Integration Readiness Assessment • Management/Clinical Development Team • Analysis of Current Legal Structure • Physician Alignment and Training • Analysis of Current Payer Contracting • IT Technology/Data Warehouse • Initiate Clinical Integration Activities • Data Collection for Clinical Programs • Common Patient Registry • Network Refinement/Recruitment • Disease Management, EBM Clinical Protocols, and EMRs • Training and Physician Leadership • Regulatory Compliance and Group Contracting • FTC Guidelines/Approval • Standardize and Integrate Protocols • Clinical Integration Network Contracting • Measure, Monitor, Report, and Educate

37. Provider Business Models: Clinical Integration III. Clinical Integration as a Better Model for Managed Care Contracting Future State Current State CIO/ACO – Continuum of Care Provider Network and Population Management Non-Aligned / Non-Integrated Continuum of Care Provider Network

38. Provider Business Models: Clinical Integration III. Clinical Integration as a Better Model for Managed Care Contracting Future State – CIO Provider Network • Integration of facilities-practitioners w/true interdependence and collaboration. • Disease management and corresponding clinical protocols. • Integrated IT which allows efficient/effect patient information exchange,utilization and claims data collection and management to lower costs and improve quality and measurement of physician compliance and performance vs. peer benchmarks and community standards.

39. Provider Business Models: Clinical Integration III. Clinical Integration as a Better Model for Managed Care Contracting Future State – CIO Provider Network • Specialists and PCP focus on in-network referrals. • A high level of physician financial investment and commitment of time for training, utilization of the system and compliance with standards, benchmarks and protocols. • Processes for improving performance and compliance, with enforceable consequences for noncompliance.

40. Presentation Agenda • Overview of Evolving Federal and State Regulatory Landscape and Impact on Hospital Revenues • Emerging Provider Business/Financing Models-Options and Considerations • Clinical Integration as a Better Model for Managed Care Contracting • Lessons Learned

41. Sustainable Provider Business Models IV. Lessons Learned • Sustainable future state provider business models will require: • Market scale. • A strong brand and market position in geographies served. • Multiple care delivery locations throughout geographies served. • A functional, physician alignment strategy with clinical integration. • A corporate culture uniformly focused on quality, service, efficiency and the provision of value. • Advanced IT and decision support. • A service line portfolio management approach linked with managed care contracting/rates. • Ability to capture and retain patient lives. How will you address the above?

42. Physician - Hospital Integration IV. Lessons Learned • There is no one-size-fits-all approach. • Providers need to invest more in affiliations rather than less… traditional “cooperation” models are not cost-effective. • A shared culture, common vision, and operational support drive success more than economic incentives. • A defined business strategy should drive physician integration decisions with a focus on the long-term vs. short-term. • Balanced risk/reward compensation models work best with and for physicians… incentive alignment is crucial. • Evolving payment models favor more integration vs. less. • Dedicate the right resources, with the right experience to get the job done the right way… physician leadership is crucial.

43. Is a Clinical Integration Strategy Right for You? IV. Lessons Learned • Can you remain competitive and financially viable in a restructured regulatory and reimbursement environment with your current business model? • What about in 5 years? • What about in 10 years? • With a cost structure that allows you to at least breakeven on Medicare payment levels? • If you conclude that you need to make fundamental business model changes and clinical integration is part of that change process… which approach works best for your organization in your market with your resources?

44. Christopher Kalkhof, MHA, FACHE Contact Information and Speaker Bio • Christopher Kalkhof is a Director with Alvarez & Marsal’s Healthcare Industry Group in New York. He has more than 25 years of diverse healthcare management experience. He specializes in managed care strategy development and contract negotiations; contract implementation and integration with revenue cycle/case management processes; provider-payer collaborations; physician alignment, referral management and integration; strategic planning and new product development. • Over the last few years, Mr. Kalkhof has spent much of his time assisting clients optimize their net managed care revenue potential, resulting in net rate increases and revenue improvements in excess of $435 million. Over the span of his career he has gained managed care related work experience in over 20 states and has directly negotiated hundreds of payer agreements for hospital, behavioral health, physician, IPA/PHO, home care, hospice and skilled nursing facility clients. He has also reviewed hundreds of additional payer contracts. • Recent or prior relevant experience has included: • Developing a broad-based managed care strategy and leading a contract rebasing/negotiations process, involving over 50 payer product contracts for a partial physician owned hospital with an estimated net revenue improvement of $10 million on a 12 month run rate basis. • Assessing contracting strategy for a community hospital and 100+ employed physicians and developed “best practices” contract templates for the hospital and the employed physician groups. • Renegotiated payer contracts for nearly $13 million in net revenue increases (24 month run rate basis). Stopped an unjustified payer attempt to recoup $1.2 million in alleged overpayments, upgraded contract manager (CM), trained staff and incorporated CM application into revenue cycle operations. Denials identified and reduced by over 60% in 1st 5 months. • Conducting a risk mitigation/EBIDA improvement opportunity assessment as part of a due diligence “clean team” review of an acquisition candidate hospital, which also included a clinically integrated PHO joint venture. • Evaluating a hospital’s current contracting strategy, contract content and physician-clinical integration options. • Prior to joining A&M, Mr. Kalkhof was: Director/National Managed Care Lead for a Big 4 firm’s provider consulting practice; Interim SVP of Delivery Systems/Payer Relations for Saint Vincent Catholic Medical Centers of NY and Co-Chair of the system’s PHO; Interim VP Managed Care for Christ Hospital (Jersey City, NJ); consulting Director of Managed Care at Doctors Hospital (Houston, TX) through the bankruptcy and post-bankruptcy ownership change to physicians; Partner in a practice management firm; Director of Marketing Administration and Professional Relations for a large health insurer; and Product Development Manager for a HMO. • Mr. Kalkhof received his Master of Health Administration degree from Tulane University and his Bachelor of Science, degree from Allegheny College. He is a Fellow in the American College of Healthcare Executives and a frequent presenter on managed care revenue improvement and physician alignment topics for the HFMA, ACHE, MGMA, WRG and other professional groups. In 2008, Mr. Kalkhof served as a member of the NYS Office of Medicaid Inspector General’s Medicaid Managed Care Compliance Program Guidance Advisory Committee. Christopher Kalkhof, FACHE Director Office (347) 254-2433 Mobile (716) 912-0309 E-Mail ckalkhof@ alvarezandmarsal.com Website www.alvarezandmarsal.com

45. The Alvarez &Marsal Advantage • Founded in 1983, Alvarez & Marsal (“A&M”) is a leading independent global professional services firm with more than 1,700 professionals based in North America, Europe, Asia and Latin America. • Currently 39 offices globally with headquarters in New York, London, and Hong Kong. • Offer deep financial, tax, operational and industry expertise. • Deep bench of talent across industries with the unique ability to transition between financial, operational and advisory roles to meet client’s changing business needs. • A&M is the leading, independent global professional services firm which excels at leadership, problem solving and value creation. A&M’s Healthcare Industry Group practice represents an assembled team of healthcare professionals who bring a significant track record of working with management, boards of directors and stakeholders of both investor-owned and non-profit providers, payers and suppliers to improve operational, financial and clinical performance. • A&M’s managed care consultants and interim management professionals bring deep best practices expertise in the development of managed care contracting and physician alignment strategies, payer contract negotiations, and the implementation / integration of contracting and physician alignment strategies into an organization’s overall clinical and business operations. • Our managed care services are aligned with your contract management cycle and can be tailored to meet your specific needs and market environment. We work with your team, serving in advisory or interim management roles, to ensure your success with your overall payer contracting strategy. www.alvarezandmarsal.com 44