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Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
Mercy Community Leader Breakfast
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Mercy Community Leader Breakfast

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Bradford S. Koles Jr. presentation for Mercy Community Leader Breakfast on February 7, 2012

Bradford S. Koles Jr. presentation for Mercy Community Leader Breakfast on February 7, 2012

Published in: Business, News & Politics
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  • 1. ©2011 THE ADVISORY BOARD COMPANY • 23508A 1
  • 2. The New Performance Standard Responding to the Changes Reshaping Health System Economics©2011 THE ADVISORY BOARD COMPANY • 23508A
  • 3. 3 Road Map 1 Health Care on a Budget 2 Four Forces Shaping Future Margins©2011 THE ADVISORY BOARD COMPANY • 23508A 3 Closing Remarks
  • 4. 4 Meet Your Newest Medicare Beneficiaries Happy 65th Birthday! Donald Trump Cher Sylvester Stallone©2011 THE ADVISORY BOARD COMPANY • 23508A Liza Minnelli Dolly Parton Pat Sajak Source: Health Care Advisory Board interviews and analysis.
  • 5. 5 Universal Access: The Boomers’ American Dream Baby Boomers Redefining American Industries ” From Opportunity to Entitlement? 1960s Education Transformative at All Stages of Life • Expansion of public “Baby boomers didn’t just eat food; they university systems transformed the snack, restaurant and supermarket industries. They didn’t just wear 1970s Employment clothes; they transformed the fashion industry. They didn’t just buy cars; they • Greater integration of transformed the auto industry. They didn’t women into workforce just date; they transformed sex roles and • Rise of part-time practices. They didn’t just go to work; they employment transformed the workplace. They didn’t just get married; they transformed relationships 1980s Homeownership and the institution of the family. They didn’t • Mortgage interest©2011 THE ADVISORY BOARD COMPANY • 23508A just borrow money; they transformed the deductions debt market. They didn’t just go to the doctor; • Homeowner subsidies they transformed health care. They didn’t just Health Care use computers; they transformed technology. 2010s • How will Medicare balance They didn’t just invest in stocks; they entitlement with solvency? transformed the investment marketplace.” • Will choice, access be Ken Dychtwald preserved? Gerontologist Zinkewicz P, “Baby Boomers ‘boom’ their way toward golden years,” available at: http://www.roughnotes.com/rnmagazine/2005/july05/07p106.htm, accessed September 23, 2011; Health Care Advisory Board interviews and analysis.
  • 6. 6 An Industry Preparing For Fundamental Change Coverage Expansion, Payment Reform Reshaping Health Care Timeline of Health Reform Developments Patient Protection HHS releases President CMS issues and Affordable Care Meaningful Use Obama repeals provisions to Hospital Act (PPACA) passes regulations 1099 reporting Readmissions House of requirement Reduction Program Representatives from PPACA IMAGE CREDIT: SHUTTERSTOCK. VA Attorney CMS releases HHS releases General files first proposed rule for Medicare©2011 THE ADVISORY BOARD COMPANY • 23508A lawsuit against Medicare Shared Value-Based individual mandate Savings Program Purchasing Program final rule Source: Health Care Advisory Board interviews and analysis.
  • 7. 7 Before 2014, 2012 Future of Affordable Care Act Still in Doubt Three Competing Visions IMAGE CREDIT: GOVERNOR.STATE.TX.US. IMAGE CREDIT: MITT ROMNEY MEDIA IMAGE CREDIT: WHITEHOUSE.GOV. © JESSICA RINALDI. “I am not the first “If I were President, on “On day one, as the©2011 THE ADVISORY BOARD COMPANY • 23508A President to take up day one I would issue President, the executive this cause, but I am an executive order order will be signed and determined to be paving the way for Obamacare will be the last.” Obamacare waivers to wiped out as much as it all 50 states.” can be.” Source: White House, available at: www.whitehouse.gov, accessed September 21, 2011; Mitt Romney Media, available at: http://en.wikipedia.org/wiki/File:Mitt_Romney.jpg, Office of the Governor Rick Perry, available at: www.governor.state.tx.us/about; Health Care Advisory Board interviews and analysis.
  • 8. 8 (As Always) It’s The Economy, Stupid Policy Debate Dominated by Economy, Deficit, Debt September 21, 2011 September 9, 2011 Los Angeles Times International Business Times “Six in 10 Americans Don’t “Bank of America Layoffs: The See Economy Improving Soon” Industry Bloodbath Continues” September 16, 2011 August 5, 2011 January 16, 2011 Washington Post Washington Post Richmond Times-Dispatch “Jobless Rate Climbs in “S&P Downgrades U.S. “Debt Soars to All-Time High D.C., Maryland, Virginia” Credit Rating for First Time” of $14 Trillion”©2011 THE ADVISORY BOARD COMPANY • 23508A Source: “Debt Soars to All-Time High of $14 Trillion,” Richmond Times-Dispatch, January 16, 2011; Goldfarb Z, “S&P Downgrades U.S. Credit Rating for First Time,” Washington Post, August 5, 2011; Haynes V, “Jobless Rate Climbs in D.C., Maryland, Virginia,” Washington Post, September 16, 2011; “Bank of America Layoffs: The Industry Bloodbath Continues,” International Business Times, September 9, 2011; “Six in 10 Americans Don’t See Economy Improving Soon,” Los Angeles Times, September 21, 2011; Health Care Advisory Board interviews and analysis.
  • 9. 9 Washington’s Newfound Budget Discipline Debt Ceiling Increase Contingent on Massive Deficit Reduction U.S. National Debt and Debt Ceiling $US, In Trillions 16 Legislation in Brief: 14 Budget Control Act of 2011 12 • 74th increase to debt ceiling in 49 years • Establishes a process to raise 10 federal debt limit by $2.4 T 8 • Initial increase offset by automatic $917 B 6 in debt reduction over next ten years • Further increases contingent on 4 enacting additional $1.2 T in 2 debt reduction©2011 THE ADVISORY BOARD COMPANY • 23508A 0 Source: Klein E, “Thirty Years of the Debt Ceiling in One Graph,” The Washington Post, July 15, 2011; Ernst & Young, “Budget Control Act of 2011: Where Do We Go From Here?,” September 8, 2011; Health Care Advisory Board interviews and analysis.
  • 10. 10 No Blank Check From Employers Either Defined Contribution Plans Displacing Defined Benefits Transition to Defined Contribution Plan 10% Reduction in premium Orion contributes $125-$350 Employee selects individual costs due to switch per month toward coverage policy on exchange Payers Taking Notice Wall Street Journal Case in Brief: Orion Corporation©2011 THE ADVISORY BOARD COMPANY • 23508A “WellPoint, Non-Profits Invest in • 70-employee residential services firm Private Insurance Exchange” located in St. Paul, Minnesota • WellPoint, Blue Cross Blue Shield of Michigan, • Converted HDHP1 to defined and Health Care Service announce plans to contribution plan managed by acquire 78 percent share of Bloom Health Minnesota-based Bloom Health • Insurers plan to offer fully operational exchanges by 2013 Source: Bloom Health, available at: www.gobloomhealth.com, accessed September 21, 2011; Kamp J, “WellPoint, Non-Profits Invest in Private Insurance Exchange,” Wall Street Journal, September 20, 2011; 1) High-Deductible Health Plan. Health Care Advisory Board interviews and analysis.
  • 11. 11 The New Great Depression Generation? Amid Economic Uncertainty, Consumers Tightening Their Belts Households Postponing or Cancelling Medical Care 95% Percentage of primary care 20% physicians reporting that 16% patients rationing or forgoing medications, treatments due to financial concerns 2006 2009 ” Is it Cyclical… …Or Is It An Enduring Trend?©2011 THE ADVISORY BOARD COMPANY • 23508A “In 2009, despite the economic “We have a very weak economy and it’s just a downturn, the number of prescription different environment for the elective parts of drugs dispensed rebounded to healthcare. This could go beyond the recession. prerecession rates of growth.” Being a less aggressive consumer of healthcare is here to stay.” Paul Ginsburg, Economist, Center Health Affairs, 2011 for Studying Health System Change Source: Martin A, et al., “Recession Contributes to Slowest Annual Rate of Increase in Health Spending in Five Decades,” Health Affairs, 2011, 30: 11-22; Johnson A, Rockoff J, & Mathews A, “Americans Cut Back on Visits to Doctor,” Wall Street Journal, July 29, 2010; Health Insurance, “With or Without Health Insurance, Americans Skipping Doctors Visits, Surgeries,” available at: http://www.insureme.com/health-insurance/or-without-health-insurance-americans-skipping-doctor-visits-surgeries, accessed September 21, 2011; Thomson Reuters, “Thomson Reuters Study Finds More Patients Postponing Medicare Care Due to Cost,” available at: http://thomsonreuters.com, accessed September 21, 2011; Health Care Advisory Board interviews and analysis.
  • 12. 12 Getting Paid Less to Do Less New Payment Models Calling Old Imperatives Into Question Accountable Payment Models Performance Risk Utilization Risk Cost of Care Quality of Care Volume of Care Bundled Pricing Pay-for-Performance Shared Savings • Bundled Payments for Care • Value-Based Purchasing • Medicare Shared Improvement program • Readmissions penalties Savings Program • Commercial bundled • Quality-based • Pioneer ACO Program©2011 THE ADVISORY BOARD COMPANY • 23508A contracts commercial contracts • Commercial ACO contracts Source: Health Care Advisory Board interviews and analysis.
  • 13. 13 Seeking Shelter in Scale Market Pressures Driving Consolidations, Integration Providence Health System Steward Health One of the nation’s largest Recent M&A Activity Care System Catholic health organizations Owns six Catholic adding hospitals, practices Vanguard Health Systems hospitals in Boston Purchased Detroit Medical market, with plans to Center for $1.5 B acquire two more Trinity Health Purchased Loyola Health System for $100 M, plus an annual subsidy of $22.5 M to medical school Geisinger Health System Full merger with Shamokin Area Community Hospital©2011 THE ADVISORY BOARD COMPANY • 23508A Texas Health Resources Acquired MedicalEdge Healthcare Group and its Community Health Systems Novant Health 420 physicians, clinicians in has withdrawn its offer to acquire Nine-hospital system the country’s second-largest all Tenet Healthcare experiencing recent acquisition of an independent Corporation’s outstanding growth through physician practice shares after Tenet rejected two of acquisition of hospitals, its bids for buyout offers imaging centers Source: Becker’s Hospital Review, “15 Growing Health Care Systems,” available at: http://www.beckershospitalreview.com/lists-and-statistics/15-growing- healthcare-systems.html, accessed May 1, 2011; Lawley E, “Tenet Sues Community Health,” Nashville Post, April 11, 2011; Roberson J, “Texas Health Resources Acquires MedicalEdge Healthcare Group,” Denton Record-Chronicle, January 5, 2011; Health Care Advisory Board interviews and analysis.
  • 14. 14 Defining an Expanded Value Proposition Three Strategic Identities System as Preferred System as Service Provider System as Population Network Health Manager Redesigning benefit plans Marketing value-added services Contracting directly to to create a closed network to capture new opportunities share actuarial risk©2011 THE ADVISORY BOARD COMPANY • 23508A Source: Health Care Advisory Board interviews and analysis.
  • 15. 15 Health Care’s Identity Crisis Traditional Market Distinctions Blurring Providers Acquiring Payers Payers Acquiring Physician Groups Case in Brief: Case in Brief: Partners HealthCare Acquiring UnitedHealth Acquiring Monarch Neighborhood Health Plan HealthCare©2011 THE ADVISORY BOARD COMPANY • 23508A • Partners HealthCare planning to acquire • UnitedHealth planning to acquire Neighborhood Health Plan, Boston-based management division of Monarch payer insuring more than 240,000 HealthCare, one of largest physician primarily low-income residents groups in California • Partners to provide grants to Neighborhood • Monarch to become part of UnitedHealth’s Health affiliated community centers health services business unit Source: Mathews A, “UnitedHealth Buys California Group of 2,300 Doctors,” Wall Street Journal, September 1, 2011; Weisman R, “Partners Plans to Acquire Insurer Neighborhood Health,” Wall Street Journal, August 10, 2011; Health Care Advisory Board interviews and analysis.
  • 16. 16 Road Map 1 Health Care on a Budget 2 Forces Shaping Future Margins©2011 THE ADVISORY BOARD COMPANY • 23508A 3 Closing Remarks
  • 17. 17 Four Forces Shaping Future Margins Financial, Clinical Profiles Shifting Dramatically Decelerating Continuing Cost Price Growth Pressure • Federal, state budget pressures • No sign of slower cost growth ahead constraining public payer price growth • Drivers of new cost growth largely • Payments subject to quality, non-accretive cost-based risks • Commercial cost shifting stretched to the limit Shifting Deteriorating Payer Mix Case Mix©2011 THE ADVISORY BOARD COMPANY • 23508A • Baby Boomers entering Medicare rolls • Medical demand from aging • Coverage expansion boosting population threatens to crowd out Medicaid eligibility profitable procedures • Most demand growth over the next • Incidence of chronic disease, decade comes from publicly multiple comorbidities rising insured patients Source: Health Care Advisory Board interviews and analysis.
  • 18. Force #1: Decelerating Price Growth 18 New Baseline Already Challenging Affordable Care Act Significantly Reduces Public Payments Impact of Affordable Care Act on Provider Rates Cumulative Federal Revenue from Decreased Medicare and Medicaid DSH Payments $22.0 B $110 B $17.0 B Cuts to Medicare $14.0 B $12.6 B Fee-For-Service rates $8.4 B $36 B $7.6 B $3.6 B©2011 THE ADVISORY BOARD COMPANY • 23508A Cuts to Disproportionate Share $3.5 B Hospital (DSH) payments $1.1 B $1.7 B $0 B $500 M 2014 2015 2016 2017 2018 2019 Medicare Medicaid Source: US House of Representatives, “Amendment in the Nature of a Substitute to H.R. 4872, as Reported,” accessed March 18, 2010; US Senate, The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act,” accessed December 24, 2009; Health Care Advisory Board interviews and analysis.
  • 19. 19 Health Care Likely On the Chopping Block But Little Agreement on How Distribution of Spending in Possible Approaches to 2011 Budget Proposal Reducing Health Care Spending Other Interest Health Care1 Eligibility changes Provider rate cuts 14% on Debt 7% 24% Other 15% Safety Net 20% Programs 2 20% Defense Decreased Fraud, waste©2011 THE ADVISORY BOARD COMPANY • 23508A supplemental payments reduction Social Security Cost shifting to Payment model overhaul beneficiaries (i.e. voucher system) 1) Includes spending for Medicare, Medicaid, CHIP, substance abuse and mental health services, National Institutes of Health, and Food and Drug Administration. Source: New York Times, available at: http://www.nytimes.com/interactive/ 2) Includes spending for unemployment insurance programs, food stamps, military and federal civilian 2010/02/01/us/budget.html, accessed September 17, 2011; Health Care employee retirement and disability, and Temporary Assistance for Needy Families (TANF) program. Advisory Board interviews and analysis.
  • 20. 20 Sequestration the Lesser of Two Evils? Automatic Cuts to Health Care Relatively Small Sequestration Impact on Breakdown of Total Cuts Key Budget Areas Under Sequestration 2013 2013-2021 Defense Other1 Medicare Medicaid 0.0% -2.0% Other $1.1 T $123 B Health Care -7.8% ” -10.0%©2011 THE ADVISORY BOARD COMPANY • 23508A Cutting Our Losses? "Sequestration is the devil you know and the Super Committee is the devil you dont." Max Richtman National Committee to Preserve Social Security and Medicare Source: Congressional Budget Office, available at: www.cbo.gov, accessed on September 19, 2011; Reuters, “Healthcare Lobbyists Want Debt Committee to Fail,” available at: http://www.reuters.com/, accessed 1) Nondefense discretionary and other mandatory spending. September 17, 2011; Health Care Advisory Board interviews and analysis.
  • 21. 21 Medicaid Payment Cuts Across the Country Budget Shortfalls, Declining Federal Funding Common Concerns Washington: South Dakota: Wisconsin: New York: Looking to Cut provider Cut provider Considering cut $53 B Medicaid Medicaid Medicaid rates $500 M program by $2 B rates by 10% by 11.5% Medicaid cut Pennsylvania: Increasing California: co-pays for Proposing certain 10% provider services to rate cut save $50 M Virginia: Cut outpatient service reimbursement by 4%©2011 THE ADVISORY BOARD COMPANY • 23508A Arizona: 5% provider rate cut in April 2011, another 5% rate cut in North Carolina: October 2011 Dropping coverage Mississippi: on adult eye exams, Texas: Cut Closing mental glasses as part of provider Medicaid health centers $354 M Medicaid rates by 8% and crisis centers spending reduction Source: Health Care Advisory Board interviews and analysis.
  • 22. 22 Medicaid Budget Crisis Forcing Innovation Three State Responses to Medicaid Budget Pressure Cut Rates, Limit Services Outsource Program Operations Force Provider Innovation • Washington, California, • Florida Medicaid overhaul • North Carolina placing©2011 THE ADVISORY BOARD COMPANY • 23508A Texas, South Dakota to shift all Medicaid enrollees into enhanced proposing provider rate cuts enrollees to private medical homes through of over 8 percent managed care plans Community Care of • Mississippi closing mental by 2014 North Carolina program health and crisis centers Source: Health Care Advisory Board interviews and analysis.
  • 23. 23 Some Moving Beyond Traditional Cuts Oregon Bill Ties Medicaid Cuts to Third-Party Care Coordination Plan Oregon Medicaid Contracting Model Medicaid Payment Rates Additional reduction if CCOs fail to produce sufficient savings State pays fixed global payment to Care (19%) Coordination Organizations (CCOs) (15%) CCOs contract with providers to coordinate care, Current 2012 2014 develop new delivery models that lower costs©2011 THE ADVISORY BOARD COMPANY • 23508A Case in Brief: Oregon Health Care Transformation Law • Law reduces Medicaid rates by 19 percent in 2012, mandates creation of care coordination organizations (CCOs) composed of managed care plans charged with coordinating providers, developing new delivery models to lower costs • If CCOs fail to achieve expected $250 M in savings, lawmakers may propose additional cuts of up to 15 percent to take effect in 2014 Source: Managed Healthcare Executive, "Oregon Medicaid shifts to global payments, coordinated care,“ available at: http://managedhealthcareexecutive.modernmedicine.com/mhe/News+Analysis/Oregon-Medicaid-shifts-to-global-payments- coordina/ArticleStandard/Article/detail/732912, accessed September 11, 2011; Health Care Advisory Board interviews and analysis.
  • 24. 24 Future Payments Depend on Performance Upside Opportunity Available, But Downside Risk Prevails Prominent Pay-for-Performance Programs Payment Driver Description Payment Reduction Timeline • Mandatory pay-for-performance program Value-Based • Percentage of hospital inpatient payments • Withholds begin at 1% in Purchasing withheld, earned back based on quality 2013, grow to 2% by 2017 Program performance • Hospitals with greater than expected Hospital • Penalties capped at 1% of readmission rate subject to financial penalty Readmissions total DRG1 payments in 2013, • Performance based on 30-day readmission Reduction 2% in 2014, and not to exceed metrics for three conditions in 2013, expanding Program 3% in 2015 and beyond in 2015 to include four others©2011 THE ADVISORY BOARD COMPANY • 23508A Hospital-Acquired • Hospitals in top quartile of national, risk- • 1% penalty deducted from Condition (HAC) adjusted HAC rates subject to financial penalty DRG payment starting in 2015 Penalty Source: US Senate, “The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act,” February 19, 2010; Health Care Advisory 1) Diagnosis-Related Group. Board interviews and analysis.
  • 25. 25 Picking Winners, Losers Based on Performance Performance Scores Drive Payment Redistribution Final Rule: Value-Based Purchasing Program Structure Measure Performance Compare Hospitals Adjust Payments • CMS evaluates hospitals based • Medicare ranks all hospitals • Medicare converts TPS into on achievement and based on TPS incentive payments improvement on selected • For achievement score, • Calculation will use linear clinical care, patient hospitals ranked below the 50th exchange function experience measures percentile do not receive points • Hospitals that receive higher • Based on weighted average of towards TPS©2011 THE ADVISORY BOARD COMPANY • 23508A TPS will receive higher achievement and improvement • For improvement score, incentive payments scores, CMS calculates Total hospitals whose performance • CMS to notify hospitals of Performance Scores (TPS) for has not improved relative to a incentive payment for FY 2013 each hospital1 baseline score do not receive on November 1, 2012 points toward TPS 1) In FY 2013, clinical care measures are weighted at 70 percent Source: Centers for Medicare and Medicaid Services, “CMS Issues Final Rule for First Year of Hospital and patient experience measures are weighted at 30 percent. Value-Based Purchasing Program,” April 29, 2011; Health Care Advisory Board interviews and analysis.
  • 26. 26 Redefining the Acute Care Episode Bundled Payments Drive Delivery System Integration Bundled Payment Framework Lump Sum Payments Drive Integration Program in Brief: Medicare’s Bundled Through Shared Accountability Payments for Care Improvement • Program seeking voluntary participation in four bundled payment models • Models 1-3 provide retrospective Payer reimbursement; Models 2 and 3 include post-episode reconciliation; Model 4 offers single prospective payment • Acute care hospitals, physician groups, health systems eligible for all models; post-acute facilities may participate without©2011 THE ADVISORY BOARD COMPANY • 23508A hospitals in Model 3 • Physicians eligible for gainsharing bonuses up to 50 percent of traditional fee schedule • For all models, applicants must propose Physician Hospital Post-Acute quality measures, which CMS will use to Services Services Services develop set of standardized metrics Source: Centers for Medicare and Medicaid Services; Health Care Advisory Board interviews and analysis.
  • 27. 27 All Models Require Discount of FFS1 Pricing Model 1: Model 2: Model 3: Model 4: Hospital Inpatient Services Hospital and Physician Post-Discharge Hospital and Physician Inpatient for All DRGs Inpatient and Services Only Services Post-Discharge Services Model 1 participants Physician groups, acute care plus post-acute care hospitals reimbursed under Eligible Model 1 participants plus post- providers, long-term IPPS2, health systems, PHOs, Model 1 participants Participants acute care providers care hospitals, inpatient conveners of participating rehab facilities, home providers health agencies Clinical All Medicare DRGs Select inpatient DRGs, proposed by applicants Conditions Inpatient hospital and Inpatient hospital and physician Included physician services; Post-acute care; Inpatient hospital services services; Services related post-acute care and related readmissions related readmissions readmissions Minimum of 3% for Minimum increases Expected 30-89 days post-discharge Proposed by applicant Minimum 3% discount (larger for DRGs from 0% for first six months Discount services; minimum 2% for 90+ (no set minimum) in ACE Demonstration) to 2% in Year 3 days post-discharge©2011 THE ADVISORY BOARD COMPANY • 23508A IPPS payment less discount for Prospectively established payment; Provider Part A services; physicians Traditional FFS payment, hospitals distribute payment Payments reimbursed on traditional fee subject to reconciliation with target price to clinicians schedule All Hospital IQR3 measures, Quality Proposed by applicants, with CMS ultimately establishing a standardized set of metrics aligned with plus additional measures Measures measures in other CMS programs proposed by applicants 1) Fee-For-Service. 2) Inpatient Prospective Payment System. Source: Centers for Medicare and Medicaid Services; 3) Inpatient Quality Reporting. Health Care Advisory Board interviews and analysis.
  • 28. 28 Bundling Not Limited to the Medicare Program Bundled Payment Initiatives Developing Nationwide Reimbursing for “Baskets of Care” Participating in Prometheus Pilot Exploring Participating in cardiac Bundling for Prometheus Pilot bundling obstetrics Developing orthopedic Bundling for bundling CABG1 Participating in Prometheus Pilot©2011 THE ADVISORY BOARD COMPANY • 23508A Bundling joint Bundling total replacements, knee replacement procedures with “defined outcomes” Bundling for cardiac surgery Bundling for Bundling total joint prostate surgery replacement 1) Coronary Artery Bypass Graft. Source: Health Care Advisory Board interviews and analysis.
  • 29. 29 Shared Savings Options Taking Shape Choices Cater To Varying Appetites For Risk Medicare Shared Savings Program Pioneer ACO Model • First ACO contracts to begin April 2012; • Accelerated pathway to ACO formation contracts to last minimum of three years designed for organizations able to assume • Final rule issued October 20, 2011 utilization risk immediately – Physician groups and hospitals eligible • Participating providers must serve at least to participate, but primary care 15,000 Medicare beneficiaries physicians must be included in any • Offers higher risk, higher reward model; ACO group providers can obtain rewards ranging from – Participating ACOs must serve at least 50-75% of Medicare savings achieved©2011 THE ADVISORY BOARD COMPANY • 23508A 5,000 Medicare beneficiaries • Providers can choose retrospective or – Bonus potential to depend on Medicare prospective patient assignment cost savings, quality metrics methodology – Two options available: • Quality measures to match those in final • No downside risk, lower bonus rule for Medicare Shared Savings Program payment • Deadline to apply was in August 2011; • Downside risk, higher bonus payment CMS expected to select Pioneer ACOs by January 2012 Source: Health Care Advisory Board interviews and analysis.
  • 30. 30 Mechanics of Shared Savings Applying Total Cost Accountability to Fee-for-Service Payments Shared Savings Payment Cycle Assignment 1 Patients assigned to ACO Program in Brief: Medicare Shared based on terms of contract Savings Program Billing Providers bill normally, receive • Program begins April 1 or July 1, 2012; 2 standard fee-for-service contracts to last minimum of three years payments • Physician groups and hospitals eligible to participate, but primary care physicians must Comparison be included in any ACO group Total cost of care for assigned 3 • Participating ACOs must serve at least 5,000 population compared to risk- Target Actual adjusted target expenditures Medicare beneficiaries • Bonus potential to depend on Medicare cost©2011 THE ADVISORY BOARD COMPANY • 23508A Bonus savings, quality metrics Bonuses or penalties levied • Two payment models available: one with no 4 based on variance of downside risk, the second with downside risk expenditures from target in all three years Distribution ACO responsible for dividing 5 bonus payments among stakeholders Source: Health Care Advisory Board interviews and analysis.
  • 31. 31 Final Rules for Medicare Shared Savings Summary of Final Rules Who Can Participate? 1. Minimum population size: 5,000 beneficiaries 2. ACO Founders: PCPs, PCP Independent Practice Associations, employed groups, Federally Qualified Health Centers, Rural Health Centers, some Critical Access Hospitals 3. ACO Participants: Hospitals, specialists, PCPs with <5,000 patients, other suppliers and providers 4. ACO must be a legal entity with own tax identification number, governance, management Patient Attribution 1. Retrospective based on plurality of primary care E&M billings by ACO provider 2. Patients may not opt out of being counted against ACO performance measure 3. Patients retain unrestricted choice of providers Shared Savings 1. ACOs receive shared savings payments if spending per attributed beneficiary grows slower than national per beneficiary spending Quality and Reporting©2011 THE ADVISORY BOARD COMPANY • 23508A 1. 33 quality measures (patient/caregiver experience, care coordination/patient safety, preventive health, at-risk populations) 2. Bonus payout to ACO is adjusted based on quality performance 3. Significant transparency requirements around ACO operations and financing Legal Considerations 1. No mandatory antitrust review required for ACOs, but regulators will monitor ongoing market impact 2. Voluntary pre-approval antitrust review available for ACOs above 30% market share 3. Five new waivers create ACO-specific exemptions from fraud and abuse laws Source: Health Care Advisory Board interviews and analysis.
  • 32. 32 CMS Re-Calibrates SSP in Response to Providers Changes in Final Rule Increase Attractiveness of SSP Participation ” Broadening Participation Options Critical Improvements Included in Final Rule “Today’s menu of ACO options allows America’s hospitals to create new models of accountable care organizations on which Greater reward, lower-risk financials the transformation of health care delivery is so dependent.” Richard Umbdenstock, President and CEO Simplified quality requirements ” American Hospital Association A More Attractive Financial Model Decreased barriers to entry©2011 THE ADVISORY BOARD COMPANY • 23508A “We are very pleased that this rule allows ACOs to share in every dollar of cost savings and includes an option that limits financial risk, which is important for many physician practices.” Peter Carmel, MD, President American Medical Association Source: American Hospital Association, "Statement on Final ACO Rule," available at: http://www.aha.org/presscenter/pressrel/2011/111020-st-acorule.pdf, accessed October 24, 2011; Herman B, "10 Healthcare Leaders Share Thoughts on Final ACO Rule," Beckers Hospital Review, available at: http://www.beckershospitalreview.com/hospital-physician-relationships/10-healthcare-leaders-share-thoughts-on-final-aco-rule.html, accessed October 24, 2011; Health Care Advisory Board interviews and analysis.
  • 33. 33 Rule Update Warrants a Second Look Program Changes and Implications Initial Concern Change in Rule Implications • Upfront payments to capitalize physician-only • Smaller providers face lower financial Insufficient capital to ACOs, others hurdles to participation fund transition • Meaningful use no longer a prerequisite for • Advance Payment ACO Model smoothes participation cash flow concerns • Relaxed requirements attractive to physician • Meaningful use no longer a prerequisite for stakeholders Resistance from key participation • With structural hurdles lowered, provider stakeholders • Elimination of mandatory anti-trust review focus can shift to financial, strategic • Lessened quality reporting, performance burden considerations • First-dollar savings, elimination of downside risk • Creation of relative “shallow end” minimizes Unfavorable risk/reward from Track 1 risk of slower transition calibration • Benchmark calculation more sensitive to patient • Still, program designed for organizations mix already working to manage utilization risk • ACOs benefit from ongoing insight into Patient assignment • Retrospective attribution supplemented with panel composition©2011 THE ADVISORY BOARD COMPANY • 23508A method prospective patient information • ACO panel still comprises only patients served by ACO Overwhelming quality • Fewer quality measures • Less burdensome reporting requirements performance, reporting • Slower transition to pay-for-performance • Underperformance on any given measure burden • Technical changes to bonus calculation method less harmful • Elimination of mandatory anti-trust review • For ACOs confident in anti-trust compliance, Onerous program design • Relaxed governance prescriptions, leadership formal review hurdle eliminated prescriptions requirements • Clarity around permissible activities with • Extended waivers for Stark, anti-kickback ACO participants, professionals Source: Health Care Advisory Board interviews and analysis.
  • 34. 34 Reality Check: Success Remains a Heavy Lift Key Determinants of Successful SSP Participation Manage Utilization Maintain Exceptional Operate Under Risk Quality Elevated Transparency • Drive care to ambulatory • Meet high standards for • Provide all necessary medical network care quality across documentation, data©2011 THE ADVISORY BOARD COMPANY • 23508A • Reduce preventable multiple dimensions to CMS acute care episodes • Demonstrate care • Manage communication coordination across to key stakeholders sites of care, over time Source: Health Care Advisory Board interviews and analysis.
  • 35. 35 Implications for Organizations Сonsidering the SSP Eliminating Downside Risk from Track 1 Creates a Relative “Shallow End" for Prospective ACOs • The elimination of any formal downside risk and the promise of first-dollar savings mean the one-sided model is now a much more attractive option for wary ACO prospects hoping to remain in the shallow end of the pool for the time being. With Greater Risk in Track 2 Comes Greater (and Greater) Reward • The higher basic sharing rate (60%, as compared to 50% in the one-sided model) along with a fixed MSR (2%, compared to a sliding scale in the one-sided model) offers higher upside to successful ACOs. Of course, that potential reward comes with the risk of having to repay losses, so those considering the two- sided model will need to feel very prepared to perform well from the beginning of the program. No Changes to the Criteria for Success as a Medicare ACO • Managing utilization risk, delivering exceptional quality and operating under intense transparency from day one are all critical factors for succeeding in the Shared Savings Program. Although the structural barriers are far lower, the fundamental strategic imperative to develop an integrated care enterprise capable of managing population health across the care continuum remains the baseline for success as an ACO.©2011 THE ADVISORY BOARD COMPANY • 23508A SSP Provides New Potential Upside—with Low-Risk—for Additional Return on Investments • Whether in anticipation of accountable payment, in preparation for the challenges of an aging and chronically ill patient population, or simply for reasons of clinical mission, many providers are building care management infrastructure that can be leveraged to reduce the total cost of care. The Shared Savings Program, especially the low-risk one-sided model, is a chance to convert a substantial portion of a provider’s book of business to a payment model that rewards, rather than penalizes, this clinical improvement. Source: Health Care Advisory Board interviews and analysis.
  • 36. 36 Supporting You Through the Transition The Medicare Payment Innovation Project Key Program Resources Project Goals and Focus Areas • What are the key implications of new payment models emerging as CMS implements provisions of the Patient Protection and Affordable Care Act? Accountable Care Quantitative Tools Publications and Assessments • How do hospitals and health systems deploy sound strategies for engaging in payment innovation with Medicare? • What key insights can hospitals and health systems learn from organizations Teleconferences with “Toward Accountable participating in existing Medicare pilot Payment Innovators Payment” Blog and demonstration projects?©2011 THE ADVISORY BOARD COMPANY • 23508A Project in Brief: Medicare Payment Innovation Project • Multiyear research initiative designed to support Health Care Advisory Board members as they engage in payment experimentation with Medicare and private payers • Main areas of focus include pay-for-performance, bundled payments, shared savings models, and projects operated by the Center for Medicare and Medicaid Innovation (CMMI) • For information on participating, contact Rob Lazerow at lazerowr@advisory.com or visit the project resource page at http://www.advisory.com/hcab/paymentinnovation Source: Health Care Advisory Board interviews and analysis.
  • 37. 37 Application Content and Key Dates Application Process Details Accountability for Beneficiaries Disclosure of Prior Participation Eligibility Certify that participants, Disclose previous participation Submit supporting materials to providers, suppliers agree to in Shared Savings Program, CMS to demonstrate eligibility accountability terms affiliation with other ACOs Distribution of Savings Selection of Track/Interim Payment Assurance of Ability to Repay Describe plans to distribute Indicate whether applying for For Model 2, demonstrate shared savings among Track 1 or 2, request interim ability to repay potential losses stakeholders payment calculation1 owed upon reconciliation©2011 THE ADVISORY BOARD COMPANY • 23508A Key Dates Applications Accepted: Beginning early January 2012 Potential Start Dates: • April 1, 2012 (term of agreement is 3 years and 9 months) • July 1, 2012 (term of agreement is 3 years and 6 months) • January 1 in 2013 and subsequent years (3-year agreement) 1) ACOs applying for start dates in 2012 have the option to request interim payment Source: Centers for Medicare and Medicaid Services; Health Care calculation based on first 12 months of program participation and quality performance. Advisory Board interviews and analysis.
  • 38. 38 A Closer Look “Rulebook” Offers In-Depth Detail, Analysis of Shared Savings Program The Medicare Shared Savings Program Rulebook Includes detailed analysis of: • Eligibility requirements • Legal issues including antitrust • Patient attribution • Benchmark calculation • Shared savings, shared loss modeling • Quality criteria • Strategic implications©2011 THE ADVISORY BOARD COMPANY • 23508A Study in Brief: Medicare Shared Savings Program Rulebook • Clearly explained but detailed discussion of major provisions of final rule for Medicare’s Shared Savings Program • Go-to resource for technical questions as well as strategic guidance for those considering application to program • Available at www.advisory.com
  • 39. 39 Burden on Commercial Pricing Unsustainable Required Commercial Price Growth Unrealistic Commercial Price Growth Needed to Maintain 2.5% Operating Margin 1.5% Necessary Commercial Price Growth 9.5% Potential 2.0% Public Payer 9.0% 2.5% Price Growth 6-8% 8.5% Historical annual growth in commercial payer 8.0% prices over last decade 7.5% 3.5% 7.0% Average Advisory Board estimate Commercial©2011 THE ADVISORY BOARD COMPANY • 23508A of annualized commercial 6.5% Price Growth, price growth, 2011-2021 2001-2009 6.0% 65% 67% 69% 71% 73% 75% Non-Commercially Insured Share of Volume Source: American Hospital Association Chartbook, available at: http://www.aha.org/aha/research-and-trends/chartbook/index.html, accessed April 26, 2011; Health Care Advisory Board interviews and analysis.
  • 40. 40 Deceleration in Private Payer Pricing Likely Pressures on Commercial Pricing 1 2 3 Regulatory scrutiny of Exchange-based Employers premium increases coverage diluting average increasingly willing to intensifying commercial price restrict choice 4 5©2011 THE ADVISORY BOARD COMPANY • 23508A Quality performance New payment models risk increasingly demanding utilization prevalent management Source: Health Care Advisory Board interviews and analysis.
  • 41. Pressure #1: Regulatory Scrutiny of Premium Increases Intensifying 41 Price Hikes Not to Be Taken for Granted Traditional Growth, Operating Models at Risk Medical Loss Ratio (MLR) Requirements Regulatory Review of Premium Increases • Insurers mandated to disclose, justify proposed rate increases 80% MLR for individual and small group plans over 10 percent • Obama administration announced $109 M in grants to states to bolster 85% MLR for large group plans ” oversight of insurers • New ratios mandate that insurers spend States Cracking Down on Rate Hikes fixed amount of every premium dollar©2011 THE ADVISORY BOARD COMPANY • 23508A on either reimbursement for medical care or activities that improve care quality “A third major California health insurer has • Measure limits amount that insurers agreed to scale back insurance rate hikes can spend on advertising, other this year for thousands of customers after growth opportunities postponing the increases for 60 days at the • Insurers that fail to meet standards request of the states insurance must provide rebates to plan enrollees commissioner….” Los Angeles-Times Source: “Employer Health Benefits 2010 Annual Survey,” Kaiser Family Foundation, September 2, 2010; Helfand D, “Aetna to Scale Back Health Insurance Rate Hikes,” Los Angeles Times; Pear R, “Insurers Told To Justify Rate Increases Over 10 Percent,” New York Times, May 19, 2011; Levey N, “29 States Get Grants to Boost Health Insurer Oversight,” Los Angeles Times, September 20, 2011; Health Care Advisory Board interviews and analysis.
  • 42. Pressure #2: Exchange-Based Coverage Diluting Average Commercial Price 42 Commercial Coverage Not What It Used to Be Benchmark Plan Likely Less Generous Than Employer Coverage Actuarial Value of Common Plan Types Coverage of Average Medical Costs Provision in Brief: 90% Health Insurance Subsidies 87% 82% • Available to individuals and families making up to 400 percent of the federal poverty line 70% • Subsidies designed so individual Silver contribution to health insurance policy does Plan not exceed 10 percent of household income • Subsidies calibrated to the silver plan level of coverage, but consumers may choose to buy bronze coverage instead to spend less©2011 THE ADVISORY BOARD COMPANY • 23508A out of pocket, or may opt to buy up to gold or platinum coverage, paying difference from 1 own earnings HMO PPO FEHBP Source: “Good as Gold? A Primer on Comparing Health Plans,” New York Times, September 22, 2009; “What the Actuarial Values in the Affordable Care Act Mean,” Kaiser Family Foundation, available at: www.kff.org/healthreform/upload/8177.pdf, accessed April 11, 2011; Health Care Advisory Board 1) Federal Employee Health Benefits Plan. interviews and analysis.
  • 43. 43 Exchange-Based Coverage Adding to Collection Risk Estimates of PPACA1 “Silver” Plan Design Cost of Plans Offered Through Exchange Deductible for Individual Policy2 For Family of Four, by Percentage of FPL3 $4,200 Premium After Federal Subsidy (Based Poverty Level on Silver Plan) 150% $1,505 $2,050 $1,850 200% $2,778 250% $4,438©2011 THE ADVISORY BOARD COMPANY • 23508A 300% $6,483 Actuarial Aon Hewitt Towers 350% $7,563 Research Watson Corporation 400% $8,636 1) Patient Protection and Affordable Care Act. 2) Assumes 20% coinsurance after deductible, coverage of benefits equivalent to typical employer plan and preventive services under ACA, and estimated premium growth of Source: Kaiser Family Foundation, “Health Reform Subsidy Calculator,” 7%, 2009-2014. available at: http://healthreform.kff.org/SubsidyCalculator.aspx; Health Care 3) Federal Poverty Level. Advisory Board interviews and analysis.
  • 44. 44 Employers, Insurers Preparing for Exchanges Individual Coverage Market Burgeoning Employer Coverage Costs Insurer Response to Exchanges • Cigna initiating national advertisement campaign Percentage Caterpillar Health Law Puts designed to target consumers 70% could save on health care Cigna in Ad Mode who will purchase coverage costs by dropping coverage through exchanges • Marketing campaign, estimated at $25 M, is company’s first Total dollars AT&T could $1.8 B save by dropping coverage since 2002 of 300,000 active employees Estimated cost of “Cadillac©2011 THE ADVISORY BOARD COMPANY • 23508A $255 M Tax” to Verizon in 2018 23 M Number of people projected to purchase coverage through exchanges in 2016 Source: Tully S, “Documents, reveal AT&T , Verizon, others, thought about dropping employer-sponsored benefits,” Fortune, May 6, 2010, available at: http://money.cnn.com/2010/05/05/news/companies/dropping_benefits.fortune/index.htm?cnn=yes&hpt=C2; CBO, “An analysis of health insurance premiums under the PPACA,” available at: http://www.cbo.gov/ftpdocs/107xx/doc10781/11-30-premiums.pdft, accessed April 11, 2011; Mathews A, “Health law puts Cigna in ad mode,” Wall Street Journal, September 19, 2011; Health Care Advisory Board interviews and analysis.
  • 45. Pressure #3: Employers Increasingly Willing to Restrict Choice 45 Limiting Choice No Longer the Third Rail Narrow Networks Making a Resurgence Employer Visits to higher-cost hospitals require Access to lower-cost hospitals higher out-of-pocket payment available at standard co-payment rates©2011 THE ADVISORY BOARD COMPANY • 23508A Case in Brief: BCBS Hospital Choice Product • Product spurred by Massachusetts regulation, which mandated that insurers in the Connector network offer at least one tiered or limited network plan • Product incents patients to choose low-cost, in-network providers by imposing fees for seeking care at 15 higher cost hospitals • BCBS reports that the plan saves employers 5.5 percent; product the most successful in plan’s history Source: Blue Cross Blue Shield, “Hospital Choice Cost Sharing,” available at: http://www.bluecrossma.com/plan-education/pdf/hospital-list.pdf, accessed April 15, 2011; Health Care Advisory Board interviews and analysis.
  • 46. 46 Market Innovating to Meet Employer Demand BridgeHealth Crafting Narrow Surgical Networks High-Quality, Low-Cost Network Employers BridgeHealth • Negotiates discounts of 20%- 40% less than commercial rate • Uses predictive modeling to identify high-risk employees • Educates employee population about alternatives to surgery©2011 THE ADVISORY BOARD COMPANY • 23508A Case in Brief: BridgeHealth • Surgery benefits firm based in Denver, Colorado • Aggregates high-quality providers to create virtual narrow networks for specific surgical procedures, securing discounts of 20%-40% off commercial rates • Sells network access, services to reduce surgical demand directly to employers Source: Employee Benefit Adviser, “Forecasting and Managing Surgery Costs,” available at: http://eba.benefitnews.com/news/forecasting- managing-surgery-costs-2685253-1.html, accessed March 13 2011; Health Care Advisory Board interviews and analysis.
  • 47. 47 Employers Assembling the DIY Narrow Network Lowe’s Channels Employees to Best-in-Class Provider Savings Calculation1 Employee Response Exceeds Expectations Number of Participating Employees, 2010 23 Patient: John Smith2 10 Local hospital price: $531,000 Cleveland Clinic price: $469,000 Total Savings: $62,000 Expected Actual©2011 THE ADVISORY BOARD COMPANY • 23508A Case in Brief: Lowe’s/Cleveland Clinic • Lowe’s signed three-year contract with Cleveland Clinic to pay bundled rates for cardiac procedures, any readmissions for employees nationwide • Lowe’s designed employee benefit to waive cost-sharing, cover travel expenses for patients opting to receive cardiac surgery at Cleveland Clinic • Arrangement saves Lowe’s money on readmissions, provides high-quality care for patients Source: Appleby J, “Latest Destination for Medical Tourism: The U.S.,” USA Today, July 7, 2010; Medical Tourism Guide, 1) Estimated savings for one patient requiring “Cleveland Clinic, Lowe’s Heart Deal Exceeds Expectations,” available at: http://www.medicaltourism- three complex cardiac procedures. guide.com/2010/10/22/cleveland-clinic-lowes-heart-deal-exceeds-expectations, accessed April 16 2011; Health Care 2) Pseudonym. Advisory Board interviews and analysis.
  • 48. Pressure #4: Quality Performance Risk Increasingly Prevalent 48 Private Insurers Raising the Stakes WellPoint Tying Pay Increases to Quality Metrics Quality Metric Weights Patient Case in Brief: WellPoint Satisfaction • Insurer replacing traditional eight 10% percent annual rate increases with new mandatory program that pays increases only to hospitals with Patient Health sufficient scores on 51 quality of Safety 35% 55% Outcomes care indicators • WellPoint estimates that program will reduce annual inpatient cost growth by three to five percentage points©2011 THE ADVISORY BOARD COMPANY • 23508A 3-5% Estimated percentage reduction in annual inpatient cost growth Source: Adamy J., “WellPoint Shakes Up Hospital Payments,” The Wall Street Journal, May 16, 2011; Health Care Advisory Board interviews and analysis.
  • 49. Pressure #5: New Payment Models Demanding Utilization Management 49 Utilization Risk Not Just a Medicare Mandate Private Market Initiatives Developing Nationwide Providence Health & Maine Health Services: $30 M, two-year Management Coalition: contract with public BCBS Minnesota: Multi-stakeholder group employee benefits board Shared savings contract supporting ACO pilots with five providers BCBS Massachusetts’s Blue Shield California: Alternative Quality Two ACOs in Northern BCBS Illinois: Shared Contract: Annual global California savings contract with budget, quality incentives Advocate Health Care for participating providers Anthem Blue Cross: ACO pilot with Sharp Humana: ACO pilot Aetna: ACO pilot HealthCare medical groups with Norton Healthcare with Carilion Clinic©2011 THE ADVISORY BOARD COMPANY • 23508A Cigna: Medical home UnitedHealth Care: ACO contract with Piedmont with Tucson Medical Center Physicians Group Source: “Anthem Blue Cross, Sharp HealthCare Pilot San Diego-Area ACO,” available at: www.healthcarefinancenews.com; “Norton Healthcare, Humana Launch ACO Pilot,” “Aetna, Carilion Clinic Building ACO in VA ,” available at www.healthleadersmedia.com; “An ACO Takes Root in San Francisco,” available at: www.chwhealth.org; “8 Aspects of UnitedHealthcares Plans to Fund an ACO at Tucson Medical Center,” available at: www.beckershospitalreview.com; “Advocate Health Care, Blue Cross and Blue Shield of Illinois Sign Agreement Focusing on Improving Quality, Bending the Health Care Cost Curve,” available at: www.bcbsil.com; “Minnesota’s Largest Health Plan Signs ‘Total Cost Of Care’ Agreement With Park Nicollet Health Services,” available at: www.bcbs.com; “BCBS Massachusetts Announces First Year Results of Alternative Quality Contract,” available at: www.bluecrossma.com; “CIGNA and Piedmont Physicians Group Launch Accountable Care Organization Pilot Program,” available at: newsroom.cigna.com; Maine Health Management Coalition, available at: www.mehmc.org; Health Care Advisory Board interviews and analysis.
  • 50. 50 Changing Incentives Across the Delivery System Putting Health Care on a Budget in Massachusetts Key Contract Details Program in Brief: BCBS Massachusetts Providers paid FFS with annual Alternative Quality Contract global budget; all patient services included in budget, • Payment contract introduced in January 2009 by regardless of whether participating BCBS of Massachusetts with provider groups in provider delivered care Massachusetts for HMO, POS enrollees • 12 participating provider groups, with various risk experience, organizational forms, size ranges 10 percent PMPM quality performance incentive on 64 • Five-year contracts consist of global budget with quality measures; outcomes annual spending growth limits, 10 percent total measures given triple weight PMPM quality incentive payments, technical©2011 THE ADVISORY BOARD COMPANY • 23508A support for participating providers • In 2009, participating groups reduced No specified physician structure readmission rates worth $1.8 million; on track to or organization mandated; reduce growth trend by 50 percent over five years distribution of payments left to individual providers Source: Chernew M, et al., “Private Payer Innovation in Massachusetts: The ‘Alternative Quality Contract,’” Health Affairs, 2011, 30: 51-61; Health Care Advisory Board interviews and analysis.
  • 51. 51 AQC1 Pegs Cost Growth to Inflation Program Gaining Acceptance in a Cash-Strapped State Massachusetts Five-Year HMO Enrollment with Alternative Projected Cost Trend Quality Contract Providers Total Lives, 2009-2011 Projected 470 K Growth: 10% 355 K Health 305 K Care Expense Growth©2011 THE ADVISORY BOARD COMPANY • 23508A AQC Target Growth: 5% Time 2009 2010 2011 Source: Chernew M, et al., “Private Payer Innovation in Massachusetts: The ‘Alternative Quality Contract,’” Health Affairs, 30, no.1 (2011):51-61; BCBS MA, “The Alternative Quality Contract: Year One Results,” available at: http://www.bluecrossma.com/visitor/pdf/aqc-results-white-paper.pdf, accessed April 10, 2011; Health Care Advisory 1) Alternative Quality Contract. Board interviews and analysis.
  • 52. 52 Resources for Payment Transformation Research and Insights on New Payment Models Playbook for Accountable Care Succeeding Under Lessons for the Transition to Total Bundled Payments Cost Accountability Reducing Readmissions and Protecting Hospital Profitability in an Era of Increasing Performance Risk The Medicare Shared Webconference: Medicare’s Savings Rulebook Bundled Payments for Care Analysis of the Proposed Rules and Improvement Program Strategic Implications for Providers Details and Strategic Implications©2011 THE ADVISORY BOARD COMPANY • 23508A Accountable Care Inpatient Bundled Payment Readiness Diagnostic Impact Calculator Source: Health Care Advisory Board interviews and analysis.
  • 53. 53 Force #1: Decelerating Price Growth Key Takeaways 1. Budget constraints on federal, state governments raise prospects of substantial cuts to Medicare, Medicaid pricing 2. Commercial pricing subject to multiple downward pressures; projected growth insufficient to maintain traditional cross- subsidization dynamics 3. Revenue from all payers subject to intensifying performance risk 4. Accountable payment models beginning to impose utilization risk©2011 THE ADVISORY BOARD COMPANY • 23508A Source: Health Care Advisory Board interviews and analysis.
  • 54. Force #2: Continuing Cost Pressure 54 Long-Term Cost Growth Continuing Market, Regulatory, Demographic Pressures Mounting Expenses per Adjusted Admission Drivers of Continued Cost Growth: $10,045 Market pressures pushing up unit costs of labor, other inputs $6,509 $4,588 Overhead expenses swelling as new IT mandates take hold Cost Growth, Cost Growth,©2011 THE ADVISORY BOARD COMPANY • 23508A 1989-1999: 1999-2009: 3.6% 4.4% Aging, sicker population requiring increasingly complex, 1989 1999 2009 costly care pathways Source: American Hospital Association Chartbook, available at: http://www.aha.org/aha/research-and-trends/chartbook/index.html, accessed April 29, 2011; Health Care Advisory Board interviews and analysis.
  • 55. 55 No Relief in Sight for Labor Costs Wages, Benefits, Utilization All on the Rise Nursing Shortage Persistent Labor Cost Concerns Projected Shortage of RN FTEs, in Thousands 1,017 Wages must rise to 704 compete for scarce labor 406 111 219 Staffing ratios mandated 2000 2005 2010 2015 2020 by unions, law Union Pressure©2011 THE ADVISORY BOARD COMPANY • 23508A Health benefit packages difficult to pare back 33% Proportion of contract negotiations involving explicit strike threats, 2009-2010 Source: American Hospital Association Chartbook, available at: http://www.aha.org/aha/research-and-trends/chartbook/index.html; Labor Notes, available at: labornotes.org, accessed on May 1, 2011; Health Care Advisory Board interviews and analysis.
  • 56. 56 IT Costs Draining Capital Budgets Meaningful Use Demands Major Investments Timeline of Meaningful Use Requirements Hospital IT and Meaningful Use Costs IT as a Percentage of Total 2011: Stage 1 Capital Spending Data Capture & Sharing Electronic capture of 40% health information in a structured format 12% 2013: Stage 2 Advanced Clinical Processes 2008 2009 Quality improvement at the point of care and electronic exchange of information©2011 THE ADVISORY BOARD COMPANY • 23508A 2015: Stage 3 $20-34 M Estimated cost of meeting Improved Outcomes Meaningful Use requirements Improvements in quality, safety, clinical decision support, and patient self-management tools Source: CMS, available at: https://www.cms.gov, accessed on September 13, 2011; Moody’s Preliminary Medians for Not-for-Profit Hospitals; Health Care Advisory Board interviews and analysis.
  • 57. 57 Maintaining Market Advantage Costly Physician Acquisition, Clinical Technology Races Continue Clinical Alignment Never Cheap Clinical Innovation Never Complete Net Loss per Employed Physician, 2010 Total da Vinci Robot Installations 75th Percentile 50th Percentile 25th Percentile 1411 1285 1028 ($81 K) 825 595 425 ($190 K)©2011 THE ADVISORY BOARD COMPANY • 23508A ($282 K) 2006 2007 2008 2009 2010 2011(Q2) Source: Medical Group Management Association, Cost Survey for Multispecialty Practices, 2011; Intuitive Surgical (Sunnyvale, CA); Health Care Advisory Board interviews and analysis.
  • 58. 58 Primary Diagnosis Rarely the Only Problem Increasing Complexity of Care Driving Up Cost of Care Distribution of Total Discharges, by Percent Increase in Cost per Case, Number of Chronic Conditions1 by Number of Chronic Conditions2 0 0% 78.0% of treated adults have multiple chronic conditions 1 15% 2 30% 17% 18% 16% 3 47% 14% 12% 4 64%©2011 THE ADVISORY BOARD COMPANY • 23508A 7% 8% 5 77% 7% 6 87% 7+ 108% 0 1 2 3 4 5 6 7+ Source: Friedman B, et al., “Hospital Inpatient Costs for Adults with 1) Does not include maternity-related principal diagnoses. Multiple Chronic Conditions,” Medical Care Research and Review, 2) Relative to patients with no chronic conditions. 2006, 63: 327-346; Health Care Advisory Board interviews and analysis.
  • 59. 59 Force #2: Continuing Cost Pressure Key Takeaways 1. Historical cost growth outpacing projected pricing growth 2. Cost pressures derive from long-term, systemic factors; one-off cost cutting campaigns will not suffice to alter overall trends 3. Strategically attractive—or even mandatory—investments in technology, physician practices consume significant shares of overall resources©2011 THE ADVISORY BOARD COMPANY • 23508A Source: Health Care Advisory Board interviews and analysis.
  • 60. Force #3: Shifting Payer Mix 60 Demographics, Policy Reshaping Payer Mix Aging of Population Coverage Expansion Medicare-Eligible Population Insurance Status of Population, 2011 55 M Insured 85% 15% Uninsured 40 M Projected Status of Previously Uninsured Population, 2021©2011 THE ADVISORY BOARD COMPANY • 23508A Uninsured 2011 2021 Medicare 7% 13% Commercial 45% Medicaid 35% Source: U.S. Census Bureau, available at: http://www.census.gov, accessed April 26, 2011; Health Care Advisory Board interviews and analysis.
  • 61. 61 Baby Boomer Surge Beginning Medicare Rolls in Line to Increase Dramatically 2011 US Population Distribution By Age 75 M Baby Boomers ~7,000/day Newly eligible Medicare beneficiaries 23% Percentage of population covered©2011 THE ADVISORY BOARD COMPANY • 23508A by Medicare in 2030 Source: U.S. Census Bureau, available at: http://www.census.gov, accessed on September 13, 2011; Kaiser Family Foundation, available at: http://www.kff.org/medicare/h08_7821.cfm, accessed on September 13, 2011; Health Care Advisory Board interviews and analysis.
  • 62. 62 Moving Ever Closer to Single Payer Medicare to Constitute Majority of Discharges by 2021 Inpatient Volume by Payer Class 2011 2021 0.3% Self Pay Self Pay 5% Commercial 27% Commercial 35% 37% Medicare 52% Medicare©2011 THE ADVISORY BOARD COMPANY • 23508A Medicaid 20% 22% Medicaid Source: Health Care Advisory Board interviews and analysis.
  • 63. 63 The End of Self Pay? Commercial, Medicaid Eligibility Expanding Elements of Coverage Expansion Percentage of Newly Insured 2014 Individuals by Source of Coverage Increased Access to Medicaid • Federal funding expanded to cover individuals at or below 133% of FPL1 Commercial 46% 54% Medicaid Creation of Health Benefit Exchanges • State-based exchanges allow individuals to shop for affordable health insurance Establishment of Individual, Employer Mandate 31.7 M©2011 THE ADVISORY BOARD COMPANY • 23508A • Individuals required to obtain basic health insurance coverage or pay fee Number of newly insured • Employees may take funds employer individuals through might have contributed to their insurance coverage expansion and purchase more affordable plan in health insurance exchanges Source: White House, available at: http://www.whitehouse.gov/healthreform/timeline, accessed on September 14, 2011; Kaiser Family Foundation, available at: http://www.kff.org; accessed on September 19, 2011; Health Care Advisory Board 1) Federal Poverty Line. interviews and analysis.
  • 64. 64 Payer Mix Shift a Mixed Blessing Demand Growth, Reduced Bad Debt May Balance Medicare Shift Price, Demand Impacts of Payer Mix Shifts Impact on Impact on Payer Mix Shift Average Price Demand Aging: All Payers to Medicare Coverage Expansion: Self-Pay to Medicaid©2011 THE ADVISORY BOARD COMPANY • 23508A Coverage Expansion: Self-Pay to Commercial Source: Health Care Advisory Board interviews and analysis.
  • 65. 65 Older Also Means Sicker Medicare Population Much More Frequent Health Care Consumers Population by Primary Projected Annual Discharges Source of Coverage, 2021 per Capita, by Payer, 2021 Uninsured 1% Medicare patients’ use of inpatient Medicare services three times that of 17% patients in other payer classes 19% Medicaid 63% Commercial 0.536 Discharges By Payer, 2021©2011 THE ADVISORY BOARD COMPANY • 23508A Uninsured 0.3% 0.183 Commercial 0.076 27% 0.042 52% Medicare Self Pay Commercial Medicaid Medicare 20% Medicaid Source: Health Care Advisory Board interviews and analysis.
  • 66. 66 No Death Knell for Growth In Absence of Utilization Management, Demand to Soar Annual Discharges per Capita Annual Inpatient Demand Source of Discharge Growth Advisory Board Projections Advisory Board Projections Advisory Board Projections 56.9 M 0.174 39.9 M 0.131 Population Payer 15.3% 84.7% Growth Mix Shift©2011 THE ADVISORY BOARD COMPANY • 23508A 2011 2021 2011 2021 Source: Health Care Advisory Board interviews and analysis.
  • 67. 67 Virtually All New Volumes Publicly Insured Sources of Inpatient Volume Growth 2011-2021 88% (12%) 100%©2011 THE ADVISORY BOARD COMPANY • 23508A 17% 7% Commercial Medicaid Medicare Self Pay Total Source: Health Care Advisory Board interviews and analysis.
  • 68. 68 Future Demand Will Not Fund Capacity Expansion Even at Current Prices, Public Payments Fail to Cover Total Costs Average Payment Relative To Cost1 By Payer Medicare, Medicaid volume 134% growth unable to finance capacity expansion 100% 90% 89%©2011 THE ADVISORY BOARD COMPANY • 23508A Commercial Medicare Medicaid2 Source: American Hospital Association Chartbook, available at 1) Fully-allocated costs. http://www.aha.org/aha/research-and-trends/chartbook/index.html, accessed 2) Includes Medicaid Disproportionate Share Hospital payments. April 26, 2011; Health Care Advisory Board interviews and analysis.
  • 69. 69 All Growth Is Good Growth (As Long as You Have a Place for It) Contribution Profit per Case Effect of Demand Growth By Payer Without Capacity Constraints Hospital significantly Volume growth below maximum mitigates negative Commercial 55% occupancy; able to impact of worsening absorb all new demand case mix Medicare 43% Impact of Fully Captured Demand Medicaid©2011 THE ADVISORY BOARD COMPANY • 23508A 22% (3%) 38% 33% Change in Change in Change in inpatient revenue inpatient total inpatient per case volume revenue Source: Health Care Advisory Board interviews and analysis.
  • 70. 70 Upward Pressure on Length of Stay Older Patients Require Longer Courses of Care Average Length of Stay Average Length of Stay for Selected Conditions In Days, 2007 In Days, 2007 6.8 7.1 5.6 6.2 4.9 5.1 5.2 5.1 5.2 5.4 2.9 3.1 2.5 4.8©2011 THE ADVISORY BOARD COMPANY • 23508A All Ages Ages 65 Hypertension Heart Failure Pneumonia Cancer and over Ages 45-64 Ages 65-74 Ages 75-84 Source: Center for Disease Control, available at: http://www.cdc.gov/nchs/data/hus/hus10.pdf, accessed May 28, 2011; Health Care Advisory Board interviews and analysis.
  • 71. 71 Reaching the Limit of Inpatient Efficiency? Length of Stay Improvements Slowing Over Past Decade Average Length of Stay for Common Medical Conditions Patients Aged 65-74, 1990-2007 10 9.5 8.4 8.2 6.4 5.5 5.2 Pneumonia Length of 5.1 Heart Failure Stay (Days) 4.3 4.8 COPD1 4.6©2011 THE ADVISORY BOARD COMPANY • 23508A Hypertension 2.6 2.9 0 1990 2000 2007 Source: Center for Disease Control, available at: http://www.cdc.gov/nchs/data/hus/ hus10.pdf#102, accessed May 28, 1) Chronic Obstructive Pulmonary Disease. 2011; Health Care Advisory Board interviews and analysis.
  • 72. 72 Force #3: Shifting Payer Mix Key Takeaways 1. Retirement of Baby Boomers, implementation of coverage expansion poised to reshape hospital payer mixes 2. Decline in average price per case potentially offset by increased demand—perhaps enough to create long-run capacity shortages 3. Vast majority of volume growth expected to be publically insured; revenue from these cases too low to finance additional physical capacity©2011 THE ADVISORY BOARD COMPANY • 23508A Source: Health Care Advisory Board interviews and analysis.
  • 73. Force #4: Deteriorating Case Mix 73 Payer Mix Not the Only Thing Shifting Deteriorating Case Mix at HCA Cutting Into Profits Annual Change in Admissions at HCA 1.9% Case in Brief: HCA Healthcare Surgical • 164-hospital for-profit system in 20 states Total • ~5 percent of national discharges occur at HCA facilities (1.6%) • Recent earnings call reported shift in service mix from more complex surgical cases to less acute medical cases, particularly among Medicare beneficiaries©2011 THE ADVISORY BOARD COMPANY • 23508A • Company did not report significant market share (1.3%) losses during same period Change in revenue per • Case mix shift regarded as factor in 22 percent drop Medicare admission in Q2 profit, year-over-year Source: HCA Healthcare, available at: www.hcahealthcare.com, accessed on September 15, 2011; Seeking Alpha, available at: http://seekingalpha.com, accessed on September 16, 2011; Health Care Advisory Board interviews and analysis.
  • 74. 74 Surgical Share a Key Indicator of Success Those that Profit with Poor Payer Mix Tend to Have Better Case Mix Surgical Share of Inpatient Volume Inpatient Contribution Income Hospitals with Largest Proportion of Weighted Per-Case Average Publicly Insured Volume1 19.8% 15.4% $6,110 $2,927©2011 THE ADVISORY BOARD COMPANY • 23508A Operating Margin Operating Margin Surgery Medicine <3.5% >3.5% 1) Top quartile by share of inpatient discharges paid by Source: Medicare Cost Reports; Health Care Advisory Board Medicare or Medicaid. interviews and analysis.
  • 75. 75 More Medicine On the Horizon Public Payer Volumes Composed of Predominantly Medical Cases Medical and Surgical Shares of Volume, by Payer Commercial Medicare Medicaid Surgical Surgical Surgical 39% 61% 27% 73% 24% 76% Medical Medical Medical©2011 THE ADVISORY BOARD COMPANY • 23508A Source: Health Care Advisory Board interviews and analysis.
  • 76. 76 Worsening Case Mix Not Just Due to Aging Overall Population Health Deteriorating Obesity Rate Among U.S. Adults1 Obesity Rate Among U.S. Adults1 1988 2009©2011 THE ADVISORY BOARD COMPANY • 23508A No Data <10% 10%–14% 15-19% 20-24% 25-30% >30% Source: Centers for Disease Control Behavioral Risk Factor Surveillance System, available at: http://www.cdc.gov/brfss/, accessed May 4, 2011; 1) Body Mass Index ≥ 30, or 30 pounds overweight for 5’ 4” person. Health Care Advisory Board interviews and analysis.
  • 77. 77 Chronic Disease Growth Outpacing Population Growth Projected Increase in Chronic Disease Cases 2003-2023 62.0% 19%: Projected 54.0% population 53.0% growth, 2003- 2023 39.0% 41.0% 29.0% 31.0%©2011 THE ADVISORY BOARD COMPANY • 23508A Source: Milken Institute, available at: http://www.milkeninstitute.org/ pdf/chronic_disease_report.pdf, accessed April 27, 2011; Health Care Advisory Board interviews and analysis.
  • 78. 78 Surgical Growth Headed Elsewhere Financial, Technological Factors Driving Surgeries to Outpatient Settings Growth in Surgical Volume Drivers of Outpatient Surgical Growth 2010-2020 Reimbursement gap closing between comparable inpatient 21.1% and outpatient services Technological innovation allowing safe, efficient care in outpatient settings 7.6%©2011 THE ADVISORY BOARD COMPANY • 23508A Outpatient service convenience improves patient experience Inpatient Outpatient Source: Health Care Advisory Board interviews and analysis.
  • 79. 79 Patient Mix Problem Bigger than Payer Mix Problem All Else Equal, Case Mix Deterioration Hurts More than Payer Shift Margin Impact of Potential Payer Mix Shift Margin Impact of Potential Case Mix Shift1 Typical 300-bed Hospital Typical 300-bed Hospital 2.2% 2.2% 1.9% 0.8%©2011 THE ADVISORY BOARD COMPANY • 23508A Current Margin Future Margin Current Margin Future Margin 1) Based on five percentage point reduction in surgical share of inpatient volume. Source: Health Care Advisory Board interviews and analysis.
  • 80. 80 Force #4: Deteriorating Case Mix Key Takeaways 1. Aging of patient base expected to lead to deterioration in medical/surgical case mix 2. Medical volume growth also driven by rising incidence of chronic disease across all payer classes 3. Surgical growth not absent, but concentrated in outpatient arena 4. Case mix deterioration combined with inpatient capacity constraints poses powerful threat to operating margins©2011 THE ADVISORY BOARD COMPANY • 23508A Source: Health Care Advisory Board interviews and analysis.
  • 81. 81 Road Map 1 Health Care on a Budget 2 Four Forces Shaping Future Margins©2011 THE ADVISORY BOARD COMPANY • 23508A 3 Closing Remarks
  • 82. ©2011 THE ADVISORY BOARD COMPANY • 23508A

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