The shifting healthcare system realities after reform

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Webinar given by William Blair Company did good job on describing healthcare reform recent history and after effects.

Webinar given by William Blair Company did good job on describing healthcare reform recent history and after effects.

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  • 1. Welcome To The Shifting Halthcare System – g y Realities After Reform Wednesday, June 2, 2010 Webinar Please consult the last page of this report for all disclosures. William Blair & Company, L.L.C. has received compensation for investment banking services from the company within the past 12 months, or expects to receive or intends to seek compensation for investment banking services in the next 3 months. This information has been prepared solely for informational purposes and is not intended to provide or should not be relied upon for accounting, legal, tax or investment advice. Please consult with your tax and/or legal advisor with regard to your individual circumstances. The factual statements herein have been taken from sources believed to be reliable, but such statements are y / g g y , made without any representation as to accuracy or completeness. Opinions expressed are current as of the date appearing in this material only. 222 W. Adams St. Chicago, IL 60606 www.williamblair.com
  • 2. Featuring Ben Andrew Ryan Daniels Principal Principal, CFA Group Head – Healthcare Sector Healthcare Services Analyst William Blair & Company William Blair & Company Health Care Equity Research Group 2
  • 3. Best Practices and Troubleshooting  To ask a question, type in your question in the open field box under the slide window and press submit  Questions can be asked at any time during the presentation  To magnify the slide presentation for enhanced viewing, please use the zoom icon on the bottom right hand viewing corner of the slide window  If you hear an echo you might have two webcast browsers pulled up- make sure to double check you are only echo, streaming one  If you don t have any audio, please make sure the volume on your speakers AND on your volume control on don’t audio your computer are turned all the way up  If slides are not advancing with the audio, try pressing F5 on your keyboard to refresh your webcast player audio  At the end of the webcast there will be a survey that will pop up when you close your webcast player, pop up blockers need to be disabled to see this Health Care Equity Research Group 3
  • 4. Contents  Healthcare Reform: Timeline of Key Events & Next Steps  Realities After Reform  Implications for Healthcare as an Industry and an Investment p y  Q&A Session Health Care Equity Research Group 4
  • 5. Healthcare Reform: Timeline of Key Events y & Next Steps Health Care Equity Research Group 5
  • 6. Healthcare Reform: Timeline of Key Events & Next Steps 2008 2009 2010 November 4, 2008 , Barack Obama elected 44th President of the United States of America Health Care Equity Research Group 6
  • 7. Healthcare Reform: Timeline of Key Events & Next Steps 2008 2009 2010 June 5, 2009 Senator Ted Kennedy Issues Bill • Access to healthcare with no annual/lifetime limits •G Guaranteed Coverage t dC • Requires individual and employer contributions • Public Insurance Option Health Care Equity Research Group 7
  • 8. Healthcare Reform: Timeline of Key Events & Next Steps 2008 2009 2010 July 14, 2009 y House Presents “America’s Affordable Health Choices Act” • Includes Public Plan Option • E ti t 96% Coverage of U.S. residents Estimates C fUS id t • New surtaxes to pay for subsidies • Requirement to accept all applicants Health Care Equity Research Group 8
  • 9. Healthcare Reform: Timeline of Key Events & Next Steps 2008 2009 2010 July 22, 2009 y President Obama’s Primetime News Conference • Sensing growing public skepticism over his healthcare reform plans; President Obama hosts a primetime address on the need for healthcare reform at the White House h lth f t th Whit H Health Care Equity Research Group 9
  • 10. Healthcare Reform: Timeline of Key Events & Next Steps 2008 2009 2010 August 2009 – Summer Recess g Town-Hall Hostilities Arise • Congressmen and Congresswomen from across the United States face skeptical crowds at local town-hall meetings on healthcare • Public opinion of healthcare reform begins to drop markedly Health Care Equity Research Group 10
  • 11. Healthcare Reform: Timeline of Key Events & Next Steps 2008 2009 2010 September 9, 2009 p President Obama’s Address to Congress • In a widely-praised speech, President Obama works to regain momentum for the Democratic Healthcare Reform Agenda • In discussing the need for reform, comments: “Put simply, our health care problem is our deficit problem. Nothing else even comes close. Nothing else.” Health Care Equity Research Group 11
  • 12. Healthcare Reform: Timeline of Key Events & Next Steps 2008 2009 2010 September 16, 2009 p Senate Finance Committee Releases Reform Proposal • 223-page proposal outlining key Senate objectives for healthcare reform • Soon thereafter, Senate Finance Committee rejects the Public Plan Option Health Care Equity Research Group 12
  • 13. Healthcare Reform: Timeline of Key Events & Next Steps 2008 2009 2010 October 29, 2009 House Bill Released • House leaders unveil a 1,990-page Healthcare Reform Bill • C t estimated at $1 05 t illi Cost ti t d t $1.05 trillion over 10 years Health Care Equity Research Group 13
  • 14. Healthcare Reform: Timeline of Key Events & Next Steps 2008 2009 2010 November 7, 2009 House Passes Healthcare Reform Bill Health Care Equity Research Group 14
  • 15. Healthcare Reform: Timeline of Key Events & Next Steps 2008 2009 2010 November 18, 2009 Senate Releases +2,000-page Reform Bill • Initial cost estimated at $848 billion over 10 years • E ti t d coverage for 94% of the population Estimated f f th l ti Health Care Equity Research Group 15
  • 16. Healthcare Reform: Timeline of Key Events & Next Steps 2008 2009 2010 December 24, 2009 The Night Before Christmas…Senate Passes Reform Bill • The Senate votes 60-39, along party lines, to pass its version of healthcare reform • Recess begins Health Care Equity Research Group 16
  • 17. Healthcare Reform: Timeline of Key Events & Next Steps 2008 2009 2010 January 19, 2010 y Scott Brown wins Massachusetts Senate Seat • In a remarkable turn of events, Scott Brown wins the Special Election to Fill Senator Ted Kennedy’s Massachusetts Senate seat M h tt S t t • Importantly, Senators no longer have the 60 votes need to end filibuster debate • Many pundits declare healthcare reform dead Health Care Equity Research Group 17
  • 18. Healthcare Reform: Timeline of Key Events & Next Steps 2008 2009 2010 February 13, 2010 y WellPoint Makes Headlines / Healthcare Reform Becomes “Health Insurance Reform” • Anthem Blue Cross announces a 25% increase in individual i i di id l insurance policies li i • Obama administration uses Anthem news as a lightening rod for healthcare reform debate • CEO Angela Braly soon thereafter called to testify in front of Congress Health Care Equity Research Group 18
  • 19. Healthcare Reform: Timeline of Key Events & Next Steps 2008 2009 2010 February 25, 2010 y Obama Hosts Healthcare Summit • President Obama hosts a bipartisan summit at the Blair House • By the end of the session, it is evident that bipartisan reform efforts are hopeless Health Care Equity Research Group 19
  • 20. Healthcare Reform: Timeline of Key Events & Next Steps 2008 2009 2010 March 15, 2010 Obama Rolls up His Sleeves and Hits the Road • In a final effort to push healthcare reform, President Obama travels to Ohio to rally support • Later in the week, he cancels his trip to the Pacific to help push forward his key domestic agenda item Health Care Equity Research Group 20
  • 21. Healthcare Reform: Timeline of Key Events & Next Steps 2008 2009 2010 March 21, 2010 History is Made • After an executive order to eliminate abortion funding, healthcare reform is passed in the House (i.e., approval of the Senate Bill) th S t Health Care Equity Research Group 21
  • 22. Healthcare Reform: Timeline of Key Events & Next Steps 2008 2009 2010 March 23, 2010 The Patient Protection and Affordable Care Act is Signed into Law by President Obama Health Care Equity Research Group 22
  • 23. Healthcare Reform: Timeline of Key Events & Next Steps 2010 Key Initiatives Insurance companies barred from denying coverage to anyone with pre-existing conditions Subsidies for small business to provide coverage begins (35% tax credit) Children allowed to stay on parent’s insurance until age 26 parent s 2010 2011 2012 - 2018 Health Care Equity Research Group 23
  • 24. Healthcare Reform: Timeline of Key Events & Next Steps 2011 Key Initiatives Plans must offer preventive services with no copayments Long-term care premiums start being collected Drug discounts begin Medicare payroll tax increases from 1.45% to 2.35% for those making over $200,000 ($250,000 for joint filers) 2010 2011 2012 - 2018 Health Care Equity Research Group 24
  • 25. Healthcare Reform: Timeline of Key Events & Next Steps 2014 Key Initiatives Exchanges created Citizens must have health insurance or pay fine ($95 in 2014) Employers with 50 or more employees must 2012 Key Initiatives y provide coverage or pay a $3,000 per employee fee Medicaid expansion to 133% poverty level N/A Insurance industry pays annual fee of $8 Billion 2012 - 2018 2013 Key Initiatives 2015 -2017 Key Initiatives Medicare pilots (bundled care) begin Fines for lack of insurance coverage continue to increase each year 2018 Key Initiatives Excise tax on devices (2.3%) (2 3%) 40% excise tax on health plans valued at more than $10,200 (individual) or Loss of tax deduction for $27,500 (family) subsidizing Part D Hospital ta increase o 90 bas s osp ta tax c ease of basis points for those earning over $200,000 Health Care Equity Research Group 25
  • 26. Realities After Reform Health Care Equity Research Group 26
  • 27. Realities After Reform  The Patient Protection and Accountable Care Act (“PPACA”) will unquestionably expand insurance coverage; however, we believe it falls short in two other key areas: 1. Reducing Healthcare Costs. Healthcare costs are growing at rates approximately three times higher than GDP, making current trends completely unsustainable. In our view, the Reform Bill does little to bend the long-term healthcare cost curve. 2. Improving Healthcare Quality. Despite spending more money on healthcare, per capita, capita than any other industrialized nation our healthcare quality scores trail those of nation, many developed nations on certain metrics. The U.S. also needs to reinvigorate the primary care physician (PCP) workforce to help drive more preventive care coordination. Again, the PPACA appears to fall short here. g pp In our view, exorbitant cost increases remain the key issue facing the U.S. healthcare system. h lh Health Care Equity Research Group 27
  • 28. Realities After Reform  Why Is the Cost of Healthcare the Biggest Remaining Issue?  Because, if nothing is done, healthcare will consume 50% of the U.S.’s GDP by 2082.  The Medicare Trust Fund will be bankrupt in less than 8 years (right as most of the Baby Boomers enter Medicare).  Publically held debt is $8 5 Trillion today (total debt is $13.0 T w/ $4.5 T $8.5 $13 0 $4 5 intragovernmental).  Present value of unfunded Medicare & Medicaid liabilities is about $50 Trillion. Percentage of U.S. GDP Consumed By Healthcare Expenditures 50 45 40 35 30 A l l Ot h e r H e a l t h Ca r e 25 20 15 M ed i c ai d 10 5 M ed i c ar e 0 2007 2012 2017 2022 2027 2032 2037 2042 2047 2052 2057 2062 2067 2072 2077 2082 Source: Congressional Budget Office Health Care Equity Research Group 28
  • 29. Realities After Reform  Recall, even President Obama agrees that healthcare costs are the country’s largest fiscal issue: “If we do nothing to slow these skyrocketing (healthcare) costs, we will eventually be spending more on Medicare and y p g Medicaid than every other government program combined. Put simply, our health care problem is our deficit problem. Nothing else even comes close. Nothing else.” - President Barack Obama, September 9, 2009 Health Care Equity Research Group 29
  • 30. Realities After Reform  Positive quotes by press/politicians would lead one to believe that the healthcare Bill will help solve our healthcare cost problems:  “…The Congressional Budget Office reported that, if enacted, the latest health care reform legislation would, over the next 10 years, …lower federal deficits by $138 billion.” (NYT, M h 21 billi ” (NYT March 21, 2010)  President Obama: “If you have health insurance, this reform just gave you more control… If you don't have insurance, this reform gives you a chance to be a part of a y , g y p big purchasing pool … This reform is the right thing to do for our seniors…. It makes Medicare stronger and more solvent… It will reduce our deficit by more than $100 billion over the next decade…and more than $1 trillion in the decade after that.” (March 23, 2010) ” 23  House Speaker Nancy Pelosi (D-CA): “It makes it more accessible to many more people… It holds insurance companies more accountable…It [is] fairer to the middle class... Overall, we save over $1.3 trillion for the taxpayer… We protect Medicare and make it solvent for nearly a decade longer… “  And Vice President Joseph Biden: “This Is a Big F***ing Deal”(March 23, 2010) And…Vice This (March 23 Health Care Equity Research Group 30
  • 31. Realities After Reform  We are not so sure. Rather we think creative accounting is at work…some key examples:  The “10/6 Differential” – 10 years of revenue, but only 6 years of expenses / y , y y p  Much of the tax revenue collected immediately, but the cost does not begin until 2014  Medicare Physician Fee Schedule Fix NOT included on the cost side:  $280 Billion over 10 years; this is TWICE the $138 billion budget deficit reduction projected for the bill  State Medicaid Expenditure Support (Two Issues)  Increased Enrollment (16m on a base of ~50m) paid for 100% by Feds at first, but scales down after 2017  Medicaid physician rates increased to Medicare levels, paid for by Federal funds, but stops after two years  CLASS – long-term care insurance  CBO Score assumes revenue is collected for ten years, but cost only incurred for five  Scored to contribute $70B in savings, but offsetting cost not considered  Using Social Security taxes to offset health care spending  Expected to contribute $53 billion  Student Loan Provision expected to generate $19B in savings  Answers the question “Why is there a student loan provision in a health care bill?”  $463 billion in Medicare savings assumed through reduced payment levels for Medicare Advantage and IMAC (“MedPAC on steroids”)  Will Congress really allow such severe cuts to Medicare when the time comes?  Joseph Antos, a former director of the CBO said the bill could actually cost $1.6 Trillion in the first 10 years Health Care Equity Research Group 31
  • 32. Realities After Reform  The United States also has yet to deal with huge structural issues related to healthcare reform and the quality of care.  Perhaps the best example is with primary care doctors:  At present, there is such a shortage of primary care doctors (PCPs) in the United States, that an average patient visit lasts only 6 to 8 minutes. minutes  The main reason this is the case is that government payments for PCPs services are so low, they must have remarkably high throughput to be even modestly successful (e.g., to make $175,000 $175 000 per year on average))  Last year, the government proposed raising PCP rates by 6% to 8%, but this was put on hold as including the fee increase in the healthcare bill would have made it seem more expensive g p  So, when 47 million additional Americans (a roughly 15% increase in insured lives) start looking for doctors, where will they find them? Physician capacity cannot grow quick enough to meet potential demand. demand  This will likely lead many currently uninsured to still seek care via hospital emergency rooms, which is no different than today…is this really healthcare reform? Does having insurance guarantee access to high-quality care? t t hi h lit ? Health Care Equity Research Group 32
  • 33. Implications for Healthcare as an Industry and an Investment Health Care Equity Research Group 33
  • 34. Implications for Healthcare as an Industry and an Investment So what can the U.S. do to solve the healthcare funding issue?  “Easier” Solution:  Value-added tax (VAT):  A VAT is one of the last “easy” deficit reduction tools that Congress has at its disposal  Per WSJ: every percentage point in VAT tax would bring in roughly $100 billion per year. • European-level rates of 20% would net the U.S. Treasury $2 trillion  Look for this discussion to heat up around the time of the Deficit report in December 2010  Harder Approaches:  Tort reform  Viewed as a large mechanism to reduce costs  Estimates ranging from $50 billion in annual savings to as much as a 25% reduction in care delivered  Pilot Programs (such as those linking payment to improved outcomes) could be a way to bend the cost curve  More investment in preventive care and primary care physicians  Comparative effectiveness- better information and increased transparency (price and quality) for payers and consumers  Value-based reimbursement for providers- pay for outcomes & quality, not volume of services provided  Healthcare rationing (e tremel hard to “sell this idea to the p blic) (extremely “sell” public) Health Care Equity Research Group 34
  • 35. Implications for Healthcare as an Industry and an Investment  One of the key points is that we believe the healthcare reform process has only j just begun. g  Not only will the current Bill not be fully implemented until 2018, but numerous hurdles remain  Public opinion of the law continues to worsen--a late-May Rasmussen Reports Poll showed that 63% of U.S. voters want to repeal the Bill (an all-time high)  Republicans hope to regain control of Congress and will attempt to stop funding for the reform legislation  In the interim, healthcare costs will continue to pressure consumers and drive an increasingly obvious need for additional changes Health Care Equity Research Group 35
  • 36. Implications for Healthcare as an Industry and an Investment  If we had to rate the healthcare services universe based solely on federal policy, we believe the various sub-segments would fall into different buckets: Strongest Outlook Positive Outlook Neutral Outlook Negative Outlook Weakest Outlook Healthcare IT Acute-care Hospitals Overall Physicians Durable Medical & Medicare Advantage Medicaid HMOs Clinical Labs Hospice Home Oxygen Home Health PCPs Dialysis Providers Surgery Centers SNFs Specialty Hospitals Preventive Care & Psychiatric Hospitals Managed Care Disease Mgmt. Imaging No Impact Dental Veterinary Healthcare Outsourcing Medical Waste Private Pay Seniors Housing Value-added devices Generic devices Low-tech devices Imaging equipment Me-too devices Diagnostics Aesthetics Health Care Equity Research Group 36
  • 37. Implications for Healthcare as an Industry and an Investment  Over the long-term, our healthcare team focuses on investment ideas we believe will drive superior relative returns.  Consumer-based healthcare providers with limited government reimbursement risk (veterinary healthcare, dental, aesthetics, and outsourcing providers)  Higher quality, lower-cost Higher-quality lower cost healthcare deliver sources (surgery centers, PBMs, and centers PBMs diagnostics providers)  Innovative products and services companies (medical technology, biotechnology, and specialty pharmaceuticals)  Preventive healthcare companies and enablers (HCIT, laboratories, and disease management providers) Health Care Equity Research Group 37
  • 38. Q&A Ben Andrew Ryan Daniels Principal Principal, CFA Group Head – Healthcare Sector Healthcare Services Analyst William Blair & Company William Blair & Company Health Care Equity Research Group 38
  • 39. Disclosures Current Ratings Distribution (as of 4/30/10)   Coverage Universe Percent Inv. Banking Relationships* Percent  Outperform (Buy) 65% Outperform (Buy) 6%  Market Perform (Hold) 34% Market Perform (Hold) 2%  Underperform (Sell) 1% Underperform (Sell) 0%  * Percentage of companies in each rating category that are investment banking clients, defined as companies for which William Blair has received compensation for investment banking services within the past 12 months. Company Profile: The William Blair research philosophy is focused on quality growth companies. Growth companies by their nature tend to be more volatile than the overall stock market. Company profile is a fundamental assessment, over a longer-term horizon, of the business risk of the company relative to the broader William Blair universe. Factors assessed include: 1) durability and strength of franchise (management strength and track record, market leadership, distinctive capabilities); 2) financial profile (earnings growth rate/consistency, cash flow generation, return on investment, balance sheet, accounting); 3) other factors such as sector or industry conditions, economic environment, confidence in long-term growth prospects, etc. Established Growth (E) – Fundamental risk is lower relative to the broader William Blair universe; Core Growth (C) – Fundamental risk is approximately in line with the broader William Blair universe; Aggressive Growth (A) – Fundamental risk is higher relative to the broader William Blair universe. The ratings and company profile assessments reflect the opinion of the individual analyst and are subject to change at any time. The compensation of the research analyst is based on a variety of factors, including performance of his or her stock recommendations; contributions to all of the firm’s departments, including asset management, corporate finance, institutional sales, and retail brokerage; firm profitability; and competitive factors. THIS IS NOT IN ANY SENSE A SOLICITATION OR OFFER OF THE PURCHASE OR SALE OF SECURITIES THE FACTUAL STATEMENTS SECURITIES. HEREIN HAVE BEEN TAKEN FROM SOURCES WE BELIEVE TO BE RELIABLE, BUT SUCH STATEMENTS ARE MADE WITHOUT ANY REPRESENTATION AS TO ACCURACY OR COMPLETENESS OR OTHERWISE. OPINIONS EXPRESSED ARE OUR OWN UNLESS OTHERWISE STATED. FROM TIME TO TIME, WILLIAM BLAIR & COMPANY, L.L.C. OR ITS AFFILIATES MAY BUY AND SELL THE SECURITIES REFERRED TO HEREIN, MAY MAKE A MARKET THEREIN, AND MAY HAVE A LONG OR SHORT POSITION THEREIN. PRICES SHOWN ARE APPROXIMATE. THIS MATERIAL HAS BEEN APPROVED FOR DISTRIBUTION IN THE UNITED KINGDOM BY WILLIAM BLAIR INTERNATIONAL, LIMITED, REGULATED BY THE FINANCIAL SERVICES AUTHORITY (FSA), AND IS DIRECTED ONLY AT, AND IS ONLY MADE AVAILABLE TO, PERSONS FALLING WITHIN COB 3.5 AND 3.6 OF THE FSA HANDBOOK (BEING “ELIGIBLE COUNTERPARTIES” AND “PROFESSIONAL CLIENTS”). THIS DOCUMENT IS NOT TO BE DISTRIBUTED OR PASSED ON TO ANY “RETAIL CLIENTS.” NO PERSONS OTHER THAN PERSONS TO WHOM THIS DOCUMENT IS DIRECTED SHOULD RELY ON IT OR ITS CONTENTS OR USE IT AS THE BASIS TO MAKE AN INVESTMENT DECISION. “WILLIAM BLAIR & COMPANY” AND “WILLIAM BLAIR & COMPANY (SCRIPT)” ARE REGISTERED TRADEMARKS OF WILLIAM BLAIR & COMPANY, L.L.C. Copyright 2010 William Blair & Company, L.L.C. Health Care Equity Research Group 39