The Maryland hospitals have gone through an unprecedented transformation in how their payments and operations are regulated. This transformation was not taken lightly and can serve as a guide for hospitals outside the State of Maryland as they look to take on additional financial risk in value-based contracts.

1. Transforming the
Provider Market
What Pennsylvania Hospitals and Health
Systems Can Learn from the New Maryland
Medicare Waiver

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1
Agenda
Changes in the Maryland Provider Market
Assessing Readiness to Take on Risk
Implementing Population Health Strategies
In Value-Based Contracts

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2
Introduction
With You Today:
James Case
Manager - Healthcare Advisory
jcase@kpmg.com
■ James Case is a Manager in KPMG’s
Healthcare Regulatory and
Compliance practice in Baltimore.
James has a strong background
across a spectrum of financial
services including:
– strategic and business planning,
– third party hospital reimbursement,
and
– compliance services.
■ James has a MHS in Health Finance
and Management from the Johns
Hopkins Bloomberg School of Public
Health and a BA in Health
Administration and Policy from the
University of Maryland.

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3
There is unprecedented change going on in the acute hospital provider
market in Maryland
Maryland reaches milestone deal
with the feds for new Medicare
Waiver
Baltimore Business Journal, January 10, 2014
Sarah Gantz
Maryland may be
the model for
curbing hospital
costs
Instead of drumming up
more business with big-
name doctors, stand-
alone emergency
departments
And high tech
equipment, Maryland
hospitals this yea will
do the unthinkable;
strive to admit fewer
patients
USA Today, January 31, 2014
Christine Vestal, Pew/Stateline Staff Writer
A bold experiment in per capita
spending limits
Modern Healthcare, January 18, 2014
Merrill Goozner

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4
Many hospitals are evaluating risk related to population health, but
Maryland hospitals have been put on an accelerated time schedule

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In taking that leap, there are lessons the Pennsylvania hospitals can
learn when evaluating their strategies going forward
What does my population demand
or need for healthcare services?
How do I make population health
initiatives sustainable?
How do I measure my ability to
control outcomes?
What does this population health
trend mean to my bottom line?

7. Change in the
Maryland Acute
Care Provider
Market

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Why Does Maryland Matter? Maryland’s Unique All-Payer System
Maryland is the only State in the nation with an all-payer system
The Health Services Cost Review Commission (“HSCRC”) sets rates for hospital services, and
all payers--including Medicare and Medicaid--are required to pay those rates to hospitals in the
State
Act of Congress: Section 1814(b)(3) of the Social Security Act provides for Maryland’s unique
status:
■ Requires all-payer participation with no undue discrimination between payers
■ Requires the State to meet a test to maintain this legislative waiver

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8
The Maryland market consists of a wide variety of hospitals

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The original Maryland Medicare Waiver was focused on controlling
inpatient unit costs
The Original “Waiver Test”
Cumulative rate of growth in Maryland inpatient Medicare payments per case compared to the
cumulative rate of growth nationally over the same time period (January 1, 1981 to present)
Key Original Waiver Tenants
Inpatient cost per case focus The original waiver test was based on Maryland inpatient regulated
acute and chronic Medicare payments only
■ Did not include outpatient payments
■ Did not adjust for changes in case mix over time
■ Did not include physician or post acute care
Since the inception of the Medicare Waiver 35 years ago, the delivery of healthcare changed
significantly
■ HSCRC quality and readmission policies that focused on quality of care incentivized shifting lower
cost cases to outpatient settings and left the remaining inpatient cases more acute and costly.
■ The focus of the original waiver on inpatient cost per case no longer aligned with the current focus
on population health

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The operating margin of Maryland hospitals deteriorated starting in
2012 which led to discussions of a redesigned Waiver
Maryland hospitals experienced declines in financial performance due to decreased
volumes and low update factors designed to save the original waiver
3.3%
2.2%
2.4%
2.2%
2.7%
2.9%
2.5%
1.6%
1.9%
0.6%
1.7%
3.2%
0.0%
1.0%
2.0%
3.0%
4.0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
0.8%
2.4%
1.5%
OperatingMargin
Fiscal Year
Discussions of New Waiver Begin
2.5%
HSCRC Operating Margin Target = 2.75%
Trend of Operating Margin Performance of Maryland Hospitals
Source: Maryland Hospital Association Financial Conditions of Maryland
Hospitals; April 2013

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Maryland decided to apply for a new Waiver to better align with today’s
healthcare environment
Demonstration Project through the Center for Medicare & Medicaid Innovations (“CMMI”)
Effective 1/1/2014, Phase I is 2014-18. Phase II extends until 2022.
Modernized Waiver Tests:
■ Limit growth in Maryland per capita Revenue (inpatient and outpatient) to 3.58% (population
growth estimated 0.6% annually)
■ Demonstrate $330 million over 5 years in Medicare savings via a slower growth rate in
hospital payments for Maryland Medicare beneficiaries versus the National payment per
beneficiary average
■ Reduce the Medicare readmissions rate to the national level in 5 years (CY2014-CY2018)
■ Reduce Potentially Preventable Complications by 30% in five years (CY2014-CY2015)
Renewal after 5 years with favorable performance and expansion to include physician and
post acute services; if not renewed, revert to the national system.

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The HSCRC has two revenue methodologies to control per capital costs
Fee for Service
 Revenue is based on volumes – number
of inpatient episodes of care and
outpatient procedures
 More inpatient episode of care and
outpatient visits = more revenue
 Encourages caring for the ill and
maximizing volumes
Global Budget Revenue
 Revenue is fixed—annual revenue is
pre-determined and does not change
from year to year
 More admissions and outpatient
visits = no more revenue
 Encourages cost effective delivery of
care with a focus on preventative care
and patient wellness.
All Hospitals in the State are moving to the Global Budget Revenue
Model

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The Global Budget Model:
■ Annual fixed revenue budget for inpatient and outpatient regulated services.
■ Annual adjustments for changes in market share and quality programs.
■ As volumes decline, prices will need to increase to achieve GBR cap. Significant volume
declines will cause price inefficiency.
■ This GBR cap could be enhanced or reduced based on hospital efficiency and utilization.
To achieve success under the new Waiver, hospitals have entered into
revenue agreements to set fixed revenue targets called
Global Budgets

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Not all revenue is included under Global Budgets
The regulated revenue that is being capped is not all inclusive. At this time, it still
excludes areas of patient care outside of the HSCRC’s authority:
■ Outpatient Renal
■ Outpatient Programs off the Hospital Campuses
■ Physician Professional Fees
■ Non-Patient Revenue (cafeteria, parking lot, rental income, etc.)
■ Specimen Only Labs (the patient does not physically reside in the Hospital)
Out-of-state revenue may or may not be included in the cap depending on the provider
May represent collaboration opportunities between
Maryland and Pennsylvania hospitals

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The incentives under the GBR model promote a population health
perspective
■ Providing appropriate care at appropriate level or location
(Physician office vs. Emergency Room)
■ Move towards Chronic Disease management
Success under GBR model includes:
 Preventing Unnecessary Admissions  Improving Patient Satisfaction
 Preventing Readmission  Increasing Primary Care Services
 Preventing Unnecessary ED Visits  Decreasing Unnecessary Utilization
 Reducing Hospital complications  Increasing Physician Alignment
 Reducing Unnecessary Admissions from
Nursing Homes
 Reduce the number of patients admitted
with Ambulatory Sensitive and Chronic
Conditions
Controlling hospital costs is a key success factor under GBR

17. Assessing
Readiness to
take on Risk

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In order to evaluate the readiness for risk, hospitals must start to build
the case for change
Activities
Understand
Demographics &
Population Needs
 Confirm population /services in and out of scope
 Assess unmet demand using public health intelligence to identify health inequalities, morbidity,
disease prevalence and social care needs
 Develop and agree patient needs assessment criteria
Demand and
Capacity forecast
modelling
 Establish current demand and capacity
 Model population forecasts to create a picture of demand by specialty.
 Project future demand
 Assess future unmet demand
Market Analysis
 Identify all providers within market including beds, services, activity, facilities, income, financial
position
 Identify all providers including services provided, income, bed base, and facilities
 Assess patient travel times between core services
 Horizon scan for factors impacting on capacity and demand
Sustainability tests
(Clinical / Financial
/Operational)
 Conduct clinical sustainability test including clinical outcomes, patient experience and medical
workforce establishment /turnover against industry guidance
 Carry out high level financial analysis including performance and future efficiency requirement, and
service line profitability/deficit by specialty
 Assess operational performance and future sustainability including access and workforce
performance indicators
Baselining &
Benchmarking
 Select peers and KPIs
 Conduct benchmarking exercise to signpost areas where differences exist (strengths and
weaknesses)
 Interpret findings from benchmarking exercise
 Use outputs of above activities to collate report on implications of ‘do nothing‘ option

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Hospitals began by looking at trends in the demographics of their
populations to assess underlying patient needs
Example Calculation of Life Expectancy in Baltimore City

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Historical utilization was analyzed to draw assumptions about future
utilization with changes in demographics
All Payors FY 2010 FY 2011 FY 2012 FY 2013
ODS Cases
(1)
4,261 3,954 3,121 2,771
2+ Day Stays
(1)
19,703 19,334 18,104 17,042
Total Admissions 23,964 23,288 21,225 19,813
Observation (OBV)
(2)
- 347 1,780 2,089
Total Admissions and OBV 23,635 23,005 21,902
Readmissions (3)
- 1,904 1,705 1,526
Change in:
ODS (307) (833) (350) (1,490)
OBV 347 1,433 309 2,089
Net ODS and OBV 40 600 (41) 599
2+ Day Stays (369) (1,230) (1,062) (2,661)
Total Admissions plus OBV (329) (630) (1,103) (2,062)
Readmissions - 199 179 378
Change in Originating Volume (329) (431) (924) (1,684)
Cumulative
FY 2010 -
FY 2013

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The Hospitals performed broad and specific market analyses to
understand their competitors and potential collaborators
Social Care
Specialist
Care
Primary Care Community Care
Mental Health
Acute Care
Community services
• Reassess entire community services
provision
• Linked with pathway redesign, ‘right
size’ and consolidate services, close
services/sites where appropriate
• Integrate with strategic long term
conditions management approaches
• ‘Facilitated network hubs’ to act as
focal point for elderly and end of life
care
Primary Care
• With above average investment in primary
care, identify services provided, review for
value for money
• Explore ‘hub and spoke’ models to
maximise impact primary care can have
• Identify linkages to community/acute
spend and ensure anticipated benefits are
realised e.g. capacity removed
Mental Health
• Address balance between
institutional and community care
and ensure investment priorities
are right
• Remove acute capacity where
feasible
What is the optimum size
of community services?
Maternity & reproductive services
• Review provision of maternity services against
best practice, consolidate/close services
• Review C-Section rates
• Assess whether community infrastructure is
appropriate and prevent ante-natal admissions
• Implement gynaecology decision aides to
reduce clinical variation
Trauma, injury & musculoskeletal
• Review clinical practice, variation and ‘over-
treatment’
• For orthopaedics delineate between
specialist ‘focus factory’ non-elective care,
and ‘value adding’ elective orientated
services
• Integrate appropriately with community,
pre/re-hab and other support services,
further use of decision aides to reduce
variation

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21
Demand models were quantified to ultimately understand the net
financial impact under various scenarios
Income Statement Impact under FFS Model
$ in millions
Income Statement Impact under GBR Model
$ in millions
$181
$190
$200
$152$156$160
20152014 2016
Margin of $29M
Expenses
Revenue
$200$200$200
$152$156$160
Margin of $48M
2014 2015 2016
The incremental margin can be used for further
population health management investments

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22
Scenario financial performance was then benchmarked to understand
the implications of moving to GBR versus the status quo
3.5%
4.4%
5.0%
3.5%
3.5%
3.6%
1.2%1.2%
1.7%
2.0%
2.7%
3.6%
3.8%
3.9%
4.1%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
2014 2015 2016
Baa Rating
Aa3 Rating
Baseline
Baseline Including Capital Investments
Status Quo
Trend of Operating Margin Performance

24. Implementing
Population
Health Strategies
In Value-Based
Contracts

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After establishing this type of payment arrangement, Maryland hospital
are establishing processes to implement change in their organizations
Generate insights into the health dynamics of a population and the clinical focal points and
clinical teams that will address care delivery pathways and questions of pricing and revenue.
Collect
Data
Identification
and Collection
– combine
longitudinal
clinical data
and non-
traditional
fields such as
income and
education
levels
Focus
Focal Point
Analysis –
calibrated to the
high-risk, high-
priority patient
population to
identify
additional co-
morbidities and
develop targeted
clinical team
Implement
Implementing
Clinical Analytics
– creating a road
map for
operationalizing
clinical analytics
within your
organization
Develop
Clinical Pathways
and Economic
Pricing –
establish
framework for
contract pricing
and risk
management of
care delivery
Vizualize
Extraction and
Analytics –
application of
modeling
algorithms and
visualization
techniques to
identify high-risk,
high-priority focal
points based
upon co-
morbidities.
Verify
Data Integrity –
reconcile and
validate data to
ensure
consistency and
completeness

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25
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
DIAGC DIAGIM NEURAD NUCRAD RAD
MedicareAllowedAmounts,
Radiology Services, 2010-2013
There is financial risk associated with clinical variation that is controllable through process
redesign
Under a capitated arrangement, clinical variation creates economic risk
as well as financial opportunity
■ Need to identify opportunities to eliminate clinical variation
– Example: an analysis we performed on Medicare-based Radiology expenses illustrates
tremendous variation even after adjusting for risk factors or clinical complexity
$1,000
$10,000
$100,000
$1,000,000
$10,000,000
DIAGC DIAGIM NEURAD PEDRAD RAD
MedicareAllowedAmounts,
LogarithmicScale
Radiology Services, 2010-2013
65th Percentile
Average
Medicare Based Radiology Charges
Variation in costs that need
further explanation and
analysis
Radiology Charges By Practice Radiology Charges Per Unit,
Non-traumatic joint disorders

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Identifying clinical variation will lead to creation of clinical cohorts to
target interventions and protocols
■ Identify patients with significant costs
of care across multiple conditions
– (i.e. patients with a non-chronic
digestive disease diagnosis that are also
diabetic)
■ The assumed complexity of cases
identified by this analysis helps frame
potential teaming and/or care
management efforts
FOCUS
1. FOCUS COHORT
IDENTIFIED
2. CLINICAL TEAM
ASSEMBLED BASED ON
CO-MORBITITIES WITHIN
FOCUS COHORT
Outcomes
Treatment
Pathways
and
Protocols
Secondary
Diagnosis
Primary
Diagnosis
e.g.,
Hypertension
e.g.,
Diabetic
e.g.,
Arthritic
3. CLINICAL TEAM DEFINES THE
CLINICAL PATHWAYS AND PROTOCOLS
TO ADDRESS CLINICAL VARIATION AND
TO IDENTIFY ADDITIONAL SOURCES OF
CARE DELIVERY AND FINANCIAL RISK

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Focusing on high risk patient types first have created the most initial
value
■ Clinical Team Focuses Redesign of Care
Delivery Process on High Economic Risk
Populations
■ Outcomes differ for each “pathway”;
leverage published materials such as
AHRQ, HEDIS or HHS’ quality – and cost-
based resources
■ For each pathway, need to identify sources
of volatility (e.g., population risk drivers) and
care service delivery variability (e.g.,
operational and supply chain issues)
Case Based
Reasoning
Outcomes
Treatment
Pathways
and
Protocols
Secondary
Diagnosis
Primary
Diagnosis
e.g.,
Hypertension
e.g.,
Diabetic
e.g.,
Arthritic
Primary
disease states
Co-Morbidities
DataAnalytics
Focus Sub-
Population
Multi-Disciplinary
Clinical Team
Case Based
Reasoning

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Finance and performance management competencies may need to be
augmented to support development of these types of programs
Identifying Care Needs Providing Population Health Management
Care Coordination
Evidence-based
Practices
Provider Services
Measurement &
Quality Improvement
Program
Management
Case Assessment
Transition of Care
Management
Gaps in Care
Analysis
Remote Monitoring &
Management
Readmission
Management
Authorization
of Care
Comprehensiv
e Utilization
Review
Peer Review
Standards &
Compliance
Appeals &
Grievance
Analysis of
Utilization
Costing &
Savings
Analysis Report
Patient
Diagnosis
Secondary
Preventive
Care
Planning or
Implementing
Treatment
Follow-up
Management
Hospital
Provider
Efficiency
Cost
Reductions
Evidence-
based
Standards
Core Performance
Measures
Patient Experience
Measures
Practice Performance
Reporting
Reporting Performance
Publicity
Finance
Information
Technology
Human Resources Operations Compliance
Patient Services
Improved Patient
Convenience
Patient Education Patient Involvement Patient Satisfaction
Population
Health
Management
Disease
Management
Case
Management
Utilization
Review
Clinical
Decision &
Support
Performance
Management
Core
Infrastructure
Patient
Engagement
TalentManagement
ProcessImprovement
TechnologyEnablement
DataManagement

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Pennsylvania hospitals will need to think through the types of cases
that could use the Maryland model as learning platform
■ Encounters for a relatively low dollar amount (think preventive services or singular office
visit) may be candidates for capitation
■ Less frequent and slightly more expensive care, e.g., office procedures and follow-ups etc.,
may be bundled because of the one-off nature of the services and needs
■ More complex encounters (but which are still manage-able) represent lower frequency and
greater clinical variability, requiring a cross functional team and a more complex value-based
reimbursement structure as well
– Accountable care organizations, with a performance attribution methodology down to the
physician level, may be an example of this type of VBP arrangement
■ Random, catastrophic events are largely uncontrollable or manage-able, and are likely best
suited for fee-for-service arrangements
■ One budgeted value can be derived across these bands and across the population,
considering the distribution of major epidemiology or diagnostic groups

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Presenters Contact Details
Questions and Discussion
James Case
Manager
KPMG LLP
410.949.8895
jcase@kpmg.com

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of KPMG International.
© 2014 KPMG LLP, a Delaware limited liability
partnership and the U.S. member firm of the KPMG
network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All
rights reserved.