Linde Wilson

Linde Wilson

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  Beijing Boston Chennai Chicago London Los Angeles Melbourne Milan Mumbai Munich New Delhi NewYork Paris San Francisco São Paulo Seoul Shanghai Singapore Sydney Tokyo Wroclaw Ending the Payer-Provider Cold War: Working together to produce value Linde Finsrud Wilson L.E.K. Consulting New York, New York l.wilson@lek.com May 7, 2015
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  1 Footer Whether welike it or not, the reality is the payer-provider world is radically changing  Increases in the number of covered individuals  Employer-sponsored coverage eroding  Consumers bearing increased responsibility for healthcare  Focus on value - Movement from fee-for-service to fee-for- value  Providers becoming payers and payers becoming providers  Disruptors who are adept at lower cost and higher quality enter the market
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  2 Footer The wallcomes down  No common ground  Variations in language  Lack of trust  Lack of understanding about what is going on on “the other side of the wall”  History of being burned  Line item negotiating fostering animosity and destroying value  Where there are winners there are losers  Periods of “détente” followed by surprise attacks Two sides of a comingled and interdependent space that cannot operate without each other
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  3 FooterSource: L.E.K.research and analysis Current state of healthcare industry  Unsustainable healthcare expenditure growth  Payment structure which incents volume of care provided  Unnecessary care delivered resulting from care not being tied to outcomes  Avoidable disease progression and costs to patients through lack of preventative care  Lack of focus on the entire patient experience  Denied claims, downgrades, un-reimbursed admissions and other penalties as payers manage utilization  Fragmented provider network that lack economies of scale Future goal for healthcare industry  Sustainable healthcare expenditures  Payment structure which incents value of care provided  All care given is deemed necessary by tying it to outcomes  Population health management and preventative care appropriately delivered to improve outcomes and reduce costs  Focus on the individual to improve patient experience and satisfaction  Better quality and outcomes through performance- based reimbursements  Consolidated provider network delivering economies of scale The healthcare industry must evolve in order to improve efficiencies, reduce costs and deliver superior care
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  4 Footer Stressors onPhysicians causing vulnerability and sometimes fear  80% of Doctors are Over-Extended or at Full Capacity  29% of physicians would not choose medicine if they had their careers to do over  69% of physicians believe that their clinical autonomy is sometimes or often limited and their decisions compromised  38% of physicians either do not see Medicaid patients or limit the number of Medicaid patients they see.  44% of physicians plan to take one or more steps that would reduce patient access to their services, leading to the potential loss of tens of thousands of FTEs Source: Merrit Hawkins 2014 Survey of America’s Physicians Physicians  Income unchanged for over a decade  Pressures to report quality and cost  Need to consolidate and what that means  Need to manage population health, particularly chronic disease  Push for change in workflow/patient flow (PCMH)  Understanding the financial consequences of clinical decisions in real-time  Getting up to speed on multiple IT systems combined with manual processes Resultant Changes in Practice
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  5 Footer Trends thatimpact the core of health system operations and create vulnerabilities Health Systems  Shrinking margins  Payment system changes, RACs, impact of concurrent review  Pressure to demonstrate quality  Increasing Medicaid patients  Management of population health  Process redesign while one foot is in the boat and one on the dock Resultant Changes in the Health System  Significant increases in outsourcing (particularly non-core functions) for cost savings  8% increase in employed physicians in the past 5 years  86% of IDNs include PCMH - Health system turning “inside out”
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  6 Footer 403020100 100 40 20 0 -20 -100 9080706050 “Typical”Suburban Community Hospital Gross Margins: Today Gross Margins % 4% % of Total Hospital Revenues, by Payer Type Average = ~4% Average = ~0% % of Total Hospital Revenues, by Payer Type Reality: As the commercial “subsidy” becomes smaller as a result of reform, an already financially stressed hospital system is expected to become unprofitable Source: L.E.K. research and analysis 1 2 3 4 Medicaid Expansion (133%-400% FPL) Commercial exchange reimbursement lower than traditional commercial Demographics shift aging population drives growth of Medicare Medicare reimbursement cuts and expansion of Medicare Advantage 40 20 0 -20 -100 1009080706050403020100 “Typical” Suburban Community Hospital Gross Margins: Post-Reform Gross Margins %
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  7 Footer Reimbursement issuesare among the most pressing challenges facing hospitals Note: *Currently, what are the most significant challenges within your hospital? Please select the top five challenges. Source: The L.E.K. study 0 5 10 15 20 25 30 35 40 45 50 55 Rising costs of adopting new IT, med. device innovations Decreasing volume in inpatient care Outcome-focused changes in reimbursement Higher patient expectations for care quality Increased complexity / acuity of admission cases Competition from retail clinics, ASCs and community healt "High margin" patients shifting to competing providers Increases in urgent care visits Technology advancements enabling care in lower acuity set Getting employees engaged around quality metrics Shift in patient mix towards Medicare and Medicaid Penalties and declining reimbursement Most significant challenges facing hospitals* (2015) (n=153) Percent of respondents
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  8 Footer In theface of market pressures, hospitals are consolidating, integrating, and improving accountability and supply chains to improve their economics Local multi-site systems Regional systems Affiliation Vertical integration Consolidation Integration Most common in 2020 Most common today Most common today Most common in 2020 Standalone hospitals (local single-site hospitals) Hospital systems with a national footprint (national systems) Hospitals with acute care facilities only (acute focused) Hospitals with full range of non-acute settings (strategic integration) “Two-sided” shared savings Bundled / Episode payments “One-sided” Shared savings Hospital accountability Supply chain evolution Partial capitation Most common today Most common today Most common in 2020 Moderate supply chain coordination Most common in 2020 Hospital takes no risk / accountability (traditional FFS) Hospital takes full risk / accountability (global capitation) Limited supply chain coordination Extensive supply chain coordination 1 2 3 4 INDICATIVE
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  9 Footer9 Providers areoutsourcing many patient care and non-patient care functions Note: *For the following services, please indicate what your current status for outsourcing is and how you expect this to change or stay the same in the next 5 years. Source: The L.E.K. study 0 10 20 30 40 50 60 Core measure reporting Clinical engineering Supply chain mgmt. Cath lab function mgmt. Lab services Radiology staffing PharmacyHospitalist staffing Accounting / back office Inventory mgmt. ED staffingPatient billing / collection IT maint. Nurses / surgical scrub staffing Diagnostic imaging Infection mgmt. ASC administration Cath lab department mgmt. Outsourcing of services currently and in the next 5 years* (2015) (n=153) Percent of respondents Dialysis Anesthesia Rehab centers Would consider outsourcing in next 5 years Outsource and plan to continue for next 5 years
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  10 Footer Payers arebeing hit as well Payers  Scaling many new and innovative reimbursement models and new populations-”new game begins before the old one ends”  Managing the gap between funding and medical costs within a changing regulatory environment  Reducing administrative costs  Understanding the idiosyncrasies of the provider environment  Impacting care decisions before care is delivered  Efficient change to operations to facilitate the “new world”  Inspiring providers to move from traditional model  Provider market consolidation and contract modeling Resultant Changes in Payers  98% of payers involved in some type of value-based care risk model  In the shorter term, payers are more focused on cost containment than on outcomes-based approaches to containing costs. (Source: E&Y Progressions 2014)  Trust between health systems and payers is at an all time low-narrow networks, tiered networks, implantation of population health workers rather than collaborating  Vast majority of 5 star MA plans are provider- sponsored causing stress with payers
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  11 Footer United plansto double the revenue under risk arrangements by 2017 to $50B through several partnership models  United currently has 2M members in full risk, shared risk or bundled episodes of care payment models  United has 11 notable collaborations to date - ACO collaborations: Tucson Medical Center, Steward Health, Quality Health Solutions, Mount Carmel Health Partners, Seton Health Alliance, Lifespan, New West Physicians, Westmed Medical group - PCMH incentive programs: Coastal Medical - Medicare shared savings program: Cornerstone Health Care - White label / joint venture: Northshore-LIJ United Co- Branded Insurance Plan - Joint research institute: Mayo Clinic  United has committed to doubling their ACO contracts over the next 5 years 50 23 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 UHC revenue in risk-sharing arrangements $B 21.4 2017F2013 Source: United website, presentations, and SEC filings
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  12 Footer Integration ofpayer services into an existing provider network is the most difficult form of vertical integration Source: L.E.K. analysis, Healthcare Executive Insight Supplementation Corporate structure License Management Market entrance Offering  Should we offer private insurance, Medicare Advantage, Medicaid managed care, and / or dual eligible plans?  Should we offer small or large group plans?  Should we contract with an incumbent provider to supplement our own insurance offering?  If so, which provider should we partner, and how should we manage the relationship?  Do we require an insurance license? an HMO license? Both?  Should we build administrative infrastructure de novo, acquire it, or outs-source to a third party?  What about capitalization? Reinsurance?  Who should we hire for key leadership positions?  How can we achieve the appropriate balance of expertise and experience on our board?  Should we build our offering de novo, acquire an existing plan, or partner?  Which geographical market should we enter and when? Expanding a healthcare business into the payer market requires new expertise and significant financial resources
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  13 Footer The migrationto value will be complicated and drawn out; along the way, Payer-Provider collaboration will ensure provider success at each step Provider takes full financial risk / accountability Provider takes no financial risk / accountability Provider accountability – spectrum of options Most common today Increasingdegreeofcoordinatedcare required Traditional Fee For Service (FFS) Reimbursement for specific, individual services “Two-sided” shared savings FFS with downside risk but higher bonus than in one- sided agreement “One-sided” shared savings FFS payment; bonus if spending is below a benchmark level Bundled / episode payments Single payment for all services to a patient for an episode of care Partial capitation Capitated payment for some but not all services provided (e.g., physician vs. hospital services) Global capitation Monthly or annual capitated payments for all services provided 13 Financial risk to providers Evolution of healthcare landscape
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  14 Footer Vertical integration “One-sided” shared savings “Two-sided” shared savings Bundled/ episode payment Partial capitation Global capitation Provider risklevel HighLow Independent physician groups Network of physician groups Integrated delivery networks PCMHs Specialty pay / P4P (other VBCs) Provider risk pool model Hospital P4P (other VBCs) ACOs Bundles (other VBCs) Partial and global capitation Source: L.E.K. research and analysis Providers are confronted with a wide range of value-based payment models which they must manage to and across simultaneously Expected evolution for successful ACOs 14
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  15 Footer Excess spendingon healthcare is costing a typical Fortune 500 company ~10% of its market value L.E.K. Analysis of U.S. Fortune 500 (rankings by % impact) Calculations #146 (avg. impact) #12 (high impact) Employees 60,000^ 138,000^ Health insurance premium per employee (employer share)* $7,216 $7,216 Excess healthcare cost – assumption (%) 50% 50% Excess healthcare cost ($M) $216 $498 EBITDA multiple (#) 7.3 5.3 Impact on market value of healthcare cost reduction ($M) $1,585 $2,637 Impact on market value of improved productivity ($M)** $305 $363 Impact on market value (%) 9.5% 37.5% Note: * Reflects a ~50/20/30 split between single, employee+1 and family plans; ** Reduction in lost work days and disability costs; ^ WW employee numbers were used Source: KFF, Company Financials, L.E.K. analysis, Inner Active Wellness, TX Window on State Government 30 20 10 0 9.5% Potential value recapture from healthcare industry – select Fortune 500 firms Billions of dollars 37.5% #12 (high Impact) 8.0 2.6 0.4 #146 (avg impact) 19.9 1.6 0.3 Market cap (Q1 2014) Impact of healthcare cost reduction Impact of productivity improvement**
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  16 Footer Purchasers ofhealth care lack market power regarding pricing Note: * Mean regional market share of four largest participants (commercial segment); ** Indicative based on known hospital concentrations (MSA-level average HHI of roughly 4700) Sources: AMA; The Robert Wood Johnson Foundation; Cory Capps and David Dranove; American Journal of Managed Care, James Robinson; Massachusetts Attorney General Martha Coakley; the Federal Trade Commission and the Department of Justice 100 80 60 40 20 0 Purchaser market share* Percent Purchasers (price takers) 7 100 80 60 40 20 0 Provider market share* Percent Providers (price setters)** 95 2nd largest 4th largest 3rd largest Largest Employers Providers
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  17 Footer The demandfor value by employers has placed pressure on payers and providers to collaborate…. but years of often double digit price increases has impacted patience and patients. The collaborative imperative is now.
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  18 Footer Delivering ValueSuccessfully will Require Development of Defined Capabilities Strong Analytics Engaged Leadership IT Infrastructure Care Management  Clinical risk identification  Real-time access to comparative cost  Data management and reporting that can be customized  Predictive modeling  Physician leadership  Shared objectives and governance  Strong middle management  EMR - Inpatient and ambulatory coordination  Business and Clinical decision support  Patient portal  Integrated care management that spans the continuum into the community  Ambulatory based care management  Effective model development Process Efficiency  Payer process redesign  Provider process redesign  Development of collaborative processes
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  19 Footer Payers andproviders have ingredients that, when combined create the recipe for value  Expertise in regulatory compliance and “coverage”  Claims data to more effectively manage population health  Opportunity to get off the fee-for-service treadmill  “Fill the gap” telephonic care management for high utilizers  Extension of care via member outreach  Greater understanding of coding process, particularly ICD-10  Ability to test models with lower risk (via bonuses, grants, etc.) Value Created by Payers for Providers Value Created by Providers for Payers  Regular patient interactions to effectively manage health  History of trust  Effective retention tools and processes  A product pathway (via concentric / overlapping networks, benefit levels, centers of excellence, etc.)  In world of commoditization, the ability to truly differentiate vis-à-vis competitors  Thought leadership and incubator for care models that are sustainable within the constraints of reimbursement trajectories  Face-to-face care management through PCMH rather than telephonic
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  20 Footer Where dowe begin? EBM with “Real Time” UM Transparent Rate Structure Share Clinical and Claims Data Create a Methodology for Identifying Willing and Able Partners Joint Strategy Development Introduce Technology Shared/Integrative Case Management Trust
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  21 Footer Care Coordination ProviderPayer
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  22 Footer Disrupter-what happensif payers and providers don’t collaborate?  Optimization of a business model for the needs of a relatively unattractive or small segment  Leverage an enabling technology that allows preservation or enhancement of cost or quality advantages  Design it so Incumbent competitors are unable to respond effectively due to legacy costs and a continuing need to serve their existing customer segments
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  23 Footer Background andobjectives Disruptors Payers  Providers become payers pushing payers to become providers  Employers align for market power Providers  Disruption to most profitable or core services Hearing set on Highmark plan to put $175 million in Allegheny Health
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  24 Footer Thank you LindeFinsrud Wilson L.E.K. Consulting l.wilson@lek.com (857) 265-5618