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Health Care Advisory Board The Emerging Era of Choice Restructuring Health System Strategy for the Retail Revolution

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Health Care Advisory Board. The Emerging Era of Choice. Restructuring Health System Strategy for the Retail Revolution. “Cord Cutters” and “Cord Nevers ” Giving Up Broad Networks. - PowerPoint PPT Presentation

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Page 1: Health Care Advisory Board

Health Care Advisory Board

The Emerging Era of ChoiceRestructuring Health System Strategy for the Retail Revolution

Page 2: Health Care Advisory Board

©2014 The Advisory Board Company • advisory.com • 28603A

6

“Cord Cutters” and “Cord Nevers” Giving Up Broad Networks

Source: Experian Marketing Services, “Cross-Device Video Analysis,” April 17, 2014, available at: www.experian.com; Manjoo F, “Comcast vs. the Cord Cutters,” The New York Times, February 15, 2014, available at: www.nytimes.com; Health Care Advisory Board interviews and analysis.

An Industry Built on a House of Cards

Paying for More Than You Use

“This is the battle hymn of the cord cutter: You are paying too much for television, and you aren’t watching most of what you’re paying for.”

Farhad Manjoo, The New York Times

U.S. Households With Internet But No Cable, 2013

6.5%U.S. Adults Age 18-34 With Netflix or Hulu But No Cable, 2013

18.1%

Page 3: Health Care Advisory Board

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Most Hospitals Staying Afloat Through Cross-Subsidization

Source: American Hospital Association, “Trendwatch Chartbook 2014,” available at: www.aha.org; Health Care Advisory Board interviews and analysis.

Revisiting a Tenuous Business Model

Hospital Payment-to-Cost Ratio, Private Payer, 2012

149%Hospital Payment-to-Cost

Ratio, Medicare, 2012

86%

• Above-cost pricing

• Robust fee-for-service volume growth

• Steady price growth

• Only one component of our total business

Commercial Insurance Public Payers

Below CostAbove Cost

Traditional Hospital Cross-Subsidy

Page 4: Health Care Advisory Board

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Entrenched Payers, Insulated Patients Unlikely to Upset Status Quo

Source: Health Care Advisory Board interviews and analysis.

Cross-Subsidy Depends on Inefficient Markets

Established Provider

• Commercial pricing growth steady

• Network inclusion likely for most plans

• Patient volume depends largely on referral patterns

Entrenched Payer

• High employer switching costs impede competition

• Handful of broad networks satisfy majority of passive employers

• Excess cost growth easily passed on to employers through premium increases

Price-Insulated Patient

• Open access to broad provider network standard

• Modest cost-sharing obscures true prices

• Physician recommendation dominates point-of-care decisionmaking

Assumptions Underlying Provider Growth Strategy

Page 5: Health Care Advisory Board

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9

Four Years Post-Reform, New Paradigm Finally Becoming Clear

Source: Health Care Advisory Board interviews and analysis.

The Retail Revolution

Medicare Reforms and the Transition to Risk

Coverage Expansion and the Rise of Individual Insurance

Activist Employers and the Primacy of Value

1

2

3

Major Themes Reshaping Provider Strategy

Page 6: Health Care Advisory Board

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10

Medicare Payment Cuts Becoming the Norm

Medicare Reforms and the Transition to Risk

Source: CBO, “Letter to the Honorable John Boehner Providing an Estimate for H.R.6079, The Repeal of Obamacare Act,” July 24, 2012; CBO, “Estimated Impact of Automatic Budget Enforcement Procedures Specified in the Budget Control Act,” September 12, 2011; CBO, “Bipartisan Budget Act of 2013,” December 11, 2013, all available at: www.cbo.gov; Health Care Advisory Board interviews and analysis.

1) Includes hospital, skilled nursing facility, hospice, and home health services; excludes physician services.

2) Disproportionate Share Hospital.

Public-Payer Reimbursement Still in the Crosshairs

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

($4B)($14B)

($21B) ($25B)($32B)

($42B)

($53B)

($64B)

($75B)

($86B)

ACA’s Medicare Fee-for-Service Payment Cuts

Reductions to Annual Payment Rate Increases1

$260BHospital payment

rate cuts, 2013-2022

Office of the Actuary, CMS

“Notwithstanding recent favorable developments… Medicare still faces a substantial financial shortfall that will need to be addressed with further legislation”

Not the End of the Story

$56B $151BReduced Medicare and Medicaid DSH2 payments, 2013-2022

Reduced Medicare payments due to sequestration and 2013 budget bill

Page 7: Health Care Advisory Board

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11

More Mandatory Risk On the Horizon

Source: The Advisory Board Company, “Mortality Rates Are Only One of Many VBP Changes to Come,” December 4, 2013, available at: www.advisory.com; CMS, “Request for Information on Specialty Practitioner Payment Model Opportunities,” February 2014, available at: www.innovation.coms.gov; Health Care Advisory Board interviews and analysis.

1) Includes Value-Based Purchasing Program, Hospital Readmissions Reduction Program, and Hospital-Acquired Conditions Program.

Steady Shift Toward Risk-Based Payment

FY 2013 FY 2014 FY 2015 FY 2016

30%

30%

30%

25%

70%

45%

20%10%

25%

30%

40%

20% 25%

Clinical Process

Patient Experience

Outcomes of Care

Efficiency

Medicare Value-Based Purchasing Program Performance Criteria

6%

Other Mandatory Risk Programs

Hospital-Acquired Condition Penalties

Readmission Penalties

No Trivial Thing

Weight in Total Performance Score

Medicare revenue at risk from mandatory pay-for-performance programs2, FY 2017

Page 8: Health Care Advisory Board

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12

Dismal Outlook for Fee-for-Service Motivating a Look at Risk-Based Options

Source: CMS, “More Partnerships Between Doctors and Hospitals Strengthen Coordinated Care for Medicare Beneficiaries,” December 23, 2013; Health Care Advisory Board interviews and analysis.

More Providers Taking the Hint

Medicare ACO Program Entrants

1 in 10Medicare FFS beneficiaries attributed to an ACO

Series1

32

375

114

106

123

2012 MSSP1 Cohorts

2013 MSSP Cohort

2012 Pioneer

ACO Model

Total2014 MSSP Cohort

The Broader Picture

20.5MAmericans enrolled in or attributed to Medicare, Medicaid, or commercial ACOs

46M-52MPatients treated by ACOs as of April, 2014

626Total ACO count, including commercial and Medicaid ACOs, May 2014

1) Medicare Shared Savings Program

Page 9: Health Care Advisory Board

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Performance, Persistence Closely Correlated

Source: Centers for Medicare and Medicaid Services, http://innovation.cms.gov/Files/x/PioneerACO-Fncl-PY1PY2.pdf; “San Diego-Based Sharp HealthCare Pulls Out of Pioneer ACO Program,” California Healthline, August 28, 2014; Health Care Advisory Board interviews and analysis.

1) Dropped out after second year; second-year performance not reported

Some Pioneers Changing Course

Pioneer ACO Performance

First-year performance

Second-year performance

Dropped out after program year

Gross Savings as Percentage of Benchmark1

-5.6% (min)

7.1% (max)

Alison Fleury, CEOSharp HealthCare ACO

“The model was financially detrimental…despite favorable underlying utilization and quality performance”

Page 10: Health Care Advisory Board

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Pending Program Updates Crucial for Future Participation

Source: Centers for Medicare and Medicaid Services, “New Affordable Care Act tools and payment models deliver $372 million in savings, improve care,’ September 16, 2014; Health Care Advisory Board interviews and analysis.

1) Includes one participant’s $4M repayment of shared losses

Medicare Shared Savings Program a Mixed Bag

Medicare Shared Savings Program ACO PerformanceFirst Performance Year

$297MShared savings earned by MSSP ACOs in first performance year1

53

52

115

Held Spending Below Benchmark, Earned Shared Savings Payment

Held Spending Below Benchmark, but Did Not Earn Shared Savings

Did Not Hold Spending Below Benchmark

Will ACOs have any ability to prevent network leakage?

Issues to Watch for in Updated Regulations

Will second-term ACOs really have to bear downside risk?

Will beneficiaries be attributed to ACOs prospectively?

Will benchmarks be calculated differently?

Will the share of savings paid to ACOs be higher?

Page 11: Health Care Advisory Board

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Policymakers and (Some) Providers Angling for Higher-Octane Options

Source: H.R. 5558, http://welch.house.gov/uploads/ACO%20Bill%20Text.pdf; Health Care Advisory Board interviews and analysis.

Transition to Risk Hardly Stalled

The Bigger Question: What Should Medicare ACO Programs Be?

Training grounds for other risk models? (e.g., Medicare Advantage)

Adaptive environments involving progressively more risk?

Permanent middle grounds between fee-for-service, capitation?

Bill in Brief:“The ACO Improvement Act”

• Bipartisan bill (H.R. 5558) introduced by Representatives Diane Black (R-TN) and Peter Welch (D-VT)

Key Features

• ACOs would receive capitated payments, not shared-savings adjustments

• Patients would proactively select a primary care provider rather than be retroactively attributed

• ACOs could discount primary care services to encourage network loyalty

Page 12: Health Care Advisory Board

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Shift Signals Individualization of the Medicare Market

Source: Jacobson G et al., “Projecting Medicare Advantage Enrollment: Expect the Unexpected?” Kaiser Family Foundation, June 12, 2013, available at: www.kff.org; Hollander C, “CMS to Increase Medicare Advantage Pay Rate By 0.4%,” ModernHealthcare, April 7, 2014, available at: www.modernhealthcare.com; Health Care Advisory Board interviews and analysis.

Medicare Advantage Gaining Momentum

Projected Medicare Advantage Enrollment

29.5% of Medicare beneficiaries

10.4M

19.0M

2009 2020

Unambiguous incentive for population health management

Provider Benefits Over Shared Savings Models

Greater provider control over network integrity

Less frequent patient churn

Page 13: Health Care Advisory Board

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But Every Silver Lining Has Its Cloud

Coverage Expansion and the Rise of Individualized Insurance

Source: Gallup, “In U.S., Uninsured Rate Holds at 13.4%,” http://www.gallup.com/poll/178100/uninsured-rate-holds.aspx; Department of Health and Human Services, “Impact of Insurance Expansion on Hospital Uncompensated Care Costs in 2014,” http://aspe.hhs.gov/health/reports/2014/UncompensatedCare/ib_UncompensatedCare.pdf; Health Care Advisory Board interviews and analysis.

ACA (and Recovery) Making a Dent in Uninsurance

18.0%(highest on record)

13.4%(lowest on record)

2013 Q3 2014 Q3

Percentage of U.S. Adults Without Health Insurance

Employer-sponsored coverage grows

Medicaid expansion begins

Insurance exchanges launch

$5.7BReduction in uncompensated care, 2014

A Bargain Still Unbalanced

$14BACA-related reductions in Medicare fee-for-service payment, 2014

vs.

Page 14: Health Care Advisory Board

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23 States Still Foregoing Expansion

Medicaid Expansion

Source: The Advisory Board Company, “Where the States Stand on Medicaid Expansion,” September 4, 2014, available at: www.advisory.com; CMS, “Medicaid and CHIP: July 2014 Monthly Applications, Eligibility Determinations and Enrollment Report,” September 22 2014; HHS, “Health Insurance Marketplace: Summary Enrollment Report for the Initial Annual Open Enrollment Period,” May 1, 2014; PricewaterhouseCoopers, “Medicaid 2.0: Health System Haves and Have Nots,” Health Care Advisory Board interviews and analysis.

1) Estimate- does not include CT or ME.2) Children’s Health Insurance Program.

Medicaid Expansion Contentious—and Consequential

Increase in Medicaid, CHIP2 enrollment,October 2013-July 2014

8M1

Advisory Board estimate of impact of Medicaid expansion on typical hospital’s 10-year operating margin projection

2.4%

State Participation in Medicaid Expansion

Participating Not Currently Participating

As of October 2014

5%Average Medicaid enrollment increase across non-expansion states

PricewaterhouseCoopers

“For-profit health systems…report far better financial returns through the first half of the year than expected, owed in large part to expanded Medicaid”

Financial Impact

Page 15: Health Care Advisory Board

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Responsibility Migrating to Payers, Providers, Patients

Source: Health Care Advisory Board interviews and analysis.

Expanding or Not, States Pushing Medicaid Innovation

Provider-Led Care Management

E.g., Oregon’s “Coordinated Care Organizations”

Exchange-Based Privatization

E.g., Arkansas’ “Private Option”

Full Medicaid Managed Care

E.g., Florida’s Statewide Medicaid Managed Care Program

Traditional State-Run Program

Competing Philosophies on Medicaid Reform

Page 16: Health Care Advisory Board

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Exchange-Based Medicaid Drawing Interest, But Broader Uptake Uncertain

Source: Kaiser Family Foundation, “Medicaid Expansion in Arkansas,” October 8, 2014; Government Accountability Office, “Medicaid Demonstrations: HHS’s Approval Process for Arkansas’s Medicaid Expansion Waiver Raises Cost Concerns,” August 8, 2014; Health Care Advisory Board interviews and analysis.

Arkansas Turning to Private Market

Arkansas residents eligible for expanded Medicaid coverage select plans on exchange

Arkansas’s “Private Option”

Using federal matching funds, State pays full cost of silver plan; beneficiary pays no premium

Beneficiary holds private insurance; cost sharing based on existing Medicaid rules

Program Likely Not Budget-Neutral

1

2

3$778M

Increase in cost of expansion under exchange system relative to GAO estimate of cost under traditional Medicaid

CMS Wary of Other Modifications

Pennsylvania application for similar waiver denied over inclusion of work requirements

Arkansas proposal to require individual health savings account contributions still pending

Page 17: Health Care Advisory Board

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Aggregate Numbers in Line With Expectations; Enrollee Mix Older

Insurance Exchanges

Source: HHS, “Health Insurance Marketplace: Summary Enrollment Report for the Initial Annual Open Enrollment Period,” May 1, 2014; Cheney K and Haberkorn J, “Obama: 8 Million Enrolled Under ACA,” Politico, April 17, 2014, available at: www.politico.com; Cheney K and Norman B, “Insurers See Brighter Obamacare Skies,” Politico, April 15, 2014, available at: www.politico.com; Health Care Advisory Board interviews and analysis.

1) Numbers do not add precisely due to rounding.

One Year In, Insurance Exchanges Generally on Track

October to December

January to February

March Total

2.2M

2.1M

3.8M 8.0M

Initial Public Exchange Enrollment1

2013-2014

7.0M(Original CBO

Projection)

91%Of enrollees still enrolled as of September 2014

25M Projected exchange enrollment by 2018

Enrollees aged 18-34

28%

Page 18: Health Care Advisory Board

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Source: HHS, “Health Insurance Marketplace: Summary Enrollment Report for the Initial Annual Open Enrollment Period,” May 1, 2014; Health Care Advisory Board interviews and analysis.

1) Data from federally-facilitated exchanges only.

Individuals Gravitating Toward Leaner Plans

20%65%

9% 5%2%

Bronze

Level 1: Choice of Metal Tier

GoldPlatinum

Catastrophic

Silver

Premium Sensitivity Manifest at Two Levels

Factors Influencing Metal Level

Deductible

Copays

Out-of-Pocket Maximum

Non-Essential Services Covered

Network Composition

Level 2: Plan Choice Within Metal Tier

43%

21%

36%Any Other Plan

Lowest-Cost Plan

Second-Lowest-Cost Plan

All Metal Levels1

Scope of Non-Essential Benefits

Negotiated Payment Rates to Providers

Utilization Patterns, Trends

Premium Levers Beyond Benefit Design

Negotiated Rates

Page 19: Health Care Advisory Board

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Aggressive Cost Sharing Potentially Troublesome for Provider Strategy

Source: Breakaway Policy Strategies, “Eight Million and Counting: A Deeper Look at Premiums, Cost Sharing and Benefit Design in the New Health Insurance Marketplaces,” May 2014; eHealth, “Health Insurance Price Index Report for Open Enrollment and Q1 2014,” May 2014; Health Care Advisory Board interviews and analysis.

High Deductibles Dominating Exchange Markets

$6,000+

$3,000-$5,999

Individual Deductibles Offered On Public Exchanges2014

Median

16%

16%

39%

30%

$1,000-$2,999

<$1,000

Individual Deductibles Chosen on eHealth Individual Marketplace

$2,500 $6,250Maximum

High out-of-pocket costs discourage appropriate utilization

Challenges for Providers

Large patient obligations lead to more bad debt, charity care

Price-sensitive patients more likely to seek lower-cost options

Page 20: Health Care Advisory Board

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Payers Betting Individual Consumers Value Affordability Over Broad Choice

Source: Gottleib S, “Hard Data On Trouble You’ll Have Finding Doctors in Obamacare,” Forbes, March 8, 2014, available at: www.forbes.com; McKinsey & Company, “Hospital Networks: Configurations on the Exchange and Their Impact on Premiums,” December 2013; Health Care Advisory Board interviews and analysis.

1) “Pathway X” bronze plans compared to leading PPO plan offering across nine states.2) Comparing products by the same carrier of the same tier, across 7 carriers.

Premium Sensitivity Supporting Narrow Networks

Median premium reduction directly attributable to network narrowing2

26%

Breadth of Hospital Networks in Exchange Plans20 Urban Markets, December 2013

Exclude 30% of 20 largest hospitals

Average Percent of PPO Network Specialists Included in Exchange Plan Networks1

Anthem BlueCross BlueShield, 2014

OB/GYNs Orthopedists Oncologists Cardiologists

62% 59% 59%48%

38%

32%

30%

“Ultra-Narrow”

“Narrow”

Broad

Exclude 70% of 20 largest hospitals

100% PPO Network Breadth

Page 21: Health Care Advisory Board

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Is It Worth Winning Share With Unsustainable Premiums?

Source: Crostby J, “Top Selling Insurer on MNsure Won’t Be Back This Year,” Minneapolis Star Tribune, September 16, 2014; Health Care Advisory Board interviews and analysis.

1) Pre-exchange individual market

Proper Risk Pricing Still Essential

Low Premiums Moving the Market… …but Perhaps Not the Right One

2%Market share in 20121

58%Market share in 2014

• PreferredOne offers lowest Silver plan premium in country;

• wins massive market share on Minnesota exchange (MNsure)

• PreferredOne exits exchange

• Will still offer individual coverage through other successful channels with different risk profile

2014:

Marcus MerzCEO, PreferredOne

“Continuing to provide this coverage through MNsure is not sustainable.”

2013:

Page 22: Health Care Advisory Board

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Robust Marketplaces Beginning to Develop

What Next for the Exchanges?

Source: “UnitedHealth to Expand Exchange Presence as Profits Dip,” ModernHealthcare, April 17, 2014; Department of Health And Human Services, “Health Insurance Marketplace Will Have 25 Percent More Issuers in 2015,” September 23, 2014; Health Care Advisory Board interviews and analysis.

Increased Insurer Participation Driving Competition

Federally-Facilitated Marketplace (36 states)

State-Based Marketplace (8 states reporting)

191

61

248

67

2014 2015

Issuers Offering Qualified Health Plans

Estimated reduction in second-lowest-cost silver premium of one new issuer entering market

Gail Boudreaux, EVPUnitedHealth Group

“We had a very modest footprint in 2014. We do have a bias to increase that participation in 2015. […] The size of the overall market is positive.”

Competition At Work

4%

Page 23: Health Care Advisory Board

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Second Round of Open Enrollment Will Reveal True Dynamics

What to Watch for on the Exchanges

Trends We’ll Be Watching:

Enrollment:

• Are the technical glitches really fixed?

• Will higher individual mandate penalties change anyone’s mind?

• Will the young and healthy turn out in force?

Choice and Mobility:

• How will automatic reenrollment affect consumer behavior?

• Will last year’s bargain hunters regret choosing high deductibles and narrow networks?

• Can plans that raise premiums maintain market share?

Market Reaction:

• How aggressively will providers court the newly insured?

• Will employers dump workers onto the exchanges?

1

2

3

Page 24: Health Care Advisory Board

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Will Employers Maintain Coverage, and How?

Activist Employers and the Primacy of Value

Employer-Sponsored Insurance at a Crossroads

“Activation”“Abdication”

Convert to Self-Funding

Pros:

• Close control over network design

• Exemption from minimum benefits requirements

Cons:

• Greater financial risk

• Network assembly challenging

Shift to Private Exchange

Pros:

• Responsiveness to employee preference

• Predictable, defined contributions

Cons:

• Disruption to benefit design

• Risk employees may underinsure

Spectrum of Options for Controlling Health Benefits Expense

Drop Coverage

Pros:

• Escape from cycle of rising premium costs

Cons:

• Employer mandate penalty

• Labor market disadvantage

Source: Health Care Advisory Board interviews and analysis.

Page 25: Health Care Advisory Board

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Low-Wage Employers Most Active Today, but Skilled Industries in the Wings

Source: Accenture, “Are You Ready? Private Health Insurance Exchanges are Looming;” privatehealthexchange.com; Health Care Advisory Board interviews and analysis.

Huge Growth Forecast for Private Exchanges

2014 2015 2016 2017 2018

3M9M

19M

30M

40M

Potential Growth Path for Private Exchange Enrollment

Private exchange operators as of October, 2014

172

Prominent Employers Using Private Exchanges

For Active Employees: For Retirees: (Medicare Advantage, Medigap plans)

Page 26: Health Care Advisory Board

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Understanding Why Private Exchanges Matter

Beyond the Buzzword

Crucial Differences Between Private Exchanges, Traditional Group Markets

Individuals can switch networks, insurance carriers on their own

On a private exchange, In the group market,

Changes in network or carrier may require employer-level decisions

Provider networks must be broad enough to serve entire workforce

Defined benefit plans insulate employees from differences in cost

Narrow networks can appeal to specific employee segments

Defined contribution plans expose employees to cost differences

Source: Health Care Advisory Board interviews and analysis.

Page 27: Health Care Advisory Board

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Small Employers Also Beginning to Show Interest

Source: Gabel JR et al., “Small Employer Perspectives On The Affordable Care Act’s Premiums, SHOP Exchanges, And Self-Insurance,” Health Affairs, 32(11): 2032-39; Health Care Advisory Board interviews and analysis.

1) 3 to 50 FTEs.

Self-Funded Strategies Steadily Gaining Ground

ACA Benefits Standards Avoidable Through Self-Funding

Modified Community Rating

Essential Health Benefits

Guaranteed Issue and Renewability

Medical Loss Ratio Requirements

26%of small employers’1 brokers have discussed with them the possibility of self-insurance

2000 2005 2010 201440%

45%

50%

55%

60%

65%

70%

49%

54%

59%61%

Percentage of Covered Workers in Self-Funded Plans

Page 28: Health Care Advisory Board

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Custom Network Builders Offering Local Solutions

Source: Innovative Healthware Services, Inc., Arnold, MD; Health Care Advisory Board interviews and analysis.

Hands-On Network Management Increasingly Feasible

Case in Brief: Innovative Healthware Services

• Private company based in Arnold, Maryland that markets software solutions for PPOs, TPAs, providers, and payers

• “Custom Provider Network” limits a self-funded employer’s network to selected list of hospitals, physicians, and ancillary care

Self-funded employer submits list of physicians, hospitals, and ancillary care

IHS negotiates cost-effective provider agreements using Medicare-based pricing

IHS continually evaluates network providers to “ensure competitive price contracts”

IHS1 “Custom Provider Network” Solution

Innovative Healthware Services

“Working with the TPA and employer, we replace the ‘one size fits all’ network with a cost-effective customized network created around the needs of your business and your employees.”

Page 29: Health Care Advisory Board

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Exporting Walmart’s Centers of Excellence Program

Source: Walmart, “Walmart, Lowe’s And Pacific Business Group On Health Announce A First Of Its Kind National Employers Centers Of Excellence Network,” October 8, 2013; Health Design Plus, “Health Design Plus & Employers Health Announce National Centers of Excellence Initiative,” June 11, 2013; Chen C, “Providers Using Bundled Payments, Quality to Entice Employers,” Health Data Management, March 11, 2014,; Health Care Advisory Board interviews and analysis.

Aggregators Pooling Employers, Providers

Case in Brief: Health Design Plus• Third-party administrator based in

Hudson, Ohio that creates Centers of Excellence (COE) programs for self-funded employers

• Assembled Walmart’s centers of excellence bundled payment network

Two New Employer Coalition Partnerships

Pacific Business Group on Health(San Francisco, California)

• 60 large employer members

• Employees in all 50 states

• 10M covered lives

Employers Health Coalition(Canton, Ohio)

• 300+ employer members with employees in all 50 states

• 3M covered lives

Bruce ShermanMedical Director,

Employers Health Coalition

“It would be prohibitive for a small employer…When you spread the administrative costs over a number of employers, it becomes more attractive.”

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Source: Intel Corporation, “Employer-Led Innovation for Healthcare Delivery and Payment Reform: Intel Corporation and Presbyterian Healthcare Services,” Santa Clara, California; Evans M, “Slimming Options,” Modern Healthcare, July 13, 2013, available at: www.modernhealthcare.com; Health Care Advisory Board interviews and analysis.

1) Presbyterian Healthcare Services.

Some Providers Taking Lead in Network Assembly

Case in Brief: Intel Corporation

• Large multinational employer headquartered in Santa Clara, California

• Entered into narrow-network contract with Presbyterian Healthcare Services, an 8-hospital system in New Mexico, for employees at Rio Rancho plant

5,400 Covered lives in contract

$8-10M Projected savings, 2013-2017

Intel-Presbyterian Partnership

Customized Care OfferingsAddition of depression screening into customary provider workflow

Infrastructure for Care ManagementConversion of Intel’s on-site clinic into full service patient-centered medical home

Narrowing of Health Plan OptionsIntel reducing number of health plan options from 8 to 4; two remaining plans are narrow networks of PHS1 providers

Shared AccountabilityUpside and downside risk for health care spending compared to projected target

Page 31: Health Care Advisory Board

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Multiple Opportunities to Appeal to Decision-Makers

Source: Health Care Advisory Board interviews and analysis.

Providers Must Win Share at Two Points of Sale

Network Selection Care DecisionNetwork Assembly

Decision Processes Shaping Provider Choice

Being chosen by payers, employers, exchange operators, custom network builders, and accountable physician entities to be offered as a network option

Being chosen by patients, referring physicians at the point of care

Being chosen by individuals during plan enrollment

Secure Enrolled Lives Win Share of Volumes

1 2

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Source: Health Care Advisory Board interviews and analysis.

Recognizing New Channels for Growth

Established Provider

Care Delivery Network

Relationship-Based Referring Physician

Cost-Conscious Referring Physician

Price-Sensitive Consumer

Entrenched Payer

Vulnerable Payer

Activated Employer

Exchange Operator

Custom Network Builder

Secure Enrolled Lives Win Share of Volumes

Traditional Growth Channels

Key Decision-Makers in Traditional and New Growth Channels

Individual Insurance Shopper

Accountable Physician Entity

New Growth Channels

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New Dynamics Unfamiliar in Health Care, But Not in Broader Economy

Source: Health Care Advisory Board interviews and analysis.

All Signs Point to a Retail Market

Traditional Market Retail Market

Growing number of buyers

1

Proliferation of product options

2

Increased transparency

3

Reduced switching costs

4

Greater consumer cost exposure

5

Passive employer, price-insulated employee

Activist employer, price-sensitive individual

Broad, open networks Narrow, custom networks

No platform for apples-to-apples plan comparison

Clear plan comparison on exchange platforms

Disruptive for employers to change benefit options

Easy for individuals to switch plans annually

Constant employee premium contribution,

low deductibles

Variable individual premium contribution, high deductibles

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Delivering Desirable Network Attributes at Low Cost

Source: Health Care Advisory Board interviews and analysis.

Redefining the Value Proposition

Competitive Unit Prices

Strategic Imperatives:

• Avoid reactive position vis-a-vis price cuts, transparency

• Radically restructure cost structures to sustain lower unit prices

Total Cost Control

Strategic Imperatives:

• Develop population health model to control cost trend

• Clearly communicate total cost advantage to potential purchasers

Geographic Reach and Clinical Scope

Strategic Imperatives:

• Match service portfolios, footprints to target purchasers

• Explore partnership strategies that strengthen market presence

Clinical and Service Quality

Strategic Imperatives:

• Present unimpeachable clinical credentials to wholesale buyers

• Emphasize access, experience advantages to individual consumers

Low Cost Desirable Network Attributes

Four Imperatives for Health Systems

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Delivering Desirable Network Attributes at Low Cost

Source: Health Care Advisory Board interviews and analysis.

Redefining the Value Proposition

Competitive Unit Prices

Strategic Imperatives:

• Avoid reactive position vis-a-vis price cuts, transparency

• Radically restructure cost structures to sustain lower unit prices

Total Cost Control

Strategic Imperatives:

• Develop population health model to control cost trend

• Clearly communicate total cost advantage to potential purchasers

Geographic Reach and Clinical Scope

Strategic Imperatives:

• Match service portfolios, footprints to target purchasers

• Explore partnership strategies that strengthen market presence

Clinical and Service Quality

Strategic Imperatives:

• Present unimpeachable clinical credentials to wholesale buyers

• Emphasize access, experience advantages to individual consumers

Low Cost Desirable Network Attributes

Four Imperatives for Health Systems

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Care Choices, Network Assembly Dynamics Driven by Premium Pressure

Source: Health Care Advisory Board interviews and analysis.

Low Premiums Shaping More than Network Selection

Premium Sensitivity at Point of Coverage

Price Sensitivity at Point of Care

Total Cost Scrutiny in Network Assembly

Consequences of Premium Sensitivity

Health Care Executive

“Our price is now given by the market. Our business is changing from cost-based pricing to price-based costing.”

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Cost-Conscious Behavior Affecting Pillars of Profitability

Source: KFF, “2012 Employer Health Benefits Survey,” available at: www.kff.org; New Choice Health, “New Choice Health Medical Cost Comparison,” available at: www.newchoicehealth.com; Healthcare Blue Book, “Healthcare Pricing,” available at: www.healthcarebluebook.com; Kliff S, “How much does an MRI cost? In D.C., anywhere from $400 to $1,861,” Washington Post, March 13, 2013, available at: www.washingtonpost.com; Health Care Advisory Board interviews and analysis.

1) High-deductible health plan.2) $2,086; based on KFF report of average HDHP

deductible.3) $733; based on KFF report of average PPO deductible.

Price Sensitivity at the Point of Care

Consumers Paying More Out-of-Pocket

Fall within HDHP deductible2

$150 $275 $400$900 $1K

$2K

$6K

$9K

$18K $730

$900

$1,269

$2,183

$411

• Price-sensitive shoppers will be acutely aware of price variation

• MRI prices range from $400 to $2,183

MRI Price Variation Across Washington, DC

Fall within PPO deductible3

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Low-Cost Access Potentially Just the Beginning

Source: Canales MW, “Wal-Mart Opening Clinic in Cove,” Killeen Daily Herald, April 18, 2014, available at: www.kdhnews.com; Health Care Advisory Board interviews and analyais.

Walmart Bringing Everyday Low Prices to Health Care

• Two nurse practitioners provider primary care services on site

• Clinic refers to external specialists, hospitals as appropriate

Service:

Pricing:

$4 $40For Walmart employees

For Walmart customers

Hours:

Care Clinic Model

Weekdays

8AM-8PM

Saturday

8AM-5PM

Sunday

10AM-6PM

Labeed DiabPresident of Health & Wellness

Walmart

“Our goal is to be the number one health-care provider in the industry.”

130M 150MAnnual emergency department visits

Weekly visits to Walmart stores

Probably Worth Paying Attention

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Network Assemblers Looking at More Than Unit Price

Source: Health Care Advisory Board interviews and analysis.

Broadening Our Concept of Cost Advantage

Price Cut

Improve efficiency to offer lower fee schedule

Trend Control

Implement care management to control cost growth trend

Degree of Cost Control

Two Cost-Focused Strategies for Appealing to Network Assemblers

Low Unit Price Total Cost Control

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Baseline Year 1 Year 2

Source: Overland D, “CareFirst Medical Home Saves More in Second Year,” FierceHealthPayer, June 7, 2013, available at: www.fiercehealthpayer.com; Health Care Advisory Board interviews and analysis.

1) Per member per month.

Creating Cost-Conscious PCPs

Case in Brief: CareFirst BlueCross BlueShield• Not-for-profit health services company serving 3.4 million

members in Maryland, D.C., and northern Virginia

• In 2011, launched PCMH program providing opportunities for virtual panels of 10-15 PCPs to earn bonuses based on quality and total cost metrics

• Provides PCPs with color-coded rankings of specialists based on risk-adjusted PMPM costs

Eligible PCPs participating80%

Members covered by PCMH program1M

Average pay increase for PCPs receiving bonuses

29%

“Virtual panel” of 10-15 PCPs

Panel shares in savings if risk-adjusted PMPM cost is below target

PMPM Cost Target

Actual PMPM Cost

Total cost target set by trending baseline risk-adjusted PMPM cost by average regional cost growth

CareFirst PCMH Total Cost Incentive ModelRisk-adjusted PMPM1 Cost

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Total Cost Transparency Key to Referral Changes

Source: Health Care Advisory Board interviews and analysis.

Steering Care to Most Efficient Specialists

Specialists Color-Coded By Total Cost

PCP Virtual Panels

Employed Specialist A

(Red)

Employed Specialist B

(Yellow)

Independent Specialist C

(Green)

Hospital A Hospital B

Percent of panels earning bonuses, 201266%

Difference in risk-adjusted PMPM cost between top- and bottom-quartile PCPs

27%

Savings from PCMH program, 2012$98M

Chet BurrellPresident & CEO

CareFirst BlueCross BlueShield

“We’re seeing that [the data] changes the patterns. There’s a hubbub among the panels to see what their choices are, and what it costs them.”

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Discerning When Not to Operate

Source: The Advisory Board Company, “Commercial Bundled Payment Tracker,” October 9, 2013, available at: www.advisory.com; Health Care Advisory Board interviews and analysis.

The Value of a Second Opinion

Of referred patients do not undergo surgery

30-50%

Walmart

In 2013, expanded Centers of Excellence program to cover cardiac, spine, and hip/knee replacement surgery

Lowe’s

In 2010, offered employees free heart surgery at Cleveland Clinic

Pepsi Co.

In 2011, offered employees free cardiac and complex joint replacement surgery at Johns Hopkins Medicine

Large Employers and Hospitals Participating in Centers of Excellence Programs

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Assuring Employers of Ability to Manage Future Costs

Source: Health Care Advisory Board interviews and analysis.

Making the Case for Care Management Capabilities

Investment in Data Analytics

Shows capability to assess patient risk and pinpoint interventions

Clinical and Claims Data Integration

Illustrates advantage over traditional health plan

Demand for Out-of-Network Claims Data

Shows commitment to continuously manage care for attributed population

Telehealth Platforms and Programs

Demonstrates ability to keep low-acuity cases in most appropriate care site

Powerful Ways to Signal Care Management Capabilities

Chief Marketing OfficerLarge Health System

“In our market, there is plenty of talk about ‘accountable care’, but we are differentiating with the organizational commitment and the infrastructure investment to sustain a new economic model.”

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Source: Commins J, “Aurora Health Offers Employers a Savings Guarantee,” HealthLeaders Media, July 30, 2012, available at: www.healthleadersmedia.com; Aurora Health Care, “Roundy’s Offers Employees Innovative Health Care Plan Through Anthem’s Blue Priority & Aurora Accountable Care Network,” October 24, 2012, available at: www.aurorahealthcare.org; Health Care Advisory Board interviews and analysis.

Promising Total Cost Savings to Employers

Average savings guaranteed to employers over three years

10%

Savings Guaranteed Off Of Projected Costs

Case in Brief: Aurora Health Care

• 15-hospital, not-for-profit health system based in Milwaukee, Wisconsin

• Announced separate narrow network products with Aetna and Anthem Blue Cross and Blue Shield that offer employers guaranteed savings over three years

Two Separate Products with Different Payer Partners

Time

Employer Health

Spending

Guaranteed Savings

Baseline spending projected using three years’ historical spending 1

2Blue Priority (Anthem Blue Cross and Blue Shield)

Aetna Whole Health

(Aetna)

Roundy’s Supermarkets, Inc. was first large employer client

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Delivering Desirable Network Attributes at Low Cost

Source: Health Care Advisory Board interviews and analysis.

Redefining the Value Proposition

Competitive Unit Prices

Strategic Imperatives:

• Avoid reactive position vis-a-vis price cuts, transparency

• Radically restructure cost structures to sustain lower unit prices

Total Cost Control

Strategic Imperatives:

• Develop population health model to control cost trend

• Clearly communicate total cost advantage to potential purchasers

Geographic Reach and Clinical Scope

Strategic Imperatives:

• Match service portfolios, footprints to target purchasers

• Explore partnership strategies that strengthen market presence

Clinical and Service Quality

Strategic Imperatives:

• Present unimpeachable clinical credentials to wholesale buyers

• Emphasize access, experience advantages to individual consumers

Low Cost Desirable Network Attributes

Four Imperatives for Health Systems

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Source: Health Care Advisory Board interviews and analysis.

1) Pseudonym.

Which Would You Choose?

Broad Geographic Reach…

Network in Brief: Crescent Health1

• National hospital provider with hospital campuses across the country

• Despite broad geography, limited clinical depth at local level

…or Deep Clinical Scope?

Network in Brief: Silica Healthcare1

• 6-hospital system in the Midwest with employed physician network

• Care sites concentrated in roughly half of single metropolitan area

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Source: Health Care Advisory Board interviews and analysis.

Full Care Continuum Important for Payer Partners

Four Reasons PinnacleHealth System Selected for Risk-Based Product

Favorable Pricing Structure

6-12 Months’ Experience Under Performance Incentives

Broad Provider Geographic Footprint

Comprehensive Clinical Scope

Sample Clinical Services

Primary Care

Pediatric Care

Imaging

Cardiovascular Care

Orthopedics

Physical Therapy and Rehab

Inpatient Care

Case in Brief: CareConnect Point of Service

• Accountable care narrow network plan for mid-sized employers, created around PinnacleHealth System and offered by Capital BlueCross in central Pennsylvania

• Network is open for specialty and inpatient care but narrowed to PinnacleHealth System’s PCPs for primary care

• Will be expanded to individual market in 2015

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Addressing Individual Limits in Geographic Reach

Source: Health Care Advisory Board interviews and analysis.

Combining Geographies to Match Purchaser Footprint

Network in Brief: Healthcare Solutions Network

Cincinnati-based employers have employees living on both sides of river

• Joint venture collaboration between Cincinnati, Ohio-based TriHealth and Edgewood, Kentucky-based St. Elizabeth Healthcare

• Offers health insurers access to a unified, high-quality, low-cost network that covers the entire Tristate region

• Both organizations offering the network to their current employees and dependents

Partnering to Expand Geographic Reach

St. Elizabeth Healthcare

TriHealth

Neither Organization Able to Offer Adequate Geographic Coverage Alone

Ohio

Kentucky

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National and Hyper-Local Competition Reshaping Notions of Sufficiency

Source: Health Care Advisory Board interviews and analysis.

Geographic and Clinical Demands Intertwined

Neighborhood Conveniences

Potential Differentiators

• Disease management, care navigation

• Digestive health

• Women’s midlife

• Sports medicine

• Midwifery

• Transplants

• Neurosurgery

• Complex cardiac (e.g. TAVR1)

• Clinical trials

• Primary care

• Pediatrics

• Imaging

• Ambulatory surgery

• Radiation therapy

• Medical oncology

Core Services

Local Offerings

Regional/National Destinations

• Emergency

• Dialysis

• Rehab

• Stroke

• Cardiology

• OB/Gyn

• Routine orthopedics

• SNF

• Pediatric specialty

• Oncology

• Alternative access points (e.g. retail, urgent care)

• E-visits, remote monitoring

• Home health

Purchasers’ Geographic Preferences for Clinical Services

Balancing an Increasing Demand for Convenience with an Increasing Willingness to Travel

• Cardiac surgery

• Technology-intensive procedures

1) Transcatheter Aortic Valve Replacement.

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Delivering Desirable Network Attributes at Low Cost

Source: Health Care Advisory Board interviews and analysis.

Redefining the Value Proposition

Competitive Unit Prices

Strategic Imperatives:

• Avoid reactive position vis-a-vis price cuts, transparency

• Radically restructure cost structures to sustain lower unit prices

Total Cost Control

Strategic Imperatives:

• Develop population health model to control cost trend

• Clearly communicate total cost advantage to potential purchasers

Geographic Reach and Clinical Scope

Strategic Imperatives:

• Match service portfolios, footprints to target purchasers

• Explore partnership strategies that strengthen market presence

Clinical and Service Quality

Strategic Imperatives:

• Present unimpeachable clinical credentials to wholesale buyers

• Emphasize access, experience advantages to individual consumers

Low Cost Desirable Network Attributes

Four Imperatives for Health Systems

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Source: Health Care Advisory Board interviews and analysis.

“Quality” Means Different Things for Different People

Network Assemblers Individuals

Facility-level clinical process, outcome measures

Actual ease of access, care experience

Network-level quality, access, service ratings

Network Selection Care Decision

Quality Demands of Network Assemblers and Individuals

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Steering Care Toward High-Quality Providers

Source: Health Care Advisory Board interviews and analysis.

1) Sample metrics include mortality rate, complication rate, and readmissions rate.

Custom Network Builders Scrutinizing Performance

Step 1: Evaluation of Clinical Performance Data

Provider Evaluation Process at Imagine Health

National Top Quartile Clinical Performance

Step 2: RFP Evaluation of Additional Factors Per capita

cost of careEfficiency of care utilization

Care experience programs

1

Case in Brief: Imagine Health

• Company based in Cottonwood Heights, Utah that builds custom, high-performance provider networks for self-funded employers

• Selects participating provider systems using clinical performance data and an RFP process

• Steers volumes to in-network providers through benefit design and employee education

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Chris GoreyChief Marketing Officer

Providence Health Systems

Boeing’s Access Requirements

Winning Contracts By Meeting Access Demands

Source: Health Care Advisory Board interviews and analysis.

Providers Must Also Deliver on Ease of Access

Same-day PCP appointment(acute conditions)

3-day PCP appointment (any condition)

10-day specialist appointment

Extended hours of operations

Extended urgent care hours

Centralized 1-800 number at ACO level with care navigators for triage and advocacy

Member website

Phone apps

Case in Brief: Providence-Swedish Health Alliance

• Alliance between Providence Health Systems, Swedish Health Services in Seattle, WA

• Awarded contract to serve as Boeing’s narrow ACO network option

“[Geographic] access is critical. But we can’t lose sight of the patient experience. Health care consumers need to see a positive change in how they are able to access healthcare.

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An Expected Part of the Patient Experience

Source: Terry K, “Patients Seek More Online Access to Medical Records,” InformationWeek, September 17, 2013, available at: www.informationweek.com; Silvestre, et al., “If You Build It, Will They Come? The Kaiser Permanente Model of Online Health Care,” Health Affairs, March/April 2009: 334-344; Health Care Advisory Board interviews and analysis.

Online Access Becoming the New Baseline

Case in Brief: Kaiser Permanente Northern California• Nation’s largest not-for-profit health plan based in Oakland, California; serves 9 million

members nationwide and 3.3 million in Northern California

• Began offering online health services in 1996; fully deployed KP.org patient portal in 2007

KP.org Portal Key Features

View medical record

Schedule appointments

Fill prescriptions

Assign proxy access

View lab results

Communicate with physician

82%77% 76% 74%

Consumers Demanding Portal Features

n = 1,000 U.S. Consumers

Access to Medical Records

Online Appointment

Booking

Prescription Refill

Requests

Receiving E-Mail/Text Reminders

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Patient Experience Vital For Securing Purchaser Choice Year Over Year

Source: Health Care Advisory Board interviews and analysis.

Welcome to the Renewals Business

Day 1

Day 365

Care Decision

Network Selection and Ongoing Experience

Care Decision

Care Decision

Care DecisionClinical interactions represent repeated opportunities to reinforce patient preference through superior experience

Annual network selection in fluid insurance market implies consistent reevaluation of network performance

Patient Experience

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Not Immediately Obvious Which Advantages Will Dominate

Source: Health Care Advisory Board interviews and analysis.

Recipe for Success Becoming Far More Complex

Network Assembly Network Selection Care Decision

All providers included in nearly all networks; only compete on price negotiations

Employees have little choice of networks

Most decisions made by referring physician

• Low total per-member cost• Promise of total cost savings

• Low premium• Low employee contribution

• Low out-of-pocket cost

• Broad geographic footprint• Comprehensive clinical scope

• Inclusion of preferred physicians

• Proximity to access points

• High clinical process, outcomes performance

• Adherence to evidence-based care• On-demand access options• Centralized navigation services• Prompt appointment times• Extended hours

• High population health quality ratings

• High member satisfaction ratings

• Positive brand association• On-demand access options

• Great care experience• On-demand access

options• Prompt appointment

times• Extended hours

Cost

Reach and Scope

Clinical and Service Quality

Network Assemblers Individual Consumer

Ret

ail

Ma

rke

t

Traditional Market

Th

resh

old

Fa

ctors

Diffe

ren

tiatin

g

Fa

ctors

Expanding Arena of Competition

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Search for Financial, Geographic Scale Driving Hospital M&A

Strategic Advantage #1: Scale

Source: “Advocate and NorthShore Combine to Create Preeminent Health Care System,” Northshore University Health System; Herman B, “Advocate-NorthShore merger continues trend toward regional supersystems,” Modern Helathcare, Spetember 12, 2014; Health Care Advisory Board interviews and analysis.

Consolidation on the March

Other Notable Hospital M&A Activity

$6.5BCombined system’s expected annual revenue

Baylor + Scott and White

Mount Sinai + Continuum Health Partners

Beaumont + Botsford + Oakwood

“Combined, we will create economies of scale that will allow us to reduce the trend of rising health care costs.”

Michele RichardsonAdvocate Board Chair

Case in Brief:Advocate NorthShore Health Partners

• 16-hospital merger of Advocate Health Care, NorthShore University HealthSystem

• Creates strong clinical, geographic presence in Chicago area

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Policy Tensions Remain Between Integration, Competitiveness

Source: Health Care Advisory Board interviews and analysis.

Aggregation Always Subject to Regulatory Scrutiny

January 2014: Federal judge blocks merger of St. Luke’s Health System and Saltzer Medical Group

April 2014: U.S. Court of Appeals orders ProMedica to unwind its 2010 acquisition of St. Luke’s Hospital

January 2014: FTC rules CHS must divest two hospitals to complete HMA acquisition

…But Market Power Still a Red FlagAllowances for Effective Coordination…

Bundled payment programs open door to gainsharing with Medicare revenues

Clinical Integration safe harbors allow joint contracting between independent physicians

CMS incentivizes, promotes ACO programs

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Insurer, Seven Competing Systems Offer Market-Wide Solution

Strategic Advantage #2: Integration

Source: “Anthem, Seven California Health Systems Team Up To Form HMO,“ California Healthline, September 17, 2014; Commins J, “Anthem Blue Cross, 7 CA Health Systems Create New Challenger, Business Model,” HealthLeaders Media, September 18, 2014; Health Care Advisory Board interviews and analysis.

Vivity Betting on Coordination over Consolidation

AnthemBlue Cross

Cedars-Sinai Medical Center

Good Samaritan Hospital

PIH Health

MemorialCare Health System

UCLA Health

Torrance Memorial Health

Huntington Memorial Hospital

• 7 health systems

• 14 hospitals

• 6,000 physicians

“What we are recognizing is that the most effective delivery model is an integrated delivery model. We can reduce waste, improve quality of care, provide people access to the top facilities in the nation, frankly, and do that in an integrated way.”

Pam KehalyAnthem Blue Cross

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But Will Less-Intensive Arrangements Yield Sufficient Gains?

Source: Health Care Advisory Board interviews and analysis.

New Partnerships Aim at Integration Without M&A

Seven systems in NY, NJ, MA, and PA form Allspire NetworkSix hospitals form BJC

Collaborative:

14 systems ally to form Stratus Health Care

Two Systems form Georgia Health Collaborative

Four health systems form regional alliance Health Innovations Ohio

Four health systems ally to form Noble Health Alliance

Five health systems ally to form accountable care initiative Quality Health Solutions

Five SC systems form cost saving Initiant Healthcare Collaborative 

Five health systems join Vanderbilt Health Affiliate Network

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Born Out of Necessity, No-Frills Approach Suddenly Compelling

Strategic Advantage #3: Efficiency

Source: Health Care Advisory Board interviews and analysis.

The Community Hospital Resurgent?

Rural or exurban setting

Medicare, Medicaid-heavy payer mix

Limited service portfolio

Physician shortages

Smaller patient population

Labor costs lower than urban competitors

Already managing to public-payer margins

Fewer unjustifiable fixed costs

Early experience with team-based care, telemedicine

More focused patient engagement efforts

Common Challenges Potential Advantages

The Community Hospital Initiative

• Dedicated research and service effort included within Health Care Advisory Board membership

• Focuses on issues facing

– Smaller organizations

– Independent hospitals

– Rural facilities

• For more information, contact Ben Umansky at [email protected]

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Health Care Advisory Board

The New Network AdvantageAssembling the Scale, Scope, and Assets Needed to Secure Profitable Growth

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2

3

1

Road Map

Charting an Intentional Corporate Strategy

Leverage Beyond Price

The New Network Advantage

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Consolidation Dominating Industry Mindshare

Source: Health Care Advisory Board interviews and analysis.

Insecurity Abounds

The End of Independence?

“We want to stay independent. But when I look at where things are going, I just don’t see how we can compete without being part of something bigger.”

CEO, standalone 200-bed hospital

$10 Billion or Bust?

“Any health system is going to need $10 billion in revenue to survive in tomorrow’s market”

Overheard at 2014 J.P. Morgan Healthcare Conference

What Was Your Reaction?

CHS-HMA merger puts more pressure on

stand-alones to seek partners

-Page 6

SURVIVALBIGGESTOF THE

August 5, 2013

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But Will Less-Intensive Arrangements Yield Sufficient Gains?

Source: Health Care Advisory Board interviews and analysis.

New Partnerships Aim at Integration Without M&A

Seven systems in NY, NJ, MA, and PA form Allspire NetworkSix hospitals form BJC

Collaborative

14 systems ally to form Stratus Health Care

Two Systems form Georgia Health Collaborative

Four health systems form regional alliance Health Innovations Ohio

Four health systems ally to form Noble Health Alliance

Five health systems ally to form accountable care initiative Quality Health Solutions

Five SC systems form cost saving Initiant Healthcare Collaborative 

Five health systems join Vanderbilt Health Affiliate Network

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Five Major Varieties of Provider Partnership

Source: Health Care Advisory Board interviews and analysis.

No Shortage of Alternative Models

Merger or Acquisition

Clinically-Integrated Hospital Network

Accountable Care Organization

Regional Collaborative

Clinical Affiliation

Description Formal purchase of one organization’s assets by another, or the combination of two organizations’ assets into a single entity

Collection of hospitals contracting jointly in order to support improved coordination, outcomes; modeled after physician CI networks

Independent entity, owned by one or several independent organizations, that accepts risk-based contracts and distributes shared savings

Flexible umbrella structure, often encompassing many independent organizations of similar geography, that may serve as foundation for further integration

Typically bilateral agreement to cooperate around a particular initiative or service line; may involve local or national partners

Examples • Baylor Scott and White

• Community Health Systems/Health Management Associates

• Trinity Health/Catholic Healthcare East

• Tenet/Vanguard

• Long Island Health Network

• Vanderbilt Health Affiliated Network

• Quality Health Solutions (WI)

• Arizona Care Network

• Accountable Care Alliance

• Allspire Health Partners

• Stratus Healthcare

• BJC Collaborative

• Noble Health Alliance

• Health Innovations Ohio

• Evergreen Healthcare with Virginia Mason

• Mayo Clinic Care Network

• Cleveland Clinic Affiliate Program

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Defenses Around Old Business Model Unlikely to Hold

Source: Health Care Advisory Board interviews and analysis.

Protection Not the Right Motivation

Higher prices charged to payers

Lower prices paid to suppliers

Typical Advantages of Market Power

Regulators scrutinizing any arrangement conferring undue market power

Increasingly competitive markets punishing inflexible, high-cost providers

Size confers price leverage

Volume-based negotiating strategies like GPOs nearing their limit

Diminishing Returns to Traditional Strategy

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Partnerships Must Drive Market Advantage

Source: Health Care Advisory Board interviews and analysis.

Leverage Beyond Price the Key to Success

Cost Advantage

Winning Preference Through Clinical Scope and Geographic Reach

Lowering Unit Prices Through

Operational Scale

Reducing Total Costs Through

Population Health

Influence on Network Assembly

Control Over Underlying Cost Structures

Impact on Entire Care Continuum

Product Advantage

Deg

ree

of M

arke

t Adv

anta

ge

Time to Maximum Benefit

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Overcoming Financial Barriers

6. Jointly-Financed Infrastructure Investment

Breaking Down Information Silos

7. Continuum-Wide Data Transparency

Hardwiring Mutual Accountability

8. Network-Enabled Performance Incentives

Source: The Advisory Board Company interviews and analysis.

The New Network Advantage

IIIWinning Preference Through

Clinical Scope and Geographic Reach

I II

Cost AdvantageProduct Advantage

Reducing Total Costs Through

Population Health

Lowering Unit Prices Through

Operational Scale

Leveraging Low-Price Care Sites

3. Top-of-site Referral Partnerships

Slimming Underlying Cost Structures

4. Clinical Footprint Rationalization

5. Next-Generation Shared Services

Driving Network Assembly

1. Comprehensive Network Product

Appealing to Network Assemblers

2. Portfolio-Enhancing Clinical Partnerships

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Discrete Elements of Partnership Support Specific Goals

Source: Health Care Advisory Board interviews and analysis.

Meaningful Integration About More than the Model

Potential Elements of Provider Integration

Payer Contracting

Brand/Identity

Strategic Plan

Governance

Operations

Clinical IT

Care Model

Expertise

Strengthens negotiating position, allows access to larger purchasers

Confers reputational benefits, signals strength of integration

Allows rationalized investments/divestitures

Enables process efficiencies, knowledge exchange

Broadens perspective over care continuum; reveals opportunities for reducing total cost of care

Reduces fragmentation in care delivery; improves outcomes

Flattens learning curves; promotes best practices

Ensures stability and implementation of other shared elements

Potential Benefits

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Choice of Model Only Determines Environment for Pursuing Integration

Source: Health Care Advisory Board interviews and analysis.

Concrete Decisions Beyond Legal Structure

Contracting Brand/Identity

Strateg

ic PlanExp

erti

se

Care M

odel

Clinical IT Operations

Go

vern

ance

Centralization

Collaboration

Independence

Questions for Every Partnership

• Which strategic and operational functions should be included in your organization’s partnership strategy?

• For each function: Is it better to centralize the function by combining it with that of a partner, or is it better to collaborate with a partner while maintaining separate but aligned versions of the same function?

• Does the legal structure of an existing or proposed partnership facilitate the appropriate degree of integration for each function?

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2

3

1

Road Map

Charting an Intentional Corporate Strategy

Leverage Beyond Price

The New Network Advantage

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Winning Preference Through Clinical Scope and Geographic Reach

Driving Network Assembly

1. Comprehensive Network Product

Appealing to Network Assemblers

2. Portfolio-Enhancing Clinical Partnerships

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Source: Health Care Advisory Board interviews and analysis.

1) Pseudonym.

Which Would You Choose?

Broad Geographic Reach…

Network in Brief: Crescent Health1

• National hospital provider with hospital campuses across the country

• Despite broad geography, limited clinical depth at local level

…or Deep Clinical Scope?

Network in Brief: Silica Healthcare1

• 6-hospital system in the Midwest with employed physician network

• Care sites concentrated in roughly half of single metropolitan area

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Individual footprint sufficient to appeal to small employers in local market

Flexible Approach Meets the Demands of a Wide Range of Purchasers

Source: Health Care Advisory Board interviews and analysis.

Developing a Targeted Network Strategy (or Three)

Regional

Network in Brief: Whitehaven Health1

• Integrated health delivery system in the Midwest

• Segments market strategy by geography

• Health system footprint is sufficient for appealing to local purchasers; regional and super-regional networks assembled through partnership

Discussing possibility of additional partnerships to form state-wide network able to contract with state employers

Partnership with like-minded, geographically contiguous health system provides flexibility to sign larger regional contracts

Local

Super-Regional

Partnership-driven

Geo

gra

phic

Rea

ch

Number of contracting possibilities

A Multi-Layered Approach to Network Development

1) Pseudonym.

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Local

• Small employers

• Local payers

Regional

• Large employers

• National payers

Super-Regional

• State/national employers

• International purchasers

Source: Health Care Advisory Board interviews and analysis.

Deciding Whether to Take the Lead

What is your organization’s network strategy?

Driving Network Assembly

Appealing to Network Assemblers

A Key Decision at Every Level

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Collaboration Provides a Financially-Sustainable, Proactive Approach

Source: Health Care Advisory Board interviews and analysis.

Leveraging Partnership to Appeal to Purchasers

Brand MarketingBuild or Buy

Driving Network Assembly

Appealing to Network Assemblers

Committed to Independence

Open to Collaboration

Pitfall:

Increasingly difficult for all but niche providers to confidently position organization as “must-have”

Pitfall:

Extremely slow and capital-intensive; may require moving away from core competencies

ComprehensiveNetwork Product

1

Portfolio-Enhancing Clinical Partnerships

2

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Addressing Individual Limits in Geographic Reach

Source: Health Care Advisory Board interviews and analysis.

Combining Geographies to Match Purchaser Footprint

Network in Brief: Healthcare Solutions Network

Cincinnati-based employers have employees living on both sides of river

• Joint venture collaboration between Cincinnati, Ohio-based TriHealth and Edgewood, Kentucky-based St. Elizabeth Healthcare

• Offers health insurers access to a unified, high-quality, low-cost network that covers the entire Tristate region

• Both organizations offering the network to their current employees and dependents

Partnering to Expand Geographic Scope

St. Elizabeth Healthcare

TriHealth

Neither Organization Able to Offer Adequate Geographic Coverage Alone

Ohio

Kentucky

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Selling Narrow Network Product Through Commercial Insurers

Source: Health Care Advisory Board interviews and analysis.

Using Expanded Reach to Target Local Employers

TriHealth

St. Elizabeth’s

Healthcare Solutions Network

Public Payers

Local Employers

Insurer sells HSN as a narrow network product

Combined geography sufficient to support large Cincinnati employers

Creating a Purchaser-Focused Network Solution

Governance

Organization CEOs serve as Co-CEOs with support of existing management teams

Quality Alignment

Aligning quality targets to work towards demonstrable quality improvements

Historical Relationship

Previous collaboration around insurance products key to ensuring mutual trust

Key Partnership Elements

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Network in Brief: EvergreenHealth and Virginia Mason

Creating a Comprehensive High-Value Network Through Partnership

Source: Health Care Advisory Board interviews and analysis.

Aligning to Expand Clinical Scope

EvergreenHealth

Gains access to quaternary facility with proven clinical outcomes and access to expanded geography

Virginia Mason

Gains access to home care services and fills gap of secondary facilities east of Seattle with a partner with a proven reputation for value

• EvergreenHealth is a 318-bed medical center and integrated health system based in Kirkland, Washington; Virginia Mason is a 336-bed medical center and group practice based in Seattle

• In 2012, partnered to create a broader network of care in the Puget Sound region with the purpose of continuous improvement in quality and safety, reduction in cost of care, improving patient experience, and shared recruitment to avoid oversupply of physicians

• Partnership leverages strengths of both organizations and broadens each partner’s scope of services and expanded geographic reach

Beginning with Cardiac and Neuroscience Care

Virginia Mason quaternary facility

EvergreenHealth home care

EvergreenHealth tertiary facility

Virginia Mason clinics

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Built on a Foundation of Shared Vision

Source: Health Care Advisory Board interviews and analysis.

Ensure A Cohesive Bond

Bob Malte, CEO, EvergreenHealth

Linking a Network Without an LLC

“We set out to form an extremely durable and long-term partnership that allows us to come together and create a high-value network of care. To do that, we forged a board-driven, 20-year agreement that ensures the partnership’s strength and stability, ultimately increasing the quality and value of care available in our community.”

Develop a Long-Term Vision

Contractual partnership agreement spans 20 years, ensuring both parties are fully committed to partnership

EnsurePhysician Support

Both partners demonstrate clinical quality and outcomes

Secure Support

Steering committee contains equal representation from both partners (CEOs, CMOs, COOs)

TrackPerformance

Quality dashboards track progress on clinical areas; partnership dashboard tracks progress on priority activities aligned with strategic partnership goals

Gary Kaplan MD, CEO, Virginia Mason

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Telemedicine Partnerships Allow Complex Care to Remain In-House

Tactic #2: Portfolio-Enhancing Clinical Partnerships

Source: Health Care Advisory Board interviews and analysis; Mayo Clinic Care Network, available at: http://www.mayoclinic.org/about-mayo-clinic/care-network.

Bringing High-End Expertise to the Local Market

Network in Brief: Mayo Clinic Care Network

• 26-member network; partnership model that extends Mayo physicians and expertise to members

• In addition to direct access to clinical expertise, members are able to brand themselves as members of Mayo Clinic Care Network

1. eConsult: Specialists can connect with Mayo Clinic experts when they want additional input on complex patient care

2. AskMayoExpert: Web-based system allows members to access Mayo perspective on hundreds of medical conditions

Systems and AMCs Also Seeking to Enhance Portfolios

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Conflicting Incentives a Risk When Partnering Regionally

Source: Health Care Advisory Board interviews and analysis

1) Pseudonym.

Competitive Dynamics Threaten Local Partnerships

Case in Brief: Nielsen Park Hospital1

• Small, rural community hospital in the South

• Partnered with large tertiary system to enable local access to high-end specialty services such as cardiology, oncology

• Despite promising start to partnership, competition for volumes between partners threatening sustainability of affiliation

Multi-Layered Collaboration Promises Benefit…

Shared Staff

Physicians from tertiary hub travel to community hospital

Telemedicine

Allows community physicians to consult with specialists in real-time

Co-branding

Community hospital able to brand itself as affiliate of tertiary hub

…Tensions Over Referrals Threatens Affiliation

Tertiary hub looking to draw as many referrals as possible from community partner

Community hospital trying to retain as many volumes as possible within local community

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Ideal Geography a Key Tension in Clinical Affiliation Decisions

Source: Health Care Advisory Board interviews and analysis.

Weighing a Local or National Partner

Consider Local Partner if…. Consider National Partner if….

Local providers with same service gap are interested in collaboration

Local providers that currently offer service are interested in partnering for mutual benefit

Demand for service is low enough that local providers are willing to share staff, equipment

Patients value brand familiarity over national reputation

Ultimate aim of partnership is joint contracting or shared population health management

Local competition for volumes in targeted service area is high

Local demand for service is insufficient to justify full-time staff

Targeted service may easily be provided through telemedicine or virtual physician-to-physician consults

Patients recognize and value national reputation

National providers have significant quality advantage over any local partnership options

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Winning Preference Through Clinical Scope and Geographic Reach

Source: Health Care Advisory Board interviews and analysis

Key Takeaways

Shared vision and strategy key to partnership around network product

It is difficult to make the necessary investments to ensure network growth without a shared vision and a significant amount of trust among network partners.

Creation of a health plan may be a component of network strategy, but should not be the sole strategy

The most successful networks ensure flexibility in contracting options; achieving this means leading with a provider network that can also contract with commercial payers.

Certain models faster at bringing a network together but may restrict contracting ability

M&A and CI joint contracting arrangements are slower to market, but allow for tighter network integration than faster models such as regional alliances and clinical affiliations.

Competitive tendencies can threaten the success of regional clinical affiliations

Competition for volumes can undermine regional affiliations; clear referral protocols are necessary to ensure each partner retains appropriate volumes.

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Source: Health Care Advisory Board interviews and analysis.

Weighing the Models

ModelComprehensive Network Product

Portfolio-Enhancing Clinical Partnerships

Comments

Merger or Acquisition

M&A clearly expands geographic reach and clinical scope; however, it is a much slower and more capital-intensive approach than other models.

Clinically-Integrated Hospital Network

CI is probably the most common means of pursuing joint contracting; this model will be essential for those organizations looking to partner around a narrow network offering.

Accountable Care Organization

Sharing risk is probably the quickest way to enable joint contracting; however, starting an ACO involves costs and cultural shift.

Regional Collaborative

Collaboratives often involve more members so there is greater potential to expand reach and scope; however, attempts to contract jointly will likely invite significant regulatory scrutiny.

Clinical Affiliation Agreement

These, typically bi-lateral agreements, are well-suited to filling a specific clinical gap; however, they often span large geographies and thus tend to limit opportunities to contract jointly.

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Source: Health Care Advisory Board interviews and analysis.

Ideal Partners

Complementary Clinical Assets

Complementary Geography

Strong Brand Name

Shared Strategic Vision

Willingness to Share Referrals

Five Characteristics of the Ideal Partner

Partners that span a different part of the care continuum are ideal for bringing new capabilities to the network

For the purposes of expanding reach or sharing referrals, partners with contiguous geography are ideal; national partners ideal for telemedicine partnerships

Consider whether patients value national brands or prefer a local partner (i.e. the “best hospital in town” or the hospital that they have been to before)

Particularly important for those organizations looking to jointly own and sell a market-facing network; affiliations of this nature require long-term commitment

Clinical affiliations in particular require clarity around referral protocols and where volumes will be retained to ensure competitive tensions do not undermine partnership

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Lowering Unit Costs Through Operational Scale

Leveraging Low-Price Care Sites

3. Top-of-Site Referral Partnerships

Slimming Underlying Cost Structures

4. Clinical Footprint Rationalization

5. Next-Generation Shared Services

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Limited Ability to Compete Against Low-Cost Providers

Source: Regents Health Resources, “Imaging Market File,” Radiology Business Journal , April 2011; Health Care Advisory Board interviews and analysis.

1) MRI, CT, Radiography, Nuclear Medicine, Ultrasound, Mammography, and PET.

2) Hospital Outpatient Department.

High Cost Driving Price Rigidity

High Fixed Cost Production Model

Low-Cost Narrow-Focus Care SitesHospital Outpatient

DepartmentFreestanding

Imaging Center

$779

$334

Difference in Average Price for Common Imaging Procedures1

HOPD2 vs. Freestanding Imaging Facilities, 2011

57% lower

Struggling to offset expensive fixed cost base

Lack of back-office efficiency

Facilities with low-fixed costs

Streamlined focus on narrow set of services

vs.

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Three Tactics for Increasing Price Flexibility

Source: Health Care Advisory Board interviews and analysis.

Use Networks to Build Operational Scale

Slimming Underlying Cost Structures

4

Next-Generation Shared Services

Leveraging Low-Price Care Sites

Top-of-Site Referral Partnerships

3 5

Clinical Footprint Rationalization

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Sending Patients to the Right Site, at the Right Cost

Tactic #3:Top-of-Site Referral Partnerships

Source: Health Care Advisory Board interviews and analysis.

Re-envisioning Top-of-Site Care

Tertiary Hospital to Community Hospital

Emergency Department to Urgent Care Provider

Primary Care Office to Retail Clinic

School Clinic

Urgent Care

Pediatric After Hours Women’s

Clinic

Pediatric Urgent Care

Medical Home

E-Visits

Full Worksite

Clinic

Mental Health Urgent Care

Advanced Care

Center

Retail Clinic

Chronic Disease Clinic

An Expanding Network of Low-Acuity Partners

Three Main No-Regrets Focus Areas for Volume Shifts

1

2

3

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Faulkner’s Stubbornly Low Prices Show Benefit of Strategy

Source: Sussman et al, “Integration of an Academic Medical Center and a Community Hospital: The Brigham and Women’s/Faulkner Hospital Experience,” Journal of Academic Medicine, 2005; Health Care Advisory Board interviews and analysis.

1) Came together under common corporate parent

More Than Just Theoretical

Brigham and Women’s Proving the Point

Lower commercial prices at Faulkner vs. BWH, as of 2012

General admissions shifted from BWH to Faulkner since 2005

19%

13.7%2013 Case

Mix Index0.801.38

Faulkner Hospital

BWH contracts with local multispecialty group (Harvard Vanguard Medical Group) came up for renegotiation

HVMG received attractive terms from another local hospital

BWH able to retain contract by offering to shift more lower-acuity volumes to Faulkner at lower unit price

Attractive Strategy In Negotiations with Purchasers

Merged1 1997

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Integration of Clinical Programs Needed to Encourage Top-of-Site Care

Source: Sussman et al, “Integration of an Academic Medical Center and a Community Hospital: The Brigham and Women’s/Faulkner Hospital Experience,” Journal of Academic Medicine, 2005; Health Care Advisory Board interviews and analysis.

Removing Obstacles to Volume Reallocation

Joint Clinical Programs

Due to limited operating room availability at Brigham, unfilled rooms at Faulkner made available to BWH surgeons

Key Elements of the Brigham and Women’s-Faulkner Volume Reallocation Effort

Integrated Teaching Programs

Brigham surgery and medicine residents perform a portion of training at Faulkner

Co-branding Opportunity

Patient Convenience

Less travel, availability of private rooms, better parking all seen as improving the patient experience

Cross-Branding Opportunity

Combining the two organization’s name resonated with patient focus groups and held pushback at bay from both entities

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Most Markets Far From Rationalized

Tactic #4: Clinical Footprint Rationalization

Source: Alicia Caramenico, “Council: Eliminate excess hospital beds to save $116M,” Fierce Healthcare, May 2013; Health Care Advisory Board interviews and analysis.

Right-Sizing Facility Footprint a Clear Opportunity

Per bed when removing beds piecemeal, includes reduction in supply and staff expenses

$25-106K

Per bed when closing entire facilities, includes facility, supply, and staffing cost reductions

$580K

1980 1990 1995 2000 2008 2009

1.46 M

1.36 M1.21 M

1.08 M 0.98 M 0.95 M78%

70%66%

66% 69%68%

Inpatient Beds Occupancy Rate

Despite Reductions in Hospital Beds, Most Organizations Still Have Excess Capacity

U.S. Inpatient Beds, Occupancy Rate 1980-2009

1) Calculated by taking 18% of the average cost per bed, by bed type, from the 2009 and 2010 Medicare Cost Report Data, inflated at 2% annually to reflect natural price growth.

Significant Opportunity for Savings in Reducing Excess Bed Capacity

Estimated Cost Savings from Eliminating Expectedly Empty Beds in Rhode Island1

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Northwest Metro Alliance Combined Planning Process

Strategic Alignment Allows for More Efficient Planning for Future Capacity

Source: HealthPartners and Allina Hospitals and Clinics, available at: https://www.healthpartners.com/ucm/groups/public/@hp/@public/documents/documents/cntrb_008919.pdf, accessed 3 May 2014; Health Care Advisory Board interviews and analysis

First, Do No Harm

Network in Brief: Northwest Metro Alliance

• Partnership between Bloomington-based HealthPartners and Minneapolis-based Allina Health, centered in northwest suburbs of Minneapolis

• Joint planning done through alliance reduces duplicative efforts

• Alliance creates guiding principles and rules

• Shared incentives under HealthPartners’ health plan encourages cooperation

• Allows for collaborative planning across the entire population

Example: HealthPartners and Allina Health are joint owners of two outpatient imaging centers in the market

Avoids Duplication of Services within Shared Market

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Consolidation of More Lucrative Services May Require Financial Alignment

Source: Health Care Advisory Board interviews and analysis.

Address All Stakeholder Incentives

Cultural Alignment

• Long working relationship since 1995

Strategic Alignment

• Shared vision of regional growth

• Launched three-way joint venture with Dean Health

• Collaborating on a number of population health management projects

Financial Alignment

• Agreed to sign PSA with Prevea physicians ensuring physician compensation at fair market value

Components of Alignment Necessary to Execute on Capacity Rationalization

HSHS-Prevea Partnership Finds Opportunity to Rationalize Duplicative Imaging Capacity in

Wisconsin

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Byron1 Merger Showcases Potential of Full-Service Line Consolidation

Source: Health Care Advisory Board interviews and analysis.

1) Pseudonym.

Limit to What Can Be Achieved Without Full Merger

Bells Medical Center1 • 900 cases/year• Large campus with excess capacity

Clarkes Hospital1 • 200 cases/year • Capacity constraints for other services

Decision to Consolidate Duplicative CV Services at Byron Health1

Large Profitability Differential Bells program clearly more profitable than Clarkes program

Close Geographic Proximity Programs within 5 miles of each other, serving same population

Operational Gains Potential cost savings from consolidated staffing, space

Staffing Cost Savings

25%Loss in market-share after consolidation

0%Reduction in number of Cardio-Pulmonary Perfusionists needed

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Applying the “Shared Services” Concept to Health Care

Tactic #5: Next-Generation Shared Services

Source: Health Care Advisory Board interviews and analysis.

Creating Advantage Through ‘Internal Outsourcing’

Attributes of a Top-Performing Shared Services Organization

Treats operational units as clients, competes for business vs. outside vendors

Concept in Brief: Shared Services Organization

• Single service organization performs selection of business support activities on behalf of multiple operating units

• “Shared” processes moved out of individual operating units and into separately managed shared services organization (SSO)

• An SSO has same expectations, responsibilities and accountabilities as external vendor does to its clients, making it more than just a centralization function

Strategy, functionality driven by needs at operational unit level

Focus on process standardization and continuous improvement

Transfer of insight from high-performing units to low performing units

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Significant Opportunity to Improve Network Attractiveness

Source: Health Care Advisory Board interviews and analysis.

1) Intensity Modulated Radiation Therapy

Translating Cost Savings into Competitive Pricing

Margin Improvement

• Improve margins from 6.5% to 9%

New Investments

• e.g. Two new 1.5 T MRI Scanners

• e.g. Four new 64 Slice CT scanners

• e.g. One new IMRT1 Machine

Service-Specific Price Reductions

• e.g. reduce outpatient imaging prices up to 35% while still maintaining existing margins

Universal Price Reductions

• Reduce prices overall by up to 5.9% while still maintaining existing margins

• 150-bed hospital carries out successful cost-savings initiative

• Manages to cut $2 million from operating expenses

1

2

3

4

Savings Reallocation Options for Hypothetical Medium-Size U.S Hospital

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Lowering Unit Costs Through Operational Scale

Source: Health Care Advisory Board interviews and analysis.

Key Takeaways

Scale no guarantee of cost savings

Regardless of the model chosen, successful consolidation requires an investment in a dedicated cross-organizational consolidation function. No model guarantees such a function.

Cross-organizational transparency necessary to unlock full benefits of consolidation

Though non-merger models have the ability to centralize and consolidate costs, mergers provide an extra level of cross-organizational transparency and therefore a greater opportunity to cut costs.

Integration of clinical programs necessary to promote top-of-site volume allocation

Models that encourage clinical alignment will facilitate more efficient volume reallocation.

Rationalization of underutilized capacity historically elusive

Potential merger savings based on consolidation and closure of facilities should be highly scrutinized.

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Source: Health Care Advisory Board interviews and analysis.

Weighing the Models

ModelTop-of-Site

Referral Partnerships

Clinical Footprint

Rationalization

Next Generation

Shared Services

Comments

Merger or Acquisition

Greatest possibility for consolidation of business functions, rationalization of referrals and clinical capacity though success requires partnership beyond financial integration.

Clinically-Integrated Hospital Network

Contracting leverage gained through CI offers incentive for clinical collaboration but little incentive for operational consolidation and rationalization.

Accountable Care Organization

Huge incentive for rationalization of referrals, though less for consolidation of operations; strategic alignment offers possibility to prevent duplication of future clinical investment.

Regional Collaborative

Potential, though limited, to consolidate and centralize business operations, and gain leverage over vendors, suppliers.

Clinical Affiliation Agreement

Focus on operational alignment limits potential to consolidate business operations, though may help to rationalize referral patterns, prevent future duplication of investment.

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Ideal Partners

Complementary Case Mix

Low Cost Structure

Willingness to Consolidate

Cultural Closeness

Existing Capabilities

Five Characteristics of the Ideal Partner

Partnerships between organizations that have complementary service capabilities provide opportunity for mutual benefit by reallocating volumes between sites.

Organizations with a low existing cost structure represent good opportunities to expand low-price sites of care.

Consolidation requires commitment and close cooperation; ideal partners are committed to executing on centralization and consolidation possibilities.

Consolidation and centralization are highly political process; a high degree of cultural alignment is necessary across all organizational levels to prevent significant pushback.

Partners with already highly efficient operational functions provide best opportunity for consolidationas scaling existing functions is easier than building anew.

Source: Health Care Advisory Board interviews and analysis.

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Reducing Total Costs Through Population Health

Overcoming Financial Barriers

6. Jointly-Financed Infrastructure Investment

Breaking Down Information Silos

7. Continuum-Wide Data Transparency

Hardwiring Mutual Accountability

8. Network-Enabled Performance Incentives

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Controlling Unit Costs Only Part of the Equation

Source: Health Care Advisory Board interviews and analysis.

Providers Judged by Ability to Reduce Utilization

Price Cut

Improve efficiency to offer lower fee schedule

Utilization Management

Rationalize utilization to secure referral preference

Trend Control

Implement care management to control cost growth trend

Degree of Cost Control

Three Provider Strategies to Appeal to Network Assemblers on Cost

Low Unit Price Total Cost Control

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Steps To Total Cost Management Well Established

Source: Health Care Advisory Board interviews and analysis.

A Clear Path for Improvement

Keep patient healthy, loyal to the system

Avoid unnecessary higher-acuity, higher-cost spending

Trade high-cost services for low-cost management

High- Risk

Patients

Rising-Risk Patients

Low-Risk Patients

Study in Brief: Playbook for Population Health

• Study summarizes the key leadership and care model capabilities needed for financial success under population health

• Available at advisory.com/pophealthplaybook

Attaining Financial Success From Patient Management

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Partnership Offers a Path Forward

Source: Health Care Advisory Board interviews and analysis.

Population Health a Difficult Ambition Acting Alone

Reducing Financial Barriers

6

Jointly-Financed Infrastructure Investment

Hardwiring Mutual Accountability

8

Network-Enabled Performance Standards

Problem #3: Lack of shared accountability

Problem #1: Insufficient financial capital

Breaking Down Information Silos

7

Continuum-Wide Data Transparency

Problem #2: Fragmented data and expertise

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Population Health Requires Extensive Investment

Source: American Hospital Association, “Activities and Costs to Develop an Accountable Care Organization,” available at: http://www.aha.org/content/11/aco-white-paper-cost-dev-aco.pdf, accessed May 5, 2014; Health Care Advisory Board interviews and analysis.

Tactic #6: Jointly-Financed Infrastructure Investment

1) American Hospital Association.

An Undeniable Financial Burden

AHA’s1 estimate of ACO start-up costs fora 5-hospital system

$12M

Care management staffing

Electronic Medical Record

Common Areas of Investment

Patient-Centered Medical Home

Disease Registry

Post-Acute Care network

Managementresources

AHA’s estimate of ongoing annual ACO costs for a 5-hospital system

$14.1MLegal and consulting support

Health Information Exchange

Predictive analytics

PCPrecruitment

Specialist network

Patient engagement tools

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Shared Care Management Investment Through ACO

Source: Health Care Advisory Board interviews and analysis.

Partnership Reduces Individual Financial Burden

Arizona Care Network Shared Staffing Model

Arizona Care Network

Dignity Health Arizona

• Care management teams (RN, community resource specialist, pharmacist)

• Physician support staff (e.g. for quality training)

• IT infrastructure

Abrazo Health

Network in Brief: Arizona Care Network

• Physician-led ACO and CI network; jointly-owned by Abrazo Health and Dignity Health Arizona

• Population health infrastructure investments made at network level, allowing Abrazo and Dignity to share costs of resources such as staffing, IT

Jointly-owned physician-led ACO and CI network

Shared Investment Areas

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Partners Benefitting from Master Patient Index

Tactic #7: Continuum-Wide Data Transparency

Source: Healthcare Financial Management Association, “Dallas-Fort Worth Hospitals Share Data for Dramatic Improvements,” available at: https://www.hfma.org/Content.aspx?id=22078, accessed May 5, 2014; Health Care Advisory Board interviews and analysis.

Pool Data Across Network to Pinpoint Efforts

Network in Brief: Dallas-Fort Worth Hospital Council Foundation • Consortium of 156 hospital

and associate members in Northern Texas

• Provides educational programs, collaborative efforts, strategic alliances, and advocacy with the local and state governments

• Discovered that 25% of readmitted patients in the region did not return to their original hospital for care, making it difficult to accurately predict readmission rates

Regional Utilization Trends Reveal Top Population Health Opportunities

80 area hospitals feed patient utilization data into enterprise data warehouse

Master patient index matches patient records across facilities and organizations

Data is fed into analytic tools that provide insight into regional trends in utilization

Paying members receive access to quality dashboard that helps pinpoint population health efforts

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Ensures Management of Riskiest Population Segments

Source: Healthcare Financial Management Association, “Dallas-Fort Worth Hospitals Share Data for Dramatic Improvements,” available at: https://www.hfma.org/Content.aspx?id=22078, accessed May 5, 2014; Health Care Advisory Board interviews and analysis.

Putting the Master Patient Index into Practice

20%Reduction in readmissions across all member hospitals

Real-Time Data Enables Targeted Resource Deployment at One Member Hospital

Reduction in 30-day acutemyocardial infarction readmission rate at one member hospital

12% 9%

16% 12%Reduction in 30-day pneumonia readmission rate at one member hospital

Examination of region-wide, cross-facility utilization patterns reveals readmissions as area of opportunity

Analytic tools reveal clinical, demographic trends among patients who had been readmitted in the past

z

Aggressive case management of identified patients leads to reduction in readmissions

Member hospital uses population-level insight to identify patients at increased risk for readmission

z1 2

34

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Drilling Down to the Individual Patient Level

Four Approaches to Real-Time Data Sharing Among Network Partners

Source: Chicago Tribune, available at: http://articles.chicagotribune.com, accessed October 1, 2012 ; Health Affairs, “Four Years Into A Commercial ACO For CalPERS: Substantial Savings And Lessons Learned,”; HealthPartners and Allina Hospitals and Clinics, available at: https://www.healthpartners.com/ucm/groups/public/@hp/@public/documents/documents/cntrb_008919.pdf, accessed 3 May 2014 Health Care Advisory Board interviews and analysis.

1) Admission, Discharge, Transfer.

Manual Data-Sharing Agreements

Key to Partnership: Consensus on how often to proactively push data

Example: Visiting Nurse Service of New York sends home health assessment to three hospital partners every day

EMR Look-Ups

Key to Partnership: Shared or linked EMR systems

Example: Through their partnership in the Northwest Metro Alliance, Allina and HealthPartners have read only-access to each other’s Epic systems

Regional HIE

Key to Partnership: Shared funding to ensure financial sustainability

Example: Medical Home Network in Chicago has set up a regional HIE that provides participants with last 90 days of patient data

ADT1 Feed

Key to Partnership: Ideal partner has access to out-of-system utilization data

Example: Blue Shield of California provides real-time utilization data with provider partners through CalPERS ACO

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Shared Processes Eliminate Gaps in Stand-Alone Efforts

Establish a Common Network Language

• Each individual algorithm failed to identify some high-risk patients

• Inconsistent identification reduced ability to prevent:

ER visits

Admissions from ER

Inpatient readmissions

Prior to creation of CalPERS ACO, each participant had individual risk scoring process

Risk scores consolidated into single process and single IT platform

Analysis of Top 1,000 Riskiest Patients Revealed:

Consolidating Risk Scores First Step to Aligned Care Management

Source: Blue Shield of California, “An Accountable Care Organization Pilot: Lessons Learned,” available at: https://www.blueshieldca.com/employer/documents/knowledge-center/features/EKH_ACO%20Lessons%20Learned%20Case%20Study.pdf, accessed 3 May 2014; Health Care Advisory Board interviews and analysis.

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Two Promising Strategies to Hold Partners Accountable

Tactic #8: Network-Enabled Performance Incentives

Source: Health Care Advisory Board interviews and analysis.

Hardwiring Mutual Accountability

Including partners in formal risk-based arrangements (e.g. shared savings, global payment contracts)

Candidates:

• Hospital ACO partners

• Employed physicians

• Ancillary providers

Formal Shared Risk

Membership-Based Incentive

Positioning membership in the network itself as performance incentive (e.g., preferred referral network)

Candidates:

• Clinical Integration Network

• Post-Acute Care Providers

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Bringing Ancillary Providers to the Table Through Shared Savings

Source: MMC Physician-Hospital Organization, available at: http://www.mainehealth.org/mhaco, accessed May 3, 2014; Health Care Advisory Board interviews and analysis;

Extend Shared Risk Beyond Hospital and Physicians

Network in Brief: MMC Physician-Hospital Organization

• PHO composed of 1,100 physicians from the Community Physicians of Maine and the seven MaineHealth hospitals; based in southern and coastal Maine

• As part of participation in the Medicare Shared Savings Program, will be sharing savings with ancillary providers based on value performance measures

Home Health Included because of high Medicare utilization

Lab Included due to relevance for any population

PHO has worked with each provider to identify relevant performance metrics; focusing specifically on 33 metrics from MSSP to promote performance against value-based metrics across sites

SNF Included because of high Medicare utilization

Behavioral Health Included in case of expansion to Medicaid

Portion of savings that will be distributed to “other providers”, i.e. not hospitals, PCPs, or specialists

5%

MMC Physician-Hospital Organization ACO

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Implementing Lessons from Physician CI1

Source: Health Care Advisory Board interviews and analysis.

1) Clinical integration.2) Pseudonym.

Creating the Incentive to Keep Up

Network in Brief: Cronulla Health Care2

• Clinically integrated physician network affiliated with six Cronulla Health Care hospitals in the Midwest

• Instituted CI score, non-negotiable membership requirements to improve unity, quality of physician partners in network

• All physicians must meet a minimal performance threshold on “CI score”

• Physicians who score below minimum threshold placed on probation for one year

Creating Motivation to Meet Network Standard

Threat of Probation Incents Improvement Benefits to Network Inclusion

• Favorable payer rates from joint contracting

• Access to IT infrastructure

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Promise of Increased Referrals Creates Performance Incentive for PACs

Source: Healthcare Financial Management Association, “Bridging Acute and Post-Acute Care,” available at: http://www.hfma.org/acutepostacute/#120_Days_to_Launching_a_Continuing_Care_Network_for_Post-Acute_Care, accessed May 3, 2014; Health Care Advisory Board interviews and analysis.

Extending Network Exclusivity to the PAC World

Setting Out Strict Quality Standards to Achieve and Maintain Preferred Status

Network in Brief: OSF Healthcare

• Eight-hospital, not-for-profit health system based in Peoria, Illinois

• As part of Pioneer ACO strategy, created a preferred SNF network limited to 17 facilities who met target criteria

SNF Standards

Overall rating of four or five stars

Quality rating of three, four, or five stars

Registered nurses on-site 24/7

Ability to start IV lines 24/7

Ability to admit patients within two hours

Requiring Monthly Reporting to Ensure Continuous Performance

Network in Brief: North Shore-LIJ

• 16-hospital, not-for-profit health system based in Great Neck, New York

• In 2008, created a SNF affiliate network of 19 from list of potential 266

Monthly SNF Scorecard

_____ Long-term care mortality rate

_____ Long-term hospitalization index

_____ Total readmission rate within 30 days

_____ Total readmission rate within 72 hours

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Promote Continuous Improvement Through Focused Partnership

Preferred Networks Prove Ability to Reduce Total Cost

Reducing Hospitalizations at OSF’s Preferred Network

Heart Failure Rehospitalization Rate

All-Cause Readmission Rate

Reducing Readmissions and ED Visits at North Shore-LIJ’s Affiliates

Readmissions From Affiliated SNFs

2011 2013

27%

11%

Reduction in ED visits from affiliated SNFs>50%

2010 2012

6%

2%

2010 2012

13%

7.5%

Source: Healthcare Financial Management Association, “Bridging Acute and Post-Acute Care,” available at: http://www.hfma.org/acutepostacute/#120_Days_to_Launching_a_Continuing_Care_Network_for_Post-Acute_Care, accessed May 3, 2014; Health Care Advisory Board interviews and analysis.

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Source: Health Care Advisory Board interviews and analysis.

1) Group Purchasing Organizations.2) Post-Acute Care.

Mutual Benefit Necessary to Create Incentive

Areas of Mutual Benefit

Access to Operational Resources

Health systems may provide access to functionalities like their GPOs1 or IT systems that PAC2 providers would be unable to access on their own

Data Transparency

Regular data reports from PAC partners ensure that performance continues to meet high-bar; highlights areas where additional support may be needed

Shared Staff

PAC providers may be able to expand hospital capacity by taking on complex patients; health systems may send staff to monitor high-risk patients at PAC sites

Shared Care Pathways and Training

Health systems and PAC providers have different areas of expertise and may share protocols and training resources to improve network as a whole

Key Health System Benefit Key PAC Benefit

Critical Elements of Preferred PAC Network

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Reducing Total Costs Through Population Health

Source: Health Care Advisory Board interviews and analysis.

Key Takeaways

Alignment models that allow flexibility in partner choice create inherent performance incentives

Joint contracting networks, alliances, and ACOs offer greater ability to switch out low-performing partners than full-asset mergers

Standardizing care according to best practice requires tight financial alignment

Though looser collaborations may allow members to pinpoint best practices, standardizing care according to best practice will require partnership models that bring tighter financial alignment between partners

Adding more partners reduces financial burden, but also any potential reward

Adding more partners to population health efforts can lower financial costs, and improve care management, but it can also spreads potential savings across greater number of organizations

Easier to contract for risk through single entity

Difficulties in analyzing and valuing risk are exacerbated when multiple parties are negotiating and signing separate contracts with payers

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Source: Health Care Advisory Board interviews and analysis.

Weighing the Models

ModelJointly-Financed Infrastructure Investment

Continuum-Wide Data Transparency

Network-Enabled Performance Standards

Comments

Merger or Acquisition

Long development time for mergers lowers flexibility of partner selection, though full financial alignment allows greater clinical alignment

Clinically- Integrated Hospital Network

Investment in CI tends to focus on joint contracting for fee-for-service contracts, rather than population health management

Accountable Care Organization

Though financial incentives are aligned to support population health coordination, lack of strategic alignment precludes more helpful consolidation of resources

Regional Collaborative

Though number of partners may support greater economies of knowledge, little incentive to collaborate on population health

Clinical Affiliation Agreement

May incentivize collaboration on specific clinical objectives, but broader alignment vehicle necessary to facilitate population health coordination

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Source: Health Care Advisory Board interviews and analysis.

Ideal Partners

Common Patient Population

Organizations that share a patient population benefit when they partner to coordinate transitions and population health, whether they are working under fee for service or risk-arrangements

Complementary Population Health AssetsAll partnerships should involve some division of accountability, or efficient allocation of resources.

Partnerships that bring together complementary assets can reduce new expenditures, minimize the need to rationalize existing assets

Access to Claims DataProvider organizations that have access to patient claims data, either through an owned health plan, or an existing relationship with a payer, represent ideal partners in population health

Organizations should ensure that they negotiate access to claims data when setting up any risk-based arrangement with a commercial payer

Three Characteristics of the Ideal Partner

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2

3

1

Road Map

Charting an Intentional Corporate Strategy

Leverage Beyond Price

The New Network Advantage

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Leverage Beyond Price the Key to Success

Source: Health Care Advisory Board interviews and analysis.

Partnerships Must Drive Market Advantage

Winning Preference Through Clinical Scope and Geographic Reach

Lowering Unit Prices Through Operational Scale

Reducing Total Costs Through Population Health

Cost Advantage

I II III

Product Advantage

Deg

ree

of M

arke

t Adv

anta

ge

Time to Maximum Benefit

• Driving Network Assembly

• Appealing to Network Assemblers

• Leveraging Low-Price Care Sites

• Slimming Underlying Cost Structures

• Overcoming Financial Barriers

• Breaking Down Information Silos

• Hardwiring Mutual Accountability

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Source: Health Care Advisory Board interviews and analysis.

Model Choice No Guarantee of Success

Legal Ability to Cooperate

Models like M&A, clinical integration, and shared risk provide legal framework that enables collaboration

Shared Identity

Partnership creates unified identify, whether through formal legal structure or informal collaboration

Models Set Ground Rules…

Cultural Alignment

Identity may be in name-only; true cultural alignment requires robust communication plan, extensive training

Stakeholder Buy-In

Governance structure no guarantee of buy-in from key stakeholders such as physicians and board members

Integration Planning

Legal framework only the enabler; benefits of collaboration only realized through integration

Alignment of Governance

Partnership creates formal governance structure; leaders may be new or pulled from partner organizations

...But Underlying Challenges Remain

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Success Depends on Focused, Intentional Strategy and Execution

Network Strategy Must Be More Than Just a Hobby

Integration as Core CompetencyScientific Approach to Cultural Fit

Transactional DisciplineClarity of Purpose Professionally Managed Pipeline

Intentional corporate strategy starts with well-formed, clearly articulated organizational purpose

Partnership function should be an organized, routine process, not an episodic activity

Robust due diligence process prevents “partnership for the sake of partnership”

Cultural affinities and possible contradictions explored in parallel to financial due diligence

Integration planning begins long before partnership is finalized and continuous indefinitely through rigorous monitoring

Five Characteristics of Intentional Corporate Strategy

1 2 3

4 5

Source: Health Care Advisory Board interviews and analysis.