Health Care Industry Trends 2013Ready-to-Use Presentation Slides

Marketing and Planning Leadership Council

2

• Spending Trends

• Volume Performance

• Reimbursement Trends

• Coverage Expansion

Growth Trends

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Bending the Cost Growth CurveHealth Care Spending Growth Continues To Slow

Percent Increase in National Health Care Spending

2003-2011

2004 2005 2006 2007 2008 2009 2010 20110.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%7.1%

6.8%6.5%

6.2%

4.7%

3.9% 3.9% 3.9%

Source: Centers for Medicare and Medicaid, “National Health Expenditure Accounts”, 2013, available at: www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and Reports/NationalHealthExpendData/Downloads/tables.pdf; Department of Health and Human Services, “Growth in Medicare Spending Per Beneficiary Continues to Hit Historic Lows”, January, 2013, available at: http://aspe.hhs.gov/health/reports/2013/medicarespendinggrowth/longdesc.shtml; Marketing and Planning Leadership Council interviews and analysis.

2010 2011 2012

1.8%

3.6%

0.4%

Medicare Spending Growth per Beneficiary

2010-2012

Spending Trends

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Hospital Volume Growth Remains Sluggish

Source: “US Not-for-Profit Healthcare Outlook Remains Negative for 2013,” Moody’s Investors Service, January 22, 2013

Volume Performance

Hospital Volume Growth Rates

2008-2011

2008 2011

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

1.0%

0.0%

-0.4%

0.1%

2.6%

3.7%

1.6% 1.6%1.9%

1.3%

0.6% 1.5%

Admissions Outpatient Visits

Outpatient Surgeries

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Modest Growth Anticipated for the Near TermInpatient and Hospital Based Outpatient Volume Projections

Inpatient Volume, CAGR1

2012-2017

Cardiac Services

Neurology

General Surgery

Orthopedics

General Medicine

Neurosurgery

Overall

0.1%

0.8%

0.9%

1.3%

2.6%

0.4%

Hospital-Based Outpatient Volume, CAGR1

2012-2017

Source: Advisory Board Inpatient and Outpatient Market Estimators; Advisory Board research and analysis.1) Compound Annual Growth Rate

Orthopedics

General Surgery

E&M

Cardiology

Radiology

Oncology

Overall

0.8%

1.0%

1.2%

1.6%

1.8%

3.1%

1.5%

(2.3%)

3.1%

Volume Performance

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Persistent Outpatient Shift

Outmigration a Long-Established Trend

Source: “Report to the Congress: Medicare Payment Policy,” MedPAC, March 2012, available at: www.medpac.gov; Marketing and Planning Leadership Council interviews and analysis.

1) Outpatient services represent entire market regardless of site of service (includes hospital-based settings, ASCs, other freestanding providers and physician offices)

Medicare Volume Growth

Cumulative Percent Change

All Payer Volume Growth Projections1

2012-2017

Outpatient Services per FFS Part B Beneficiary

Inpatient Discharges per FFS Part A Beneficiary

34%

(8%)

2004 2011

19.9%

14.8%

13.8%

10.7%

14.0%

5.0%

(4.1%)

(10.5%)

Inpatient Oupatient

Cardiac Services

Vascular Services

Orthopedics

Neurosurgery

Volume Performance

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ACA Includes Hospital Reimbursement Cuts

Reimbursement Trends

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

2) Disproportionate Share Hospital.

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

($4B)($14B)

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

($42B)

($53B)

($64B)

($75B)

($86B)

Medicare Fee-for-Service Payment Cuts

Reductions to Annual Payment Rate Increases1

$415B in total fee-for-service cuts, 2013-2022

$260BHospital payment

rate cuts, 2013-2022

$56BReduced Medicare and Medicaid DSH2

payments, 2013-2022

Source: CBO, “Letter to the Honorable John Boehner Providing an Estimate for H.R.6079, The Repeal of Obamacare Act,” July 24, 2012, available at: www.cbo.gov; Marketing and Planning Leadership Council interviews and analysis.

Law Reduces Annual Payment Increases Across Ten Years

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RAC Audits Spur Increase in Observation

Shift from Inpatient to Observation Status a “Stealth” Price Cut

Source: The Advisory Board Company Daily Briefing, “Clement: What Medicare is doing to limit observation status,” May 28,2013, Washington, DC; Jaffe S, “Medicare Seeks to Limit Number of Seniors Placed In Hospital Observation Care,” Kaiser Health News, May 3, 2013, available at: www.kaiserhealthnews.org; Gengler A, “The Painful New Trend in Medicare,” CNN Money, August 7, 2012, available at: money.cnn.com; Marketing and Planning Leadership Council interviews and analysis.

Reimbursement Trends

Inpatient Observation "Improperly" Admitted

$4,100

$1,800

$0

Potential Chest Pain Treatment Paths

Medicare Payment Rates

1.6M 69% 745KObservation stays nationwide, 2011

Increase in number of Medicare beneficiaries under

observation, 2006-2011

Hospital observation visits exceeding 24 hours, 2011

Breakdown of RAC Denials

Hospital Overpayments Recovered, 2011

$152M$648MInappropriate

One-day StaysAll Other Reasons

1) Recovery Audit Contractor.

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Medicaid Expansion Uncertain

States Diverge Over Choice to Expand Medicaid Eligibility

Coverage Expansion

State Participation in Medicaid Expansion

Participating

Will Not Participate

Undecided

As of September 2013

Source: Health Care Advisory Board interviews and analysis.

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Who Are The Enrollees?

Will Individuals Shop on the Exchanges?

Low Awareness, Weak Penalties May Dampen Enrollment

Source: Kaiser Family Foundation, “Kaiser Health Tracking Poll,” March 2013, available at: kff.org; PwC, “Health Insurance Exchanges: Long on Options, Short on Time,” October 2012, available at: www.pwc.com; Health Care Advisory Board interviews and analysis.

Coverage Expansion

1) Higher of the two values.

Individuals’ Awareness of Exchanges

How Much Respondents Have Heard About Their State’s Health Insurance Exchange

48%

29%

15%

7%

Nothing at All

Only a Little

A Lot

Some

Year Penalty1

2014 $95 or 1% of income

2015 $325 or 2% of income

2016 $695 or 2.5% of income

Penalties for Non-compliance

n=1,204

70%In good to

excellent health

56%Employed full-time

33Median

age

Sample Penalties

Office Worker

Income: $30,000

Real Estate Agent

Income: $190,000

2014 2015 2016

$300

$600

$750

$1,900

$3,800

$4,750

2014 2015 2016

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Bracing for the ChurnSignificant Crossover Expected Between Medicaid, Exchanges

Coverage Expansion

Source: Benjamin D. Sommers and Sara Rosenbaum, “Issues In Health Reform: How Changes in Eligibility May Move Millions Back and Forth Between Medicaid and Insurance Exchanges ”, Health Affairs, 30, no.2 (2011):228-236.; Marketing and Planning Leadership Council interviews and analysis.

1) Among adults with family incomes below 200 percent of the federal poverty line

2) Using 133% of the federal poverty level as the eligibility threshold

28 MAdults projected to undergo shift in

eligibility across Medicaid-exchange market within one year2

Impact of Coverage Transitions

Fluctuations in plan design, resulting in variable levels of benefits, premiums, and cost-sharing

Potential disruption of existing provider networks, steering enrollees to new care sites

Likely increase in hospital reimbursement with shift from Medicaid to commercial insurance on state exchange

Plan Benefits

Provider Networks

Payment Rate

6-months 12-months 24-months

26.9% 26.6% 19.9%

8.6%23.6% 38.4%

1 Change 2 or More Changes

Percentage of Future Enrollees with Change in Eligibility Between Medicaid, Exchange1

n=19,248

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• Pay-for-Performance

• Bundled Payments

• Accountable Care Organizations

Payment Reform

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Health Reform Seeks to Change Provider IncentivesOverview of Accountable Payment Models

1) Center for Medicare and Medicaid Innovation.

Key AttributesBundled Payments

Value-Based Purchasing

Accountable Care Organizations (ACOs)

Definition

Purchaser disburses single payment to cover certain combination of hospital, physician, post-acute, or other services performed during an inpatient stay or across an episode of care; providers propose discounts, can gainshare on any money saved

Pay-for-performance program differentially rewards or punishes hospitals (and likely ASCs and physicians in coming years) based on performance against predefined process and outcomes performance measures

Network of providers collectively accountable for the total cost and quality of care for a population of patients; ACOs are reimbursed through total cost payment structures, such as the shared savings model or capitation

Purpose

Incent multiple types of providers to coordinate care, reduce expenses associated with care episodes

Create material link between reimbursement and clinical quality, patient satisfaction scores

Reward providers for reducing total cost of care for patients through prevention, disease management, coordination

Advisory Board Assessment

Increases accountability for cost and quality within episodes of care without removing FFS volume incentive; new lever for financial alignment between independent specialists and hospitals

Withhold-earnback model will put significant dollars at risk for all providers, force immediate focus on quality and experience metrics

Long-range goal of CMS to migrate to risk contracting; will spark industry-wide investment in primary care infrastructure to establish narrower networks

Role of CMMI1

Accepting providers’ proposals to test four different bundled payment models, including one without inpatient care

Dedicating $500M to Partnership for Patients, targeting hospital-acquired infections, readmissions

Accepting providers’ proposals to test various payment systems, including both shared savings and partial capitation

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Source: Marketing and Planning Leadership Council interviews and analysis.

Accountable Payment Models

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New Responsibilities of Accountable CareCategorization of Risk-Based Payment Models

Accountable Payment Models

Cost of Care Quality of Care Volume of Care

Performance Risk Utilization Risk

Bundled Pricing

• Bundled Payments for Care Improvement program

• Commercial bundled contracts

Shared Savings

• Medicare Shared Savings Program

• Pioneer ACO Program• Commercial ACO

contracts

Pay-for-Performance

• Value-Based Purchasing• Readmissions penalties• Quality-based

commercial contracts

Source: Health Care Advisory Board interviews and analysis.

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Components of Value-Based Purchasing

Source: Marketing and Planning Leadership Council interviews and analysis.

Value-Based Purchasing

Payment Withhold Quality Performance Assessment Redistribution of Payment

• Payment withhold applies to base operating DRG payment

• Withhold applies only to roughly 3,100 hospitals meeting VBP inclusion criteria

• Provision assesses performance on 12 process of care measures and 8 patient experience of care measures

• Scored on achievement relative to national benchmarks and improvement compared to historical baseline

• Quality measure scores combined to form single figure Total Performance Score (TPS)

• Payment directly proportional to Performance Score

• Roughly half of hospitals earn back more than withhold, others earn back less

FY13 FY14 FY15 FY16 FY17

(1.0%)(1.3%)

(1.5%)(1.7%)

(2.0%)

Lowest performer

Highest performer

1 2 3

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Readmissions Penalties in BriefPenalty-Only Program Means No Upside for High Performers

Readmissions Penalties

Readmissions Incentives

FY13 FY14 FY15

(1.0%)

(2.0%)

(3.0%)

Program in Brief: Hospital Readmissions Reduction Program

• CMS to reduce payments for hospitals exceeding risk adjusted national averages for readmissions for heart failure, AMI and pneumonia

• Penalties based on all-condition readmissions

• Penalties to equal payments for readmissions above national average

• Penalty to reach up to 3% of Medicare inpatient revenue in 2015 and remain capped at that level

Percentage of Inpatient Medicare Revenue at Risk

Source: Marketing and Planning Leadership Council interviews and analysis.

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1) Bundled Payments for Care Improvement.Source: Centers for Medicare and Medicaid Services; Health Care Advisory Board interviews and analysis.

Bundled Payments

BPCI1 Participation by State

Medicare’s Largest Payment Innovation ProgramMore than 450 Providers Participating in BPCI1

1-19 providers

20-49 providers

>50 providers

0 providers

450+Total Number BPCI Participants as of

February 2013

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Redefining the Acute Care EpisodeBundled Payments Drive Delivery System Integration

1) Center for Medicare and Medicaid Innovation.

Bundled Payment Framework

Lump Sum Payments Drive Integration Through Shared Accountability

Payer

Physician Services

Hospital Services

Post-Acute Services

Program in Brief: Medicare’s Bundled Payments for Care Improvement

• CMMI1 initiative offering four voluntary bundled payment models; more than 450 providers selected to participate

• Models 1-3 provide retrospective reimbursement; Models 2 and 3 include post-episode reconciliation; Model 4 offers single prospective payment

• Acute care hospitals, physician groups, health systems eligible for all models; post-acute facilities may participate without hospitals in Model 3

• Physicians eligible for gainsharing bonuses up to 50 percent of traditional fee schedule

• For all models, applicants must propose quality measures, which CMS will use to develop set of standardized metrics

Source: Centers for Medicare and Medicaid Services; Health Care Advisory Board interviews and analysis.

Bundled Payments

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BCPI Participants Favoring Longer Episodes

Participation by Model Type

Bundled Payments

Hospital Inpatient Services

Hospital and Physician

Inpatient and Post-Discharge

Services

Post-Discharge Services

Hospital and Physician Inpatient Services

Model 4Model 3Model 2Model 1

16%

36%

41%

7%

Source: Centers for Medicare and Medicaid Services; Health Care Advisory Board interviews and analysis.

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Not Just a Medicare ProgramPrivate Sector Bundling Pilots Emerging Nationwide

Bundled Payments

1) Coronary Artery Bypass Graft.

Bundling for obstetrics

Bundling total joint replacement

Bundling for CABG1

Exploringcardiac bundling

Four physician groups bundling for orthopedic surgery

Bundling joint replacements, procedures with “defined outcomes”

Developing orthopedic bundling

Reimbursing for “Baskets of Care”

Participating in Prometheus Pilot

Bundling for cardiac surgery

Bundling total knee replacement

Participating in Prometheus Pilot

Source: Health Care Advisory Board interviews and analysis.

ACE Demo Sites

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ACOs Off and Running

ACO Presence Steadily Extending Nationwide

Source: Muhlestein D, “Continued Growth of Public and Private Accountable Care Organizations,” Health Affairs Blog, February 19, 2013; Oliver Wyman, “Accountable Care Organizations Now Serve 14% of Americans,” February 19, 2013; Leavitt Partners, “Growth and Dispersion of ACOs,” August 2013; Health Care Advisory Board interviews and analysis.

Accountable Care Organizations

1) As of February 2013.

Total Number of Operating ACOs

September 2013

Widening Reach of ACOs1

52%Portion of U.S. population living in a primary care service area with an ACO

14%Portion of U.S. population treated by an ACO

4MMedicare FFS beneficiaries treated by an ACOSeries1

23

486

27

88

106 7

235

April 2012

MSSP1 Cohort

July 2012 MSSP Cohort

Private Sector ACOs

Pioneer ACO Model

TotalJan.2013 MSSP Cohort

Pioneers switching

to MSSP

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Where the Medicare ACOs Are23 Pioneer and 228 Shared Savings Program ACOs

Source: Centers for Medicare and Medicaid Services; Health Care Advisory Board interviews and analysis.

Accountable Care Organizations

August 2013

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Mechanics of the Medicare Shared Savings ProgramApplying Total Cost Accountability to Fee-for-Service Payments

Source: Health Care Advisory Board interviews and analysis.

Accountable Care Organizations

Program in Brief: Medicare Shared Savings Program

• Cohorts launched April 2012, July 2012, and January 2013; contracts to last minimum of three years

• Physician groups and hospitals eligible to participate, but primary care physicians must be included in any ACO group

• Participating ACOs must serve at least 5,000 Medicare beneficiaries

• Bonus potential depends on Medicare cost savings, quality metrics

• Two payment models available: one with no downside risk, the second with downside risk in all three years

Shared Savings Payment Cycle

Shared Savings PaymentBonuses or penalties levied based on variance of expenditures from target

4

DistributionACO responsible for dividing bonus payments among stakeholders

5

AssignmentPatients assigned to ACO based on terms of contract

1

ComparisonTotal cost of care for assigned population compared to risk-adjusted target expenditures

3

BillingProviders bill normally, receive standard fee-for-service payments

2

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Three Primary Levers for ACOs to Reduce Spending

ACOs Targeting Total Cost of Care

Source: Health Care Advisory Board interviews and analysis.

Accountable Care Organizations

Retain Utilization Within NetworkPopulation

Health Manager

Prevent Utilization through Medical Management

1

2

3

Options for Risk-Bearing Providers

Example:

High-risk patient care management (e.g., medication management, care transitions management)

Example:

Cost incentives to encourage in-network imaging referrals

Example:

Volume steerage to high-value acute care providers

Direct Unavoidable Utilization to Low-Cost, High-Quality Partner

• Inpatient, outpatient procedures

• Select inpatient medical care

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First Year Pioneer ACO Results Are InStrong Quality Performance, Uneven Financial Results

Source: Centers for Medicare and Medicaid Services; Health Care Advisory Board interviews and analysis.

Accountable Care Organizations

Non-Pioneer Pioneer

0.8%

0.3%

Gross savings: $87.6M

First Year Pioneer ACO Results

Year One Financial Results

Beneficiary Cost Growth, 2012

13Earned bonuses,

totaling $76M

2Incurred losses,

totaling $4M

25Generated lower

risk-adjusted readmission rates

32Successfully

reported quality measures

Year Two Participation Decisions

7

2

23

Moving to MSSP1

Opting Out Entirely

Staying in Pioneer

ACO Model

1) Medicare Shared Savings Program.

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• Mergers and Acquisitions

• Partnerships and Affiliations

• Physician Market

• Imaging Centers

• Ambulatory Surgery Centers

• Retail Clinics

Provider Market

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2009 2010 2011 2012

5272

90 94

Health Systems Increasingly the Norm

Source: AHA Hospital Fast Facts, available at www.aha.org; Healthleaders Media 2011 Industry Survey, available at: www.healthleaders.com/intelligence; Levin Associates, “Hospital Mergers and Acquisitions”, available at: www.levinassociates.com/pr2012/hos; Advisory Board interviews and analysis.

Mergers and Acquisitions

1) January 2012.

Hospital Mergers and Acquisitions M&A Plans for the next 12-18 months1

Number of Hospitals Part of a Health System2000-2009

2,542

2,921

53%

25%

21%

n=189

No M&A Activity Planned

Completed Deals Underway

Exploring Potential Deals

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P&A: The New M&A?Partnerships and Affiliations On the Rise

2011: Duke Health, Lifepoint form community hospital joint venture to explore joint affiliation options

2011: Medium-sized academic medical center partners with smaller rival to fill cath lab service deficiencies

2011: Large academic medical center signs preliminary partnership agreement with six rival hospitals to better compete with bigger systems

Source: The Advisory Board Company, “Cardiovascular Regionalization and Network Strategy”, Washington, DC; Duke-Lifepoint Healthcare, “Duke University Health System and LifePoint Hospitals Partner to Create Innovative Options for Community Hospitals,” available at: http://www.dlphealthcare.com, accessed May 3, 2011; Accountable Care Alliance, Omaha, NE; http://www.accountablecarealliance.com/partners/; Crosby J, “HealthPartners, Allina form a 'lab' for health reform,” StarTribune, available at http://www.startribune.com/business/133126273.html; accessed November 5 th, 2011;Marketing and Planning Leadership Council interviews and analysis.

2010: Nebraska Medical Center, Methodist Hospital agree to accountable care alliance

Partnerships and Affiliations

2011: Allina and HealthPartners affiliate to create a “testing lab” for accountable care

2011: Large medical center agrees to sell CON-approved open-heart surgery suite to competitor

Growth Goals for Partnerships

• Ambulatory footprint

• Access to new regions

• New clinical program

• Brand equity

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The New Purpose of Partnership

Intent of Partnerships and Affiliations Rapidly Evolving

Source: Marketing and Planning Leadership Council interviews and analysis.

Partnerships and Affiliations

Objectives of Partnership

“New Market” Partnership

Value

Scale Scope Reach

GeographicClinicalOperationalFinancial

Consolidate local position

Centralize supply purchasing

Merge back office functions

Increase operational efficiency

Integrate services across care continuum

Develop care management competencies

Stake regional footprint

Establish national network

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A Host of Available Affiliation Approaches Partnership Models Addressing Existing, Emerging Challenges

Partnerships and Affiliations

Source: Health Care Advisory Board interviews and analysis.

Partnership Model Description

Joint PurchasingHospital organizations band together to form group purchasing organizations centered on vendor negotiations in order to cut supply costs

Best-Practice Sharing

Joint forums among hospitals to discuss clinical protocols, operational initiatives that have been successfully implemented

Regional Clinical Networks

Collaboration among hospitals to steer patients with acute conditions (i.e. STEMI, AAA) to most appropriate site

Service OutreachHospital sends physicians to outlying partner sites, sets up outreach clinics on a temporary basis in order to reach more patients, grow volumes

Quality Assurance Review

Hospital medical staff review medical protocols, outcomes of partner hospital, then advise on protocols to drive quality gains

Equipment Sharing Hospital loans medical equipment, facility space to affiliated partner

Shared Physician Staffing

Partner hospitals loan or share physicians with one another in order to fill gaps in service coverage, usually for more advanced procedures

Joint Program Management

Hospital provides administrative, operational oversight of CV program at partner site

Joint Program Development

Hospital serves in advisory capacity for another hospital seeking to build up a new program; support may cover clinical, legal, HR, marketing

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How Are We Growing?Physician Employment, Medical Group Ownership Continue to Rise

Source: Advisory Board Survey on Physician Employment Trends; MGMA Physician Compensation and Production Survey, available at: mgma.com; Advisory Board interviews and analysis.

Physician Market

Hospitals Employing or Affiliating with Physicians

PrimaryCare

Orthopedists Neurologists General Surgeons

76%

24%37% 39%

11%

39% 13% 11%

Employment Other Formal Affiliations

n=46 Hospitals and Health Systems

2005 2006 2007 2008 2009 2010

69%

39%

26%

58%

Physician Owned Hospital Owned

Medical Group Ownership

44.8%Physicians currently employed or under

contract

70%Hospitals reporting

increase in physician employment requests

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Physician Groups Finding Unlikely Partners

DaVita, HealthCare Partners Join Forces for Scale

Source: Mathews AW, “Dialysis Firm Bets on Branching Out,” Wall Street Journal , May 21, 2012, available at: www.wsj.com; Lee J, “HealthCare Partners Acquires N.M. Medical Group,” Modern Physician, September 11, 2012, available at: www.modernphysician.com; Dunn L, “HealthCare Partners Acquires Two Independent Practice Networks in California,” Becker’s Hospital Review, September 12, 2012, available at: www.beckershospitalreview.com; Health Care Advisory Board interviews and analysis.

Physician Market

1) Through acquisition of ABQ Health Partners and Arta Health Network.

Case in Brief: DaVita HealthCare Partners• In May 2012, dialysis chain DaVita acquired California-based

HealthCare Partners for $4.42 billion

• Deal presents new revenue stream for DaVita, opportunity to capitalize on physician-risk model

HealthCare Partners DaVita

Experience thriving under value-based payment models

Active in successfully acquiring physician groups across the country

Joint Strategy

• Expand, acquire physician groups outside of existing markets

• Franchise value-based physician groups across United States

DaVita Acquires Experienced Population Manager

984Newly acquired physicians since

merger1

Fiscally savvy, generating $7B in annual revenue

Effective in successfully scaling businesses across diverse markets

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Imaging Center Market Dips After Years of Growth

First Decline Since 2009

Source: Radiology Business Journal, “Imaging-center Growth Hits the Wall in 2013; Volumes Plummeted in 2011,” August 30, 2013; Marketing and Planning Leadership Council interviews and analysis.

Imaging Centers

Se-ries1

6,241

6,455

6,150

6,3116,383

7,074

6,816

5.60%3.40%

-4.70%

2.60%1.10%

10.80%

-3.60%

Net percent growth from previous year

Total Number of Imaging Centers in the U.S.

2005-2013

2007 2008 2009 2010 2011 2012 2013

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Total Number of Medicare-Certified ASCs

2005 2006 2007 2008 2009 2010 2011

4,3624,608

4,8795,095 5,217 5,316 5,385

ASC Growth Continues to Slow

Source: “Report to the Congress: Medicare Payment Policy,” MedPAC, March 2012; Marketing and Planning Leadership Council interviews and analysis.

Ambulatory Surgery Centers

7.3%

1.3%

5.6% 5.9%4.4%

2.4% 1.9%

Net percent growth from previous year

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Meet Your New Competitors

Walgreens Aims to Become the Premier Health Destination

Source: Japsen B, “How Flu Shorts Became Big Sales Booster for Walgreen, CVS,” Forbes, February 8, 2013, available at: www.forbes.com; “Take Care Clinics at Select Walgreens Expand Service Offerings,” Reuters, May 31, 2012, available at: www.reuters.com; Murphy T, “Drugstore Clinics Expand Care into Chronic Illness,” The Salt Lake Tribune, April 4, 2013, available at: www.sltrib.com, Walgreens, “Company Overview,” available at: www.walgreens.com; Health Care Advisory Board interviews and analysis.

Retail Clinics

2009: Launches flu vaccine campaign

Simple Acute Services

Vaccinations and Physicals

Chronic Disease Monitoring

Chronic Disease Diagnosis and Management

2013: Launches three ACOs; begins diagnosing and managing chronic disease

Case in Brief: Walgreen Co.

• Largest drug retail chain in the United States, with 372 Take Care Clinics

• In April 2013, became first retail clinic to offer diagnosis and treatment of chronic diseases

2007: Acquires Take Care Health Systems

2012: Offers three new chronic disease tests

Not Just a Drugstore

“Our vision is to become ‘My Walgreens’ for everyone in America by transforming the traditional drugstore into a health and daily living destination...”

Walgreen Co. Overview

”

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Walmart Eying the Health Care Industry

Moving Beyond Basic Retail Clinics

Source: Holmes TJ, “The Diffusion of Wal-Mart and Economics of Density,” May, 2006; Zimmerman A and Hudson K, “Managing Wal-Mart: How U.S.-Store Chief Hopes to Fix Wal-Mart,” The Wall Street Journal, April 17, 2006, available at: www.wsj.com; Aboraya A, “Wal-Mart Plans to Offer Primary Care in 5-7 Years,” Orlando Business Journal, January 11, 2013, available at: www.bizjournals.com/orlando; Aboraya A, “Exclusive: Wal-Mart Exploring Private Health Insurance Exchange for Small Biz,” Orlando Business Journal, January 11, 2013, available at: www.bizjournals.com/orlando; Health Care Advisory Board interviews and analysis.

Retail Clinics

Vice PresidentHealth and Wellness

Payer Relations

”

“That’s where we’re going now: full primary care services in five to seven years.”

Potential Evolution of Health Care Products

33%Estimated portion of the US population that visits

Walmart every week

4,600+Number of Walmart

stores in the United States

Median distance between a residence

and Walmart

4.2 miles

Basic Retail Clinic

Full Primary

Care

Health Insurance Exchange

Scope of Services

37

• Commercial Payers

• Employers

Purchaser Behavior

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Commercial Payers Demanding More Value

Taking Measures to Keep Employers in the Game

Commercial Payers

1) Benefits Value Advisor.

Source: Hostetter M and Klein S, “Health Care Price Transparency: Can It Promote High-Value Care?”, The Commonwealth Fund, April/May 2012, available at: www.commonwealthfund.org; Appleby J, “HMO-Like Plans May Be Poised to Make Comeback in Online Insurance Markets,” Kaiser Health News, January 22, 2013, available at: www.kaiserhealthnews.org; Health Care Service Corporation, “Health Care Consumers Realize Significant Cost Savings Through Benefits Value Advisor Program,” April 17, 2013, available at: www.hcsc.com; Health Care Advisory Board interviews and analysis.

Examples of Commercial Payer Cost Control Initiatives

• Health Care Service Corp. Benefits Value Advisor program

• UnitedHealthcare’s myHealthcare Cost Estimator

• BCBS of Western NY, Kaleida Health cardiac surgery bundle

• ConnectiCare, St. Francis Hospital hip and knee replacement bundle

• Harvard Pilgrim Focus Network

• Anthem BCBS Compass SmartShopper Program

Price Transparency Tools Bundled Payment Narrow Networks, Steerage

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Doubling Down on SteerageAnthem Paying Consumers to Pick Low-Cost Providers

Source: Andrews M, “Cash rewards for thrifty health consumers,” The Washington Post, March 26, 2012; Compass Smartshopper, available at: www.compassmartshopper.com; Advisory Board interviews and analysis.

Commercial Payers

476Participating members of SmartShopper pilot program

$250K $100Health care costs avoided over two year pilot program

Typical incentive paid to participants choosing lower-cost providers

Members receiving care at a low-cost provider from the list receive financial reward

Member accesses list of low-cost providers through toll-free number or website

Member works with referring physician to switch to lower-cost provider or location for service

Upon receipt of claim, Anthem identifies member access of low-cost provider list

Before Scheduled Procedure Following Procedure

Anthem’s Compass SmartShopper Program

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Trading Price for Volume on the Public Exchanges

Expect Lower Provider Payment Rates, Less Patient Choice

Source: Mathews AW and Kamp J, “Another Big Step in Reshaping HealthCare,” Wall Street Journal, February 28, 2013, available at: www.online.wsj.com; Hancock J, “Aetna Cuts Predictions for Obamacare Enrollment,” Kaiser Health News, April 30, 2013, available at: www.capsules.kaiserhealthnews.org; Health Care Advisory Board interviews and analysis.

Commercial Payers

1) Pseudonym.

Anticipated Provider Reimbursement Rates for Exchange Plans

Catholic Health Initiatives

Modest discounts from commercial rates

Tenet Healthcare Up to 10% below commercial rates Meriwether Hospital1

5% below commercial rates

WellPoint Inc.Between Medicare

and Medicaid rates

Meyers Health1

10% above Medicare rates Case in Brief: Aetna Inc.

• Health insurer planning to sell narrow network exchange products in 14 states

• Searching for providers agreeing to lower rates in narrow network products

• Plans for rates to fall closer to Medicare than commercial reimbursement

Aetna’s Planned Reduction in Exchange Network Size

25%-50% reduction in exchange network size, compared to networks for typical commercial products

Millern Medical Center1

20% below commercial rates

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Employers Already Scaling Back Coverage

Erosion of Employer-Sponsored Coverage Well Underway

Sources: Sonier J, et al., “State-Level Trends in Employer-Sponsored Health Insurance,” Robert Wood Johnson Foundation, April 2013, available at: www.rwjf.org; Collins R, et al., “Insuring the Future,” The Commonwealth Fund, April 2013, available at: www.commonwealthfund.org; Towers Watson, “Reshaping Health Care,” 2013, available at: www.towerswatson.com; Health Care Advisory Board interviews and analysis.

Individuals Covered by ESI1

23%Employers planning

to offer CDHP2 as only plan option, 2014

25%Insured non-elderly adults with deductibles $1,000

or higher, 2012

Non-elderly Population

2000 2011

69.7%

59.5%

11.5M fewer individuals

Contribution to Insurance Premiums

1) Employer-sponsored insurance.2) Consumer-directed health plan.

Employers

Coverage for Family of Four

$5,866

$2,137

$11,429

$4,316

2002 2012

Employer

2002 2012

Worker

95% growth

102% growth

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Concerns for Long Term Liability of Health Benefits

Source: Towers Watson “Health Care Changes Ahead Survey 2012;” Advisory Board interviews and analysis.

2007 2008 2009 2010 2011

73%

62%57%

38%

23%

Employers “Very Confident” Health Benefits Will Be Offered At Their Organization a Decade From Now

2011

Employers

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Currently offer access to private

exchange

Considering private exchange in 2014

<1%

15% 46%

36%

6%12%

Employee Benefit Research Institute, 2011

Mounting Pressure on Employer-Sponsored BenefitsWill Defined Contribution Emerge as Funding Strategy?

Source: Employee Benefit Research Institute, Private Health Insurance Exchanges and Defined Contribution Health Plans: Is It Déjà Vu All Over Again?”, July, 2012, no. 373;Towers Watson, “18 th Annual Towers Watson Employer Survey on Purchasing Value in Health Care”, 2013, available at: www.towerswatson.com; Marketing and Planning Leadership Council interviews.

Employers

Company Health Benefits Strategy for Active Employees Over Next Decade

Percentage of Employers Offering Private Exchanges

8.7%Growth in Employees’ Share of

Premium Costs Between 2012-2013

32%Increase in Employer Spending on

Health Benefits Relative to 5-yrs Prior

Undecided

Discontinue health

coverage

Continue offering defined

benefit plans

Consider shift to defined

contribution

Towers Watson Survey, n = 583

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Real Movement in Exchange Plan SelectionSears, Darden Exchange-Style Model in Year One

Source: Mathews AW, “To Save, Workers Take On Health-Cost Risk,” Wall Street Journal, March 17th, 2013; Marketing and Planning Leadership Council interviews and analysis.

Employers

1) Preferred Provider Organization2) Health Maintenance Organization

Case in Brief: Sears, Darden Restaurants

• Self-insured large employers redesigning employee benefits to reduce health spend through defined contribution strategy

• Offering employees lump sum credit to choose coverage from Aon Hewitt’s online marketplace

2013 Health Insurance Offerings at Sears, Darden Restaurants

Employee selects coverage from menu of plans in online marketplace

If selected plan cost exceeds credit, employee pays balance

Employer offers employees fixed credit to select health care coverage

1

2

3

2013

2012

47%

70%

14%

18%

39%

12%

PPO HMO

High-Deductible Plan

Consumer Preferences on Sears-Darden Exchange

1 2

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Most Employers Running to High(er) Deductibles

Source: Towers-Watson & National Business Group on Health, “Employer Survey on Purchasing Value in Health Care,” available at: www.changehealthcare.com/downloads/industry/Towers-Watson-NBGH-2012.pdf; Castlight Health, “Castlight Health and Life Technologies to Discuss Employee Engagement in Health Care at IHC FORUM East,” available at: www.prnewswire.com; “Mini-Microsoft”, available at: http://minimsft.blogspot.com/2010/10/microsoft-health-care-pops-cap-in-one.html; Claxton et al. “Employer Health Benefits: 2011 Annual Survey,” Kaiser Family foundation and Health Research & Educational Trust, Exhibit 4.3.; Advisory Board interviews and analysis.

Employers

1) Consumer Directed/Driven Health Plans. 2) High-deductible health plan with savings option, defined

as a health plan with a deductible of at least $1,000 for single coverage and $2,000 for family coverage.

Select Employers Moving to CDHP1

100 percent CDHP

Moving to 100 percent CDHP

100 percent CDHP

40 percent CDHP

Percent of Firms Offering HDHP/SO2 by Number of Employees

2011

3-199 200-999 1,000-4,999

5,000 or More

23% 26%

38%

49%

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Self-Insured Looking for New Solutions

Employers Bearing More Risk, Turning to Providers as Allies

Source: Kaiser Family Foundation, “2012 Employer Health Benefits Survey,” available at: www.kff.org; Towers Watson, “18th Annual Towers Watson Employer Survey on Purchasing Value in Health Care,” 2013, available at: www.towerswatson.com; Health Care Advisory Board interviews and analysis.

Employers

Percentage of Self-Insured Employers

Partially or Completely Self-Insured

2000 2003 2006 2009 2012

49%

52%

55%57%

60%

29%

21%

13%

20%

12%

8%

7%

6%Adopt new accountable payment models

Contract directly with hospitals, physicians, ACOs

Offer incentives for care coordination

Offer performance-based payments

In Place in 2013 Planned for 2014

Employer Interest in Provider-Oriented Strategies

47

• Independent Physicians

• Patients

Provider Selection Trends

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Specialist, Hospital Choices Driven by Physicians

Strong Referrals Management Still Critical

Source: Tu HT and Lauer JR, “Word of Mouth and Physician Referrals Still Drive Health Care Provider Choice,” Center for Studying Health System Change, December 2008; Health Care Advisory Board interviews and analysis.

Physicians

1) Survey respondents given option to “select all that apply.”

Information Sources Used to Select a Specialist Physician1

2008

Internet

Health Plan

Another Doctor or Health Care Provider

Friends or Relatives

Referral from PCP

7%

11%

18%

20%

69%

Information Sources Used to Select a Facility for a Procedure1

2008

Internet

Health Plan

Friends or Relatives

Another Doctor

Doctor Performing the Procedure

3%

7%

10%

14%

74%

58% rely solely on referral from PCP

69% rely solely on referring doctor

n=13,500 n=13,500

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The Logic of Physician Choice

Hospital Choice Driven by Service, Culture

Source: Health Care Advisory Board interviews and analysis.

Physicians

Factors Driving Independent Physician Referral Decisions

Clinical Quality

• High-quality nursing staff

• Supportive and knowledgeable physician network

• Positive patient-reported experiences

Contractual Relationships

• Participation in management, operations

• Aligned incentives

Service Quality

• Rapid access to lab, imaging results

• Prompt resolution of complaints and issues

• Non-disruptive IT, EMR systems

Culture of Partnership

• Open communication channels

• Physician-oriented leadership

Workshop of Choice

• Cutting-edge technology, facilities

• Efficient operating rooms, ICUs

• Access to preferred schedule slots

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Medical Home Incentives Influencing Referrals

Source: NCQA, “PCMH Eligibility,” “NCQA and Pfizer Publish Strategies For Becoming A Patient-Centered Medical Home,” both available at: www.ncqa.org; Health Care Advisory Board interviews and analysis.

Physicians

1) National Committee for Quality Assurance.2) Patient-centered medical home.

NCQA PCMH Model Widely Adopted

5,000+ NCQA-certified medical homes 26,000

Approximate number of clinicians practicing in certified medical homes

NCQA1 PCMH2 recognition requires: Hospital partner must offer:

Medical Home Practice Changing Referral Priorities, Partner Expectations

“Whole-person” care Comprehensive care services

Coordinated, integrated care across care system

Health information system interoperability; care management resources

High-quality performance Evidence-based care protocols

Team-based care Staff communication protocols, interdisciplinary care team meetings

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Anticipating the “Activated” Patient

Consumer Role in Decision Making Increasingly Important

Source: Collins R, et al., “Insuring the Future,” The Commonwealth Fund, April 2013, available at: www.commonwealthfund.org; Altarum Institute, “Altarum Institute Survey of Consumer Health Care Opinions,” Fall 2012, available at: www.altarum.org; Health Care Advisory Board interviews and analysis.

Patients

1) From 2003 to 2012.

Consumer Viewpoint on Role in Care Decision Making

n=2,071

38%

29%

6%

0%

26%

High-Deductible Health Plan Enrollment

2003 2005 2010 2012

7%10%

18%

25%

Individuals with Deductible of $1000 or More

43%Decline in proportion of individuals

with a deductible under $5001

33%Respondents age 25 to 34 preferring

fully active role in care decision making

Doctor is completely in charge of treatment decisions

Doctor makes the decisions with some input from patient

Patient is completely in charge of treatment decisions

Doctor and patient make a join treatment decision

Patient makes final decision with some input from their doctor

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Factors Influencing Patient Decisions Expanding

Patients

Key Drivers of Consumers’ Health Care Decisions

Source: Health Care Advisory Board interviews and analysis.

Email Communication

Education During Visit

Social Media Presence

Onsite Amenities

Patient Portal

Care Navigation Services

Brand, Reputation

Coordination with Other Providers

Physician Recommendation

Competitive Pricing

Clinical Quality

Experience, Service Quality

Convenience, Access