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Healthcare Industry Landscape January 2016

Healthcare Industry LandscapeJanuary 2016Ed ParkChief Operating Officer

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Cray-2 was 1985. an Apple Watch is more than twice as powerful as the iPhone 41/25/16athenahealth inc. - confidential5

What is inevitable in healthcare?

1/25/16athenahealth inc. - confidential6

Government/Medicare will continue to push towards fee-for-value

Employers will continue to shift risk onto patients high deductibles, private exchanges, etc.

Payers and Providers will continue to consolidate

Patients will begin to act more like consumers when shopping for plans and shopping for providers

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Purchaser responseMacro trendsProvider strategies

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Macro trends

1/25/16athenahealth inc. - confidential9

$2.9 trillion

So thats amazon.

What is this number? Any guesses?

Its the total amount we spend on all retail purchases, combined. Cars, jewelry, electronics, blenders, telescopes. Everything.

We spend more on healthcare than all of these goods combined.

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11https://www.nasbo.org/sites/default/files/State%20Expenditure%20Report%20%28Fiscal%202013-2015%29S.pdf Percentage of total state expendituresMedicaid and K-12 SpendingMedicaidK-12

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12Source: NIHC Concentration of Health Care Spending (Washington, DC: National Institute for Health Care Management Foundation, July 2012), http://www.nihcm.org/pdf/DataBrief3%20Final.pdfIndividual Spender TierSpending per PersonPercent of Total SpendingTop 1%$97,85921.8%Top 5%$43,03849.5%Top 10%$28,45265.2%Top 30%$12,95189.6%

It is well known that costs are highly concentrated5% of patients represent half of spending

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13Source: http://www.forbes.com/sites/danmunro/2012/12/30/2012-the-year-in-healthcare-charts/#2715e4857a0bb9c66a1458f9We also spend more than twice as much per person on healthcare as other developed countries 8580757901000200030004000500060007000Average Life Expectancy at Birth (Years)Total Expenditure on Health per capita in USD

Linear Trend LineHungaryJapanS. KoreaMexicoUKUSA

14http://www.post-gazette.com/stories/news/health/us-health-care-costs-for-the-aged-are-sky-high-371246/Annual Per Capital Healthcare Costs by Age$45,000$40,000$35,000$30,000$25,000$20,000$15,000$10,000$5,000$0

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USGermanyUKSwedenSpainLess well known is how rapidly U.S. costs rise with age relative to other countries

Employers are looking to curb costs by any measure14

15Source: 2014 annual report of the Boards of Trustees of the Medicare trust funds.Projected Change in Medicare Enrollment, 2000-2050758580959005001510100908070605040302010010%9%8%7%6%5%4%3%2%1%0%200020102020201320402050

1.9%3.0%2.4%0.9%0.4%

39.747.764.381.588.992.4Average Annual Growth in Enrollment

Medicare Enrollment (in millions)We know that overall costs will continue to increase as the population ages 11,000 people enter Medicare daily

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16Source: Michael Chernew, Harvard School of Public HealthThere was some respite as medical inflation slowed 2008-2013, but spending appears to be re-accelerating

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17Source: http://www.realclearpolicy.com/blog/2012/05/

30%25%20%15%10%5%0%1970198019902000201020202030204020502060207020802085

19703.9%201110.4%208525.7%Social SecurityMedicaid, ObamacareSubsidies,CHIPMedicareActualProjected

ActualRevenueAverage HistoricalRevenue; 18.1%

2045: Entitlement spending matches tax revenue averageOverall, were still on pace to bankrupt the U.S.

For just a moment, lets remind ourselves why the government cares at all. The essential reason is that healthcare spending is by far the most quickly growing slice of the federal budget, and by 2045 spending on healthcare and social security will equal the entirety of the governments tax revenues. Everyone sees this coming, and thats why theres such a panic unfolding on how to stop it.17

Government(public purchasers)

First, the government. 18

19Reminder: the Grand Bargain of the ACA is to expand coverage while reducing Medicare rates

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20Source: The Advisory Board Company as of January 13, 2016. https://www.advisory.com/daily-briefing/resources/primers/medicaidmapExpanding Medicaid31States plus DCConsideringExpansion2StatesNot Expanding Medicaid17States

Medicaid expansion continues to (selectively) move forward

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And the public exchanges are on track with projections

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22Lowest Uninsured Rate on RecordPercentage of U.S. Adults Without Insurance, by Quarter

Decrease in Uninsured Adult Visits on athenaNet1, Expansion States32%Decrease in Uninsured Adult Visits on athenaNet1, Non-Expansion States16%Source: Gallup, Uninsured rate essentially unchanged throughout 2015. 1Quarter 1, 2012 to Quarter 4, 2015. ACAViewAll in, we are seeing the lowest uninsured rate on record

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http://www.politico.com/tipsheets/morning-ehealth/2016/01/politicos-morning-ehealth-209-000-doctors-hit-with-meaningful-use-penalty-this-year-212129On the other side of the ledger, carrots are turning into sticks

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14%swing in Medicare FFS payments in 2018 based on 2016 performance under MU/PQRS/VBM (-10% to +4%)2436%swing in Medicare FFS payments by 2022 under MIPS (-9% to +27%)

So, 2016. Let me start with how we are advancing the agenda on how health care is delivered. To the 130 million Americans in the Medicare, Medicaid and CHIP programs, and by extension how care is paid for across all of health care, 2016 will be an enormous and pivotal year for progress and its starting off with a bang.We announced today the participants in the Next Generation ACO model. In Next Gen, provider groups take full financial responsibility for a patients care and have innovative options like telemedicine, home visits, and direct consumer incentive and engagement options. Its a model driven by all the lessons learned and feedback from previous participants and results. And the news is very good.With 21 new Next Gen ACOs, there will be over 475 total ACOs with 30,000 physicians participating around the country, including 64 that are 2-sided or full risk, up from 19 just last year and of course zero before the Affordable Care Act.My read of this news is that in 2016, we have not only more ACOs, but better ACOs. In total, 8.9 million Medicare FFS beneficiaries, or greater than 1 in 5, in 49 states and the District of Colombia, will now be a part of an ACO, with 1.6 million in better, more advanced models.Many have wondered whether ACOs would succeed or would end up in the dustbin of health cares three-letter acronyms. As a recovering entrepreneur, I can certainly tell you that the execution in the first stage is often the hardest part. But todays news is strong evidence that ACOs will be part of ushering in the new wave of alternative payment models. They have demonstrated improvements in quality, patient experience and have been certified to reduce costs.But its important to remember where we are. Think of the Next Gen model like the second generation iPhone. There will still be progress and setbacks and we will continually improve.The implementation of the bipartisan MACRA legislation is a major item squarely on our punch list that has everyones attention. At its most basic level it is a program that brings pay for value into the mainstream through something called the Merit-based incentive program, which compels us to measure physicians on four categories: quality, cost, the use of technology, and practice improvement.The stakes are high for this program. As any physician will tell you, physician burden and frustration levels are real. Programs designed to improve often distract. Done poorly, measures are divorced from how physicians practice and add to the cynicism that people who build these programs just dont get it. Over the next several months, we will be rolling out details, but for now a couple of themes.At its core, we need to simplify. We have the opportunity to sunset three old programs and align them together in a single new program. That program needs to be streamlined and simple to use so physicians can focus where they need to on their patients.We are designing from the outside-in. We started by working with front-line physicians, tech companies, and practice managers over a four day session and through an RFI to garner direct feedback on the right measures for each specialty and how to implement the program most simply. Jim and the AMA team were of significant help.

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CMS has signaled that it is putting its foot on the gas

As a very large payer in the system, we believe we have a responsibility to lead," said Health and Human Services Secretary Sylvia Mathews Burwell in a press conference. "For the first time, were going to set clear goals and establish a clear timeline for moving from volume to value in the Medicare system.

As an example of how close the government is really getting: in January, CMS announced officially that it wants to get more aggressive about tying payments to quality. By 2018, the Obama administration wants half of all Medicare payments to flow through value-based entities like ACOs, up from 30% today. And it wants 90% of all Medicare payments to be tied in some way to quality. That is, one way that you could accomplish a bending in the healthcare trend might be to make blunt cuts that is, simply continuing to increase the sequester, year after year. But rather than strictly blunt cuts, the government wants to tie these cuts to certain quality measures, so that high-quality, low-cost providers are rewarded and low-quality, high-cost