MGMA 2013 Annual Conference Preconference Session

1. MGMA 2013 Annual ConferencePreconference Session Revenue Enhancement for Surgical Practices October 6, 2013

2. Agenda I. Introduction II. Market Trends III. Call Coverage IV. Alternative Program Structures V. Developing the Alignment Strategy VI. Key Takeaways 785\90\219884(ppt)-E1

3. I. IntroductionSpeaker Introductions Mr. Joshua D. Halverson, Principal • Has over 15 years of experience in healthcare strategic and business planning, mergers and acquisitions, and finance. • Has extensive knowledge of strategic, operational, and financial best practices among large physician groups and their integration within health systems. • Specializes in economic alignment between physicians and hospitals involving acquisition, group development, compensation planning, and operations improvement. • Leads ECG Management Consultants, Inc.’s Dallas, Texas office. Mr. Kevin Duce, Senior Manager • Has nearly 10 years of consulting experience. • Has experience that emphasizes hospital/physician alignment and strategy, physician network development, compensation planning, and operational assessments of medical groups and hospital-based services. • Has specific expertise in assisting clients to design and develop successful hospital/physician alignment models. • Is based in ECG’s San Diego office. 785\90\219884(ppt)-E1

4. I. IntroductionObjectives In this session we will: • Discuss the key market trends affecting the financial performance of surgical practices. • Provide examples of emerging models for surgical practices to generate additional revenue. • Discuss the strengths and weaknesses of each model, as well as the critical factors needed to be successful under each model. 785\90\219884(ppt)-E1

5. II. Market TrendsAnatomy of a Crisis The healthcare system in the United States is on the trajectory of insolvency. • Budgetary constraints of federal and state programs are compressing reimbursement to providers. • Consolidation of commercial payors and their resulting market power contribute to minimal revenue growth. • As a result, operating margins of integrated healthcare systems across the country are under pressure. • The sustainability of the current configuration of physician organizations without structural change is being questioned. 785\90\219884(ppt)-E1

6. II. Market TrendsImperatives for Reform Healthcare spending represents the largest proportion of governmental spending. Unchecked, healthcare could amount to nearly one-third of the GDP in 25 years. Components of Mandatory Expenditures Actual Projected Healthcare (Medicare and Medicaid) Social Security Other Federal Outlays Source: Congressional Budget Office, The Long-Term Budget Outlook, June 30, 2010. “We don’t have a budget problem. We have a healthcare problem!”Healthcare will fully consume government spending and crowd out other priorities. 785\90\219884(ppt)-E1

7. Step 1: Access to healthcare services is expanded. Step 2: Reimbursement to providers is reduced. Step 3: “Then a miracle occurs …” Step 4: Healthcare organizations are able to provide: Greater access to care. Superior quality. Services for less cost. II. Market TrendsIndustry Response Healthcare organizations are attempting to respond by configuring themselves to be successful in a very challenging environment. External Perceptions ofChanges to Healthcare Delivery I think you should be more explicit here in “StepThree” 785\90\219884(ppt)-E1

8. II. Market TrendsIndustry Response (continued) Both physicians and hospitals are seeking methods to create greater integration. Integrated Delivery System Multispecialty Group High Clinical JV1 Specialty Pods Foundation Model ED Call Pay Practice Management Arrangement Recruitment Assistance Costs Comanagement Arrangements MSO2 Physician Advisory Council Medical Director General Affiliation Physician Integration Low High NOTE: Size of bubble = ability to meet strategic need. 1 JV = joint venture. 2 MSO = management services organization. 785\90\219884(ppt)-E1

9. II. Market Trends Health Reform • National mandates for patient safety, quality of care, and price transparency are difficult to meet without physician/hospital collaboration. • The principal reason for hospitals to align with physicians is to improve patient care quality and eliminate inefficiencies within the continuum of care. • Hospitals need physicians to meet quality targets to earn incentives or reduce undesired outcomes to avoid payment penalties. • Hospitals and physicians need each other to improve quality across the continuum of care. Cost Access Quality 785\90\219884(ppt)-E1

10. III. Call CoverageED Coverage Crisis Average on-call expenditures at trauma centers increased nearly 60% from 2008 to 2011, while average expenditures were relatively flat for non-trauma centers. However, trauma centers still face call coverage shortages. Physician On-Call Expenditures, 2008 to 2011 • Hospitals are at risk of losing their trauma designations. • In a survey of ED directors nationally, 75% of respondents reported inadequate trauma coverage. • 25% of ED directors reported a loss or downgrade in trauma status. Non-Trauma Center Average The results should be interpreted cautiously, as the data includes wide variation in facility size and scope of services (e.g., includes critical access facilities). 785\90\219884(ppt)-E1

11. III. Call CoverageIncreasing Coverage Burden There are two general factors causing increased burden: Professional • Growing physician shortage. • Aging physician workforce. • Increasing physician subspecialization. • Decreasing EM reimbursement. • Increasing volume. • Increasing complexity of patients. Personal General differences in physicians: expectations of delivering care, generational/lifestyle differences, and choices. Projected FTE Physicians, 2005 to 20251 950,000 900,000 Most Plausible Demand   850,000   168,300    800,000  Baseline Demand    FTE Physicians (excluding residents) Most Plausible Supply  750,000  • • • • • •  • • • • •  • •  • • Baseline Supply  • •  700,000 •  • •  •  650,000 600,000 2005 2005 2010 2015 2020 2025 1 AAMC, The Complexities of Physician Supply and Demand: Projections Through 2025. Both professional and personal factors have increased the coverage burden for community hospitals. 785\90\219884(ppt)-E1

12. III. Call CoverageEvolution of Coverage Solutions Burden-Reducing Efforts Integrated Models Payments Evolution of Call Coverage Solutions When confronted with call coverage challenges, hospitals historically have considered a variety of strategies that fall within two categories: (1) operational approaches aimed to reduce physician burden and (2) direct payments for call coverage. 785\90\219884(ppt)-E1

13. III. Call CoverageAlternatives to Call Stipends In an effort to improve quality and reduce the cost of care while guaranteeing coverage, more hospitals are considering alternative models for coverage. • This crisis is driving the prevalence and diversity of alignment structures between hospitals and surgeons. • Physicians who refuse to take call, often regardless of payments or stipends, are forcing hospitals to look elsewhere for ED coverage. • Hospitals may risk patient safety and the loss of trauma designation without proper coverage. • The ideal arrangement will: • Improve throughput and alleviate ED backlogs. • Eliminate the need for community-based physicians to participate in on-call schedules. • Address important regulatory and compliance issues. To be successful, these models require greater surgeon engagement and provide opportunities for increased reimbursent. 785\90\219884(ppt)-E1

14. IV. Alternative Program StructuresOverview A range of program structures is available to enhance inpatient coverage and potentially provide additional revenue opportunities for the practice. Inpatient Coverage Options Surgical Hospitalist Programs Enhanced Call Coverage Comanagement Arrangements 785\90\219884(ppt)-E1

15. IV. Alternative Program StructuresHospital and Surgeon Perspectives The ideal model will balance the objectives of both the hospital and the surgeons. 785\90\219884(ppt)-E1

16. IV. Alternative Program StructuresCall Coverage Payment Innovations Hospitals across the country are increasingly utilizing more innovative compensation formulas to pay for call. 785\90\219884(ppt)-E1

17. IV. Alternative Program StructuresLimitation to Call Payments • According to a survey conducted by the Medical Group Management Association (MGMA), almost 70% of participating respondents reported that they do receive additional compensation for their on-call time.1 • During the recent recession, hospitals fielded more requests from physicians for financial support, including employment and practice buyouts. • Call payments have reached high levels, upward of $2,000 per day for neurosurgery call coverage.1 • Payments must be within FMV ranges. • Call payments typically do not create significant alignment between hospitals and physicians. 1Source: Medical Directorship and On-Call Compensation Survey: 2013 Report Based on 2012 Data.  Used with permission from the Medical Group Management Association, 104 Inverness Terrace East, Englewood, Colorado, 80112.  www.mgma.com. 785\90\219884(ppt)-E1

18. IV. Alternative Program StructuresComanagement – Structure Under the comanagement model, a management company is formed for the purpose of managing the service line. Initial Minimal Start-Up Capital Service Line Management and Oversight Hospital Physicians/ Physician Group Investors Management Company (LLCor Other Structure) 1 2 Equity Distributions. Fixed/Variable Payments. 5, 6 • Governing Board • May include committee structure. • Participation from both physicians and hospital. • Number of committees will be dependent on complexity of arrangement. Management Services. 4 3 The Governing Board of the service line reports up through the management company, with a dotted-line relationship to the hospital. 785\90\219884(ppt)-E1

19. IV. Alternative Program StructuresComanagement – Structure (continued) 1 Ownership/Operating Agreement – The management company is typically a JV LLC between the independent providers who are participating. The initial capital contribution must be proportionate to ownership interest. Management Services Agreement (MSA) –The management company is contracted to provide management services to the hospital and is compensated through a base fee and incentive bonus. The scope of services, as well as performance metrics, are defined in the MSA. Governing Board – The Governing Board consists of comanagement investors. This board will ensure that the company delivers the management services to the hospital by securing subcontracts with the physician champion(s) and other administrative personnel. Management Services – As defined in the MSA, these are the services for which the hospital will compensate the management company with a base fee. These services are provided by the Governing Board, the physician champion(s), and designated committees. Compensation for Management Services– The base compensation is the predetermined fee provided to the management company for contracted services. This fee is typically an hourly rate for committee involvement and physician champion time. Incentive Bonus–The incentive bonus is a predetermined amount contingent upon the level of achievement on key performance metrics as outlined in the MSA. This represents extra earnings to the company to be returned as equity based on ownership percentage. 2 3 4 5 6 785\90\219884(ppt)-E1

20. IV. Alternative Program StructuresComanagement – Key Components Comanagement arrangements are designed to compensate physicians through a fixed portion for base management services and an incentive portion contingent upon performance metrics. Arrangement Compensation Base Management Fee (Based on Physician Time) Incentive Compensation (Based on Ability to Meet Goals) • Example metric categories include: • Quality. • Operational efficiency. • Cost savings. • Program development. • Patient satisfaction. • Governing board participation. • Service line chair fees. • Medical director fees. • Day-to-day operations oversight. • Meeting attendance/participation. • Special projects. Typically represents 50% to 70% of the total potential payment. Typically represents 30% to 50% of the total potential payment. 785\90\219884(ppt)-E1

21. IV. Alternative Program StructuresComanagement – Performance Incentives The physicians and the hospital work together to identify potential performance metrics and associated benchmarks and develop a compensation system that rewards the physicians for certain behaviors. It is important to consider overarching program goals when identifying performance metrics. 785\90\219884(ppt)-E1

22. IV. Alternative Program StructuresSurgical Hospitalist – Overview The drive for increased quality and cost efficiencies is driving the growth of surgical hospitalist programs. • The movement from reimbursement per case to population-based reimbursement will result in: • Reductions in cost of care. • Stronger care transitions. • Decreased lengths of stay. • Hospitalist programs are equipped to respond to these pressures. • Fewer physicians can handle a higher volume of cases. • Patients face shorter waits for ED consults and/or procedures. • Fewer patients are transferred from the ED to other institutions. • The quality of care is improved. 785\90\219884(ppt)-E1

23. IV. Alternative Program StructuresSurgical Hospitalist – Staffing Thoughtful planning can reduce the burden of the program’s schedule. • The schedule should be managed around periods of high demand. • This method of scheduling requires ongoing analysis of patient volumes and physician demand and a high level of coordination by the program. When calculating demand, consider volumes in the following areas: • ED consults. • Emergency and trauma surgical cases that involve general surgery. • Inpatient consults. • Follow-up clinic care. • The growth of the physicians’ private practices and the balance with the providers' hospital work." Demand for coverage will also depend on the hospital’s trauma designation and the local market. 785\90\219884(ppt)-E1

24. IV. Alternative Program StructuresSurgical Hospitalist – Features and Benefits Developing a strong and productive surgicalist team can improve bottom-line performance, patient care, and medical staff satisfaction. Features Benefits Small Cohesive Physician Group Reduced Costs Consistent Hospital Presence Improved Inpatient and ED Throughout Treatment of Patients Familiarity With Hospital Departments and Staff Improved Quality of Care Improved Continuity of Care Expertise in Trauma/ Inpatient Medicine Familiarity With Legal and Insurer Requirements Increased Medical Staff Satisfaction 785\90\219884(ppt)-E1

25. V. Developing the Alignment StrategyStrategic Considerations for Alignment The alignment opportunity should be critically examined from a variety of perspectives, both in terms of “fit” and long-term benefit to the organization. • Clinical Services • Service offering. • Clinical coverage. • Competitive Advantage • Competition. • Geography. • Unique benefit. • Feasibility • Timeline. • Alternatives. • Health Reform • Clinical integration. • Cost containment. • Payment reform. • Medical Staff • Political impact. • Reputation. 785\90\219884(ppt)-E1

26. Q uestions & A nswers Mr. Joshua D. Halverson972-633-0100 jhalverson@ecgmc.com Mr. Kevin J. Duce858-436-3220 kduce@ecgmc.com 785\90\219884(ppt)-E1