Current Issues Payor Trends and Provider Relations 0 6 . 26 .14

1. Current Issues • Payor Trends and Provider Relations • 06.26.14

2. Major Trends and What • Payors are Telling Wall Street

3. Payors have been shedding risk for a decade, shifting their books of business from 70-80% fully insured to 70-80% self-insured, putting all the risk on the employer (to pay for care) and on the hospital (to collect larger and larger financial responsibility from patients). They capitalized on the “consumer-directed health care” trend and dramatically increased the financial risk carried by their members. • 2008 - 2013 is the single most profitable period in the history of the managed care industry. Stock prices have surged, and now the ACA is requiring millions of new customers to purchase their products. • What Are Health Plans Doing? • Premium increases continue to outpace medical inflation (and have for more than 20 straight years). • IP, physician visits, and Rx usage are all down. Elective surgeries are way down. ER visits are up. • Narrow and getting narrower by the day. • Utilization • Profit • Networks • Risk • Premiums

4. What’s Happening • Across the Nation? • ? • Exchanges are open for business. Network participation is a major strategic issue for providers. Consumer marketing and brand strategies are suddenly critical. The world is suddenly upside down on a number of fronts. • Exchanges • WALL STREET JOURNAL • Young Avoid New Health Plans • Early Buyers of Coverage Are Older Than Expected, Raising Expense Concerns • In Kentucky, nearly 40% of 4,631 enrollees in private health plans are over age 55, while 24%, including children, fall under age 34. A much higher portion of young people signed up for Medicaid plans. • WellPoint Inc., the largest insurer offering plans in Connecticut, said most of its enrollees in that state were between 55 and 64 in a recent call with investors. The insurer said it predicted an initial wave of enrollees might be older, but that it would increase efforts to woo younger members.

5. Trends in the Industry • Payors becoming providers - limited but important • Payors demanding cuts - how do you tackle new problems with fewer resources? • Health systems launching their own health plans • Taking risk • Direct contracting with employers • Narrow networks • Pushback on physician rates, non-hospital sites, implants and stop loss • Major league payor/provider conflict

6. 1. Payors Becoming Providers • Insurers across the nation are watching Highmark, which became the first — and so far only — insurer to take a major step into the hospital business when it purchased seven medical centers this year. • “Every insurer and Blue Cross plan in the country is taking a close look” at what's happening in Pittsburgh, said Ted Schwab, partner at the health • and life sciences practice of Oliver Wyman, a New York-based management consulting firm. • “If this one is successful, you're going to see activity at an unprecedented level,” he said. • Hospitals and health insurers are increasingly jittery about maintaining revenue and profit as customers and the government demand that the health care system rein in costs and improve quality.

7. 1. Payors Becoming Providers • Highmark and West Allegheny Health System (WPAHS) • Aims to offset UPMC’s alleged dominance in Pittsburgh market; announced during public and hostile negotiations with UPMC. • Highmark assumes the mantle of hero – supposedly ensuring competition in the market by saving WPAHS and maintaining choice (other than UPMC). • Deal would put Highmark back in the driver’s seat, playing a larger role in care delivery and quality. • WPAHS later said deal was off the table, but Highmark blocked them from pursuing other buyers, while pressuring the system to declare bankruptcy. Settled with bondholders for $.85 on the dollar. • Other Highmark initiatives: • In January, announced plans to build 10 ASCs in western Pennsylvania. • Acquiring Jefferson Regional Medical Center and Saint Vincent Health System. • Creating regional physicians network, recruiting 200+ physicians in past year; largest acquisition was Premier Medical Associates, Pennsylvania’s largest independent physician practice.

8. October 2012 AIS Report on BCBS Plans • N.C Blues Plan Invests in Urgent Care to • Cut ER Costs • “...the catalyst for the deal with FastMed came following a review of data regarding ER visits by members...Non-emergency ER visits represent about 14% of all ER claims paid by the insurer, and a 5% shift away from ER use to urgent care clinics could reduce medical spending by $8 million annually. • June 09, 2011 Los Angeles Times • WellPoint to buy CareMore Health Group for about $800 million • “The deal is part of an effort by WellPoint to boost its presence in the senior care market. CareMore, based in Cerritos, has 26 clinics in California, Nevada and Arizona that specialize in caring for people on Medicare.” • September 1, 2011 WALL STREET JOURNAL • UnitedHealth Buys California Group of 2,300 Doctors • “UnitedHealth Group Inc. will acquire the operations of a major southern California physician group, in the latest example of how lines are blurring between insurance companies and health-care providers..” • July 2011 Managed Care Magazine • Humana Steps Back To Seize the Future • “When Humana recently purchased Concentra, a company that, among other things, operates 300 stand-alone clinics, the plan entered familiar terrain. Before becoming primarily a health insurance company in 1993, Humana was the nation’s largest for-profit hospital company.” • January 17, 2013 CNBC • New Cigna Medical Group Health Center Opens • “The treatment center is designed to provide cutting-edge health care to Cigna customers through easy access to primary care physicians...” • Macro Payor Trends: Vertical Integration • 1. Payors Becoming Providers • November 20, 2012 Pittsburgh BusinessTimes • Highmark-WPAHS talks get underway • “The acquisition must be approved by the state Insurance Department, which would also open the doors to an additional $200 million infusion for WPAHS from Highmark. Highmark has already committed $200 million to WPAHS as part of its effort to create a $1 billion medical network to compete with the University of Pittsburgh Medical Center.”

9. 2. Payors Demanding Cuts • Demands for rate cuts increasingly common from Blues and United • Price leaders in each market particularly at risk • Lower volumes, government cuts create huge price pressures • Population health, wellness strategies require resources for investment - not starvation diet

10. 3. Health Systems Launching Their Own Plans • “Hospitals from Colorado to Virginia are exploring similar strategies spurred by rising costs and incentives in the health reform law. An estimated 20 percent of networks market an insurance product, including MedStar Health, serving the Washington-Baltimore region with Georgetown University Hospital and eight other facilities. • Another 20 percent are exploring doing so, according to a survey of 100 hospital leaders conducted last year by the Advisory Board. • Driving the change is the transition from FFS payment schemes, which pay for each doctor’s visit, appendectomy or CT scan separately, to one that pays providers a lump sum per person per year. This will shift more of the financial risk of medical care from insurers to providers. • Once hospital systems are paid this way, “they’re sort of halfway toward being an insurance company,” said Chas Rhoads, chief research officer for the Advisory Board. “The more hospitals take on risk and manage the care, the more they look like insurance companies. And ultimately you have to ask: why do we even need an insurance company sitting between a health system and an employer?” • New provider-owned health plans.

11. 3. Health Systems Launching Their Own Plans • New provider-owned health plans.

12. 3. Health Systems Launching Their Own Plans

13. 3. Health Systems Launching Their Own Plans • Forming or joining payors’ narrow networks was the most common strategy currently in place. • Population health strategies for employers and other groups were said to be in preparation or in place by over half of respondents. Q: Different strategies that many health systems have begun to implement are listed below. Please indicate the stage, if any, that appropriately describes where your hospital/health system stands in implementing the following strategies or programs.

14. 4. Taking Risk • Risk • Now, the payors are finishing their “hat trick” of shedding risk in their new contract approaches. • All the latest trends in payor/provider contracting point to providers taking on more risk for the care they provide. • Providers are facing lower payments for fee-for-service care, quality-based payments that may be complex or even impossible to manage or measure. • We face tiering and restricted networks that will drive up deductible and co-payment collection problems even more. The contracts for participation in Exchange networks are likely to shift even more risk onto providers.

15. Trust toward Payors (Behavioral Reliability)This organization makes every effort to honor its commitments • The average of all payor scores is 56.9 (on a 100-point scale). • Cigna and Blue Cross / Blue Shield performed best with scores of 66.4 and 65.9 respectively. • United Healthcare performed worst with a score nearly 14 points (24%) below the average. Q. For each health plan below, indicate your level of agreement with this statement: This organization makes every effort to honor its commitments. *Trust Index Score values are calculated on a scale from 0 for "Strongly disagree" to 100 for "Strongly agree" wherein "Neither" is valued at 50 and "Don't know" responses are excluded from the analysis.

16. Trust toward Payors (Honesty)This organization is accurate and honest in representing itself and its intentions • The average of all payor scores is 55.7. • Cigna and Blue Cross / Blue Shield performed best with scores of 65.9 and 62 respectively. • United Healthcare performed worst with a score 13 points (23%) below the average. Q. For each health plan below, indicate your level of agreement with this statement: This organization is accurate and honest in representing itself and its intentions.*Trust Index Score values are calculated on a scale from 0 for "Strongly disagree" to 100 for "Strongly agree" wherein "Neither" is valued at 50 and "Don't know" responses are excluded from the analysis.

17. Trust toward Payors (Fairness)This organization balances its interests with ours and doesn't routinely take advantage of us. • The average of all payor scores is 47; all scores were lower in this measure, suggesting a disconnect between the interests of payors and providers. • Cigna and Coventry performed best with scores of 57 and 52.6 respectively. • United Healthcare again performed worst with a score nearly 11 points (23%) below the average. Q. For each health plan below, indicate your level of agreement with this statement: This organization balances its interests with ours and doesn't routinely take advantage of us.*Trust Index Score values are calculated on a scale from 0 for "Strongly disagree" to 100 for "Strongly agree" wherein "Neither" is valued at 50 and "Don't know" responses are excluded from the analysis.

18. Trust toward PayorsCombined Trust Measures • The average of all combined payor scores is 53.2. • Cigna, Blue Cross / Blue Shield, Coventry and Aetna were all above average. • WellPoint / Anthem, Humana, BlueCard, and United Healthcare were all below average. †Composite Trust Index Score values are calculated as an equally-weighted mean of all three individual Trust measures.

19. Consumer Trust toward PayorsCombined Trust Measures • 66% of respondents believed Blue Cross / Blue Shield to be the health plan most trusted by consumers; only 6% believed the plan to be the least trusted. • 47% believed United Healthcare to be the health plan least trusted by consumers; only 6% believed the plan to be most trusted. Q. Thinking about the consumers and patients you serve, who do you think they regard as the MOST trustworthy health plan? Q. Thinking about the consumers and patients you serve, who do you think they regard as the LEAST trustworthy health plan?

20. 2013 • Stage 2: Planning and preparing to implement • 5. Direct Contracting • Stage 3: Currently have in the works • Please indicate what stage (if any) your hospital/health system is at in terms of implementing the following strategies/programs. • Stage 1: Talking about it, but not doing anything yet • Do not have in place and no plans to in future • Don’t know

21. 6. Narrow Networks • Narrow and getting narrower by the day. • Exchange networks started the trend, but challenge is much bigger. • Networks

22. 6. Narrow Networks • Narrow and getting narrower by the day. • Exchange networks started the trend, but challenge is much bigger. • Networks • How do you protect (and grow) market share? • How much will you discount to participate in a payor’s exchange network? • What are your competitors’ likely strategies? • How does your organization become “must have” for employers and consumers alike? • How do you establish relevance with consumers, and preference?

23. “...but if there’s no agreement on which hospitals and doctors deserve the best or worst ratings, then how, asked Dr. Bechta, can the insurers claim that these plans are driving patients to the lowest-cost, best-quality providers?” • 6. Narrow Networks

24. 6. Narrow Networks • Thousands of employers … across the country are slashing expensive doctors and hospitals from their insurance rosters in a move to hold down rising healthcare costs — a trend that is gaining favor with corporate bosses, if not the rank and file. • The availability of doctors varies by each narrow network. Woodland Hills-based Health Net, one of the first to promote the strategy in California, features 47,000 doctors in its full HMO network but just 7,000 physicians in its Silver plan. • That network — available in 10 counties, including Los Angeles, Orange, San Bernardino and Riverside — can save businesses as much as 14% on insurance premiums, a spokesman said. • An even smaller network, Bronze, has 1,600 doctors in (three LA counties), and can shave as much as 24% off insurance bills.

25. “What businesses say they want - and what insurers are promising - are networks made up of fewer but higher quality physicians. • Whereas tiered networks offer incentives to patients who see “preferred” or “high performing” physicians, or charge higher co-pays for visits to lower-tier doctors, narrow networks don’t pay for care for anyone other than those physicians deemed cost-efficient and high quality. By definition, a network can’t be narrow without leaving some doctors out. • Where networks are supposedly quality based, it’s unclear that all insurers are offering physicians a chance to understand why they’re included or excluded, or disclosing the measures by which the network is selected.” • 6. Narrow Networks

26. “As the health care overhaul moves ahead, the nation’s health insurers are scrambling to reinvent themselves, hoping to boost their image and entice millions of Americans to enroll, some for the first time. • Blue Shield of California has opened • centers inside Lucky Supermarkets in San Francisco. • Blues plans in Florida, Pennsylvania and three other states have also opened store-front sales centers. • Customers going to H&R Block this tax season will be asked if they want to learn about health insurance options, part of a partnership with Blue Cross Blue Shield expected to expand to as many as 42 states by next spring.” • 6. Narrow Networks

27. 6. Narrow Networks

28. 6. Narrow Networks

29. 7. Pushback on Key Revenue Items • Physician employment and rates • Non-hospital sites (OP, lab, Dx imaging) • Addition of new hospitals or entry into new markets • Implants, high cost drugs, and stop loss thresholds • Facility fees

30. 8. Major League Payor/Provider Conflict • How much rates will rise through Dec. 31, 2014, has become the latest point of disagreement between health insurer Highmark Inc. and the University of Pittsburgh Medical Center • Sources: Nooga,com, Pittsburgh Business Times, Public Broadcasting Atlanta, Beckers Hospital Review, Durham-Middlefield Patch, The Post and Courier

31. How to Successfully Manage Payor Issues

32. clarity

33. clarity • what are the facts about the negotiation landscape? • how does the hospital benchmark in-state and out-of-state? • what does you need for rates and contract language? • what is the your BATNA? • what are the payors’ biggest priorities? • how will the physicians react, and what is in their self-interest? • what does the redirection analysis show? • how will cashflow be affected if you are OON?

34. resolve

35. resolve • how much pressure can you endure? • will the executive team stand behind the strategy? • will executive leadership remain supportive if the contract ends? • can resolve be projected to the payor every step of the way? • is the juice worth the squeeze? • if not now, will it be easier in 2015or beyond?

36. strategy

37. strategy • understand each payor’s unique playbook • factor unique environmental circumstances • determine best approach - proactive or reactive • determine pivot points for escalation • engage commercial and managed Medicaidaudiences with different messages • don’t just inform - activate • specific language about the possibility of OON

38. story

39. story • what are the perceptions of the hospital and the payor? • how do we communicate your value to the community? • how do quality and cost metrics benchmark against other comparable facilities and services offered by local hospitals? • what are the facts and how can they be explained to different audiences? • what is the payor demanding that can be characterized negatively? • what are the facility’s weaknesses and how do we navigate around them? • what are the consequences if the health system is out of network?

40. discipline

41. discipline • does you have the negotiating discipline to take the payor over the hurdles? • does your leadership have the relationships in the community and the business community? • can the internal PR/marketing team carry out the needed communication effort? • can the organization withstand patient and physician complaints? • how does the health system leverage relationships and communication channels to reach critical audiences?

42. The Meek Submit, • The Bold Survive • On the bad news front, most facilities don’t believe they can live without the volume. • Nearly every issue settles, without a fuss or a fight, no matter how unreasonable the payors’ demands and behavior. • Too few health systems rely on benchmarking and hard data. • Too few are prepared to fight fire with fire, and they keep downgrading their “minimum acceptable.” • So many hospitals are playing defense when they should be establishing the vision for the future of healthcare, and articulating their role in that vision. • Meanwhile, physician groups are selling rather than innovating.

43. The Meek Submit, • The Bold Survive • On the good news front, more hospitals are engaging employers than ever before. • The “city on the hill” strategy. • Direct contracting with large employers. • Narrow network products with 2nd and 3rd tier payors. • Wellness and disease management programs. • Medical homes, ACOs, risk strategies. • Population health is the future - the question is what (exactly), when each switch get flipped, and how margins are protected. • ”Must have” hospital and health systems are expanding margins and increasing leverage.