1999 CAS SEMINAR ON HEALTH AND MANAGED CARE Managed Care - What Is It and What Might It Be?

1. This presentation will probably involve audience discussion, which will create action items. Use PowerPoint to keep track of these action items during your presentation • In Slide Show, click on the right mouse button • Select “Meeting Minder” • Select the “Action Items” tab • Type in action items as they come up • Click OK to dismiss this box • This will automatically create an Action Item slide at the end of your presentation with your points entered. 1999 CAS SEMINAR ON HEALTH AND MANAGED CAREManaged Care - What Is It and What Might It Be? Prepared By: Milliman & Robertson, Inc. Arthur L. Wilmes, FSA, MAAA

2. Prospective Trends in Healthcare • Healthcare Providers Need to Consider Strategies That Increase Efficiency • Forces in the Healthcare Market Will Make It Very Difficult for Status Quo Providers to Compete Effectively • Healthcare Providers Will Need to Develop Their Patient Management Processes as if They Are Being Paid Under Capitation

3. Extrapolations/Observations of the Healthcare Marketplace • Consolidation of Third Party Payers (TPPs) • Medicare and Medicaid Risk Contracting • Expectations by Hospital Executives • Growth of Employer Coalitions • Emerging Healthcare Cost Trends • Medicaid Expansion Programs • Ability to Measure Healthcare Provider Performance

4. Price Squeeze • Consumer Squeeze Healthcare Prices • General Refusal to Accept Significant Price Increases • Capitation or Fee-for-Service Will Not Be Immune • Continuing Decline in Fee-for-Service Reimbursements • Use of Benchmark Analysis and Quality Initiatives (QI) • Beginning to Spill-Over into Reimbursement Contracts

5. Price Squeeze • Minimum Performance Standards • Quality of Care and Efficiency Can Be Correlative • Net Reimbursement Will be Based Upon a Benchmark Level of Efficiency • Not Going to Pay a Premium for a Provider’s Inefficiency • Net Paid Fee Service Resulting in Fee-for-Service Contract - Effectively Capitation Contract

6. Increased Information Technology • Healthcare Providers and Purchasers Will Use Information Technology • Providers Will Use the Technology to Manage Care • Purchasers Will Use the Technology to Assess Provider Performance and Make Purchasing Decisions • QI Engagements for Large Employers • Development of Operational Changes to Promote Greater Efficiency at Employer’s Healthcare Providers • Quality and Efficiency Measures were Introduced and Reported • Data Reports Used for Contract Purposes and Reimbursement

7. MSO Infrastructure • Market Changes Will Encourage Healthcare Providers to Vertically Integrate • Not Only Motivated by Financial Purposes • Also for Better Patient Management • Gain-Sharing Directive by Health and Human Services tends to Discredit the Feasibility of Loose Integration • Need for Central Unit Which Providers Non-Medical Services to Providers • Ensure That Medical Treatment is Delivered as Medically Necessary in Appropriate Setting by Provider with Appropriate Level of Training • Conventional Systems Do Not Adequately Facilitate the Successful Completion of This Goal

8. Need to Improve Efficiency of Patient Care • Influences Beyond Financial Issues • Improved-to-Optimal Health Status and Improved Functional Independence • More Efficient Use of Resources • Patients in Any Health System who Require Fewest Resources for Physical Disposition are Those Who do as Well as Can Be Expected • Professional Obligation to Know What Those Resources Are, So That Limited Supply of Total Resources not Wasted on Routine Uncomplicated Patients

9. Healthcare Providers Need to Transition Their Delivery Systems • Expectation That Limitations Will be Placed Upon Total Healthcare Spending • Inefficiency Will Not Be Tolerated (or Compensated) - Either Fee-for-Service or Capitated Contract Arrangement • Today’s Markets Are A Combination of Fee-for-Service and Capitation • Plan That Does Not Currently Lay Groundwork For Transition Seems to Be Preparing a System for the Past and Not the Future

10. General TrendsProvider and MCO Capitation • Consumer is Multi-Component Entity • Government Sector, Consumer is the Government • Government Pays All or Most of the Revenue Supporting Services • Government Has More Authority Than Patient When Dealing with TPPs and Providers

11. General TrendsProvider and MCO Capitation • Private Sector, Consumer is Primarily the Employer • Ultimate Recipient of Services in Patient • Employer Generally Pays Large Portion of Revenue Supporting Services • Individuals Generally Cannot Generate Sufficient Integration • Generally Only View Government and Employers as Consumers

12. Triangular Model of Healthcare Market Provider CONSUMER (Government/Employer) TPP

13. Interaction Among Parties in the Triangular Model • TPP Industry is Consolidating • Medicaid and Medicare Risk Enrollment Continues to Increase • Hospital Executives Indicate an Expectation of Growth in Capitation • Development of Employer Coalitions and Changes in Large Employer Purchasing Methods • Emerging Trends in Healthcare Costs • Medicaid Programs are Continuing Their Expansion by Means of HCFA Waivers • Employers and Coalitions Combining Cost and Quality Under the Umbrella of Quality Improvement

14. Recent Large Multiline Companies Leaving Health Insurance Market • Jefferson-Pilot • Lincoln National • Massachusetts Mutual • Metropolitan • Prudential • The Travelers • NYL Care

15. Emerging Regional/National MCOs • Anthem (Indiana, Kentucky, Ohio, Connecticut, Maine? Colorado? New Hampshire?) • Carefirst (Maryland, DC, Northern Virginia, Delaware) • PREMERA (Washington, Alaska) • Wellpoint (California, Georgia) • Trigon/Cerulean • Highmark (Western Pennsylvania, Pennsylvania)

16. Consolidation Trends Are Continuing • December 1998, Aetna Announced They Will Purchase Healthcare Business of Prudential • Estimated at 11.7 Million Aetna Members • CIGA is Currently in Discussions to Sell Its Property/Casualty Business

17. TPP Industry Consolidation Will Have Implications for Healthcare Providers • Consolidation is Intended to Develop Critical Mass, Capital, Purchasing Power, and Information Technology • Continue to Control a Significant Number of Insured Lives • Continued Interest and Emphasis on Disease Management Programs

18. TPP Industry Consolidation Will Have Implications for Healthcare Providers • Upturns in Medical Trends May be a Serendipitous Event for Consolidating Companies • Increased Interest in HMO and POS Plans

19. Physician Trends • Physicians Continue to Consolidate • Survey of Physicians by SMG Marketing Group, Inc. • Number of Medical Groups Has Increased 17.3% Between 1995 and 1997

20. Consolidation is Driven By “the increasing influence of managed care, especially HMOs, on the physicians. Doctors are finding it necessary to form groups to contract more effectively with managed care companies.”

21. Recent Support by the AMA of Physician Unions • Time Frame Required to Organize Physicians • Learning Curve Associated with a Physician Union • Scope is Limited to Employed Physicians • Poorly Defined Regulatory Environment

22. Continued Use of External Companies for Management • Physician Practice Management Companies (PPMCs) were Darling of Wall Street • Last Two Years Have Not Been Kind to PPMCs • Continue to Be a Force in Healthcare Market • Approximately 27 Publicly Traded PPMCs • Combined Equity Value Declined 49.3% During 1998 • Several High Profile Collapses

23. PPMCs Have Experienced Some Recent Equity Improvement • At the End of 1998, the Aggregate Stock Value of PPMCs is Up 12.8% Over the Last Six Months of 1998. • S&P Rose 7.5% During the Same Period. • Total Capitalization of PPMCs was Estimated at Approximately $4.8 Billion. • Some of the Largest PPMCs Continue to Have Difficulties. • Medpartners • FPA Medical Management

24. Hospital Trends • Evergreen Rd Released Survey of Hospitals and Doctors in March 1999 • Provider Expectation That Capitation Will Increase • Surveyed 322 Provider Organizations Nationwide

25. Survey Indicated Hospital Groups • Percent of Revenue Attributable to Capitation Contracts was 30% or More. • Expected Capitation to Increase 33% in the Next Two Years and 41% in the Next Five Years. • 65% of Surveyed Capitated Hospitals Planned to Sign New Capitation Contracts in 1999 with an Average 2.6 New Contracts per Hospital. • 27% of Surveyed Non-Capitated Hospitals Planned to Sign Capitation Contracts in 1999 with an Average of 1.9 Contracts per Hospital.

26. Continued Reduction in Hospital Occupancy • Hospital Revenues May Continue to Decline • Re-Engineering Efforts May Not Be Sufficient • Expense Reductions May Not Be Sufficient • Need to Address Revenues, Expenses, Access to Marketshare, and Operational Changes • Empty Beds Are Bad News • Competition May Complicate Strategies That Focus on FFS Contracting

27. Hospitals as Commodities • Nascent Nature of Newer Quality Measures • Little Differentiation Among Competitor Hospitals • Oversupply Shifts the Negotiating Advantage to Consumers • Need to Develop Strategic Alliances

28. Gain-Sharing is Illegal • Consultants Promoting and Implementing Gain-Sharing Arrangements • Estimate That Approximately 12 - 15 Such Gain-Sharing Programs • HHS’s Inspector General (IG) Office and HCFA Posted Bulletin on July 8, 1999 • Effectively Eliminated Broad Gain-Sharing Arrangements • Gain-Sharing Programs Confined to Managed Care Programs or Medicare/Medicaid Risk Programs are Still Allowable.

29. Highlights of the IG Bulletin • Civil Monetary Penalty Section of the Social Security Act is Interpreted to Strictly Prohibit Gain-Sharing Arrangements • Existing Gain-Sharing Arrangements Should Be Terminated Immediately. • Alignment of Incentives by Hospitals with Physicians for Purposes of Cost Savings May Not Violate the Social Security Act. • Clinical Joint Ventures May Violate Anti-Kickback Provisions of the Social Security Act.

30. Medical Trends and Employer Coalitions • Recent Surveys of Medical Trends Indicate a Return to Double Digit Increases • Recent Losses Within the Managed Care Industry • 1999 Renewal of 10.75% Negotiated Between the California Public Employers Retirement Systems (CalPERS) and KaiserPermanente • Kaiser, the Nation’s Largest and Oldest HMO, Experienced Its First Loss ($270 Million) in 1998 • Experts Have Speculated that Kaiser Will Need at Least a 25% Increase in Aggregate Premiums Over the Next Three Years

31. CalPERS and Buyers Health Care Action Group (BHCAG) of Minnesota • Two of the Largest and Oldest Employer Coalitions • Coalitions are Continuing to Form and Increase in Size • Coalitions are Seeking • To Improve Patient Access • To Increase the Scope of Benefit Coverage • To Reduce Overhead • To Improve Population Management

32. Changes in Medicare • Aetna/US Healthcare Withdrew from Connecticut • BC/BS Withdrew from Arizona, Massachusetts, and North Carolina • Oxford Withdrew from Connecticut and New Jersey • PacifiCare Withdrew from California • UHC Withdrew from Florida, Ohio, and Missouri

33. HCFA Statistics Indicate A Different Situation • Fifty-two (52) Plans Dropped Contracts at the End of the Fourth Quarter of 1998 • Dumped Approximately 299,000 Medicare Risk Beneficiaries • All but Approximately 50,000 of the Beneficiaries Have Re-Enrolled

34. HCFA Statistics Indicate A Different Situation • Average Size of the Remaining Plans Have Increased (Over 4,000 per Plan or 5% Between October 1998 and April 1999) • Number of New Medicare Risk Beneficiaries Added per Month has Increased Three Months in a Row • 53,673 Beneficiaries were Added in April 1999 • 148,467 Have Been Added Since February 1, 1999 • 398,588 Have Been Added Since August 1, 1998

35. HCFA Statistics Indicate A Different Situation • HCFA Estimates that Medicare Risk Program will Increase at Approximately 50,000 New Beneficiaries per Month and to Reach 600,000 by the End of 1999 • 103 of the Medicare Risk Plans are Growing at a Rate of 10% or More per Month • Approximately 301 Plans Enrolled in Medicare+CHOICE • 40 Plans (55% of Total Enrolled Beneficiaries) Which HCFA Characterizes as Super Meds Growing at More Than 10% per Month

36. HCFA StatisticsHave Implications • Growth in Beneficiaries is Occurring in Urban Areas • FFS Medicare Beneficiaries are Shrinking • May be Difficult to Retreat from Medicare Managed Care Contracts • Large Plan Disenrollment at the End of 1998 May Have Been a Strategic Reengineering • Need to Increase Investment in Medicare Management Systems

37. Changes in Medicaid • Three Medicaid MCOs Exited Arizona Last Fall • Two Medicaid MCOs Left Georgia • Two Cook County, Illinois Medicaid MCOs Refused to Accept Medicaid Capitation Rates • Maine Medicaid MCOs Have Refused Medicaid Capitation Recently and Maine is Developing a Direct Contract Strategy with Healthcare Providers

38. State Governments Pursuing Medicaid Risk Programs • States Appear to be Intolerant of the Inability of MCOs and Healthcare Providers to Manage Risk Contracts • Programs are Expanding into Disabled, Elderly, and Long Term Care Beneficiaries • Programs are Expanding into Children’s Health Initiative Programs (CHIP) and Other Programs

39. Implication for Healthcare Providers • Government Risk Programs May Increase in Size • Become a Larger Percentage of Marketshare • Management of These Populations Will Need to be Different • Healthcare Providers Will Need to Adapt to the Growth and Develop Changes