Financing of State HIE in North Carolina

1. Manatt, Phelps & Phillips, LLP Financing of State HIE in North Carolina December 16 2010 NC HIE Board of Directors Meeting - DRAFT

2. Proposed Pre-Payment ModelOverview • Goal: Develop a comprehensive statewide HIE infrastructure as quickly as possible. • Even with federal funding, North Carolina faces an$11 million shortfallto cover the estimated minimum $24 million development costs. • By raising the money upfront, North Carolina can: • (1) deploy the full range of HIE services as soon as possible; (2) accelerate value realization; (3) encourage widespread participation by lowering barriers to entry; (4) maximize Meaningful Use participation; (5) lock in multi-year commitments from critical mass of constituents; (6) reduce administrative burdens • To generate required upfront capital, NC HIE would create a voluntarypre-pay option for participation in the exchange. • Pre-payment amounts will be based on the percentage of value and benefit that accrues to each stakeholder group. • Entities that provide upfront contributions will realize targeted benefit down the line. • Entities that don’t pre-pay can still participate, but will be subject to higher annual payment rates Draft for Discussion Purposes

3. Goals of Discussion • Review concept • Develop common understanding of assumptions • Outline next steps • Note - recognizing that funding model illustration for discussion would rely on 100% participation from identified entities, the financial contributions outlined in this model should be considered informed draft estimates for purposes of discussion and not final. Draft for Discussion Purposes

4. Statewide HIE Services in North CarolinaEstimated Savings from HIE Implementation* HIE Services Estimated Annual Savings** Source of Savings • Decrease preventable inpatient adverse drug reactions • Avoid unnecessary inpatient hospitalizations due to missing information • Decrease outpatient visits related to preventable outpatient ADEs and missing information • Decrease unnecessary, duplicative laboratory and radiology tests • Decrease redundant and overuse of medications • Decrease emergency department expenses Med management, clinical decision support $110 million $290 million Eligibility check, radiology images, procedural results, CCD translation, disease surveillance Med Hx, lab normalization, immunization, public health/quality reporting Provider & facility index, access layer, lab & CCD routing, clinical messaging *Source: Baker, Newman, and Noyes Analysis of Anticipate Annual RoI for Maine using 2004 dollars; estimated savings adjusted for NC based on population and 100% adoption. Note, the figures haven’t been updated to 2011 dollars. ** Adjusted for outpatient services provided in lieu of unnecessary inpatient hospitalizations; change of charges to payments; and incremental cost reduction impact to providers. Estimates are also based on a number of other discrete literature. Draft for Discussion Purposes

5. Statewide HIE Services in North Carolina Pre-payment funding model allows for all phases to be completed up-front instead of a staged approach Med management, clinical decision support Level 3 HIE Services Level 3 HIE Services ( Normal phased approach) Eligibility check, radiology images, procedural results, CCD translation, disease surveillance Level 2 HIE Services Level 2 HIE Services ( Normal phased approach) Med Hx, lab normalization, immunization, public health/quality reporting Level 1 HIE Services Core Services: Secure Hub-Hub Routing Provider & facility index, access layer, lab & CCD routing, clinical messaging Statewide HIE Policy Infrastructure NC HIE creation and operations Draft for Discussion Purposes

6. Estimating Amount to Raise 6 Expected Costs vs. Grant Funding Required Amounts to Raise $24,499,650 Total Costs Federal Grant Funds plus NC matching $13,643,406 Costs Gap $10,856,244 Grant Funding We need to raise $10.8 million to cover the gap in funding Draft for Discussion Purposes

7. Proposed Pre-Payment ModelUpfront Commitments Needed to Cover $11 million Goal Hospital Systems (cover 35% of needed funds) • Pre-payments from 6-10 largest systems • Approx $3.85M total over four years Commercial Payers (cover 35% of needed funds) • Pre-payments from 2-3 largest payers • Approx $3.85M total over four years NC Medicaid (cover 20% of needed funds) • Use Medicaid 90/10 funding to contribute $2.2 million over four years Providers (cover 10% of needed funds) • Pre-payments from large practices of 100 or more (represents approx 21% of providers in state) • Approx $1.1M total over four years Hospital Systems $ 3.85 M $ 1.1 M Providers $ 3.85 M $ 2.2 M Payers NC Medicaid Note, if additional pre-funding constituents are identified and provide commitments, the percentages for each group would be appropriately revised. Draft for Discussion Purposes

8. Methodology for allocation • Definitive allocation of costs between stakeholders is challenging • State and regional HIEs have differing allocations across participant categories • Based on review of literature and prevailing models, we recommend the following allocations Hospital Systems $ 3.85 M $ 1.1 M Providers $ 3.85 M $ 2.2 M Payers NC Medicaid Draft for Discussion Purposes

9. Hospital & Health System Allocation Methodologies 35% - Hospital Systems • Pre-pay commitments over four years from 6-10 largest systems. Methodologies to allocate could include: • Each system would commit to ~$50-$75 per bed per year • Even split of 35% share • Allocated based on tier (large, mid, small, etc.) Draft for Discussion Purposes

10. Provider Allocation Methodology 10% - Providers • Recommended Methodology: • Per-provider commitments over four years from large practices (over 100 docs). • Pre-payments from 3,951 providers in large practices of 100 or more (represents approx 21% of providers in state) • Each practice would pre-pay ~$55 per provider per year over four years Draft for Discussion Purposes

11. Fee Breakdown Pre-payment “Pay as you go” Example Four Year Totals : Provider Example ( 5 person practice) $ 100 per Provider/ year $ 2,000 Pay as you go $ 55 / Provider $ 1,100 Pre-pay Hospital System C Example (1,393 Beds) $ 557,200 $ 100 PBPY $ 423,472 $ 76 PBPY “Pay as you go” participants will end up paying more over a period of four years * For purposes of this illustrative analysis, hospital contributions were categorized by bed size. Health systems could also be tiered into Large, Medium, Small, etc. Draft for Discussion Purposes

12. 2.5 2 1.5 1 0.5 0 Predicted Rates of Adoption: Breakdown by stakeholder Payers Hospitals Percent of Connected Participants 2015 2016 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 • High initial participation due to: • Participation of largest organizations • Availability of advanced financing • Adoption expected to increase at an 18% rate after initial connectivity • We are holding payer adoption steady at just the 2 for the time period selected since other payers lack significant market share Beds Providers 2015 2016 2015 2016 2011 2012 2013 2014 2011 2012 2013 2014 Manatt, Phelps & Phillips, LLP Draft for Discussion Purposes

13. Pre-Payment Model Pay As You Go Model Benefits HIE Benefits • Faster build-out of HIE • Higher adoption • Creates lock-in of stakeholders • Flexibility in payment options • More affordable for smaller stakeholders Stakeholder Benefits • Increased value for individual participants through • Access to advanced features • Critical mass of data through higher levels of adoption • Lower 5 year cost than pay-as-you-go model • Allow for the possibility of reinvestment or investment returns to stakeholders based on HIE profitability Risks Risks • In sufficient grant funds to implement advanced HIE, with minimum functionality in early stages • Lower adoption rates as participants wait for more compelling functionality and value • Lower adoption delays achieving a critical mass of data • Lower revenue based on lower adoption • Stakeholders are betting on continued success and sustainability of statewide HIE • Time value of capital with large up-front investment • Early implementation of all advanced functionality can be inheritably risky since these functionalities are not well defined and not universally adopted yet Mitigating factors • Discounts • More sustainable model Manatt, Phelps & Phillips, LLP Draft for Discussion Purposes

14. Why the Pre-Payment Model Makes Sense: Pre-Pay Model Pay-as-you-go Model Given the time frame, existing stakeholders, and estimated costs, the Pre-payment model is the most appropriate Sustainability Model for NC Pre-payment Model • 6-10 largest systems and the major payer pre-pay for the first four years • Fees would be based on current levels of funding and accumulated costs • Fees will also be based on type and size of participant • Smaller participants with less capital can still pre-opt for a pay-as you go model Draft for Discussion Purposes

15. Appendix

16. Costs and Funding Costs • Costs gradually decrease after 2012 when system is complete • Alternative pricing models (e.g., subscription service) offer a variety of cost allocations Funding • Funding calculation only includes ONC funds for 2011 (doesn’t include the $1.1 M spent on planning in 2010)

17. Incremental Value Provided with an initial higher rate of adoption Incremental Value Provided HIE Connectivity Projected adoption rates Pre-payment Model Normal Adoption Year 1 Year 2 Year 3 Year 4 Year 5 • Individual value provided strongly correlates with adoption rates The success of an HIE highly dependant on the number of users and stakeholders • A pre-payment model provides an initial higher value compared to a pay-as you-go model since more users are connected to the HIE and there is more information to exchange • Adoption rates of other providers will also increase at a faster rate if the largest systems are first connected 2011 2012 2013 2014 2015 • Assume 18% increase each year linearly, though rates may gradually increase as more users become connected • Assumed most providers who will be the first adopters will be those in large practices of 100 or more