Disruptive innovation and The future of healthcare

Disruptive innovation and The future of healthcare Kevin C. “Casey” Nolan May 7, 2019

Today’s discussion • Review key industry trends and disruption innovation shaping the future of healthcare • Provide a point of view on what the healthcare industry will look like in the future • Discuss the organizational capabilities required to be successful in the future

trends shaping the future of healthcare

Description of the current and future healthcare environment: VUCA • VUCA is an acronym that stands for Volatility, Uncertainty, Complexity, and Ambiguity • VUCA represents four distinct types of challenges that require four distinct types of responses Source: Nathan Bennett and G. James Lemoine, HBR, January 2014.

we are reminded every day of the “fourth industrial revolution” Artificial Intelligence Doctor App Amazon has 100 Million Prime subscribers; Amazon’s market capitalization is 3X that of Walmart. “Babylon’s most important customer till now has been Britain’s state-run NHS, which since last year has allowed 26,000 citizens in London to switch from its physical GP clinics to Babylon’s service instead” Value of a NYC taxi medallion dropped from$1.3M to $160,000since ride-sharing disrupted their market. …“We will set up physical and virtual clinics, and AI services in the United States,” he said, adding that Babylon would be operational with U.S. clinics in 2019, starting state by state. “For a fixed fee, we take total responsibility for the cost of primary care.”… How many Babylon’s are out there? Robinhood, commission-free brokerage, surpassed E*Trade in 2018. It doubled in one year and now has 4M accounts. Source: Forbes, Motley Fool

Sources: Wall Street Journal; KFF, Consumer Reports The case for change is compelling • Congressional testimony July 2014: “Hospital safety is no better today than it was 15 years ago.” • ~ 400,000 patients die each year across healthcare due to errors out of about 30 million discharges • ~ 1,000 patients die each day in hospitals due to medical errors • ~ 2,000 get infected each day in hospitals • ~ 1,100 drug errors each day in hospitals • ~ 32,000 adults receive the wrong diagnosis each day in OP facilities In the 1950s, flying was considered one of the safest modes of transportation, with the odds of being in an accident at 1 in 50,000. Now the odds of dying in an airline crash are about 1 in 50 million. There were zero passenger airline fatal accidents on jets world-wide in 2017 out of more than 900 million trips.

The future of healthcare will be driven by The “7cs” The Future of Healthcare

Revenue and Margin Growth is proving to be more Elusive Revenue Growth Rates are Declining Utilization Growth Declining Utilization Growth Rate By Category Annual Operating Revenue Growth Rate Commercial Payers No Longer a Safe Bet Government is Switching to Managed Care Aggregate Hospital Payment-to-Cost Ratio Managed Care Penetration Rate As a Proportion of Total Medicare Enrollees As a Proportion of Total Medicaid Enrollees Sources: 1. Moody’s Report on Non-Profit and Public Hospitals; all figures are medians 2. AHA Chartbook 2018; includes Medicaid and Medicare Disproportionate Share payments 3. CMS

Source: MedPAc 1.0 Compression of Margins Medicare margins have been in a free fall since the early 2000s… MedPac expects Medicare margins will be -11% in 2018.

1. Compression of Margins …And it is not just medicare Aggregate National Hospital Margins from Government Payers 1997 - 2014 Billions Source: MedPac Data Book, 2017

Expense growth is outpacing revenue growth . Compression of Margins

…With continued Governmental Payment Decreases on the Horizon… Medicare Fee-for-Service Payment Cuts Reductions to Annual Payment Rate Increases $415B in total fee-for-service cuts, 2013-2022 Source: CMS 1.0 Compression of Margins

Where Have all the Patients Gone? • What’s Behind the Decline? • The lingering effects of the “Great Recession” • Continued shift from inpatient to outpatient (OBS stays) • Focus on reducing readmissions • Growth in high deductible health plans • Shift to value based/population health management and improvements in care management Source: AHA; Kaiser Family Foundation and HFMA 2. Contraction of Inpatient volumes

2. Contraction of Inpatient volumes Source: AHA To the other (outpatient) side! During this same period of time, inpatient days declined by almost 20%

2. Contraction of Inpatient volumes In 2016 the percent of hospital revenue from op services exceeded ip services National % of Net Revenue Generated from IP and OP Services 2016 Source: Moody’s Investor's Service *Data based on audited financial statements for 323 Moody’s-rated NFP hospitals and health systems

The current system does not adequately address aging and Chronic Disease There are 10,000 new Medicare beneficiaries every day (1 every 7 seconds!) • Chronic conditions account for a majority of Medicare spending growth • 25% of Medicare beneficiaries have 5 or more chronic conditions • Five chronic diseases—heart disease, cancers, stroke, COPD and diabetes—account for two-thirds of all deaths in the United States and chronic diseases account for 75% of national total health care costs • Current health care infrastructure, which is designed to treat acute illness, is not effective at treating chronic illness and addressing personal behaviors associated with poor health Adults Living with Diagnosed Diabetes in the U.S. 1996 – 2016 Prevalence of Diagnosed Diabetes Among Adults Aged 18+ Years 2016 % of Adults 3. Changing Delivery Models Source: America’s Health Rankings. US Census Bureau. AHA Cost of Caring Report. AMA Health Care Trends. CDC.

3. Changing Delivery Models Sources: KFF, Wall Street Journal, Modern Healthcare New care delivery models are emerging “The days of the hospital as we know it may be numbered…Studies show hospital-level care at home for certain conditions can be provided for 30% to 50% less than inpatient care with fewer complications, lower mortality rates, and higher patient satisfaction.” “The use of predictive analytics has helped keep patients out of the hospital. Christus uses an AI program to flag patients with high risk…Rush implemented a tool that finds social resources in a person’s community and analyzes whether those referrals were acted upon…Baptist is using an algorithm to reduce readmissions and track social determinants of health.”

countless new market entrants are vying to change the delivery model 3. Changing Delivery Models

Consolidation is rapidly moving from horizontal to vertical CVS Health inked a deal to acquire Aetna for $69 billion. The deal will provide localized, community-based care across CVS Health's 9,700-plus pharmacies and 1,100 clinics. CVS Health plans to significantly extend health services at its pharmacies under the merger. Aetna will steer patients to CVS pharmacies and clinics, avoiding the costs of higher ER or other outpatient services. The merger can make expanded CVS services in-network and others out-of-network, putting additional pressure on conventional health systems to lower the costs of their outpatient services. Source: Wall Street Journal 4. Consolidation

4. Consolidation Source: Optum, Businesswire, Modern Healthcare, UnitedHealth Group, BizJournals, Star Tribune, Forbes New Partnerships will rapidly change market dynamics & blur the lines of payors & providers Optum’s Acquisition Timeline Optum to acquire DaVita Medical Group, one of the nation’s leading independent medical groups. DaVita will join Optum’s physician-led primary, specialty, in-home, urgent and surgery-care delivery services business Optum to acquire Logistics Health Inc., a Wisconsin based company providing health services for the federal government Optum to acquire MedExpress, a national leader in high-quality, affordable walk-in care Oct 2014 Jan 2017 Dec 2017 Apr 2011 Apr 2015 2010 2020 Optum to acquire Surgical Care Affiliates, an IL based company owning and operating 190 ambulatory surgery centers. SCA serves ~1 million patients per year in over 30 states Optum to acquire Alere Health, a Massachusetts based company providing condition management and women’s and children’s health services to health plans Optum to acquire the Advisory Board Company’s healthcare Business Optum to acquire MedSynergies, a Texas based healthcare consulting company

4. Consolidation Physicians are consolidating at a rapid clip: the death of marcuswelby? Physician in Solo/Two Physician Practices vs. All Other Settings • Fun Physician Facts: • 42% of the population under age 40 does not have a PCP • Physicians finishing their training have an average of 50 job offers • Physician burnout is approaching 50% • Wait times for a physician office visit went up 30% in the last 5 years • 90% of Merritt Hawkins’ searches last year were for employed physicians Source: MGMA

4. Consolidation Source: Wall Street Journal Vertical consolidation offers new value propositions Cigna’s $54B acquisition of Express Scripts intensifies the ongoing shift in healthcare and reflects the belief of even the biggest players that they must branch into other segments and forge integrated products aimed at curbing costs. Walmart’s potential acquisition of Humana could enable it to combine its expansive retail footprint, its strong brand, and its experience in building selective hospital networks with Humana’s infrastructure and data to create new health plan products for other employers.

The Ascent of consumerism is transforming healthcare Rise of the high-deductible health plan has materially accelerated consumerism in the healthcare industry. Patients and payers are expending more energy on identifying and utilizing low cost, high quality access points in lieu of the traditional access points.

5. Consumerism Source: KFF Cost sharing and new tools will influence consumer behavior Patients are Increasingly Accountable for Healthcare Costs A Growing Number of Tools are Available to Engage & Empower Patients Quality Transparency Patient Apps Cost Transparency

Changing patients into consumers Source: BCBS IL 5. Consumerism

Changing patients into consumers “I am on a high deductible health plan, which means I bear the first $5,600 of risk. So when my wife called and said, “The doctor said I need a MRI.” I said, I don’t think so. Let’s ask the doctor four questions:” • Do you know how much the MRI costs? No, but I will find out ($2,400) • Will the MRI image change your care plan for me? No • Did you know I am on a high deductible plan? No, I had no idea • Do I still need the MRI? No 5. Consumerism

Virtual Medicine will Come Of Age • In 2018, 22 million households will use virtual care solutions, up from less than a million in 2013. • Average visits among these adopter households will increase from 2 per year in 2013 to 6 per year in 2018, which include both acute care and preventive follow-up services in a variety of care settings—at home, at retail kiosk or at work. • A majority of money spent in the healthcare industry (75%) is spent on the treatment of chronic diseases. The National Health Council notes that approximately 133 million Americans currently have a chronic disease, and the number continues to increase year by year. Virtual care provides physicians an easier way to continue monitoring and engaging with chronic care patients while reducing these costs. 5. Consumerism Source: Forbes, “Virtual Healthcare Visits Will Revolutionize the Industry if We Let It”, April, 2014.

How Will consumer interface companies and other new entrants impact healthcare? • Apple is launching AC Wellness, a group of primary health clinics for its own employees and their families in spring 2018. • Ride-hailing service app Uber announced its intent to team up with healthcare organizations nationwide to provide transportation for patients traveling to and from medical appointments. • Amazon, Berkshire Hathaway and JPMorgan Chase & Co. announced they are partnering on ways to address healthcare for their U.S. employees, with the aim of improving employee satisfaction and reducing costs. • What do these companies have in common? • “Own” valuable customer relationships • Low operating costs achieved through scale and integration • Exploit “market inefficiency” Source: Wall Street Journal 5. Consumerism

There is an Explosion in Patient data and growing Demand for Access To it • 21% of Americans are already tracking their health on some kind of electronic device • There are more than 150 mobile apps on the market that can track or capture user-entered health data • The Veterans Health Administration launched a home monitoring system in the mid 2000s. More than 144,000 high risk vets were monitored in 2013 for chronic conditions. A recent study showed a 25% reduction in hospital bed days and a 19% reduction in admissions • IHS, a data and analytics firm, projects the telemedicine market will grow at a rate of more than 50% a year and be more than $2 billion in 2018. 6. Connectivity Sources: Pew Foundation. IMS Institute for Healthcare Informatics.HIS.

Personalized Diagnostics will play a big role Wearable devices, monitors, sensors, and patient-directed medical testing will create an explosion of consumer data Trends Incumbents +46m 72M wearables shipped worldwide $60B targeted therapeutics and companion diagnostic market (est.) +$18b Disruptors Source: Accenture. Robert Wood Johnson Foundation 6. Connectivity

It’s not just the data—it’s the analytics According to Fortune magazine, the frenzy of healthcare-related deal making is driven not so much by the pursuit of scale as data. The amount of health-related data generated every day is on the order of 750 quadrillion bytes—or about 30% of the world’s data production. Up until a few years ago, all that data was just sitting there. Now it’s being analyzed and interpreted. It’s the most radical change happening in healthcare. The quest to retrieve, analyze, and leverage that data has become the new gold rush. And a vanguard of tech titans—not to mention a bevy of hot start ups—are on the hunt for it. Source: Fortune 6. Connectivity

Healthcare payment has been moving inexorably—if somewhat haltingly—to a value-based model for 30+ years 7. Competing on Value

7. Competing on Value Yet despite lofty goals, results have been decidedly mixed to-date January 26, 2015 “Overall, HHS seeks to have 85 percent of Medicare fee-for-service payments in value-based purchasing categories 2 through 4 by 2016 and 90 percent by 2018.” CMS recently announced the 2016 results of the Medicare Shared Savings Program with little fanfare, despite ACOs earning $691 million in payments. Why? #1 Few ACOS have Generated Savings #2 Net Savings to CMS Are Negative #3 ACO Savings Rarely Cover Costs 66% of ACOs and CINs are Operating at a Loss Source: Centers for Medicare & Medicaid Services

7. Competing on Value and Channeling Purchasers and the “disintermediation of distance” • Reference pricing establishes a standard price for a drug, procedure, service, or bundled service and requires health plan members or employees to pay any provider charges above that set amount. • CalPERS found the hospital portion of cost for hip and knee replacement surgery ranged from $15,000 to $100,000 with very little difference in quality. CalPERS set a reference price of $30,000 and saved $5.5M over the two years, with the average price for a joint replacement dropping 26%.

The industry is currently in a period of Tremendous Experimentation of Innovative payment Models • Payor CEOs are focusing on health care value and payment innovation • Payors and providers are piloting innovative new models (ACOs, bundled payments) “I know we need to move away from volume-based to more outcome-linked reimbursement”– Blues CEO 7. Competing on Value

The healthcare industry of the future

The trends shaping healthcare are leading to a profound and permanent transformation of the industry • The healthcare industry of the future will be fundamentally different in how it is organized, how and where care is delivered, and how it is funded. • There will likely be fewer hospitals and more access points (both physical and virtual). Of the hospitals that remain, they will have higher levels of acuity and be more specialized (with few “general” facilities). • Technological advances will make the industry more personalized, more precise, and more predictive. Market Trends Compression of margins Contraction of inpatient volumes Changing care models Consolidation Consumerism Connectivity Competing on Value The Healthcare Industry of the Future

The Healthcare Industry of the Future Healthcare will move from a fragmented non-system organized for the convenience of providers… Rehab Ambulatory Center Patient’s Home Skilled Nursing Facility Physician Office Home Health Agency

The Healthcare Industry of the Future …TO one in which care is coordinated and integrated across the continuum Transforming Fragmented Silos into Coordinated Care Primary Care Physicians Specialty Care Physicians Outpatient Care and ASCs Inpatient Hospital Acute Care Long-Term Acute Hospital Care Inpatient Rehab Hospital Care Skilled Nursing Facility Care Home Health Care

The Healthcare Industry of the Future Health systems will Go from managing departments and functions… CEO CXO CXO CXO CXO FUNCTION/ DEPARTMENT FUNCTION/ DEPARTMENT FUNCTION/ DEPARTMENT FUNCTION/ DEPARTMENT FUNCTION/ DEPARTMENT FUNCTION/ DEPARTMENT

The Healthcare Industry of the Future …to managing the health of a defined population …where functions/services, providers, and sites of care are organized around the person; care is coordinated across the continuum; and navigation between services and sites of care is proactively facilitated and managed by providers for people and their families.

The industry must Reconfigure and redeploy assets to better align with & meet customer needs and expectations “We will do everything for everybody” has never been a viable value proposition for any successful business model. “…we must replace today's fragmented system, in which every local provider offers a full range of services, with a system in which services for particular medical conditions are concentrated in health-delivery organizations and in the right locations to deliver high-value care.” The Healthcare Industry of the Future

The Healthcare Industry of the Future Wall Street Journal Inpatient institutions will become more specialized, smaller, or disappear completely • “Hospitals will evolve into large intensive care units where you go to get highly specialized, highly technical or serious critical care.” • “…health systems are building free-standing emergency rooms and micro-hospitals…92% of patients who come to micro-hospitals are treated and sent home in an average of 90 minutes and 8% are admitted overnight…” • “…the U.S. has more hospital beds than it needs in most markets…The average occupancy rate was just 62%...There were more hospital closings than openings over the last 4 years, with nearly half of those converting to outpatient only facilities.”

The Healthcare Industry of the Future Source: Becker’s Review The world’s biggest technology firms will digitally transform healthcare “The healthcare industry is NOT being disrupted by digital technology but by consumer-centric organizations that offer retail-like health and wellness services specifically designed to meet and exceed the expectations of today’s healthcare consumers. Those organizations understand that healthcare customers expect much more than access, quality and affordability. They expect an exceptional, retail-like experience: ease of use and immediacy of service – how, when and where it is most convenient for them, not providers. The disruptors leverage digital tools and technologies to provide that enhanced customer experience, of course, but the disruption is being caused by their commitment to a superior customer experience, not by their commitment to digital technology.”

Disruptive innovation and The future of healthcare