Health Care Reform – What Role will the Hospital Play?

1. Health Care Reform – What Role will the Hospital Play? February 2014 Dr. James Bonnette Partner and Chief Medical Officer Zachary Hafner Principal

2. In recent years, we have undertaken a number of initiatives to lay the foundation for rewarding health care providers and suppliers for the quality of care they provide by tying a portion of their Medicare payments to their performance on quality measures. The overarching goal of these initiatives is to transform Medicare from a passive payer of claims to an active purchaser of quality health care for its beneficiaries. - The Centers for Medicare and Medicaid Services

3. Healthcare reform has now been in the works for several years… PPACA Progress Patient Protection and Affordable Care Act (PPACA) passed in March • Extended coverage for adult children up to age 26 • Required HHS and states to review “unreasonable” premium hikes • Supreme Court ruling impacts ACA provisions • Value-based demonstrations continue as Medicaid bundled payment and Medicare value-based purchasing programs launch • Additional rules on reinsurance, risk adjustment, and risk corridors released in fall • Individual mandate, subsidies, and guarantee issue take effect • Medicaid eligibility to expand • Employer requirements to offer coverage take effect • Pioneer ACOs launched Jan 1 as value-based care activity continues • MA plan payments adjusted • Minimum MLR requirements kicked in • Medicare Part D “donut hole” closed 2010 2011 2012 2013 2014 Implementation Activity • Health plans file products with state insurance commissions by midyear • Enrollment on the exchanges begins • Grants for exchange planning and establishment awarded • States finalize exchange operational planning by end of 2012 – or accept federal fallback • States define essential health benefits package Rolling enrollment in the Medicare Shared Savings Program Sources: CMS, KFF;

4. Momentum behind the “volume-to-value revolution” is growing – the market is demanding change 2. The leaders are demonstrating it 4. Consumers are redefining value expectations 3. Technology is enabling it 1. The market is demanding it Employers Medicaid Medicare Consumers Accessible Across populations Easy Population Health and Lifestyle Managers rotating over $1 TN towards higher value Personal Across geographies Integrated Error free Across health conditions Much better value Predictive/ preventative Mobile/social Less invasive Personalized Always available

5. Establishing a baseline: what we now know to be true • 2014 is different than 1994 – those who dismiss the current value revolution as a retread of the ’90s face a rude awakening • The innovation/diffusion gap is a mile wide – game changing ideas are already out there in pockets across the country • There are evolutionary pathways for health systems leading to even stronger business designs than those of the past • Value-based care models, which require coordinated care and focus on outcomes, are becoming increasingly common • What used to be a population of patients in employer selected health plans is rapidly becoming a market of customers with a retail mindset demanding new services and experiences that are not currently abundant in the market • Disruptive innovators from neighboring industries (e.g. tech and retail) are hungrily eyeing the healthcare space • There is much risk and uncertainty, but also a growing industry appetite to expand the opportunity space. • For action-oriented value creators the path is clear and compelling

6. There are three waves of transformational change reshaping healthcare… 2025 2010

7. …fueling development of new patient / consumer-centered business designs

8. Population health players are working to create tailored solutions to meet the needs of various components of the population health pyramid End of life/long-term care A Severe mental/neurological illness Frail elder C B Poly-chronic/complex D Chronic with extensive social needs Early stage chronic F E Early stage behavioral and risk factors G General healthy Acute episodic care H I

9. The top 5% of spenders drive 45%-50% of total medical spend and are the major utilizers of both emergency room and inpatient services Cumulative medical spend Source: Commercial Sample – MarketScan Commercial claims data; Medicare Sample – Medicare 5% sample. Note: Only those Medicare patients with both Parts A and B were included in the analysis. 1. Trended to 2012 using 7% annual inflation rate. 2. Trended to 2012 using 5% annual inflation rate; just Medicare Parts A and B, no Rx spend included.

10. Managing these complex patients to improved outcomes involves a very different type of care coordination, care management, and care delivery Chronic care model Behavioral MCO • Transportation • Pharmacy • At-home monitoring Shared savings or % of premium Enablement MCOs • Feedback loops (County-PCP-MCO-Housing) Extensivist clinic Communication Chronic care team At home/institution • Referrals • Test-order verification • County programs (MH/MR, D&A rehab, Office of Aging) • Extensivist, or clinical leader and “quarterback” for the member’s care • Advanced Practice Provider (NP/PA) • Patient Navigator • RNs/MAs • Social worker • Behavioral health resource team • Dietician • Pharmacist • Receptionist • Office manager Coordination The CCM Core Team manages the individual concurrently and throughout all stages of health services • In-hospital protocols • Discharge management • Emergency care Acute episodes Virtual care Member • Education • Dietary counseling • Family support and counseling Support services At the clinic • Shelters and housing • Meal delivery • Home health • Nursing homes Place of residence The core care team is responsible for coordination (gets what is needed, when it is needed, where it is needed) • Hospice care • Palliative care • Survivorship End-of-life care

11. Concentration This has significant implications for sites and types of services being consumed… Low High Current fee for service silos Integrated episode, condition and disease ecosystems Population health and condition management

12. Hospitals 10% increase Medical specialists 30% decrease 20% increase PCP 20% decrease Med equip & non-durable med prod. Rx 5% decrease Nursing home/ home health 10% decrease 5% increase …and will create winners and losers in the process; hospitals and surgical specialists stand to lose the most relative to today’s FFS model Impact of care models on physician specialties Impact of care models on medical expenditures1 $2.0 T $597 B % Change Types of Physicians $574 B $1.7 T (15%) • Gen surg. • Radiology • CV surgery (5%) • Cardio int. • Orthopedic surg (10%) • Gastroent. • OB/GYN 10% • ER medicine Specialists 10% decline • Neurology • ENT Medical expenditures (10%) • Cardiologist • Endocrinologist 20% • Oncology • Pulmonolgy (32%) • Internal medicine • Pediatrics PCP20% increase Legend Legend No change 1 Excludes other non-IHM spend (e.g., private insurance, dental, gov’t) which represent $0.3T in spend and are not impacted by care models

13. The impact a population health manager can deliver: CareMore outcomes CareMore’s per person medical costs are 20% lower than other health Insurers with a 70% loss ratio, competitive premiums and richer benefits Note: CareMore’s medical loss ratio is 68%, vs. industry average of ~85%

14. Illustrative provider profit projection What does this mean for hospitals?Hospitals must play “value offense” to thrive Health system options palette Over time the hospital is likely to become a cost center or service provider to disease and population managers • FFS dominant • FFV dominant 3 • Long-term – (2015+) • Productize and compete on value 2 1 • Today - (2014-2015) • Reduce fixed costs • Shift to value-based models and assume clinical risk • Become information enabled Profit • Today – (Ongoing) • Aggressively manage variable costs • Consolidate and integrate DO NOTHING • Time

15. While fee-for-value (FFV) is the ultimate goal, most hospitals are still early in the journey and require approaches to efficiency enhancement that are beneficial under both FFS and FFV models Provider Migration to Value Illustrative FFV Positions the organization for the future while favorably impacting performance today Provides immediate FFS impact, but diminished returns in repeated iterations Enhances position for future FFV model, but hurts FFS business

16. In a value-based world, providers have a range of options of where to play • Pop’n Health Mgr. • PCMH • IOCP • Frail elder • Condition Manager • Cardiovascular • Diabetes • Oncology • Episodic Manager • Orthopedics • Surgical COE • Fee-for-Service • Phys. Office • Outpatient • Ancillary Care • ED/UC • IP Hospital Value-based delivery offerings

17. The challenge for today’s health systems involves carefully balancing clinical transformation with shifts into risk and population management Full clinical risk New risk contracts fail to return significant margins without clinical transformation Optimal value creation and value capture Risk transformation Balanced pathway to value transformation Clinical transformation allows value creation to accrue predominantly to the payer T0 Optimal care delivery Clinical transformation

18. Retailers, payers and wellness companies are increasingly focusing on the bottom of the pyramid while providers dominate the top… for now Top-down vs. bottom-up competition for lives Polychronic Provider-led models Payer-led models Open Heart EP Intervent-ionalist Orthopedics Radiation oncology Cardiology Cancer Surgical oncology Provider-led pop manager Crowdsourced tools ESRD Frail elder Risk assessment Provider transparency Diabetes Wellness Wellness Chronic and major conditions Health status Payer-led model Monitors/ sensors Social media Ancillary products Risk financing Financial mgmt. Biometrics Information Goods Network Wellness Minute Clinics Retail-led pop manager Coaches Lifestyle Retail/ shopping Coaching Convenience Minute Clinics Retail/New-co models Apps Healthy Consumer-led Physician-led Health leadership

19. Six BIG questionsevery health system leadershould be considering

20. 1. Are we playing offense or defense? HEALTH SERVICES MARKETPLACE Health plans Physician organizations Health plans Partnerships Acquisitions Patient volume Consumer value Acquisitions Partnerships Consolidation Partnerships Health plans Healthsystems PBM’s and retail pharmacies Partnerships Consolidation Offense or defense?

21. 2. Do we know where our capability gaps are and how to close them? Do we know what the most important value-added activities are? Are we ruthlessly objective about what will take? HIT/Service Companies Health Plans Value-basedpricing • Delivered via ecosystem • Open architecture • Relentless innovator • Information enabled and predictive • Total health and wellness focus • Always engaged • 100% available and social • Magnetic for consumer • Superior results • Strong brand • Culture centered around a service mentality • Vibrancy Performancemanagement Product/distribution Cloud Analytics Health Systems/ Physician Orgs Informationmanagement Connectivity Retail Pharmacies EBM Powerless Convenientaccess Care teams Personalized,adaptive Healthassessment Empowered Partnered Coaching/engagement Supportsystems Preventionservices Behavioral Health Health/Disease Managers Rewards andloyalty Engaged Navigation Shopping/delivery Mobile/social Monitoring/tracking Consumertransparency Retailers/e-Retailers Social Media Companies

22. 3. Do we really have the consumer in focus? Health Apps Today’s world Tomorrow’s world EBM Treatment Crowd Source Big data Scope and scale of consumer engagement? Value and power of the integrated consumer value chain – 1 + 1 = ? Likely value chain organizers – what will it take – who will be trusted? Dimensions of competition – anywhere, anytime, personalized? Role of health status and benefits coverage in shaping value chain leadership? Consumer loyalty Consumer mindshare Consumer engagement Consumer timeshare Consumer life share Consumer wallet share Heart patient Whole consumer My value chain Collaborative consumer value chain

23. 4. Are we prepared to play in a multi-chain world? Health Apps EBM Treatment Crowd Source Big data My value chain Collaborative consumer value chain

24. 5. Have we really considered the compete or converge question? Traditional healthcare players Extra-industry players Race to capitalize on higher value consumer relationships Consumer mindshare Health retailers and e-retailers Providers Consumer loyalty Consumer timeshare Tech, consumer goods and services Health plans Consumer wallet share Consumer biodata share

25. 6. Are we moving fast enough? The leader advantage is expanding, fueled by new technology, capital markets, and hare earned lessons Today-player questions 2nd Generation Leaders • Is the cost of inaction on the rise? • Is there an inflection point where we can’t catch up to the leaders of the pack? • If one of these models entered our markets, could we respond? 1st Generation Leaders Organizational sophistication Today’s Volume Players Value creation

26. Key Takeaways

27. Consumers are value-starved … I am the biggest driver of my health and understand the benefits of being proactive I understand how much coverage my family and I need Life needs/hassles My wages are higher since my employer’s health costs are lower Risk Awareness I no longer forget to take medications or to get screenings Motivation Wellness Programs Professional Remembering Reward programs keep me motivated and help keep coverage affordable Monitoring Devices Virtual Care I have a clear plan for improving my health Mobile Apps Financial I can get care anytime, anywhere – issues get caught early Health Improvement Retail Clinics Rewards/Incentives I no longer find dealing with healthcare so aggravating Navigators Access Emotional I was able to afford a plan that meets my needs Reminders/Engagers I am able to connect with others who have interests /issues like mine Social Networks Gamification I can make better health decisions thanks to easy data access Health Content Affordability I can easily find the lowest cost, highest value options Social System needs/ hassles Health needs/hassles Information Transparency

28. … the opportunity map is large and compelling Consumer health market opportunity grid Consumer Services Capitalization Consumer Lifestyle Integration Full integration with consumer’s life Social Service Expansion & Integration Integration & Experience Redefinition Convenience Capitalization Nutrition/Fitness Customer needs Wellness/Preventative Cheaper, Better, Faster Broader/Differentiated Front-end Relationship In-need/Sick care Bricks-and-mortar Anytime Access Scope of engagement

29. … the solution landscape is robust and but remains unorganized

30. Population health managers are growing at the expense today’s FFS profit centers Outlook for traditional players in a value-based population management ecosystem

31. Across the country, innovative care models have been successfully implemented, and are delivering significant savings and improved outcomes Sources: 1) Health Partners; 2) Oliver Wyman; 3) The Everett Clinic