Healthcare 2015 and US Health Plans: New Roles, New Competencies

1. Healthcare 2015 and US Health Plans: New Roles, New Competencies Presented at NPAG (National Plan Automation Group) Conference September 24, 2007 Jim Adams, IBM Center for Healthcare Management

2. Agenda Agenda • Issue • Analysis – Emerging Challenges to US Health Plans • Implications – The Changing Competitive Landscape • Moving forward – Recommendations for US Health Plans • Conclusion Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

3. Issue The United States healthcare system is broken. Is it sustainable? If the US spent at the OECD per capita average, we would spend over $1 trillion less per year. Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

4. Issue Key forces are influencing the sustainability of healthcare systems Five drivers make healthcare fundamentally different from the past Key inhibitors that threaten to maintain the healthcare status quo Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

5. Issue By 2015, countries will emerge in one of four scenarios based on how they address the drivers and overcome the inhibitors • Win-win transformation • Alignment • Accountability Continued incremental reform • Lose-lose transformation • Unintended consequences • Healthcare industry • Country • Healthcare industry viewed negatively More (or less) of the same Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

6. Issue Countries that successfully transform their healthcare systems (i.e., “win-win” scenario) will witness three changes Win-win Transformation Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

7. Issue Given the following assumptions, what does all this mean to United States health plans? • The United States healthcare system will not achieve a comprehensive “win-win” transformation by 2015 • Instead, a piecemeal approach will be taken, causing unintended consequences • Universal coverage will be enacted, either nationally or on a state-level basis in a significant number of states • While universal coverage is a key part of the solution, it alone will not solve the problem • Universal coverage, even if enacted nationally, will not be administered and managed by the federal government • Most universal coverage solutions will focus on individual coverage supplemented by some requirements for employers • Health and financial responsibility will continue to be transferred to individuals, causing health to be treated more like – and with – wealth • New and non-traditional competitors and collaborators will continue to enter the market as stakeholder needs change • Care delivery models and capabilities will continue to proliferate, possibly at increasing rates • No major new efforts to control the supply side of healthcare will be taken nationally • Caps on health plan administrative costs and profits could be enacted either by some states or on a national basis What key changes will health plans have to make to continue to play a pivotal role in the US healthcare system? Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

8. Agenda Agenda • Issue • Analysis – Emerging Challenges to US Health Plans • Implications • Moving forward • Conclusion Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

9. Analysis For-profit health plans have prospered and forecasted healthcare growth offers new opportunities but also presents new challenges Healthcare payors vs. S&P 500 indices, January 1997 through July 2007 National healthcare expenditures by source of funds, 2007-2016 CAGR 2007-2016 $4.14T Total 6.94% Out of pocket 5.78% Private health insurance 6.53% $3.88T Other private funds 7.46% Medicare 7.64% Medicaid 8.03% Other public funds 6.88% Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

10. Globalization Consumerism Aging and overweight Diseases that areexpensive to treat New Treatments and Technologies Continued shift from employer-based to government-based and individual coverage Continued proliferation of new healthcare requirements, delivery models, capabilities, and reimbursement models Increase in consumer responsibility and accountability Analysis The growth in healthcare spending, combined with healthcare drivers will continue to have major impacts on health plans Impact on Health Plans Healthcare 2015 Drivers Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

11. Analysis >> The continued shift from employer-based to government-based and individual coverage Healthcare costs have traditionally far exceeded general inflation and workers’ earnings, causing a decline in employer-sponsored coverage… Percentage Changes in Select Healthcare and Economic Metrics in the U.S., 1988-2006 Health Insurance Coverage for the Under-65 Population in the U.S., 1980-2004 Source: Health Insurance Premiums from personal communication of data from KFF/HRET Employer Health Benefits Surveys from 1999, 2000, 2001, 2005: KPMG Survey of Employer-Sponsored Health Benefits: 1993, 1996; HIAA Employer-Sponsored Health Insurance Survey; 1989. Workers’ Earnings from Bureau of Labor Statistics Current Employment Statistics Survey (April-April), 1988-2001. Overall Inflation from Bureau of Labor Statistics, CPI estimates (April-April), 1988-2001, at www.bls.gov. Trends and Indicators in the Changing Health Care Marketplace, 2002 – Chartbook. Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

12. Analysis >> The continued shift from employer-based to government-based and individual coverage …and escalating premiums, causing more employees to decline coverage even when available. Reasons for loss of health insurance coverage for 3.4M employees between 2001 and 2005 Employer-sponsored health benefits as a percent of median household income, 2005-2015 Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

13. Analysis >> The increase in consumer responsibility In assuming more responsibility for their healthcare, consumers must make wiser health and financial decisions as patients and purchasers Make better health-related choices Receive personalized high-value care Improve financial planning for healthcare • “Health Coach” • Prediction • Healthy lifestyles • Behavioral Change • “Value Coach” • Health plan benefits • Provider selection • Comparative value • “Wealth Coach” • Financial planning • Financing options • Insurance options Improve access to information Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

14. Savings needed for employer-based health premiums, Medicare Part B, and out-of-pocket payments Influence factors on health status …and better plan for their healthcare financial needs. Consumers need to make better lifestyle choices… Analysis >> The increase in consumer responsibility The burden borne by consumers is significant and will thus require active involvement Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

15. Analysis >> The increase in consumer responsibility And this shift of financial responsibilities to consumers will raise a whole new set of requirements… How do I pay for any unexpected orlarge healthcare expenditures? How do I navigate the health systemto get optimal value? Who can help me make my current healthcarepayments more efficient and comprehensible? How do I permanently adopthealthier behaviors? Which health plan is best for me? How do I best save for my healthcareand other retirement expenses? Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

16. Analysis >> The increase in consumer responsibility …causing health to be treated like – and with – wealth… Wealth Status - Personal financial planning tools -Consolidated statements Goals -Needs / lifestyle desired -Financial risk tolerance Plan Monitor, update Health Status - ePHR -Medical records Goals -Lifestyle desired -Health risk assessment Plan Monitor, update Integrated Health and wealth status Health and wealth goals Plans for your wealth and health - Savings / investments / expenses - Insurance -Response to unexpected events Monitor, update Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

17. Retail Banks Credit Card Issuers Third party intermediaries Asset Managers Payment integrators Analysis >> The increase in consumer responsibility …creating overlap with and potential competition from non-traditional sources. Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

18. Analysis » The increase in consumer responsibility For health plans to be a trusted advisor, they must improve the perception of how well they are serving consumers. Health and Value Coach? Wealth Coach? Source: Harris Interactive (August 2007) Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

19. New delivery requirements… - Prediction / prevention -Cost, care, convenience -Better coordination of care -High-value care …lead to new approaches… - Focus on prevention / wellness -Patient-centered primary care -Personalized medicine -Complementary care …new delivery models… - Retail healthcare -Medical tourism -Centers of Excellence -Telemedicine …and new reimbursement models. - Pay for performance -Bundled payments -Pay for prevention -Pay for care management Analysis » New healthcare requirements, delivery models, capabilities, and reimbursement The provider side will also be changing rapidly Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

20. Chronic care Wellness / prevention Acute care Wellness Centers Retail Clinics Medical Home Concierge Medicine Ambulatory ICUs Ambulatory Surgery Centers Specialty Hospitals Centers of Excellence Medical Tourism Telemedicine Analysis » New healthcare requirements, delivery models, capabilities, and reimbursement New healthcare business models are emerging to fill the cost, quality, convenience and access gap Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

21. Health Management; Molecular Screening; Early Detection; Rapid Effective Treatment; Improved Quality of Care Disease Severity “Right” Treatment Monitoring Diagnosis/Prognosis Switch Again Switch Treatment Predisposition Screening Time Disease Severity Select Treatment Predisposition Guides Prevention; Treat the Molecular Markers vs. Symptoms and Disease Diagnosis Disease Severity Time Preventive Measures Monitoring Predisposition Screening Time Analysis >> New healthcare requirements, delivery models, capabilities, and reimbursement Personalized medicine will challenge scientists, health plans and providers but holds great promise for better health management. More Efficient Medical Care Reactive Medical Care Diagnose Disease; Treat Symptoms; Costly, Trial and Error Treatment Preventive Medical Care Source: Adapted from Personalized Medicine Coalition Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

22. Analysis >> New healthcare requirements, delivery models, capabilities, and reimbursement In summary, providers and payers will have to work collaboratively together to achieve success in a patient-centric, value-based system Increase Focus on Wellness Consistently Provide Cost- Effective Care Reward Safety, Quality And Innovation Aligned Incentives Collaboration Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

23. Agenda Agenda • Issue • Analysis • Implications – The Changing Competitive Landscape • Moving forward • Conclusion Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

24. Implications Health plans must prepare for a very different environment in 2015. Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

25. Implications The shift from “wholesale products” to “retail products and services” will require new capabilities and lead to new competitors Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

26. Implications It will increasingly be difficult to control administrative costs as plan complexity increases Percent Change in Private Health insurance Administrative Costs Per Member Versus Overall Inflation, 1988-2003 Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

27. Implications: IBM as a large employer Direct medical costs account for only about one quarter of the total costs of poor employee health. Source: Paul Hemp, Harvard Business Review, Vol.82 #10 Oct. 2004; “Presenteeism: At Work – But Out of It” Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

28. Implications: IBM as a large employer IBM’s Health Benefits Strategy Vision: Healthy people for high performance Health care strategy focused on… Sustainable cost structuresValue (quality and cost)  Meaningful choice  Prevention Consumerism & privacy • Underscores the investment in health care to help realize the productivity and innovative potential of our employees • Focuses on importance of health care partnerships Examples: • Helping employees take responsibility for healthy behavior • Employee involvement in treatment decisions • Information that helps individuals choose health plans that offer optimal value and improve efficiency in the system. • Technology-enabled, smart delivery of innovative health care services Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

29. Implications: IBM as a large employer IBM Strategy for Driving Value in Healthcare Patient-Centered Care Network Transparency • Patient-Centered Care Network • Encourage health information exchange • Intra-operability • Interoperability • PHR • Public health • Transparency • Without reliable information, markets cannot work • Need quality standards • Need cost standards • Make system results visible • Reward excellence Value-Based Purchasing Employee-Centered Culture Change Patient • Value-Based Purchasing • Getting Healthcare Right • Patient at the Center • Quality Primary Care • Evidence-Based • Technology Supported • Employee-Centered Culture Change • Encourage a sense of ownership • Incentive for healthy living • Incentive for consumerism • HRA, PHR • Sense of ownership Primary Care That Matters Primary Care That Matters Drive Primary Care Transformation (AAFP, ACP) Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

30. Implications: IBM as a large employer What is Patient-Centered Primary care? After:- Davis K., Schoenbaum S.C., Audet A-M., A 2020 Vision of Patient-Centered Primary Care, Commonwealth Fund, 2005 Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

31. Implications: IBM as a large employer Patient centric healthcare The Vision… Enabling the connection of communities for the exchange of clinical information creating improved value and quality within the health care delivery system through easier access and insight realization Definition: Interoperability Providing healthcare participants, through the use of information technology systems and software applications access to appropriate, secure, integrated healthcare clinical information and analytics to enable improvements in the quality of care, the development of personalized medicine and decrease the cost of delivering healthcare Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

32. Expected quantitative benefits $B 33.5 Providers 21.6 Payers 13.1 8.2 Independent Labs 1.9 Radiology centers Pharmacies 0.1 78.4 Total Public Health Departments 4% of US HC spending, even before clinical benefits Implications: IBM as a large employer The benefits of integrated, shared health information are compelling Qualitative • Patients • Improved quality/reduced errors • Greater convenience in porting health information • Better coordination of services • Hospitals • More thorough information for outcomes analysis • Improved efficiency in information sharing • More efficient clinical and administrative processes • Payers • More effective population health management/care management • Reduced medical loss ratio • Reduced duplication of services • Physicians • Improved efficiency – speed to info/completeness of info • Higher solution confidence to minimize investment risk • Minimized obstacles to quality • Public Health • More real-time access to critical information • More efficient and complete systems for public/ population health monitoring • Faster routes to clinical discovery Source: Rand Corporation 2005, Extrapolating Evidence of Health Information Technology Savings and Costs Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

33. Agenda Agenda • Executive summary • Issue • Analysis • Implications • Moving forward – Recommendations for US Health Plans • Conclusion Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

34. Moving Forward Health plans will have to determine their role in the changing healthcare environment and then make a variety of strategic decisions Markets and Segments Products and Services Distribution Channels Service Channels Flexibility and Agility Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

35. Moving Forward The strategic decisions health plans make will be influenced by plan size and scale “The U.S. healthcare payer market has become markedly polarized in the wake of the past 10 years of industry merger and acquisition. As of year-end 2006, it is estimated that over 60% of all commercially insured individualsin the United States are insured by one of the top 6 health plans. However, 20% of the remaining populationare insured by over 500 small health plans.” High Specialization Low Large Small Size Source: “The Tipping Point Finally Arrives: How Healthcare Payers Are Changing Business and IT Investment Strategies in Response to the Transparency Imperative,” J. W. Young, Health Industry Insights, June, 2007. Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

36. Moving Forward Health plans may choose one or several of these new roles but may struggle if they try to be all things to all people Factors Roles Focus Health / WealthService Advisor Service excellence, consumer health and financial products and services New consumer responsibilities Effective / efficient utilization of healthcare systems Health ServicesOptimizer Changing provider needs Applied ResearchAdvisor Clinical decisions, cross-enterprise process and value improvement “Retailization” of healthcare Transaction efficiencies and flexibility TransactionProcessor Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

37. Empower Members Collaborate with Providers Innovate Optimize Operational Efficiencies Enable through Information Technology Empower members to assume accountability and make more informed health and financial choices Help providers become successful in a value-based reimbursement environment Collaboratively innovate products and services, operational processes, and business models Continue driving costs down in order to maximize margins in a highly regulated industry Flexible applications, BI, on-demand information, effective operations/management & governance Moving Forward Health plans will need emphasize different competencies to thrive in the changing healthcare environment. Competencies Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

38. Moving Forward Different roles require different competencies Roles Competencies Differentiator More than threshold capabilities required Threshold Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

39. Agenda Agenda • Executive summary • Issue • Analysis • Implications • Moving forward • Conclusion Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

40. Conclusion In a healthcare system that is under ever-increasing pressure, the future of health plans continues to be questioned. Financial resources Knowledge of local markets Key relationships Strengths Perceptions of poor service? Ability to change? New competitors? Impacts of policy decisions? Challenges Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

41. Conclusion We must challenge our fundamental beliefs about the US healthcare system. Truisms? Our Perspective All stakeholders need to be more accountable and work together It’s someone else’s problem to fix If more money were the answer, we would have solved it by now More money will fix the problem IT will fix the problem We can’t fix the problem without IT Benefits for IT-related investments accrue to other stakeholders That may be true when rewards are based on volumes, not value. The solution to the problem is consistent, high-value care delivery Yes and we also must change consumer attitudes and behaviors Everyone should get all the care that he or she wants or needs We do not have unlimited funding. We must make tough, informed decisions. All healthcare is local Solutions and much of the care will remain local. Competition won’t. It’s about value, not costs Not if you can’t afford it True but at the expense of other industries. Healthcare is driving US economy This, too, shall pass This time, the world is fundamentally different Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

42. Conclusion In conclusion, we recommend health plans take the following steps Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14

43. Healthcare 2015 and US Health Plans | Confidential Draft | 16-Sep-14