State of the Industry

1. State of the Industry Market Trends at the Intersection of Philanthropy and Health Care NACCDO April 25, 2013 Michael Hubble hubblem@advisory.com Philanthropy Leadership Council

2. Giving on a Slow Rebound? Source: Giving USA 2011: The Numbers; “U.S. charitable giving shows modest uptick in 2010 following two years of declines,” June 20, 2011, available at: http://www.philanthropy.iupui.edu/news/2011/06/pr-GUSA.aspx; Philanthropy Leadership Council analysis. Adjusted for inflation. Includes clinics, hospitals, health related research facilities , disease-specific organizations for research or patient/family support, mental health services or research, and health policy centers. Change in Charitable Contributions1 Overall To Health Organizations2 2008 2009 2010 2011 2008 2009 2010 2011

3. The Real Picture Source: Giving USA 2011: The Numbers; “U.S. charitable giving shows modest uptick in 2010 following two years of declines,” June 20, 2011, available at: http://www.philanthropy.iupui.edu/news/2011/06/pr-GUSA.aspx; Philanthropy Leadership Council analysis. Adjusted for inflation. Includes clinics, hospitals, health related research facilities , disease-specific organizations for research or patient/family support, mental health services or research, and health policy centers. Change in Charitable Contributions Indexed to 2007 To Health Organizations 2007 2008 2009 2010 2011

4. Three Flashpoints in Health Care Policy Source: Advisory Board interviews and analysis. Event Timeline • November 2012: • Economy issues central to elections • Medicaid budgets influence state elections • Potential House & Senate majorities shift Supreme Court Ruling 2012 Elections End-of-Year Budget Debate • June 2012: • Individual mandate upheld • Medicaid expansion upheld, but states may “opt out” without impact on existing Medicaid funds • December 2012: • “Doc fix” worth $18B set to expire • Bush tax cuts set to expire • Federal government hits debt ceiling limit of $16.39T • $1.2T Sequester cuts take effect, including 2% cuts to Medicare • Debt ceiling deal further cuts spending

5. Health Care Likely On the Chopping Block But Little Agreement on How Source: www.whitehouse.gov; Health Care Advisory Board interviews and analysis. Includes spending for Medicare, Medicaid, CHIP, substance abuse and mental health services, National Institutes of Health, and Food and Drug Administration. Distribution of Spending in 2012 Budget (Estimate) Possible Approaches to Reducing Health Care Spending Other Health Care1 • Eligibility changes • Provider rate cuts Interest on Debt • Decreased supplemental payments • Fraud, waste reduction Social Security Defense • Cost shifting to beneficiaries • Payment model overhaul • (i.e. voucher system)

6. Hardly a More Critical Time of Need Hospitals and Health Systems Under Immense Margin Pressure Source: Daily Briefing, “Moody's: Hospital revenue growth at 20-year low, in 'critical condition‘, August 10, 2011, http://www.advisory.com/Daily-Briefing/2011/08/10/Moodys-Hospital-revenue-growth-at-20-year-low-in-critical-condition; Daily Briefing, “Moody's: Hospital downgrades return to credit crisis levels,” July 18, 2011, http://www.advisory.com/Daily-Briefing/2011/07/18/Moodys-Hospital-downgrades-return-to-credit-crisis-levels; Moody’s Investor Service, “Moody's: Not-for-profit hospitals face revenue reductions across the board,” August 9, 2011, available at: http://www.moodys.com/ research/Moodys- Not-for-profit-hospitals-face-revenue-reductions-across-the?lang=en&cy=global&docid=PR_224301#; Advisory Board analysis. Hospital Operating Margins Moody’s Rated Hospitals > 5% < 0% 0% – 5%

7. Four Forces Shaping Future Margins DeceleratingPrice Growth Continuing Cost Pressure ShiftingPayer Mix DeterioratingCase Mix Medical demand from aging population threatens to crowd out profitable procedures Incidence of chronic disease, multiple comorbidities rising No sign of slower cost growth ahead Drivers of new cost growth largelynon-accretive Baby Boomers entering Medicare rolls Coverage expansion boosting Medicaid eligibility Most demand growth over the next decade comes from publicly insured patients Federal, state budget pressures constraining public payer price growth Payments subject to quality,cost-based risks Commercial cost shiftingstretched to the limit Financial, Clinical Profiles Shifting Dramatically Source: Health Care Advisory Board interviews and analysis.

8. New Baseline Already Challenging Affordable Care Act Significantly Reduces Public Payments Source: US House of Representatives, “Amendment in the Nature of a Substitute to H.R. 4872, as Reported,” accessed March 18, 2010; US Senate, The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act,” accessed December 24, 2009; Health Care Advisory Board interviews and analysis. Decelerating Price Growth Impact of Affordable Care Act on Provider Rates Cumulative Federal Revenue from Decreased Medicare and Medicaid DSH Payments $22.0 B $110 B $17.0 B $14.0 B Cuts to Medicare Fee-For-Service rates $12.6 B $36 B $8.4 B $7.6 B $3.6 B $3.5 B Cuts to Disproportionate Share Hospital (DSH) payments $1.7 B $1.1 B $500 M $0 B

9. Cost-Shifting Possible, But For How Long? Commercial Subsidy Under Ever-Greater Pressure Source: American Hospital Association Chartbook, available at: http://www.aha.org/aha/research-and-trends/chartbook/index.html, accessed April 26, 2011; Health Care Advisory Board interviews and analysis. Includes Medicaid Disproportionate Share Hospital payments. Decelerating Price Growth Payment-to-Cost Ratios, by Payer1 ” 2009 Ratio Private Payer 134.1% Running on Empty “If we could squeeze more out of our payers, we would. But I don’t think there’s much left to squeeze.” CEO Medicare 90.1% 89.0% Medicaid 2000 2009

10. Deceleration in Private Payer Pricing Likely Source: Health Care Advisory Board interviews and analysis. Decelerating Price Growth Pressures on Commercial Pricing 1 2 3 Regulatory scrutiny of premium increases intensifying Exchange-based coverage diluting average commercial price Employers increasingly willing to restrict choice 4 5 Quality performance risk increasingly prevalent New payment models demanding utilization management

11. Long-Term Cost Growth Continuing Market, Regulatory, Demographic Pressures Mounting Source: American Hospital Association Chartbook, available at: http://www.aha.org/aha/research-and-trends/chartbook/index.html, accessed April 29, 2011; Health Care Advisory Board interviews and analysis. Continuing Cost Pressure Expenses per Adjusted Admission Drivers of Continued Cost Growth: $10,045 Market pressures pushing up unit costs of labor, other inputs $6,509 $4,588 Overhead expenses swelling as new IT mandates take hold Cost Growth, 1989-1999: 3.6% Cost Growth, 1999-2009: 4.4% Aging, sicker population requiring increasingly complex, costly care pathways 1989 1999 2009

12. Baby Boomer Surge Beginning Medicare Rolls in Line to Increase Dramatically Source: U.S. Census Bureau, available at: http://www.census.gov, accessed on September 13, 2011; Kaiser Family Foundation, available at: http://www.kff.org/medicare/h08_7821.cfm, accessed on September 13, 2011; Health Care Advisory Board interviews and analysis. Shifting Payer Mix 2011 US Population Distribution By Age 75 M Baby Boomers ~7,000/day Newly eligible Medicare beneficiaries 23% Percentage of population covered by Medicare in 2030

13. Moving Ever Closer to Single Payer Medicare to Constitute Majority of Discharges by 2021 Source: Health Care Advisory Board interviews and analysis. Shifting Payer Mix Inpatient Volume by Payer Class 2011 2021 Self Pay 0.3% Self Pay Commercial Medicare Commercial Medicare Medicaid Medicaid

14. Shifting Payer Mix Future Demand Will Not Fund Capacity Expansion Even at Current Prices, Public Payments Fail to Cover Total Costs Fully-allocated costs. Includes Medicaid Disproportionate Share Hospital payments. Average Payment Relative To Cost1 By Payer Source: American Hospital Association Chartbook, available at http://www.aha.org/aha/research-and-trends/chartbook/index.html, accessed April 26, 2011; Health Care Advisory Board interviews and analysis. • Medicare, Medicaid volume growth unable to finance capacity expansion 100% Commercial Medicaid2 Medicare

15. More Medicine On the Horizon Public Payer Volumes Composed of Predominantly Medical Cases Source: Health Care Advisory Board interviews and analysis. Deteriorating Case Mix Medical and Surgical Shares of Volume, by Payer Commercial Medicare Medicaid Surgical Surgical Surgical Medical Medical Medical

16. Chronic Disease Growth Outpacing Population Growth Source: Milken Institute, available at: http://www.milkeninstitute.org/ pdf/chronic_disease_report.pdf, accessed April 27, 2011; Health Care Advisory Board interviews and analysis. Deteriorating Case Mix Projected Increase in Chronic Disease Cases 2003-2023 19%: Projected population growth, 2003-2023

17. Shift in Case Mix Posing Powerful Margin Threat Destabilizing our Second Pillar of Cross-Subsidy Source: Medicare Cost Reports; Health Care Advisory Board interviews and analysis. Deteriorating Case Mix Top quartile by share of inpatient discharges paid by Medicare or Medicaid. • Inpatient Contribution Income • Weighted Per-Case Average

18. Welcome to Pleasantville Average Care for Average People Source: Health Care Advisory Board interviews and analysis. Case in Brief: Pleasantville Hospital • Health Care Advisory Board model hospital • Revenue, cost, and operational inputs based on national averages • Inputs adjusted to forecast impact on future financial performance • Offers insight into relative opportunity of pulling various margin improvement levers Key Characteristics 300 2.2% 73% Number of beds Operating margin Medical share of case mix

19. The Unsustainable Acute Care Enterprise An Untenable Future Without Major Improvements Source: Health Care Advisory Board interviews and analysis. 2022 Overall Impact of Market Forces at Pleasantville Case in Brief:Pleasantville Hospital Projected Operating Margin, 2022 • Health Care Advisory Board model hospital • Revenue, cost, and operational inputs based on national averages • Inputs adjusted to forecast impact on future financial performance • Offers insight into relative opportunity of pulling various margin improvement levers Current Margin Goal 19.8%: TotalGap-to-Goal • Includes effects of: • Price growth trends • Cost growth trends • Payer mix shift • Case mix deterioration Key Characteristics 300 2.2% 73% Number of beds Operating margin Medical share of case mix

20. Achieving the New Performance Standard Inaction Not an Option Source: Health Care Advisory Board interviews and analysis. Nine Imperatives for Achieving the New Performance Standard • Maximize Revenue Capture • Excel Under Performance Risk • Bend Labor Cost Curves • Standardize Clinical Care Pathways • Redesign Inpatient Care Models • Build Effective Capacity • Reassess Supply of Less Profitable Services • Deflect Demand of Less Profitable Services • Secure Surgical Market Share More relevant implications for health care philanthropy

21. Demand Growth to Outpace Physical Capacity Long-term Capacity Constraints In Play as Demand Grows Imperative #6: Build Effective Capacity Capacity Crunch at Pleasantville Projected Occupancy Without Capacity Expansion Source: Health Care Advisory Board interviews and analysis. Practical limit of average occupancy 5,118 uncaptured discharges

22. It Makes Sense To Fill the Bed… Growth is Good, as Long as You Have a Place for It Contribution Profit per Case Effect of Demand Growth Without Capacity Constraints Source: Health Care Advisory Board interviews and analysis. By Payer Hospital significantly below maximum occupancy; able to absorb all new demand Volume growth mitigates negative impact of worsening case mix Impact of Fully Captured Demand (3%) 38% 33% Change in inpatient revenue per case Change in inpatient volume Change in total inpatient revenue

23. …But Not to Build the Bed Improved Throughput Most Feasible Way to Capture Excess Demand Pleasantville Capacity Crunch Source: Health Care Advisory Board interviews and analysis. • Staffed Beds: 300 • Average LOS: 4.8 days • Average Occupancy Limit: 80% • Excess Demand: 5,118 discharges Option 1: Constructing New Facilities Option 2: Overloading Current Resources Option 3: Expediting Patient Throughput Action: Build 85 New Beds Action: Operate at 104% Average Occupancy Action: Lower Average LOS to 3.7 Days • Incurs significant capital expense • Future prices less able to pay fixed costs • Extra beds must be staffed, supplied • No space for above-average census days • Raises serious patient safety concerns • Generates unsustainable workload • Creates capacity for more discharges without raising number of patient days • Requires investment in better care pathways, but does not explicitly raise fixed, variable costs

24. The End of the Cornerstone Capital Project? Source: Philanthropy Leadership Council Member Topic Poll 2011, interviews and analysis. n=76 Percent of Council Members Currently Conducting Campaigns, by Type Jeopardizing Our Primary Campaign Priorities Impact on Representative Comprehensive Campaign Priorities: New Patient Tower Cancer Center Pavilion Nursing Scholarships Endowed Chairs Research Goal: $100 M Timeline: 6 years Comprehensive 42% Capital 46% 5% 7% Other Mini-Campaign

25. Optimal Service Portfolio Not Just About the Money Many Factors to Consider When Assessing Service Offerings Source: Health Care Advisory Board interviews and analysis. Imperative #7: Reassess Supply of Less Profitable Services Pseudonym. Service Line Evaluation Process at Bassoon Health System1 • Scorecard: • <20 Points: Seriously consider divestiture • 20-30 Points: Borderline case, attempt to reposition • >30 Points: Keep and maintain • Financial Criteria(10 points each): • EBITDA • Net Income • Overall FinancialStrength • Non-Financial Criteria(5 points each): • Strategic Necessity • Mission/Community Benefit • Brand • Internal Politics • Risk Factors • Management Resource Requirements Case in Brief: Bassoon Health System • Four-hospital health system located in the South • Employs standard template to evaluate viability of “non-core” service line offerings • Identifies services that must be kept, can be divested, or should be repositioned for growth • Financial performance, strategic considerations, practical factors all considered

26. Service Offerings Not on a Lightswitch Community Pressures, Core Business Restrict Supply-Side Options Community Obligation Diffuse Responsibility Source: Health Care Advisory Board interviews and analysis. ” Q:If you wanted to avoid treating diabetic complications, what service line would you cut? If Not Us, Then Whom? “We have to have some unprofitable services because we’re a public hospital and there is no one else who wants to offer them. You can divest from services if you’re in a market where there is someone else to offer them, but we don’t have that luxury.” Inpatient Medicine? Emergency Department? CFO General Surgery? Hospitalist Program? CFO • Non-negotiable services • Not specific to diabetes

27. Establishing the Medical Perimeter Extensive Ambulatory Care Network Addresses Medical Demand Source: Health Care Advisory Board interviews and analysis. Medical Management Investments Patient Activation Post-Acute Alignment Medical Home Infrastructure Disease Management Programs Primary Care Access Population Health Analytics Electronic Medical Records Health Information Exchanges

28. A New Breed of Funding Priorities Can We Make the Case for Reducing Demand? InformationTechnology Electronic medical records Health information exchanges Patient online portals ProgrammaticSupport Disease management programs Prevention initiatives Community partnerships Primary Care Infrastructure Medical homes Outpatient offices Off-campus clinics Source: Philanthropy Leadership Council interviews and analysis. VISION 2020