Strategy Meeting

1. Strategy Meeting Grady Health SystemBoard of Directors Nov. 1, 2010 1

2. Threading The Needle What We Don’t Know: • Whether healthcare reform will be fully implemented • If the reform timetable will be changed What We Know: • Medicare, Medicaid and private insurance payments cannot continue to grow • Federal, state and county taxpayer support is not guaranteed What Grady’s Leaders Must Do: • Set direction now without full knowledge and make adjustments alone the way • Balance service and revenue now This is the toughest part of Leadership 2

3. Acknowledgements • Grady has a long and storied history of caring for patients, particularly those without choice • Grady’s medical school relationships have been critical to Grady’s success • Education, research and clinical leadership have been important to Grady • Grady and its physician colleagues are inter-dependent • The Authority, Corporation and Grady staff are all clearly dedicated to excellence in patient care While we may not acknowledge these points often enough today we do understand and appreciate them! 3

4. Our Initial Assumptions • GMHC and FDHA would act seamlessly • Counties would continue to support our Mission with adequate and timely funding as contracted • We could operate Grady without getting bogged down in politics (funding and programs) • We could raise sufficient funds from the local community to make up for previous underinvestment We would run Grady like a business 4

5. Setting The Stage • Grady’s future income is at risk - medical services and medical education will be directly affected. • Grady must adjust to fundamental shifts in the industry over the next 3 years – there is no choice • Care delivery must reflect new payment rates and methods • The current “resident driven” teaching and care delivery model is not sustainable at Grady • Grady must shift from treated those “who show up” to attracting paying patients to help off set safety net costs. • The new challenges will be considerably more difficult to manage than what we faced in the past. • There are immediate financial challenges that must be addressed now 5

6. Reform Can Be Good News For Grady … If We Are Prepared! Grady Has Choices 6

7. Key Questions Grady Must Answer • What is the right mix of care delivery, education and research? • What teaching, professional services contracts and medical relationships will be required? • Will Grady be permitted to retain earnings for re-investment and to support its mission? • Can we operate profitably? • Will funding sources allow it? • Can Grady be more than a charity hospital? • Does the safety net mission survive beyond 2014? What will Success look like for Grady? 7

8. Grady’s Funding Sources Now 2015 • Patient Service Revenue • Medicare • Medicaid • Commercial Insurance • Self-Pay • Governmental Subsidies • Medicare • Medicaid • Contracted County Subsidies • Graduate Medical Education (GME) The Impact of Reform on Grady = 8

9. Grady’s Funding Stream - placeholder 9

10. The Impact of Reform on Grady – 2019- placeholder 10

11. Market Overview Grady’s Current Position • Georgia’s undisputed leader for trauma care and the busiest trauma center in the Southeast. AND • Georgia’s undisputed leader in uncompensated care. Despite commitments to education and research, we fit the profile of a very large but not differentiated community hospital. 11

12. Grady’s Current Position • 5 county population will increase : 6.5% by 2013, 20% by 2019 • 14.6% of Fulton & DeKalb inpatients • Payer Mix ~ 40% uninsured • Utilization exceeds managed markets • Costs are higher than managed markets • Modest reduction in use rates could produce a surplus of 900 beds • We compete with hospitals, physicians and some community-based services 12

13. The March To Sustainability 13

14. 2007 At A Glance 14

15. Grady’s Response 15

16. Grady’s Remarkable Progress 2008 Focus - Stabilize Grady • New operating entity • New leadership • Stable funding • New capital 2009 Performance • Quality/LOS • Financial • Volume • Infrastructure • Hospital of Choice 16

17. Fundamental Challenges Have Not Gone Away • Disparity between services provided and funding received • Underinvestment makes Grady unattractive to patients with a choice • Medical leadership not well aligned or incented • Lack of clinical portfolio focus • Lack of physician referral relationships 17

18. The Roadmap To 2015: From Survival to Sustainability • 2010 - Making Grady Work • 2011 - Becoming A Preferred Destination • 2012 - Producing Results • 2013 to 2015 - Maintaining High (and Profitable) Performance Levels 18

19. The 2015 Goal: “Community Competitive” Grady • Clinically, our outcomes will exceed our peers. • Financially, our performance will permit annual investments in programs, people, technology, equipment, physical plant and reserves. • Operationally, customer service, business processes, patient access and ease of use are at community standards. • Customer Service, we serve a diverse population, maintain our historic safety net mission • Market Position, we are a growing “community competitive” network of hospitals, physicians and other providers attractive to patients and payers • We are essential to our community, state and local governments, fellow hospitals and medical schools Grady’s “Hospital of Choice” status for selected services provides revenue to support safety net mission. 19

20. “Community Competitive” Network • Patient Centered • Clinically Efficient • Connected • The Right Care • The Right Time • The Right Place 20

21. 2010 Status Report Quality LOS Financial Volume Infrastructure Hospital of Choice Uncertainty over Healthcare Reform 21

22. The 2011 Plan – 4 Major Thrusts Continued Performance Improvement Quality Satisfaction levels Financial Making Grady Grow Targeted clinical programs Prune selectively Ambulatory care network expansion Relationship development Balance Budget & Service Commitments Prepare for Reform 22

23. Base Performance Requirements Have Expanded Make Grady work for all patients Deliver services within the expected reduced payment structure Create alternative models of care delivery Meet financial performance targets Find alignment with government partners 23

24. The Immediate Challenge The Difficult Topics 24

25. The Immediate Challenge Matching services and resources in 2011 We face a 2011 budget shortfall of $20M We must make adjustments effective Jan. 1, 2011 We need to prepare for budget discrepancies longer term 25

26. The Immediate Challenge Expense (service reductions) Management has cut recommendations Will need Board action in December What we want Board to do Allow us to balance budget. Services must meet funding Provide direction and protection 26

27. The Immediate Challenge • Revenue • What we need the Counties to do: • Fulton • Follow 1984 contract • Pay based on annual allocations • Simplify/reduce time spent reporting • DeKalb • Continue support • What we need the State to do: • Eliminate ICTF rules that damage Grady • Fix Morehouse pass-through formula • What we want Board to do: • Make this a priority • Support Grady’s position • Use your Influence 27

28. Break 28

29. Reminder: Threading The Needle What We Don’t Know: • Whether healthcare reform will be fully implemented • If the reform timetable will be changed What We Know: • Medicare, Medicaid and private insurance payments cannot continue to grow • Federal, state and county taxpayer support is not guaranteed What Grady’s Leaders Must Do: • Set direction now without full knowledge and make adjustments alone the way • Balance service and revenue now This is the toughest part of Leadership 29

30. The Impact Of Reform • Grady’s Patient Base will Change • Patient Service Revenues • Reduced • Payment Methods will Change • Safety Net Support Reduced 30

31. 31

32. Grady’s Potential Patient Base Will Change Expansion: Expanded coverage (but not universal) 37M new covered lives – 2019 Grady? Expansion of Medicaid Eligibility (16M) 40% increase from 2010 to 2019 133% of FPL Expansion of Medicare & Commercial Benefits Contraction: Less Dependent - Have choices of providers More attractiveand more valuable to other providers Shift in Employer Benefit Plans 32

33. The Reform Opportunity in Grady’s Service Area 33

34. The Reform Growth Opportunity 34

35. Publicly Supported Patient Service Revenues Will Decrease Hospital payments reduced by $155B over 10 years; $100B from reduced payments, balance in “savings” from reduced subsidies for uncompensated care. Medicare payment per admission in 2019 - $1000 Medicaid rates increase by 2010 but then revert to 85% of 2008 rates Physicians payment rates will be reduced (except primary care) Note: Medicare cuts occur before coverage expands 35

36. Private/Commercial Business Coverage will expand via traditional markets or Health Care Exchanges Short term demand will increase Capacity could be a problem Business may abandon/reduce insurance benefits Commercial payers will pass their risks and costs to hospitals and physicians Commercial payers (Blue Cross and others) will not be able to raise rates Commercial plans will have to be competitive with public plans Rate pressure on providers will significantly increase Payers will look to bundled payment structures for relief. (ACOs and Medical Homes (Piedmont + Cigna)) 36

37. Payment Model Changes Providers get paid for services provided – not incentive for reducing costs 37

38. The Opportunity Providers get paid for right care, right time, right location – incentive for reducing costs 38

39. Safety Net Support Will Be Decreased Medicare DSH payments reduced (2014) Medicaid DSH payments will decrease from 2014 to 2020 Payment rates for Medicaid to be pegged at 89% of 2008 rates Medicaid payments to states 100% from 2014 -2016 then reduced to 90% by 2020 Support from State and County Government? 39

40. New Requirements For Providers Clinical and financial integration of physicians and hospitals (Piedmont) Bundled rates – pilots no later than 2013 Value based purchasing (2013) Readmission penalties (October 2012) Penalties for hospital acquired conditions (2015) 1000 hospitals will be in the bottom quartile and have reimbursement cut 40

41. New Requirements For Providers Accountable Care Organizations encouraged (2012) Medicaid Medical Homes Publicly reported outcomes Temporary increase in primary care reimbursement 10% ▬ 2011-2015 41

42. New Requirements For Providers Bundled or global payments will require coordination and management of care (cost) Primary care Preventive services Acute care Post-acute care Chronic disease management If hospitals don’t take the lead or partner to make this work, others will set standards of care and price… (Peach State, Piedmont Physicians) 42

43. Post Reform Realities Grady and its physician partners must continuously improve performance and attract new patients Must be able to manage and deliver care competitively (Quality and Cost) Growth is Critical Demand will increase in the short term but fall in the longer term Patients will have and exercise choice ▬ Grady’s patient base could disappear Hospitals that rely on EDs and clinics for volume and growth will be at risk Outside support for safety net services will be reduced Grady will have to adjust services to income 43

44. The Challenges Are Greater 44

45. New Challenges And Risks • Further market consolidation of hospitals, physicians and/or payors • Increased competition for current safety net and newly insured patients • Acceleration of “value” based and/or bundled/captitated payment systems (Piedmont) • Rapid deployment of alternative payment methodologies by private insurance companies • Major change in external funding • State not prepared to implement reform 45

46. Grady’s Choice! A reform-ready Grady can be a formidable competitor and support most if not all of its service, teaching and research objectives The potential for Grady: More patients with coverage Fewer safety net patients Incentives for quality care = more investment opportunity Reduced funding Is Grady ready to accept this Challenge? 46

47. Lunch & Finance Committee 47

48. 2 1 5 3 4 48

49. Option 1: Stay The Course What is it: Continue course of incremental improvement with heavy reliance on external funding to support safety net mission as long as possible. Implications: Reform may encourage other providers to care for insured former safety net patients. Grady may reach a point of non-recoverable insolvency in 3 +/- years Grady achieves its mission and declares victory and winds down 49

50. Option 2: Safety Net What is it: Continuously adjust services to reflect reality of funding Implications: The scope and volume of services will be reduced over time The educational mission will be reduced Patient population will be those that a can’t get service elsewhere This option is only sustainable with on-going community subsidies or Grady closes. 50