From Uncertainty on the Law to Uncertainty on if it will Work HFMA – Gerry Haggerty Annual Leadership Institute May 15,

1. From Uncertainty on the Law to Uncertainty on if it will WorkHFMA – Gerry Haggerty Annual Leadership InstituteMay 15, 2013 Seth Edwards Manager, Federal Affairs

2. Premier is the largest healthcare alliance in the U.S. • Uniting more than 2,800 hospitals – 40% of all U.S. hospitals – and nearly 93,000 alternate sites of care • $40+ Billion in group purchasing volume, $5 Billion in savings in 2012 • Database representing 1 in every 4 discharges • 2.5 Million clinical real-time transactions each day • Named six times as Ethisphere most ethical company • MalcomBaldrige Quality Award Winner Our Mission: to improve the health of communities

3. Realities shaping our future Policy and politics of healthcare Payment and delivery system reform Movement toward market-based reforms

4. Policy and politics of healthcare

5. Our fiscal health is top national priority Federal debt held by the public, 1940 to 2020 • 7.9% unemployment; 88,000 new jobs in March • 1.4% GDP growth in 2013 • Federal spending 23% of GDP; Tax revenues @17% of GDP • 2001 Debt = 33% of GDP; 2013 debt = 77% of GDP

6. The competing visions and realities Backdrop: balance of power and fiscal realities that are largely unchanged Democrats hold Senate 55 Democrats (+2)/45 Republicans Republicans hold House 201 Democrats (+8)/234 Republicans Obama • Legacy = healthcare reform • Legislative goals: fiscal fights; gun control; immigration reform; climate • “We don’t have a spending problem, we have a healthcare problem.” • MOis wait for deadline and negotiate minimal package of changes Boehner and Republican House • Limit size and scope of government • Create and leverage triggering deadlinesfor deficit and debt reduction • Desire for grand bargain and tax reform, but… Major action at state level • Medicaid expansion • Payment reforms • Exchanges • Cost containment Crushing national debt Medicare & Medicaid entitlement reform front & central in budget debate

7. 2013 budget deadlines and pivotal events Doc fix (1/1/13) New fiscal year (10/1) Debt celling (5/19) Government funding expires (3/28) Sequestration (3/1) Legislative State Medicaid expansion decisions Jan Feb March April May June July Aug Sep Oct Nov Dec Multi-state health plan, exchange, essential health benefit regulations Regulatory Hospital payment update: 3.2% at risk; documentation & coding (10/1)

8. Outlook • Budget fights mean potential payment cuts • Healthcare even bigger part of budget with ACA: +$120B/year • Administration: ACA implementation - ASAP • Focus: expanding coverage; making Medicare and Medicaid efficient • Details will matter and design will evolve • ACA litigation but little impact (contraception, Federal exchange subsidies, origination clause) • Insurance expansion uneven: insured increase Δ from 34MM to 27MM • Divided government = nothing significant changes • Likely to stay divided for 4 years • State experimentation: 30 Republican Governors/Federal tensions • Medicaid reform in non-expanding states • Delivery system reforms • Most likely Federal action is on SGR (Medicare MD pay) reform • CBO score reduced from $275B to $138B • Vehicle for broader delivery system reforms?

9. Payment and delivery system reform

10. A TRANSFORMATIVE MOMENT IN HEALTHCARE • Fragmented care delivery • Misaligned relationships with physicians, payers • 30% unnecessary services • Lack of transparency Systemic challenges • Government, commercial and consumer pricing pressure • Mix degradation • Flat/declining utilization • Movement to risk-based payments • Value-based purchasing and harm penalties • Bundled payments Economic and regulatory challenges Transformative challenges Imperative to manage population health, impact outcomes and provide higher quality at lower cost

11. Obama budget calls for deep cuts to Medicare providers • 4/10 - President Obama released a $3.77 trillion budget (FY) 2014 budget blueprint • $400 billion in cuts over 10 years to Medicare and Medicaid • $306.6 billion in provider cuts • $67.8 billion reductions due to beneficiary cost-sharing changes • Revisits Obama’s FY 2013 proposals • Overall, : • $1.8 trillion in new savings and tax revenue over the next ten years • Majority goes to replace sequester’s $1.2 trillion automatic spending cuts • Boasts investments that are fully paid ($2 in cuts for every $1 in new revenue) • $803.5 million for the operation of insurance exchanges • SGR repeal and replace similar to other congressional proposals • NIH flat funded ($31 billion) • FDA + $800 million • Delays for one year the cuts to disproportionate share hospital (DSH) payments (2015, instead of 2014)

12. Obama budget calls for deep cuts to Medicare providers Medicare Medicaid Beneficiaries • Reduce bad debt payments ($25.5 billion) • Reduce Graduate Medical Education payments ($11 billion) • Cuts to Critical Access Hospitals (CAHs) ($2.1 billion) • Reductions to post-acute care providers ($79 billion) • Post-acute care bundled payment ($8.2 billion) • Cut Waste, Fraud, and Abuse in Medicare ($400 million) • Part D drug rebates ($123 billion) • Additional Independent Payment Advisory Board (IPAB) cuts • Accelerate manufacturer drug rebates in the donut hole ($11.2 billion) • Changes to the in-office ancillary exception ($6.1 billion) • Reduce Part B drug payments ($4.5 billion) • Reduce clinical lab services payments ($9.7 billion) • Delay for one year cuts to DSH payments and rebase DSH • Apply Medicare competitive bid rates to Medicaid durable medical equipment (DME) ($4.5 billion) • Cut Waste, Fraud, and Abuse in Medicaid ($3.7 billion) • Increase income-related premiums ($50 billion) • Increase Part B deductible for new beneficiaries ($ 3.3 billion) • Introduce home health copayments for new beneficiaries ($730 million) • Introduce a surcharge for first dollar Medigap policies for new beneficiaries ($2.9 billion)

13. FY 2014 Proposed Inpatient PPS Rule • Released April 26, will be published in May 10, Federal Register • Market basket increase of 2.5%, but 0.8% final update • 0.1% decrease in total payments in FY 14 compared to FY 13 • 0.8% reduction due to documentation and coding offset • 0.9% reduction in DSH using uncompensated care proxy • 0.2% reduction for revised admission/medical review criteria • Raises readmissions penalty to 2% in FY 14, and adds hip/knee and COPD to program in FY 15 • 57 total IQR measures for FY 16 payment- removes 8 measures and adds 5 claims-based outcome measures. • New measures for FY 16 VBP and new domains in FY 17 • Creates HAC Reduction Program with two Domain measurement that overlaps in its entirety with existing HAC program and VBP • Comments due June 25, 2013

14. Hospital Readmissions Reduction Program (HRRP) • Hospital-specific payment adjustment factor were applied to inpatient claims beginning Oct 1, 2012. • CMS proposes to use refined 30-day AMI, HF and PN measures based on 3 years of data (July 1, 2009 - June 30, 2012) for FY 2014 payment • Proposes to expand applicable conditions to include COPD and Hip/Knee for FY 2015 • Applies to wage-adjusted base operating DRG payment amount (includes new tech add-on payment only, no adjustments for DSH, IME, outlier, or low volume) • For SCHs the adjustment will only apply to the national portion of the rates, not the additional payment due to the hospital-specific rates 1% 2% 3% 3% 3%

15. HRRP: 30-day Readmissions Measure Refinement • Proposed to exclude readmissions classified as “planned” that may have occurred within 30 days of discharge • Planned readmissions include admissions for: • Types of care always considered planned – obstetrical delivery, transplant surgery, maintenance chemotherapy, and rehabilitation • A nonacute readmission for a scheduled procedure • Admissions for acute illness or for complications of care are never considered planned • Subsequent unplanned readmissions after a planned readmission that fall within 30-days of the original index admission will also be excluded • Applied to readmissions measures for FY 2014 and proposed for FY 2015 (with some revisions) • Maryland has received exemption from the FY 2014 VBP program

16. IPPS: Medicare DSH- Proposed Uncompensated Care DSH Payment Total DSH Payments in FY 2014 Absent ACA Provision “Empirically Justified DSH Payments” 25% Distributed in exactly the same way as current policy Distributed based on three factors: Factor 1: Total DSH payment pool in FY 2014 Factor 2: Change in the percentage of uninsured Factor 3:Proportion of total uncompensated care each Medicare DSH hospital provides 75% “Uncompensated Care DSH Payments”

17. IPPS: Medicare DSH – Uncompensated Care Payment Eligibility • Only affects operating DSH, not capital DSH • Only IPPS hospitals receiving a DSH payment adjustment can receive an “uncompensated care payment” • Hospitals in Puerto Rico and those participating in the Bundled Payments for Care Improvement Initiative are included • Maryland hospitals and hospitals participating in the Rural Community Hospital Program are excluded • Sole Community Hospital’s (SCHs) paid under their hospital-specific rates will be excluded, and uncompensated care payments will not be factored in determining if the federal or hospital-specific rate is higher for each claim.

18. IPPS: Medicare DSH – Factor 1 – Total DSH Payments • Uses most recently available projections of total Medicare DSH for the subsequent federal fiscal year as calculated by the Office of the Actuary • Projections are based on • Medicare cost reports for Medicare DSH payment • IPPS Impact file for Medicare DSH patient percentages and Medicare DSH payment adjustment percentages • Inflation updates and estimates of changes in utilization and case mix • CMS proposes to use the March 2013 estimate for proposed rule ($12.338 billion), July 2013 estimate for the final rule

19. IPPS: Medicare DSH - Factor 2 – Change in the Uninsured Percent • CMS must determine how much the 75 percent pool will be reduced as a result of the decline in the uninsured population (proposed 75 percent pool is $9.2535 billion) • Required to use Congressional Budget Office (CBO) estimates in FY 2014 – FY 2017 • Required to use CBO estimate from March 20, 2010, which is 18%, as the baseline number of uninsured in 2013 • Uses CBO estimate from Feb. 5, 2013, which is 16%, as the most recent estimate of the number of uninsured in 2014 • Change in uninsured is 88.9%, but available portion is 88.8% • 1-[(0.16-0.18)/0.18]= 88.9% • 88.9% - 0.1 percentage point= 88.8% (required reduction for FY 2014) • Results in a pool of $8.217 billion (reduction of about $1 billion in Medicare DSH payments in FY 2014)

20. IPPS: Medicare DSH – Factor 3 – Proportion of Uncompensated Care • Uses proxy to calculate uncompensated care proportion Hospital's Medicare SSI Days + Medicaid Days Total DSH Hospitals’ Medicare SSI Days + Medicaid Days • Date sources: • 2010/2011 cost report data for the Medicaid days • FY 2011 SSI ratios for the Medicare-SSI day • Includes Medicare MA patient days in the Medicare fraction • CMS considered using charity care, bad debt and other data from the hospital cost report worksheet S-10 to measure uncompensated care • Not proposing for FY 2014 use due to inconsistencies among hospitals and relative lack of experience reporting the information • May propose using worksheet S-10 data in the future

21. IPPS: Medicare DSH - Uncompensated Care Payment Operations • Payments for uncompensated care will be made on a periodic basis, NOT on a per discharge basis • Uncompensated care payments will be determined in final rule each year and will not be updated with newer data or settled on cost report • “Empirically justified” DSH will still be paid on a per discharge basis • Final determination for only eligibility will be at cost report settlement • “Empirically justified DSH payments” (25% portion) and uncompensated care payments may then be recouped if not eligible • Uncompensated care payments will begin with Federal FY not hospital FY, but will be reported in hospital FY • Estimate of Uncompensated Care DSH Payment • Multiply Factor 3 by total estimated pool amount to calculate estimated uncompensated care DSH payment amount for your hospital. Appears on IPPS Impact file and supplemental table • Link to Medicare DSH Supplemental Data File [ZIP, 339KB]

22. Payment and delivery reform is happening Value-based purchasing: HACs, quality, efficiency, cuts Bundled payment Global payment HAC & readmissions penalties Shared savings FEE-FOR-SERVICE MOVING to integrated care, new payment models & risk • Population Management • Population analytics • Care management • Financial modeling and management • Legal • Physician integration • High Value Episodes • DRG and episode targeting • Care models and gainsharing • Data analytics • Cost management • High Performing Hospitals • Most efficient supply chain • Best outcomes in quality, safety • Waste elimination • Satisfied patients

23. Is the cost curve already being bent? Source: Cutler, David, and Shani, Nikhil. “If Slow Rate of Health Care Spending Growth Persists, Projections May Be Off By $770 Billion.” Health Affairs, 32, no. 5 (2013): 841 – 850.

24. Value based purchasing across silos Track 1 Post-Acute Care Episode Bundling Track 2 Acute and Post-Acute Care Episode Bundling Acute Care Bundling Medical Home

25. IPPS: Inpatient Value-Based Purchasing (VBP) • A percent of inpatient base operating payments are at risk based on quality and efficiency metric performance • A budget neural policy, where hospitals must fail to meet targets for bonuses to be generated for others • Rewards for achievement or improvement • Quality measures from Hospital Compare measure set • 20 measures (12 process/8 HCAHPS dimensions) in FY 2013, • Adds 3 outcome measures (3 mortality) in FY 2014, and • Adds 2 outcome measures and 1 efficiency measure in FY 2015. • Inpatient Quality Reporting measures are “on deck” for VBP. • AdvisorLiveon April 18, 2012 www.premierinc.com/advisorlive • 1% 1.25% 1.5% 1.75% 2%

26. IPPS: Movement toward outcomes and efficiency Hospitals’ VBP payment will increasingly be based on their performance on outcomes/efficiency FY 2013 FY 2014 Active Performance Period FY 2015 Clinical process Patient experience Outcomes Efficiency

27. Growing Number of Public and Private ACOs • Estimated 400+ public and private ACO’s in 43 states • Medicare specific ACOs: • First ACOs (10 organizations) part of the PGP demonstration project beginning in 2006 • 32 CMMI “Pioneer” participants, program began 1/1/2012 • Medicare Shared Savings Program • 4/01/2012: 27 ACOs selected to participate • 7/01/2012: 89 ACOs selected to participate • 1/1/2013: 106 ACOs selected to participate = Insurer = Hospital System = IPA = Community Based Organization Source: Leavitt Partners Center for Accountable Care Intelligence, January 2013

28. States: Medicaid ACOs • Additional states passed legislation to encourage ACO creation: • Connecticut • Iowa • Maryland • Massachusetts • Montana • New Hampshire

29. 50 markets 300+ hospitals 12,000+ MDs 23 markets 100+ hospitals 5,000+ MDs 100% success rate in helping 20 members apply for MSSP and Pioneer

30. Enabling members Population Health success Connecting People: National ACO Collaboratives Connecting Data: Population Health Analytics Connecting Knowledge: Operational Deployment MO ACO Implementation & Readiness 80+ members collaborating on best practices 120+ market assessments Population Health data management Analytics supporting clinical integration and risk-based relationships Resources to build capabilities Cohorts, best practices portal, guidebooks, tools, vendor contracts

31. Collaborative Members Participating in MSSP/Pioneer • AtlantiCare • Aurora Health • Banner Health** • Baystate • Billings Clinic • Bon Secours-Greenville, S.C. • Bon Secours-Richmond, VA • Fairview Health System** • Geisinger • Hackensack University Medical Center • Heartland Health • Methodist Health System • Mountain States Health Alliance • Southcoast • Summa Health System • University Hospitals • WellStar ** Pioneer members WA ME MT ND MN VT OR NH WI MA ID SD NY MI WY RI IA CT PA NE NV NJ IL OH IN DE UT DC CO WV MD VA MO CA KS MO KY NC NM TN AZ OK AR SC 31 MS AL GA TX LA FL = PGP Transition Demo = ACO Pioneer = MSSP (April 01 start date) = MSSP (July 01 start date) *MSSP January 2013 announced

32. TIME UNTIL JOINING OR CREATING ACO (C-SUITE ONLY) Source: Premier healthcare alliance spring 2013 member survey

33. Early results show opportunities for savings $500 savings per patient/year 19% lower patient costs Lowered health plan costs by $10m to $15m 12.3% reduction in net health care costs $1.59m savings on cardiac and ortho. services 4.48% reduction in employee BMI

34. Assessments drive insight Implementation Collaborative overall assessment* Readiness Collaborative overall assessment** Blue = High Green = Average Red = Low *Data from 24 markets **Data from 51 assessments

35. Collaborative lessons learned8critical success factors for population health • Robust primary care network • Patient-centered medical home • Physician-led/professionally managed • Clinically integrated network • Care management programs • Population health analytics • Aligned payorarrangements • Acute episode focus “Accountable Care Strategies: Lessons from the Premier Health Care Alliance’s Accountable Crare Collaborative”, The Commonwealth Fund; Amanda J. Forster, Blair G. Childs, Joseph F. Damore, Susan D. DeVore, Eugene A. Kroch, and Danielle A. Lloyd (Premier Research Institute); August 2012 “Measuring Progress Toward Accountable Care”, The Commonwealth Fund; Eugene Kroch, R. Wesley Champion, Susan D. DeVore, Marla R. Kugel, Danielle A. Lloyd, and Lynne Rothney-Kozlak (Premier Research Institute); December 2012 Commercial Bundled PaymentContracting Guidebook February 2013 Version 1.0

36. Number of executed agreements, by payor category

37. 1,682,000 Covered lives, by model (as of 12-31-12)

38. Top 5 and Bottom 5 – Lessons from Comparisons 38

39. Major Commercial Health plan trends • Rapid movement toward consumer driven health plans and new payment arrangements • Components of new payment models • Transformational funding • Care management • Shared Savings • Early Adopters include the following: • Regional Blue Cross plans (MN, MA, IL, HA, etc.) • Commercial Health Plans (Aetna, Cigna, Humana, etc.) • Partnering with MSSP ACOs • Universal American (31 MSSPs) • Walgreen’s (3) • Building delivery systems • Cigna- Primary Care Network (PCMH)-Phoenix • United HeatlhCare-Monarch physicians group (2300 physicians) • Aetna purchases Active Health • Da Vita acquires Healthcare Partners • Growth in Provider Sponsored Health Plans • State Insurance Exchange strategies • Medicaid managed care/ACOs

40. New payor arrangements • Commercial arrangements with Blues plans • Minnesota Blue Cross and major delivery systems (35% of hospitals) • Horizon Blue Cross with AtlantiCare • BCBS Michigan with Marquette General Hospital • HMSA with Hawaii Pacific Health • Blue Cross of Massachusetts-AQC program • Blue Shield of California/CHW/Hill Medical Group (CalPers) • CareFirst BCBS in Maryland building largest PCMH • BCBS Illinois-Advocate ACO arrangement • Texas BCBS and Texas Health Resources form ACO arrangement • Other commercial arrangements • Cigna continues to expand its Collaborative Accountable Care to 52 programs in 22 states covering nearly 510,000 lives • Texas Health Resources partners with Aetna to form an ACO • Memorial Hermann (Houston’s largest health care provider) partners with Aetna to form ACO • Aurora Health Care and Banner Health both form ACOs with Aetna

41. Premier’s Bundled Payment ServicesThe largest collaborative in the US focused on bundled payment Collaborative Members Members in Model 2 Application WA ME MT ND MN VT OR NH WI ID MA SD MI NY WY RI CT IA PA NE NV NJ OH IN DE UT IL MD WV VA KS CO DC CA KY MO NC AZ OK TN AR NM SC MS AL GA LA TX FL CMS ACE Demo States 2009/2010 – 3 years As of 8/08/2012

42. CMS initial undertaking…more to come • We are focused on Model 2 of first wave Future Models 4 Models Now 4 Models to Come • Section 3023 of ACA by 2013? • Medicaid bundling demos? • Private Sector Initiatives

43. Commercial bundles • Commercial insurers are experimenting with Bundled Payments • Payors can benefit from a discounted fee arrangement and the chance to partner with a provider willing to work to improve care delivery to the payor’s beneficiaries • Commercial bundled payment agreements have the potential to increase volume

44. Congressional SGR proposals Step 1: SGR repeal & period of stable payments Provider opt-out of UIP for alternative payment model adoption Step 2: Portion of payments based on quality of care OR Update Incentive Program (UIP)

45. Movement toward market-based reforms

46. Movement toward market-based reforms Facts about Insurance Exchanges (marketplaces) • Governmental or not-for-profit entities • Qualified Health Plans (QHPs) compete on the Exchange • QHPs offer the state’s definition of “essential health benefits” (EHB) • Open to individuals and small employers • QHPs offer EHBs at designated “metal levels” of cost sharing defined by actuarial value (AV): • bronze (60% AV) • silver (70% AV) • gold (80% AV) • platinum (90% AV) AV = percentage of the total allowed cost of benefits paid by the plan, versus by the consumer through cost sharing

47. Exchange Implications 26M will join exchanges Employers with unskilled labor may “dump” to exchanges • Many individuals will purchase “Bronze” plan • Influence consumer behavior • Impact on potential for bad debt • New competitive environment and marketing by insurers • Drive narrow networks • Greater pricing pressure Greater consumer demand for price & quality information Expandable to new populations (Medicare/Medicaid) Large employers moving toward reference pricing?

48. Marketplace timeline Policy Operations & IT Issuers & States Consumer assistance Train staff to assist patients in selecting & enrolling in plan Ensure compliance & contract with QHPs Hospital steps 30 Talk to state officials to see if your hospital can serve as a Navigator

49. Insurance exchanges – how will they be structured? State-based, 17+DC Washington Vermont Minnesota Partnership, 6 North Dakota Montana New York Federally Facilitated, 27 Wisconsin Michigan Oregon Maine South Dakota Idaho Pennsylvania Wyoming Delaware Iowa Ohio New Hampshire Nebraska Maryland Massachusetts Illinois Nevada Rhode Island Connecticut Utah New Jersey Colorado Kentucky Kansas North Carolina Missouri Tennessee California West Virginia Indiana Virginia South Carolina Oklahoma Arkansas New Mexico Arizona Mississippi Georgia Alabama Texas Louisiana Florida Alaska Hawaii As of 3/4/13

50. What does this mean? • Payment levels constrained • Don’t be distracted by the political fights, but engage • Traditional Medicare & Medicaid leveraged to drive change • Coverage expansion (revenue relief) uneven • Value-based payment reforms, population health and market transformation is happening -- this time! • Greater insurer competition and consumer demands • Providers are well positioned in this environment, but • Provider-led transformation will require policy change, de-regulation, scale and smart decisions