KPMG, LLP Pricing Transparency: A Formula for Value May 24, 2007

1. HEALTHCARE KPMG, LLP Pricing Transparency: A Formula for Value May 24, 2007 ADVISORY 2007 Duke University Health System

2. With you here today • Mark Higdon, Partner • (410) 949-8530 • mhigdon@kpmg.com

3. Transparency Defined • Webster’s dictionary Pronunciation: tran(t)s-'per- әn(t)-sēFunction: noun1 : something transparent; especially : a picture (as on film) viewed by light shining through it or by projection2 : the quality or state of being transparent - free from pretense or deceit : easily detected or seen through : readily understood : characterized by visibility or accessibility of information especially concerning business practices • KPMG Internal:Providing Management and the Board with the information necessary to understand the organization’s strategies and to manage the risk of the enterprise. External: Providing the healthcare consumer with the information necessary to make informed healthcare buying decisions.

4. Who Is Causing the Discussion, Debate or Uproar Over Pricing? • Federal Government / Agencies; • State Governments; • Third-party Payors; • Lawsuits (Legal System); • The Public (Consumerism); or • The Media / Press? • Answer: All and others, too, including our employees, MDs, etc…

5. Pricing Problem or Simply Noise? • Answer: A lot of Noise, BUT There is a problem out there also…

6. The Difference Between Charges and Costs Continues to Widen In last five years, charges have increased 60% (over cost increases)

7. The Uninsured • A recent Hopkins School of Public Health Report announced: Hospitals Charge Uninsured and “Self-Pay” Patients More than Double What Insured Patients Pay. • Uninsured patients are “charged” 2.5 times more for hospital care. • Gap has grown substantially since the mid 80’s. • In the 1950’s, the uninsured were charged the lowest prices. • Charge mark-ups was greatest at for-profit hospitals.

8. The Environment • President Bush’s agenda • CMS to publish prices for high volume Medicare procedures • Consumer Directed Healthcare (CDHC) • Greater role for employees to finance first dollar coverage • Need to create and demonstrate “value proposition” • State legislative pressures for price transparency • Mandated posting of prices and charity care policies • Requirement that hospitals cap prices charged to indigent • Requirement that uninsured be charged no more than rates paid by largest commercial payer • State hospital association websites offering pricing information • NCQA Payer requirements to share financial responsibility (United website)

9. Proposed Federal Legislation“Health Care HR 6053 Price Transparency Act” • Bill calls upon the State to establish and maintain laws requiring disclosure of information on hospital charges, to make such information available to the public, and to provide individuals with information about estimated out-of-pocket costs for health care services. • “This means that State law will require health insurance providers to give patients an actual dollar estimate of what the patient must pay for health care items and services within a specified period of time” - Representative Burgess, M.D.

10. AHA Position • Supports Burgess HR 6053 bill • AHA Roadmap to Pricing Transparency(1) • Federal requirement for states, working with state hospital associations, to expand existing efforts to make hospital charge information available to consumers. • Federal requirement for states, working with insurers, to make available in advance of medical visits, information about an enrollee’s expected out-of-pocket costs. • Federal-led research effort to better understand what type of pricing information consumers want and would use in their health care decision-making. • Hospital-led effort to create consumer-friendly pricing “language” - common terms, definitions and explanations to help consumers better understand the information provided. Source: AHA Statement of April 29, 2006

11. State Government Actions • 32 States have statutes requiring hospitals to report pricing information that is made available to the public in various ways. • 5 States have voluntary systems • State efforts on pricing transparency vary from chargemaster availability (California) to frequent hospital service prices to all inpatient services charges. Source: AHA Statement of April 29, 2006

12. NC Statute • NC Gen. Stats. Ch. 131 E-214.4 - Requires that a report that includes a comparison of the 35 most frequently reported charges of hospitals and freestanding ambulatory surgical facilities be made available to the Division of Facility Services of the Department of Health and Human Services.

13. Transparency – Key Questions • What is transparency? • Government defined? • Marketplace defined? • Consumer defined? • Media defined? • What are the objectives for transparency? • Defensible? • Logical? • Rational? • Justifiable? • When/how to enter the transparency arena? • What impact will transparency have on volumes, legislative/media perception? • What data to share to achieve transparency? • Chargemaster information • High volume DRG’s/procedures/tests • Third-party payment Information • Quality Indicators

14. Community Benefit Price Quality Communication & Education Elements of Transparency Value

15. Elements of Community Benefit Community Benefit Charity Care Outreach Programs Medical Education Unfunded Mandates Essential Services Unprofitable Services Reduce Gov’t Burden Financial Counseling

16. “Community Benefit Reporting” • Catholic Health Association’s (CHA) Instructions for Hospital Community Benefit Report, IRS Form 990, Supplement to Part III • Qualitative Description of Community Benefit • Programs & Services • Quantifiable Community Benefit Information • Charity Care • Indigent care, short-fall funding Source: CHA Report, Oct. 18, 2006

17. Elements of Quality Quality Mortality & Morbidity Statistics Quality Indicators Procedure Volumes

18. Quality Reporting Is Alive and Well Under Medicare • 2007 Payment formula: 2% reduction if quality data for 21 different care measures is not reported. • Acute Myocardial Infarction (“AMI”) – 8 • Heart Failure – 4 • Pneumonia – 7 • Surgical Infection Prevention – 2 • 2009: 32 Different Metrics • 29 Process Measures • 3 Outcomes Measures

19. Complications Under Consideration for Elimination of Reimbursement • Surgical Site Infections • Ventilator-associated pneumonia • Catheter-related Bloodstream Infections • Catheter-associated Urinary Tract Infections • Pressure Ulcers • Falls • Any other adverse event included in the “Never Events” List • Wrong Site Surgery • Objects Left in During Surgery • Blood Incompatibility • Several Others

20. Medicare’s PQRI for Physicians • Eligible professionals have potential for bonus, up to 1.5%. • Activity during calendar 2007, lump sum payment in 2008. • 74 metrics in the data set. • Benefits – prepare for P4P; access to comparable information. • Challenges – data collection burden and costs.

21. Other Quality Considerations • Consumerism: Price matters, but isn’t the outcome far more important? • Bond Ratings: Growing component in the assessment of creditworthiness. • Clinical Outcomes / Patient Safety

22. Pricing: A Combination of Several Organizational Policies Pricing Charity Care Collections Charge(Cost, Market, Contracts, ROI)

23. Pricing Strategies • If very few (10%) pay charges, why not reduce them by 50%? • Impact: Reduction of hospital margin by 5% (likely the entire profit amount.) • Establish the lowest appropriate charge • Provide sufficient funding to cover costs plus a necessary margin. Guiding Principles

24. Elements of Price Price Cost Market Payment ROI • Competitive Group • State • Other • Consumer Sensitivity • No Margin / No Mission • Net Revenues Less Expenses • PP&E • Current Cost of Capital • Internal Cost Accounting • RCCs • Full or Partial Costs • Loss Leaders • Other • Commercial Payor Contracts • Medicare / Medicaid • Specific Provisions • Self Pay • Uninsured Hospital Inpatient, Hospital Outpatient Physicians, Others

25. Pricing Strategy – Key Questions • Is it reasonable to have pricing differences within business units or between departments for similar services? If so, how much and for what? • Chest x-ray performed in Radiology vs. ED vs. OP clinic • Pricing of niche / consumerism services vs. specialty service, yet maintaining margin? • Specialty cardiology services vs. Women’s Health • Effectiveness of charge capture and coding processes? Are we consistent? • Time-based • With or without contrast • Right / left / bilateral • Correlation with contracting strategies? • Relevance with Sarbanes-Oxley or other initiatives?

26. Pricing Strategies • Rational Pricing • More robust set of pricing policies meant to defend current pricing position • Increased transparency through improved disclosure • Not necessarily different approach to setting policy • Might include price decreases to demonstrate commitment • May not be linked to contracting, value proposition • Value Based Pricing • Linked to quality • Allows for creation of value proposition • Premium pricing for services that provide value to customers • Package pricing • Requires ability to communicate value proposition • IT infrastructure necessary to support

27. Pricing Strategy Considerations • Standardized Chargemaster structure • Standardized Chargemaster not standardized prices (across the system?) • Facility-based pricing and charge capture / coding processes need to be aligned - Service Lines (CV, OB, etc.) • Coordinate pricing strategy with payer contracting strategy • Facility-based pricing decisions • Market-based pricing for “consumer / commodity” type services • Pricing levels should reflect value proposition to the consumer of cost, quality and service • Specialty service pricing reflect facility costs, utilization and global NOI considerations • Medical supply charges are often areas of significant controversy

28. Pricing Analysis Price Cost Market Payment ROI • Comparison of charges to fully allocated costs by center. • Utilization of internal cost reporting or Medicare cost report data. • Development of charge to cost ratios by: • Revenue Center • Product Line • DRG or Outpatient Procedure • Decision matrix: Establish parameters (e.g., 2.5 to 5.0 times cost)

29. Market Analysis Price Cost Market Payment ROI • Comparison of charges to targeted peer group. • Utilization of MedPar (or other sources) data for inpatient and / or outpatient services. • Development of comparative results by: • DRG / Product Line • APG / Product Line • Revenue Center (across all DRGs, etc…) • Decision Matrix: Establish parameters (e.g., 80th to 135th percentile)

30. Payment Analysis / Consumer Impact Price Cost Market Payment ROI • Development of impact analysis on payments (net revenue) of pricing decisions: • Cost Parameters • Market Parameters • Inflation Increases • Development of impact analysis on consumers for pricing changes: • Out of pocket for insured • Uninsured

31. Payment Analysis / Consumer Impact Price Cost Market Payment ROI • An important and final component of the pricing analysis is the net impact to the entity • Effect on volumes / demand • Effect on margin

32. Final Thoughts • External Transparency • Likely driven by states’ initiatives • Hospital associations heavily involved • Individual entity actions • Internal Transparency • What should Board know about pricing? • Who makes the pricing decisions? • Strict compliance with key policies on pricing, collections and charity care. • Integration of Quality with Pricing (Value Based)