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Future Strategy, Future Growth

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Title: Future Strategy, Future Growth


1
  • Future Strategy, Future Growth
  • How the Recession and Reform Will (and Wont)
    Change Hospital and Health System Economics

2
  • Contemplating a Recovery
  • Future Strategy, Future Growth
  • Promise or Peril?

3
  • Contemplating a Recovery

4
The Bulls Are Back
  • Market Seeing Green Shoots Growing Stronger
  • Change in Major Stock Market Indices
  • March 4, 2009 December 31, 2009
  • Source Yahoo! Finance.

5
Bidding Up Facilities Stocks as Well
  • Margin Management, Reform Bolstering Rosy
    Investment Thesis
  • Publicly-Traded Hospital Stock Prices
  • March 4, 2009 December 31, 2009

Universal Health Services 72
Community Health Systems 140
HMA 248
Tenet Health Care 456
Expecting Strong Bottom Line Performance
We believe the sector still has a compelling
upsideExpense management is trending well
ahead of expectations (especially labor costs)
and patient mix trends remain relatively
stableWe are increasing our 2009-2010 EPS
estimatesthe revisions stem primarily from
better expense leverage.
Deutsche Bank (Summer 2009)
  • Source The Street Insider. Deutsche Bank
    Upgrades Acute Care Hospitals Sector View from
    Neutral to Positive - Raises CYH, HMA, LPNT THC
    to 'Buy. Available at http//www.streetinsider.
    com, accessed September 4, 2009.

6
The Long, Hard Road
  • Pulling Multiple Levers Simultaneously to Stave
    Off Worst of the Downturn
  • Percentage of Hospital1 Respondents Deploying
    Tactic

n 263
  • Source Impact of Shifting Patient Volumes.
    HFMA, July 2009.

7
Some Air Coming Back into the Room
  • Rapid Response to Downturn Mitigating Worst of
    the Recession

Successfully Stemming the Tide
  • Change in Operating EBITDA Margin

On the other hand, the median operating (Op)
EBITDA margin, a measure of strength or weakness
in core operations of a hospital showed
surprising resiliency.Fitch attributes
hospitals ability to maintain core operational
stability in the face of the unprecedented
economic turmoil of the past year to strong
management practices implemented in such areas as
expense control and revenue-cycle management.
  • Median Fitch-Rated Hospital

Fitch Ratings
  • Source Schaub, J. 2009 Median Ratios for
    Nonprofit Hospitals and Healthcare Systems .
    Fitch Ratings. September 2009.

8
But What About Next Year?
  • Uncertain About Growth
  • Uncertain About More Cost Reduction

Zone of Danger
  • Percentage of Respondents Not Expecting Inpatient
    Surgical Growth in 2010

Ive made my five percent cut.All the usual
suspects froze salaries, a few layoffs, letting
attrition do its thing and shelved some
technology purchases. What Im worried about is
next year. I cant find another five percent
without jeopardizing our performance. Yeah, I can
cut costs, but at what price?
  • n 263

System Vice President, Revenue Cycle
  • Source Impact of Shifting Patient Volumes.
    HFMA, July 2009 Care Advisory Board interviews
    and analysis.

9
A Range of Coverage Expansion Scenarios Now In
Play
  • Health Care Reform
  • Loss of Democratic Senate Supermajority Causing a
    Reset in Reform Debate
  • Reported Potential Federal Health Care Reform
    Outcomes

1 No Coverage Expansion
3 Insurance Market Reforms
4 Pass House-Senate Bills
2 Medicaid Expansion
  • Source Health Care Advisory Board analysis.

10
Still More Questions Than Answers
  • Will a Take Follow the Give for Providers?

The Bear Case
The Bull Case
We view the current effort to reform healthcare
in the United States as mixed to largely negative
for the sectorReform may result in an increase
in the number of insured, a decrease in bad debt
and charity care for hospitals, and the
improvement of operating practices within the
industry. However, the funding for either a
government-sponsored health plan or cooperative
health plan to cover the uninsured remains a
large, unknown part of the equation. Over the
longer-term, we believe that revenue per
procedure will decline as funding sources will
likely include reductions in Medicare
reimbursement, causing margins to contract even
further.
THA estimates cuts of 3.6 billion over 10
years, with 2.6 billion resulting from the
market basket reduction If all patients are
covered by credible insurance, hospital revenues
will increase as charity care goes away. AHA
conservatively estimates that, nationally,
hospitals will receive an additional 171 billion
per year sic over 10 years in the form of
reimbursement for the newly covered uninsured.
Craig A. BeckerCEO, Tennessee Hospital
Association
MoodysJuly 20, 2009
  • Source Spielman, B et al. Not-for-Profit
    Healthcare Medians for Fiscal Year 2008 Show
    Weakening Across All Major Ratios and All Rating
    Categories. Moodys Investor Services. August
    2009.

11
The Long View
  • Putting the Economy and Reform in Context

Raise taxes? Reallocate spending? Cut
benefits? Cut reimbursement? Delivery system
change?
How do we deal with unsustainable Medicare
spending?
How do we pay for coverage expansion?
Less Certain
More Certain
Time
  • Source Advisory Board analysis.

12
Contemplating Health Cares Recovery
  • Direction For Our Economics and Our Prospects
  • Median Hospital Operating Margin
  • Fiscal Year
  • Source Advisory Board interviews and analysis.

13
Forces Arraying Against Future Growth
Future Strategy
V. Open Season on Fee for Service
IV. Specter of Profitless Growth
III. Diminished Subsidy Resolve
Challenge to Revenue Growth
Future Growth
II. Growth No Longer On Sale
I. Volatile Growth Engine
Time
  • Source Advisory Board analysis.

14
(No Transcript)
15
  • Future Strategy, Future Growth

16
Volatility Across the Network
  • I. Volatile Growth Engine

Competition in Profitable Service Lines
Inpatient
Bariatrics Spine Cardiac Cath
Anxious Insured
Expanding Outpatient Investments
Clinic MD Office MD Office
Outpatient
Volatility
  • Source Advisory Board interviews and analysis.

17
Recession Eroding Demand
  • Hospital Admissions Deteriorating Even Before
    Worst of the Downturn
  • Percentage Change in Hospital Admissions and
    Inpatient Surgeries
  • Moving 12-Month Average
  • n 540 hospitals nationally

Surgeries
(0.5)
(1)
(1.5)
Admissions
(2)
(2.5)
(3)
(3.5)
  • Source Deutsche Bank. Acute Care Hospitals, DB
    Volume Tracker. March 2008-July 2009.

18
Greater Patient Choice Than We Appreciated
  • Preference-Sensitive Services Vulnerable to
    Care Substitutes
  • Two Equally Viable Treatment Pathways
  • Sizable Share of Profitable Hospital Business at
    Risk
  • Patient with Arthritic Knee
  • Knee Replacements

465,412
Knee Replacement
381,638
Medication
82 Elective
Demand Driven Care
Supply Sensitive Care
For conditions without a definitive treatment
pathway, demand subject to physician
recommendation and consumer preference
  • Source Bronner K, Preference-Sensitive Care
    Center for the Evaluative Clinical SciencesA
    Dartmouth Atlas Project Topic Brief, 2007,
    available at http//www. dartmouthatlas.org/topic
    s/preference_sensitive.pdf, accessed March 20,
    2009 Saul S, Need a Knee Replaced? Check Your
    ZIP Code, The New York Times, available at
    http//www.nytimes.com/2007/06/11/business/busines
    sspecial3/11gap. html, accessed March 13, 2009
    HCUP Advisory Board analysis.

19
Many Conditions Subject to Treatment Trade-Offs
Service Line Conditions Possible Treatment Options
Orthopedics Hip Osteoarthritis Hip Replacement, Medical Treatment
General Surgery Herniated Disc Back Surgery, Chiropractic Treatment, Medical Treatment
Oncology Early Stage Prostate Cancer Radical Prostatectomy, Radiation, Watchful Waiting
Cardiovascular Claudication (from Peripheral Vascular Disease) Bypass Surgery, Angioplasty, Medical Treatment, Exercise
Cardiovascular Chronic Chest Pain/Coronary Artery Disease Bypass Surgery, Angioplasty, Medical Treatment
Cardiovascular Carotid Stenois (Narrowing of Carotid Artery) Carotid Endarterectomy, Aspirin
Gastrointestinal Chronic Cholecystitis (Abdominal Pain from Gallstones) Cholecystectomy, Watchful Waiting
  • Source Bronner K, Preference-Sensitive Care
    Center for the Evaluative Clinical SciencesA
    Dartmouth Atlas Project Topic Brief, 2007,
    available at http//www. dartmouthatlas.org/topic
    s/preference_sensitive.pdf, accessed March 20,
    2009 Saul S, Need a Knee Replaced? Check Your
    ZIP Code, The New York Times, available at
    http//www.nytimes.com/2007/06/11/business/busines
    sspecial3/11gap. html, accessed March 13, 2009
    HCUP Advisory Board analysis.

20
Threatening Ever-More Business Plans
  • Demand Volatility Exacerbated as More
    Organizations Chase Same Patients

Product Line
Change in Number of Providers, 20022007
Growth Drivers
Strong profitability Significant unmet need
Bariatrics
120
Strong profitability (if implant costs reined
in) Demographic-fueled growth in demand
Spine
26
Critical to growing cardiology
business Clinical shift to less invasive
procedures
Cardiac Cath
23
CABG backup needed to grow interventional
cardiology program Enhanced perception as
cutting-edge institution
Cardiac Surgery
7
  • Source Innovations Center Futures Database
    Advisory Board interviews and analysis.

21
Outpatient Inherently More Volatile
  • Outpatient Business Weathering Poorly in Downturn
  • Change in Ambulatory Surgery Visits and Total
    Discharges
  • Year Over Year

Average Change in Total Discharges
(1.3)
(1.5)
(2)
(4)
(5)
Average Change in Ambulatory Surgery Volumes
(8)
(10)
Jun. Jul. Aug. Sep. Oct. Nov. Dec.
Jan. Feb. Mar. Apr. May Jun.
Jul. Aug 08 08 08 08 08 08 08 09 09 09 09
09 09 09 09
(12)
  • Source Deutsche Bank. Acute Care Hospitals, DB
    Volume Tracker. June 2008-August 2009.

22
Many Willing to Listen to Alternatives
  • New Utilization Management Technique Targets
    Conditions with High Treatment Variability
  • UnitedHealthcare Treatment Decision Support
  • Treatment Shift Rate

16
Coronary Disease, CABG and Angioplasty Prostat
e Cancer Bariatric Surgery Breast Cancer
Back Pain KneeReplacement Hip
Replacement Benign Prostate Disease Benign
Uterine Conditions (Hysterectomy)
TDS1 Nurse
Could impact 22 M UnitedHealthcare members if
rolled out to all health plan enrollees2
Surgical Candidate
  • Case in Brief
  • Treatment Decision Support
  • Service provided by OptumHealth, part of
    UnitedHealth Group
  • Treatment Decision Support service provides nurse
    coaching to help patients evaluate treatment
    options and find high quality providers
  • Source OptumHealth Care Solutions Product
    Sheet, 2007, available at http//www.optumhealth.
    com/content/Files/DS_TDS_Product20Sheet_FINAL.pd
    f, accessed March 27, 2009 Voice of the
    Consumer Empowered to Chose, Finding an
    Alternative to Surgery Puts Patient n Charge of
    Her Health, Hub Magazine (UnitedHealth Group),
    Summer 2008, available at http//www.hubmagazine.
    net/articles.php?ID179, accessed March 27,
    2009 UnitedHealth Group, 2007 Summary Annual
    Report, 2007.
  • 1 Treatment Decision Support.
  • 2 Assumes 140 M UnitedHealthcare members total.

23
Physicians Struggling Mightily
  • Turning to Hospitals for Income, Capital Support
  • Hospitals Reporting Increasing Requests from
    Physicians
  • By Type of Request

November 20081
March 20092
  • Source Report on the Economic Crisis Initial
    Impact on Hospitals, American Hospital
    Association, November 2008. The Economic
    Crisis The Toll on the Patients and Communities
    Hospitals Serve. American Hospital Association.
    April 27, 2009.
  • 1 Increase in physicians seeking support in past
    three months (from November 2008).
  • 2 Increase in physicians seeking support since
    September 2008.

24
Hospitals Now Going on the Offensive
  • Seeking to Lock-In Business Through Physician
    Employment
  • Percentage of Respondents Utilizing Tactic
  • n 263
  • Source Impact of Shifting Patient Volumes.
    HFMA, July 2009.

25
Seizing the Chance to Realign Markets
Never More Important
  • Changes in Physician Affiliation
  • We are probably even more sensitive to that
    referrals from newly recruited physicians now.
    Competition with other providers has sharpened
    considerably during this past quarter, or last
    six monthsOur margins are very sensitive in the
    sense that there are so few pieces of our
    business that are producing margins any more that
    if we have a physician or two change for whatever
    reason from being a member of our medical staff
    to joining a competitors medical staff, you see
    an almost instant impact on the bottom line.
  • Chief Executive Officer Addison Health System

Oncologists ENTs General Surgeon
Vascular Surgeon Hospitalists
  • Left System
  • Recruited to System

Orthopedic Surgeon Gastroenterologist Genera
l Surgeon Ophthalmologist
  • Case in Brief
  • Addison Health System1
  • Three-hospital system located in the Mid-Atlantic
  • Successful year recruiting physicians helped
    insulate the system from some of the economic
    downturn by strengthening referral network
    however, increasing competition and impact of
    each physician on margin stresses importance of
    retention
  • Source Advisory Board interviews and analysis.
  • 1 Pseudonym.

26
Estimating Potential Impact on Inpatient Service
Line Volumes
  • Change in Volumes from 5 Unemployment Level

Gynecology
Spine
General Surgery
Orthopedics
Urology
Cardiac Services
Obstetrics
Weighted average at 12 unemployment 1.11
Rehabilitation
ENT
Ophthalmology
General Medicine
Neurosurgery
Oncology/Hematology (Medical)
Weighted average at 9 unemployment 0.49
Unemployment
Thoracic Surgery
Vascular Services
Neurology
Neonatology
(3)
Other Trauma
(6)
(1)
(2)
(3)
(4)
(5)
  • Source Advisory Board interviews and analysis.

27
Estimating Potential Impact on Outpatient Service
Line Volumes
  • Change in Volumes from 5 Unemployment Level

Gynecology
Neurosurgery
Thoracic Surgery
Urology
Spine
Orthopedics
Cosmetic Procedures
Dermatology
Pain Management
Podiatry
Radiology
Obstetrics
General Surgery
Lab
Evaluation and Management
Therapy/Rehabilitation
Vascular
Weighted average at 12 unemployment 5.03
Cardiology
Psychiatry
ENT
Endocrinology
Oncology
Gastroenterology
Weighted average at 9 unemployment 2.20
Neurology
Pulmonology
Nephrology
Ophthalmology
Trauma
(25)
(5)
(10)
(15)
(20)
  • Source Advisory Board interviews and analysis.

28
Examining Prospects for Pillars of Capital
Financing
  • II. Growth No Longer on Sale

Capital Budget
InvestmentIncome
Operating Income
Philanthropy
Debt
Short Term
Long Term
Return to peak levels of 2007 will depend on
individual institution execution
Level of giving will largely reflect national
wealth creation, tax policy bequests potentially
rising with demographics
Hospital returns likely to trail a slower-growth
market in the future
Increasing risk premiums will crimp debt capacity
into the future
  • Source Advisory Board analysis.

29
Forgetting RiskAnd Then Remembering It Again
  • Return of Risk Premiums
  • Interest Rates on Hospital and Health System Bonds
  • Yields on 30-Year Bonds, January 2002-October 2009

BBB
A
AAA
2002
2004
2005
2006
2003
2007
2008
2009
  • Source Cain Brothers.

30
Lower Returns from More Conservative Balance
Sheets
  • Smaller Asset Base Will Negatively Impact Future
    Earning Power
  • Return on Invested Capital
  • Median Hospital

Even at constant rate of return, a smaller
capital base will generate lower absolute dollar
returns
160.2 M
12.2 M
ROIC1 8.3
127.8 M
ROIC1 8.3
9.8 M
148 M
118 M
  • Source Not-for-Profit Healthcare 2003 Outlook
    and Medians. Moodys Investors Services. August
    2003 Not-for-Profit Hospital Medians for Fiscal
    Year 2006. Moodys Investors Services. August
    2006 Advisory Board analysis.
  • 1 Return on Invested Capital.

31
Slow Down of Debt-Driven Growth
  • End of Credit Bubble Damages Hospital Growth
    Prospects
  • Median Hospital Cumulative Operating Profits
  • In Thousands

Actual(Savings Glut)
Higher Interest 55
54,387
23,370 (43)
Lower Returns 44
31,017
Modeled(New Normal)
  • Source Moodys Annual Hospital Median Reports,
    20032009 Advisory Board analysis.

32
No Longer Able to Buy Our Growth
  • The Retained Earnings Business Model
  • Boot-Strapping Capital Investments through
    Operating Margin Growth, Not Leverage
  • Income from Operations as a Percentage of
    Growth Capital Spending
  • Income From Operations as a Percentage of
    Growth Capital Spending
  • 2008
  • Future

59
75-85
  • Source Advisory Board analysis.

33
Multi-Pronged Approach to Increasing Coverage
  • III. Diminished Subsidy Resolve
  • Achieving Universal Coverage

Pre-Existing Conditions
  • Individual Mandate
  • Insurance Market Reform
  • Employer Mandate

Minimum Creditable Coverage Individual
Subsidies Modification to Current Public Options
Limit Underwriting Options Health Insurance
Exchange Public Plan
Play or Pay Requirement Small Business
Subsidy
  • Senate Finance Committee Options
  • Source Expanding Health Care Coverage
    Proposals to Provide Affordable Coverage to All
    Americans. Senate Finance Committee. May 14,
    2009. Advisory Board interviews and analysis.

34
Profile of the Uninsured
  • Classification of the Uninsured
  • In millions
  • Source The Uninsured A Primer. Kaiser Family
    Foundation. October 2008.

35
Expanding Coverage First and Largely on
Medicaids Back
  • Paying the Freight For Those Unable to Afford Any
    Insurance
  • Percentage of Newly Insured Americans By Source
    of Coverage
  • Children, Adults and Adults Without Dependent
    Children 1
  • n 31.7 million
  • Raise maximum Medicaid income eligibility to
    133-150 of FPL
  • Expand Medicaid eligibility to all individuals
    meeting income criteria
  • Source The Uninsured A Primer. Kaiser Family
    Foundation. October 2008.
  • 1 N is smaller than previous page due to
    difference in survey methodologies across sources.

36
Making Up for a Lack of Market Clout
  • Government Funds Defraying High Premium Costs for
    Individuals, Small Businesses
  • Subsidy as Percentage of Total Income
  • Maximum Subsidy as Percentage of Total Employee
    Contribution
  • By Percentage of Federal Poverty Level
  • Family of Four

Offered on sliding scale to employers with fewer
than 25 employees, average annual wages of less
than 40 K
  • Source Congressional Documents Show Health
    Costs. Kaiser Family Foundation. September 4,
    2009 Health Care Advisory Board analysis.

37
Maximizing the Employer Contribution
  • Mandates and Penalties to Strengthen On-the-Job
    Funding Sources
  • Percentage of Massachusetts Newly Insured Through
    Employer-Sponsored Coverage
  • Penalty Per Full-Time Employee
  • By Whether Coverage is Offered
  • n 400,000
  • n 26.8 million

If employee declines employers coverage,
employer pays lesser of 3 K per employee
receiving tax credit or 750 per FTE
  • Source The Uninsured A Primer. Kaiser Family
    Foundation. October 2008.

38
Taking Some Risk Out of Benefit Design
  • Cost-Sharing Subsidies Backstop Personal
    Financial Exposure
  • Maximum Cost-Sharing Amounts
  • By Percentage of Federal Poverty Level
  • Family of Four
  • Source Congressional Documents Show Health
    Costs. Kaiser Family Foundation. September 4,
    2009.

39
Universal Coverage a Significant Revenue Upside
to Providers
  • Reduced Bad Debt, Greater Demand
  • Industry Net Patient Revenue

17 B
618 B
  • Negative Unknowns
  • Pricing power of public plan
  • Leverage of private insurers
  • Reimbursement methodology changes
  • Cuts to DSH3 and similar payments
  • Change to consumer incentives
  • Amount of subsidized cost-sharing

608 B
27 B
7 B
574 B
1
2
  • Source American Hospital Association. AHA
    Hospital Statistics. 2009 American Hospital
    Association. Trendwatch Chartbook 2009. 2009,
    available at http//www.aha.org, accessed March
    12, 2009 American Hospital Association.
    Uncompensated Hospital Care Cost Fact Sheet.
    November 2008, available at http//www.aha.org,
    accessed March 12, 2009 Congressional Budget
    Office. Key Issues in Analyzing Major Health
    Insurance Proposals. December 2008, available
    at http//www.cbo.gov, accessed March 12, 2009
    Advisory Board analysis.
  • 1 Assumes national uncompensated care cost 34.0
    B.
  • 2 Assumes 25 percent increase in utilization
    based on a base of 35M hospital admissions at
    9,797 revenue per adjusted admission.
  • 3 Disproportionate Share Hospital program.

40
Entering the Golden Years
  • IV. Specter of Profitless Growth
  • Aging Baby Boomers Transforming the Demographic
    Landscape
  • Breakdown of U.S. Population Growth by Age Cohort
  • Change in U.S. Population by Age Cohort
  • 2010-2040
  • 2010-2040

406 M
374 M
341 M
310 M
  • Source U.S. Census Bureau, U.S. Population
    Projections, available at http//www.census.gov,
    accessed March 24, 2009 Advisory Board analysis.

41
Confronting the Public Plan We Already Have
  • Medicare Unwilling to Fund Full Weight of
    Demographic Crush
  • Medicare and Medicaid Admissions as Percentage of
    Total Admissions
  • 2007 Hospital Payment-to-Cost Ratio

Revenue per case will decline relative to current
levels by 12.3 as a result of growth in lower
reimbursement for growing Medicare admissions
60
  • Source American Hospital Association, Chart
    Book Advisory Board Analysis.

42
Multimorbid Patients on the Rise
  • Not Betting on Rates Keeping Pace with Costs
  • Comorbidity Breakdown of U.S. Inpatient
    Admissions
  • 20022016

Percentage of Inpatients
  • Source Thorpe K and Howard D, The Rise in
    Spending Among Medicare Beneficiaries The Role
    of Chronic Disease Prevalence and Changes in
    Treatment Intensity, Health Affairs, 379, August
    2006 Innovations Center Futures Database
    Advisory Board analysis.

43
A System Fixated on Specialty Care
  • Undervaluing Key Specialties
  • 2007 Average Annual Compensation
  • Source Medical Group Management Association
    (MGMA), Physician Compensation and Production
    Survey, Englewood, CO, MGMA, 2007.

44
Not Enough Geriatricians in the Pipeline
  • Total Number of Geriatricians
  • Projected Supply and Demand for Geriatricians1
  • 1998-2008
  • 2030
  • Source Hirth VA et al. A Step Toward Solving
    the Geriatrician Shortage. The American Journal
    of Medicine, 121 (3) March 2008 Advisory Board
    Analysis.
  • 1 Demand forecast derived by applying the ratio
    of geriatricians to total individuals aged 65 and
    over in 2002 to the total 65 population level
    projected in 2030.

45
Fortifying Our High Cost Structure
  • Annual Spending on Hospital Construction
  • 1999-2007
  • Source U.S. Census Bureau, Construction
    Spending Private Construction (Not Seasonally
    Adjusted), 2008, available at
    http//www.census.gov/const/ www/oprivpage.html,
    accessed March 5, 2009.

46
Fueling an Unsustainable Trend
  • Complex Patients Spurring Medicare Cost Growth
  • Total Medicare Expenditures
  • 1997-2017

857 B
431 B
225 B
  • Source Thorpe K and Howard D, The Rise in
    Spending Among Medicare Beneficiaries The Role
    of Chronic Disease Prevalence and Changes in
    Treatment Intensity, Health Affairs, 379, August
    2006 Innovations Center Futures Database
    Advisory Board analysis.

47
Fix Medicare, Fix the Deficit
  • Federal Health Spending with and withoutHealth
    System Modernization

10
Baseline
Reform projected to save 9 trillion by 2034 over
baseline
8
Percent of GDP
6
Reform
4
2009
2014
2019
2024
2029
2034
  • Source Cutler D, Health System Modernization
    Will Reduce the Deficit, Center for American
    Progress Action Fund, 2009 Advisory Board
    interviews and analysis.

48
They Do Agree on Some Things, You Know
  • IV. Open Season on Fee For Service
  • Unwavering Political Consensus on Flaws in
    Current Reimbursement Incentives
  • From the Left
  • From the Right
  • We should pay a single bill for high-quality
    health care, not an endless series of bills for
    pre-surgical tests and visits, hospitalization
    and surgery, and follow-up tests, drugs and
    office visits.
  • - Sen. John McCain
  • The fact is, right now, we encourage volume over
    valueWe've got to really analyze what is the net
    outcome.
  • - Sen. Olympia Snowe
  • Our current fee for service system creates the
    absolute wrong incentives for both patients and
    doctors and is whats driving the health care
    cost in this country higher and higher
  • - Fmr. Gov. Mitt Romney
  • The current system pushes you, the doctor, to
    see more and more patients, even if you can't
    spend much time with each, and gives you every
    incentive to order that extra MRI or EKG, even if
    it's not truly necessary, Fee-for-service has
    taken the pursuit of medicine from a profession
    -- a calling -- to a business.
  • - President Obama
  • Todays payment systems reward providers for
    delivering more care rather than better care. A
    redefined health system would realign payment
    incentives toward improving the quality of care
    delivered to patients.
  • - Sen. Max Baucus
  • Source Tanner M, McCains HealthCare Plan,
    Radiac and Right, Cato Institute, May 06, 2008
    NPR, Taking Doctors Profits Out of Medical Care
    Decisions, September 2, 2009 Human Events,
    Romney Attacks Obamacare, July 31, 2009
    Arvantes J, Obama Stresses Need for Primary
    Care, Calls for Physician Payment Changes, AAFP,
    June 2009 Baucus M, Call To Action Health
    Reform 2009, November 2008 Advisory Board
    interviews and analysis.

49
Reorganizing Care Delivery to Bend the Cost Curve
  • Specialty Care in the Cross-Hairs of Reformers

New Care Models
Increase Specialty Care Efficiency
Improve Care Coordination Capability
  • Source Advisory Board analysis.

50
Giving P4P Some Teeth
  • Increase Specialty Care Efficiency
  • Senate Finance Committee Considers Hospital
    Value-Based Payment Program
  • Funded by Reduction to Providers Medicare IPPS
    Payment
  • Bonus Paid on Sliding Scale Based on Provider
    Performance
  • Source Transforming the Health Care Delivery
    System Proposals to Improve Patient Care and
    Reduce Health Care Costs. Senate Finance
    Committee. April 29, 2009 Advisory Board
    Interviews and Analysis.

51
At Root, Cutting Prices on Hospital Care
  • Making Specialty Care Less Lucrative, More
    Efficient
  • New CMS Acute Care Episode (ACE) Demonstration

Part A/Part B



Hospital
Inpatient Procedures Cardiac (28) CABG
Valve Procedures Defibrillator Implant
Pacemaker PCI1 Orthopedic (9) Hip
Replacement Knee Replacement
Gainsharing (optional)
CMS will provide up to 50 percent of Medicare
savings as rebates to beneficiaries annual
premium


Physician Hospital Organization
Inpatient Physicians
Optional provider incentive program, cannot
exceed 25 percent of normal payment to physicians
for quality, efficiency improvements, cost savings
Medicare Beneficiaries
  • Case in Brief
  • CMS Acute Care Episode Demonstration
  • Goal is to use global payment within Medicare
    fee-for-service to better align provider
    incentives, leading to better quality, greater
    efficiency in hospital care bundled payment for
    hospitalization episode only, does not include
    post-discharge period
  • Demonstration will run three years beginning
    January 2009 after year one, CMS may consider
    including some post-acute services, such as
    cardiac rehabilitation, with an episode of care
  • Source Details for Medicare Acute Care Episode
    (ACE) Demonstration, CMS, available at http//
    www.cms.hhs.gov, accessed April 9, 2009 CMS
    Announces Sites for a Demonstration to Encourage
    Greater collaboration and Improve Quality Using
    Bundled Hospital Payments, CMS Office of Media
    Affairs, Department of Health and Human Services,
    January 7, 2009. Advisory Board interviews and
    analysis.
  • 1 Percutaneous Coronary Intervention.

52
Penalizing Lack of Coordination
  • Starts with Targeting Readmissions

Transitions to Bundled Payment
  • Providers Subject
  • to Withhold

DRG Payment




25
Providers in 75th percentile for readmission
rate subject to withhold Providers eligible
to earn back withhold if readmission does not
occur Proposal to start in FY2013, phased out
as bundled payment system introduced
Proposal to bundle acute and post-acute care
in one payment, adjusted for assumed provider
efficiencies Phased in over five years
starting FY2015 with priority given to conditions
contributing to greatest post-acute spending
  • Source Transforming the Health Care
    Delivery System Proposals to Improve Patient
    Care and Reduce Health Care Costs. Senate
    Finance Committee. April 29, 2009 Advisory
    Board interviews and analysis.

53
Focusing on Technologys Role in Medical Inflation
  • Reducing Specialty Care Demand
  • Seeking to Reduce Indiscriminate Technology
    Adoption and Care Variation

Select IOM4 CER Priorities
  • Stimulus Bill Comparative Effectiveness Funding
  • Management strategies for localized prostate
    cancer
  • Prospective registry to compare treatment
    strategies for low-back pain
  • Imaging technologies for diagnosising, staging
    and monitoring patients with cancer
  • Treatment strategies for atrial fibrillation
    including surgery, catheter ablation and Rx
  • By Agency
  • 1 National Institutes of Health.
  • 2 Health and Human Services.
  • Agency for Healthcare Research and Quality.
  • Institute of Medicine
  • Source American Recovery and Reinvestment Act
    Comparative Effectiveness Funding, available at
    http//www.ahrq. gov/fund/cefarra.htm, accessed
    March 2009 Text of the Recovery Act Related to
    Comparative Effectiveness Funding, Excerpt from
    the American Recovery Act of 2009, available at
    http//www.ahrq.gov/fund/cefarraexc.htm, accessed
    March 2009.

54
Reallocating Reimbursement
  • Future Payment Going to Base of the Delivery
    System

MedPAC Recommendation to Increase Primary Care
Rates
In MedPACs recommendations to CMS in February
(2009), the advisory group proposed increasing
primary care rates by 510 percent to better
support their services To make the proposal
budget neutral, other physicians fees would need
to decrease by about one percent Senate
Finance Committee proposed similar increase for
primary care physician payments in policy option
paper
  • Source Silva C, MedPAC Report Calls for 1.1
    Doctor Pay Raise in 2010, American Medical News,
    available at http//www.ama-assn.org, accessed
    March 9, 2009 Transforming the Health Care
    Delivery System Proposals to Improve Patient
    Care and Reduce Health Care Costs. Senate
    Finance Committee. April 29, 2009 Advisory
    Board interviews and analysis.

55
Organizing the Delivery System to Change
Utilization Patterns and Outcomes
  • Creating an Infrastructure for Primary Care
    Innovation

Medical Director
Case Managers
Program Director
Physicians, Hospital Representatives, Health
Department Staff, Social Workers

Network Administrative Staff1
Community Steering Committee

Virtual Network
Community Care Responsibilities Develop,
implement, track new quality initiatives Make
system changes, remove barriers to medical home
success, integration with other providers
  • Case in Brief
  • Community Care of North Carolina
  • Medicaid-funded group of 14 networks in North
    Carolina serving 80 percent of Medicaid
    beneficiaries started in 1998, estimated 2006
    Medicaid savings between 161 million300
    million
  • Provides 3 PMPM payment to networks to hire
    administrative staff who develop quality
    initiatives, and case managers who coordinate,
    manage patient care
  • Participating physician practices paid 2.50 PMPM
    to provide medical home services
  • Improved clinical outcomes for patients with
    asthma, diabetes, CHF and looking to expand
    disease management services for COPD, depression
  • Source Details for Medicare Acute Care Episode
    (ACE) Demonstration, CMS, available at http//
    www.cms.hhs.gov/DemoProjectsEvalRpts/MD/itemdetail
    .asp?filterType nonefilterByDID -
    99sortByDID 3sortOrder descendingitemID
    CMS1204388intNumPerPage 10, accessed April 9,
    2009 CMS Announces Sites for a Demonstration to
    Encourage Greater collaboration and Improve
    Quality Using Bundled Hospital Payments, CMS
    Office of Media Affairs, Department of Health and
    Human Services, January 7, 2009. Advisory Board
    interviews and analysis.
  • 1 Paid for by 3 PMPM fee to network.

56
Rewarding Attempts to Better Coordinate Care
Bonus Payments Based on Achieved Savings
Accountable Care Organizations (ACO) Collaborate
on Quality and Cost
Projected Spending Indexed to 100
  • Bonus Based on Achieved Savings

Project Spending Baseline
Actual Spending
Proposal in Brief
  • Expanding on success of Medicares Physician
    Group Practice demonstration, proposal to allow
    ACO to share in provider-generated Medicare
    cost-savings
  • To form an ACO, providers must have a formal
    legal structure, participate for two years, cover
    at least 5,000 Medicare beneficiaries and meet
    quality goals in addition to achieved savings
    goals
  • Source Transforming the Health Care Delivery
    System Proposals to Improve Patient Care and
    Reduce Health Care Costs. Senate Finance
    Committee. April 29, 2009 Advisory Board
    interviews and analysis.

57
Completely Realigning Incentives
  • Alternative Quality Contract Plan Gaining Steam
    in Massachusetts
  • Last Year

This Year
  • Blue Cross Blue Shield of Massachusetts Proposal

Quality BonusCombination of improved outcomes,
process and service measures
Age, acuity adjustments to rates
Tufts and its affiliated doctors said they will
join Blue Crosss alternative quality
contractUnder the deal, Tufts and its doctors
will get a raise with the potential to earn even
more money if they reduce the costs of treatment
and reach ambitious quality goals.
Plan in Brief
BCBSMA2 Alternative Quality Contracts
  • Five year plan with global payments adjusted for
    age, gender, health status for all services
    provided to the patient
  • Performance measured based on 39 process metrics,
    13 outcome metrics and 12 patient-experience
    metrics
  • BCBSMA Executive President, Andrew Dreyfus,
    estimates 1520 percent of the plans provider
    network will join this model over the next few
    years
  • Source Allen, Scott and Jeffrey Krasner, Blue
    Cross, Tufts Break Fee Deadlock. Boston Globe.
    January 18, 2009 Bennett D, Middle Ground
    Quality Requires that Stakeholders Work Together
    for the Greater Good. Managed Healthcare
    Executive. March 1, 2009. Dembner, Alice, New
    Therapy for Old Woes, The Boston Globe,
    available at http//www.boston.com accessed June
    10, 2008.
  • 1 Per member per year.
  • 2 Blue Cross Blue Shield of Massachusetts.

58
Tired of Waiting
  • Improve Care Coordination
  • 19 Billion of Stimulus Funding Directed at
    Health Care IT
  • to Spur EHR Adoption Rates
  • Stimulus Bill Funding

Hospitals 2019 (E)
Physician Offices 2019 (E)
Most of the funding will be made available as
Medicare and Medicaid incentives to health care
providers for adopting certified health IT
systems and achieving meaningful use
90
70
65
45
  • Source American Hospital
    Association Health Care Advisory Board
    interviews and analysis.

59
Favoring Information Technology Over Clinical
Technology
  • Reimbursements Defray Costs, But Dont Absorb Them
  • Estimated One-Year Spending on EHR Compared to
    Maximum One-Year Incentive Payment

Total Four-Year Hospital Incentive Payments1 by
Number of Total Discharges
  • Typical 200-bed hospital

M
M
M
2
M
M
  • Source Continued Progress Hospital Use of
    Information Technology. American Hospital
    Association. 2007, available at
    http//www.aha.org/aha/ content/2007/pdf/070227-co
    ntinuedprogress.pdf, accessed March 19, 2009
    American Hospital Association Advisory Board
    analysis.
  • 1 Assumes hospitals meet meaningful use
    qualifications by 2011 and remain eligible to
    receive incentive payments for four years.
    Calculation for incentive payment Medicare
    Incentive (2 M (200(Discharges up to a
    maximum of 23000-1150)))(Medicare share). And,
    Medicare Share Total Medicare Inpatient
    Days/(Total Inpatient Days((Total Charges
    Charity Care Charges)/Total Charges). For
    Medicaid Incentive, substitute Medicaid Inpatient
    Days. Hospitals assumed to have 40 Medicare
    Share and 10 Medicaid Share.
  • 2 Assumes median EHR capital spending per bed
    5,556 and median EHR operating costs per bed
    12,060.

60
Requiring a High Level of Functionality
  • Proposed Definition of Meaningful Use

Three-Phased Approach to Implementing Definition
Overarching Goals
  • Improve quality, safety, and efficiency
  • Ensure privacy and security protections
  • Engage patients and their families
  • Improve care coordination
  • Improve population and public health and reduce
    disparities in care

ABC Tools
Washington Update The Proposed Meaningful Use
Criteria - Key Characteristics of the Definition
and Its Implications for Health Care Providers
(June 17, 2009)
For detailed analysis of the proposed definition
of meaningful use including a breakdown of
specific objectives for each phase of the
definition, please see our Washington Health Wire
on advisory.com (www.advisory.com/policy).
  • Source HHS. Meaningful Use A Definition
    Recommendations to the Health IT Policy Committee
    from the Meaningful Use Workgroup. June 16,
    2009. Advisory Board analysis.

61
Moving Care into a Digitized Ecosystem
  • Health Information Exchanges Key to Success of IT
    Plan
  • Operational HIEs

Wisconsin Health Information Exchange
  • 2008

Milwaukee Area
Five competing health systems pilot health
information exchange targeted at addressing
frequent ED visitors Project funded by 1.3 M
Medicaid grant and 250 K contribution from each
system Patient information to be shared name,
gender, date of birth, address, and medical
history One system estimated savings of
400/patient due to avoided duplicate testing
  • Source eHealthInitiative, Fifth Annual Survey
    of Health Information Exchange at the State and
    Local Level, September 2008 Milwaukee-area
    Health Information Exchange Aims to Reduce Costs,
    Duplication, Clinical Strategy Watch, September
    19, 2008 Advisory Board analysis.

62
Assessing the Impact of Reform
Hitting Reset on Basic Incentives
FFS Weakened But Still Holds
  • Source Advisory Board interviews and analysis.

63
Assessing the Impact of Reform
Level of Hospital Business-Model Disruption
Encourage More Efficient Care
Reduce Downstream Demand
Expand Coverage
  • Employer Mandate
  • Individual Mandate
  • Reduced DSH Payments
  • Public Plan
  • Bundled Payments
  • At-Risk Quality Bonuses
  • Outcomes-Based Payment Reductions
  • Episode-Based Payments
  • Stimulus IT Incentives
  • Comparative Effectiveness Research
  • Medical Homes
  • Disease Management
  • Capitation

Mostly Upside
Harder to Profit
Brave New World
Reduction in bad debt from elimination of
uninsured patients will bolster hospital bottom
lines however, payment cuts enacted through the
introduction of a public plan paying
government-insurance rates or rate reductions in
existing government insurance programs may limit
upside
Hospitals will continue to be rewarded for
generating volumes although the profitability of
those volumes may decrease as coordination costs
cut into margins and IT utilization trims back
certain redundant tests and care
With strong demands to reduce disease incidence
and severity and regulatory- or
reimbursement-driven disincentives to the
proliferation and application of expensive
specialty care, this collection of reforms could
force many hospitals to reconsider their core
business model
  • Source Advisory Board interviews and analysis.

64
Top 10 Implications of Coverage Expansion,
Payment Innovation and Delivery System Reform
  1. The transition to outcomes-focused reimbursement
    will materially increase risks to revenue growth
  2. Operating efficiency will challenge top-line
    growth as the driver of future inpatient
    profitability
  3. Bundled payments and other reimbursement
    innovations will make specialty care more rare
    and less profitable
  4. Rewards in primary care practice will evolve to
    focus on coordination, chronic disease management
    and population health
  5. Total cost management will begin to supplant
    fee-for-service incentives in the health system
    business model
  • Source Advisory Board interviews and analysis.

65
Top 10 Implications of Coverage Expansion,
Payment Innovation and Delivery System Reform
(cont.)
  1. All providers will maintain tighter and fewer
    affiliations across the delivery system
  2. MA strategy will expand in scope to focus
    increasingly on (functional) vertical integration
  3. Information-driven care, not simply information
    technology adoption, will ascend as a competitive
    differentiator
  4. Consumer-driven health care will be driven
    (further) to the margins
  5. New regulatory frameworks and entities will
    emerge

For More Information
A memo explaining each implication is available
at www.advisory.com/policy.
  • Source Advisory Board interviews and analysis.

66
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67
  • Promise or Peril?

68
Forces Arraying Against Future Growth
Future Strategy
V. Open Season on Fee for Service
IV. Specter of Profitless Growth
III. Diminished Subsidy Resolve
Challenge to Revenue Growth
Future Growth
II. Growth No Longer On Sale
I. Volatile Growth Engine
Time
  • Source Advisory Board analysis.

69
Disaggregating Future Growth Opportunities
  • Four Distinct Business Opportunities

Inpatient Care
Ambulatory Care
Chronic Disease Management
Prevention/Wellness Maintenance
  • Source Advisory Board analysis.

70
Building a Culture of Continuous Cost Reduction
  • Transforming into the DRG Factory
  • Making Care Redesign a Core Function

1. Disaggregate Business Into Clinical Processes
Identified 104 work processes, inpatient and
outpatient, that account for more than 90 percent
of care delivery
2. Design Care Process Models
Large interdisciplinary teams develop care
process models for all major clinical conditions
3. Develop Clinical IT Systems
Built clinical IT system that hardwires care
process models, warehouses data, generates
outcomes reports IT system supports ongoing
process improvement by linking work steps to
outcomes
4. Pilot and Deploy Initiatives
Processes, IT refinements rolled out across system
Case in Brief
Intermountain Health System
  • 21-hospital health system located in Utah and
    Idaho
  • Views core business as perfecting discrete
    clinical processes
  • Benefits of process improvement accrue to captive
    health plan that accounts for 25 percent of
    patient volumes
  • Source Advisory Board Interviews and analysis.

71
Are We Already Partially Reformed?
  • Rapidly Acquiring the Assets of a Health Services
    Company

Wired Market
Employed PCPs
Ability to Profit from Integration Incentives
Inpatient EMR
Employed Specialists
Number of Assets
  • Source Advisory Board analysis.

72
Can We Afford Not to Be Completely Reformed?
  • New Capital Limitations, Costs May Weaken
    Participation in Technology Arms Race
  • Typical Financial Performance of Recent Hospital
    Investments

Potential Incentives to Monetize Asset
  • P4P Contract to Decrease Readmissions
  • Shared Savings Opportunity for Avoided
    Duplicative Diagnostic Tests
  • Primary Care Incentive Payments for Chronic
    Disease Management
  • Source Advisory Board analysis.

73
Not Waiting to Be Told
  • Phasing in Transformative Care Models

Laying the Groundwork
Introducing Novel Offerings
Reinventing the Health System
Case in Brief
McKean Health 1
  • Five-hospital health system located in the
    Midwest
  • Dedicated to migrating from a hospital-centric
    health system to an integrated care management
    network over the next decade
  • Partnering with payers, community providers,
    physicians and hospital-based managers to
    facilitate the transformation

Heart disease eradication campaign
Disruption to Traditional Acute Care Model
Bundled chronic care products
Disease management risk contracts
EMR-enabled medical home network
Hospital at Home initiative
Diabetes Management Team
Remote monitoring center
Heart Failure Clinic
Phase I
Phase II
Phase III
Time
  • Source Advisory Board analysis.
  • 1 Pseudonym.

74
Reorienting System Strategy at McKean1
  • Engaging Key Constituencies in Business Model
    Transformation

Phase I Laying the Groundwork Phase II Introducing Novel Offerings Phase III Reinventing the Health System
Physician Strategy Assess interest of independent medical groups in partnering on risk-based contracts Discuss potential revenue sharing model and performance metrics Launch a bundled payment program for COPD patients as test-run of partnership model Co-market bundled chronic care products Co-invest in EMR upgrades, care management staff to solidify care continuum Launch joint research institute to develop new care delivery models
System Leadership Strategy Develop strategic plan for transitioning from a hospital-based management structure to a system-wide service line model Cultivate administrative competencies for managing health system at service line level Integrate service line leaders for top three product lines into organizational matrix Empower service line leaders to set system-wide strategy, launch new care management offerings Restructure accountability metrics for hospital leaders around system-level service line performance
Capital Investment Strategy Conduct facility portfolio assessment to determine future need for inpatient capacity at each campus Hold the line on outlays for CV, other resource-intensive product lines at satellite campuses Recalibrate investment prioritization methodology to favor care management investments Downscale inpatient capacity at one (or more) satellite hospital to free up space for outpatient services De-prioritize investment in surgical technologies in favor of chronic disease opportunities
  • Source Advisory Board interviews and analysis.
  • 1 Pseudonym.

75
Promise or Peril?
  • Managing Through Unprecedented Uncertainty
  • Key Questions for Senior Executives
  • How will we continue to reduce expenses given
    continued economic uncertainty and potential
    price pressure from reform?
  • How will we make our IT investments pay off
    beyond maximizing meaningful use incentives?
  • Can we support our pre-recession growth plans
    relying more heavily on operating income rather
    than debt to expand investments?
  • Will we be able to keep up with the financially
    strongest organizations in our market if the
    technology arm's race continues post recession?
  • Are we prepared for major changes in payment
    incentives? How do we know?
  • Source Advisory Board analysis.
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