Health Care Advisory Board I. The Emerging Era of Choice
Restructuring Health System Strategy for the Retail Revolution II.
The New Network Advantage Assembling the Scale, Scope, and Assets
Needed to Secure Profitable Growth Slide 2 2014 The Advisory Board
Company advisory.com Presentation for Carolinas Healthcare November
6, 2014 Slide 3 LEGAL CAVEAT The Advisory Board Company has made
efforts to verify the accuracy of the information it provides to
members. This report relies on data obtained from many sources,
however, and The Advisory Board Company cannot guarantee the
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In addition, The Advisory Board Company is not in the business of
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Board Company is not affiliated with any such company. Health Care
Advisory Board Project Director Ben Umansky Contributing
Consultants Yulan Egan Nick Bartz Tom Liu Design Consultant Kevin
Reardon Slide 4 IMPORTANT: Please read the following. The Advisory
Board Company has prepared this report for the exclusive use of its
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The Advisory Board Company. Slide 5 Health Care Advisory Board The
Emerging Era of Choice Restructuring Health System Strategy for the
Retail Revolution Slide 6 2014 The Advisory Board Company
advisory.com 28603A 6 Cord Cutters and Cord Nevers Giving Up Broad
Networks Source: Experian Marketing Services, Cross-Device Video
Analysis, April 17, 2014, available at: www.experian.com; Manjoo F,
Comcast vs. the Cord Cutters, The New York Times, February 15,
2014, available at: www.nytimes.com; Health Care Advisory Board
interviews and analysis.www.experian.comwww.nytimes.com An Industry
Built on a House of Cards Paying for More Than You Use This is the
battle hymn of the cord cutter: You are paying too much for
television, and you arent watching most of what youre paying for.
Farhad Manjoo, The New York Times U.S. Households With Internet But
No Cable, 2013 6.5% U.S. Adults Age 18-34 With Netflix or Hulu But
No Cable, 2013 18.1% Slide 7 2014 The Advisory Board Company
advisory.com 28603A 7 Most Hospitals Staying Afloat Through
Cross-Subsidization Source: American Hospital Association,
Trendwatch Chartbook 2014, available at: www.aha.org; Health Care
Advisory Board interviews and analysis.www.aha.org Revisiting a
Tenuous Business Model Hospital Payment-to-Cost Ratio, Private
Payer, 2012 149% Hospital Payment-to-Cost Ratio, Medicare, 2012 86%
Above-cost pricing Robust fee-for-service volume growth Steady
price growth Only one component of our total business Commercial
InsurancePublic Payers Below CostAbove Cost Traditional Hospital
Cross-Subsidy Slide 8 2014 The Advisory Board Company advisory.com
28603A 8 Entrenched Payers, Insulated Patients Unlikely to Upset
Status Quo Source: Health Care Advisory Board interviews and
analysis. Cross-Subsidy Depends on Inefficient Markets Established
Provider Commercial pricing growth steady Network inclusion likely
for most plans Patient volume depends largely on referral patterns
Entrenched Payer High employer switching costs impede competition
Handful of broad networks satisfy majority of passive employers
Excess cost growth easily passed on to employers through premium
increases Price-Insulated Patient Open access to broad provider
network standard Modest cost-sharing obscures true prices Physician
recommendation dominates point-of-care decisionmaking Assumptions
Underlying Provider Growth Strategy Slide 9 2014 The Advisory Board
Company advisory.com 28603A 9 Four Years Post-Reform, New Paradigm
Finally Becoming Clear Source: Health Care Advisory Board
interviews and analysis. The Retail Revolution Medicare Reforms and
the Transition to Risk Coverage Expansion and the Rise of
Individual Insurance Activist Employers and the Primacy of Value 1
2 3 Major Themes Reshaping Provider Strategy Slide 10 2014 The
Advisory Board Company advisory.com 28603A 10 Medicare Payment Cuts
Becoming the Norm Medicare Reforms and the Transition to Risk
Source: CBO, Letter to the Honorable John Boehner Providing an
Estimate for H.R.6079, The Repeal of Obamacare Act, July 24, 2012;
CBO, Estimated Impact of Automatic Budget Enforcement Procedures
Specified in the Budget Control Act, September 12, 2011; CBO,
Bipartisan Budget Act of 2013, December 11, 2013, all available at:
www.cbo.gov; Health Care Advisory Board interviews and
analysis.www.cbo.gov 1)Includes hospital, skilled nursing facility,
hospice, and home health services; excludes physician services.
2)Disproportionate Share Hospital. Public-Payer Reimbursement Still
in the Crosshairs ACAs Medicare Fee-for-Service Payment Cuts
Reductions to Annual Payment Rate Increases 1 $260B Hospital
payment rate cuts, 2013-2022 Office of the Actuary, CMS
Notwithstanding recent favorable developments Medicare still faces
a substantial financial shortfall that will need to be addressed
with further legislation Not the End of the Story $56B$151B Reduced
Medicare and Medicaid DSH 2 payments, 2013-2022 Reduced Medicare
payments due to sequestration and 2013 budget bill Slide 11 2014
The Advisory Board Company advisory.com 28603A 11 More Mandatory
Risk On the Horizon Source: The Advisory Board Company, Mortality
Rates Are Only One of Many VBP Changes to Come, December 4, 2013,
available at: www.advisory.com; CMS, Request for Information on
Specialty Practitioner Payment Model Opportunities, February 2014,
available at: www.innovation.coms.gov; Health Care Advisory Board
interviews and analysis.www.advisory.com www.innovation.coms.gov
1)Includes Value-Based Purchasing Program, Hospital Readmissions
Reduction Program, and Hospital-Acquired Conditions Program. Steady
Shift Toward Risk-Based Payment Clinical Process Patient Experience
Outcomes of Care Efficiency Medicare Value-Based Purchasing Program
Performance Criteria 6% Other Mandatory Risk Programs
Hospital-Acquired Condition Penalties Readmission Penalties No
Trivial Thing Weight in Total Performance Score Medicare revenue at
risk from mandatory pay-for-performance programs 2, FY 2017 Slide
12 2014 The Advisory Board Company advisory.com 28603A 12 Dismal
Outlook for Fee-for-Service Motivating a Look at Risk-Based Options
Source: CMS, More Partnerships Between Doctors and Hospitals
Strengthen Coordinated Care for Medicare Beneficiaries, December
23, 2013; Health Care Advisory Board interviews and analysis. More
Providers Taking the Hint Medicare ACO Program Entrants 1 in 10
Medicare FFS beneficiaries attributed to an ACO 2012 MSSP 1 Cohorts
2013 MSSP Cohort 2012 Pioneer ACO Model Total 2014 MSSP Cohort The
Broader Picture 20.5M Americans enrolled in or attributed to
Medicare, Medicaid, or commercial ACOs 46M-52M Patients treated by
ACOs as of April, 2014 626 Total ACO count, including commercial
and Medicaid ACOs, May 2014 1)Medicare Shared Savings Program Slide
13 2014 The Advisory Board Company advisory.com 28603A 13
Performance, Persistence Closely Correlated Source: Centers for
Medicare and Medicaid Services,
http://innovation.cms.gov/Files/x/PioneerACO-Fncl-PY1PY2.pdf; San
Diego-Based Sharp HealthCare Pulls Out of Pioneer ACO Program,
California Healthline, August 28, 2014; Health Care Advisory Board
interviews and analysis. 1)Dropped out after second year;
second-year performance not reported Some Pioneers Changing Course
Pioneer ACO Performance First-year performance Second-year
performance Dropped out after program year Gross Savings as
Percentage of Benchmark 1 -5.6% (min) 7.1% (max) Alison Fleury, CEO
Sharp HealthCare ACO The model was financially detrimentaldespite
favorable underlying utilization and quality performance Slide 14
2014 The Advisory Board Company advisory.com 28603A 14 Pending
Program Updates Crucial for Future Participation Source: Centers
for Medicare and Medicaid Services, New Affordable Care Act tools
and payment models deliver $372 million in savings, improve care,
September 16, 2014; Health Care Advisory Board interviews and
analysis. 1)Includes one participants $4M repayment of shared
losses Medicare Shared Savings Program a Mixed Bag Medicare Shared
Savings Program ACO Performance First Performance Year $297M Shared
savings earned by MSSP ACOs in first performance year 1 Held
Spending Below Benchmark, Earned Shared Savings Payment Held
Spending Below Benchmark, but Did Not Earn Shared Savings Did Not
Hold Spending Below Benchmark Will ACOs have any ability to prevent
network leakage? Issues to Watch for in Updated Regulations Will
second-term ACOs really have to bear downside risk? Will
beneficiaries be attributed to ACOs prospectively? Will benchmarks
be calculated differently? Will the share of savings paid to ACOs
be higher? Slide 15 2014 The Advisory Board Company advisory.com
28603A 15 Policymakers and (Some) Providers Angling for
Higher-Octane Options Source: H.R. 5558,
http://welch.house.gov/uploads/ACO%20Bill%20Text.pdf; Health Care
Advisory Board interviews and analysis. Transition to Risk Hardly
Stalled The Bigger Question: What Should Medicare ACO Programs Be?
Training grounds for other risk models? (e.g., Medicare Advantage)
Adaptive environments involving progressively more risk? Permanent
middle grounds between fee-for-service, capitation? Bill in Brief:
The ACO Improvement Act Bipartisan bill (H.R. 5558) introduced by
Representatives Diane Black (R- TN) and Peter Welch (D-VT) Key
Features ACOs would receive capitated payments, not shared-savings
adjustments Patients would proactively select a primary care
provider rather than be retroactively attributed ACOs could
discount primary care services to encourage network loyalty Slide
16 2014 The Advisory Board Company advisory.com 28603A 16 Shift
Signals Individualization of the Medicare Market Source: Jacobson G
et al., Projecting Medicare Advantage Enrollment: Expect the
Unexpected? Kaiser Family Foundation, June 12, 2013, available at:
www.kff.org; Hollander C, CMS to Increase Medicare Advantage Pay
Rate By 0.4%, ModernHealthcare, April 7, 2014, available at:
www.modernhealthcare.com; Health Care Advisory Board interviews and
analysis.www.kff.org www.modernhealthcare.com Medicare Advantage
Gaining Momentum Projected Medicare Advantage Enrollment 29.5% of
Medicare beneficiaries 10.4M 19.0M 20092020 Unambiguous incentive
for population health management Provider Benefits Over Shared
Savings Models Greater provider control over network integrity Less
frequent patient churn Slide 17 2014 The Advisory Board Company
advisory.com 28603A 17 But Every Silver Lining Has Its Cloud
Coverage Expansion and the Rise of Individualized Insurance Source:
Gallup, In U.S., Uninsured Rate Holds at 13.4%,
http://www.gallup.com/poll/178100/uninsured-rate-holds.aspx;
Department of Health and Human Services, Impact of Insurance
Expansion on Hospital Uncompensated Care Costs in 2014,
http://aspe.hhs.gov/health/reports/2014/UncompensatedCare/ib_UncompensatedCare.pdf;
Health Care Advisory Board interviews and analysis. ACA (and
Recovery) Making a Dent in Uninsurance 18.0% (highest on record)
13.4% (lowest on record) 2013 Q32014 Q3 Percentage of U.S. Adults
Without Health Insurance Employer-sponsored coverage grows Medicaid
expansion begins Insurance exchanges launch $5.7B Reduction in
uncompensated care, 2014 A Bargain Still Unbalanced $14B
ACA-related reductions in Medicare fee-for-service payment, 2014
vs. Slide 18 2014 The Advisory Board Company advisory.com 28603A 18
23 States Still Foregoing Expansion Medicaid Expansion Source: The
Advisory Board Company, Where the States Stand on Medicaid
Expansion, September 4, 2014, available at: www.advisory.com; CMS,
Medicaid and CHIP: July 2014 Monthly Applications, Eligibility
Determinations and Enrollment Report, September 22 2014; HHS,
Health Insurance Marketplace: Summary Enrollment Report for the
Initial Annual Open Enrollment Period, May 1, 2014;
PricewaterhouseCoopers, Medicaid 2.0: Health System Haves and Have
Nots, Health Care Advisory Board interviews and
analysis.www.advisory.com 1)Estimate- does not include CT or ME.
2)Childrens Health Insurance Program. Medicaid Expansion
Contentiousand Consequential Increase in Medicaid, CHIP 2
enrollment, October 2013-July 2014 8M 1 Advisory Board estimate of
impact of Medicaid expansion on typical hospitals 10-year operating
margin projection 2.4% State Participation in Medicaid Expansion
ParticipatingNot Currently Participating As of October 2014 5%
Average Medicaid enrollment increase across non-expansion states
PricewaterhouseCoopers For-profit health systemsreport far better
financial returns through the first half of the year than expected,
owed in large part to expanded Medicaid Financial Impact Slide 19
2014 The Advisory Board Company advisory.com 28603A 19
Responsibility Migrating to Payers, Providers, Patients Source:
Health Care Advisory Board interviews and analysis. Expanding or
Not, States Pushing Medicaid Innovation Provider-Led Care
Management E.g., Oregons Coordinated Care Organizations
Exchange-Based Privatization E.g., Arkansas Private Option Full
Medicaid Managed Care E.g., Floridas Statewide Medicaid Managed
Care Program Traditional State- Run Program Competing Philosophies
on Medicaid Reform Slide 20 2014 The Advisory Board Company
advisory.com 28603A 20 Exchange-Based Medicaid Drawing Interest,
But Broader Uptake Uncertain Source: Kaiser Family Foundation,
Medicaid Expansion in Arkansas, October 8, 2014; Government
Accountability Office, Medicaid Demonstrations: HHSs Approval
Process for Arkansass Medicaid Expansion Waiver Raises Cost
Concerns, August 8, 2014; Health Care Advisory Board interviews and
analysis. Arkansas Turning to Private Market Arkansas residents
eligible for expanded Medicaid coverage select plans on exchange
Arkansass Private Option Using federal matching funds, State pays
full cost of silver plan; beneficiary pays no premium Beneficiary
holds private insurance; cost sharing based on existing Medicaid
rules Program Likely Not Budget-Neutral 1 2 3 $778M Increase in
cost of expansion under exchange system relative to GAO estimate of
cost under traditional Medicaid CMS Wary of Other Modifications
Pennsylvania application for similar waiver denied over inclusion
of work requirements Arkansas proposal to require individual health
savings account contributions still pending Slide 21 2014 The
Advisory Board Company advisory.com 28603A 21 Aggregate Numbers in
Line With Expectations; Enrollee Mix Older Insurance Exchanges
Source: HHS, Health Insurance Marketplace: Summary Enrollment
Report for the Initial Annual Open Enrollment Period, May 1, 2014;
Cheney K and Haberkorn J, Obama: 8 Million Enrolled Under ACA,
Politico, April 17, 2014, available at: www.politico.com; Cheney K
and Norman B, Insurers See Brighter Obamacare Skies, Politico,
April 15, 2014, available at: www.politico.com; Health Care
Advisory Board interviews and analysis.www.politico.com 1)Numbers
do not add precisely due to rounding. One Year In, Insurance
Exchanges Generally on Track Initial Public Exchange Enrollment 1
2013-2014 7.0M (Original CBO Projection) 91% Of enrollees still
enrolled as of September 2014 25M Projected exchange enrollment by
2018 Enrollees aged 18-34 28% Slide 22 2014 The Advisory Board
Company advisory.com 28603A 22 Source: HHS, Health Insurance
Marketplace: Summary Enrollment Report for the Initial Annual Open
Enrollment Period, May 1, 2014; Health Care Advisory Board
interviews and analysis. 1)Data from federally-facilitated
exchanges only. Individuals Gravitating Toward Leaner Plans Bronze
Level 1: Choice of Metal Tier Gold Platinum Catastrophic Silver
Premium Sensitivity Manifest at Two Levels Factors Influencing
Metal Level Deductible Copays Out-of-Pocket Maximum Non-Essential
Services Covered Network Composition Level 2: Plan Choice Within
Metal Tier Any Other Plan Lowest- Cost Plan Second-Lowest-Cost Plan
All Metal Levels 1 Scope of Non-Essential Benefits Negotiated
Payment Rates to Providers Utilization Patterns, Trends Premium
Levers Beyond Benefit Design Negotiated Rates Slide 23 2014 The
Advisory Board Company advisory.com 28603A 23 Aggressive Cost
Sharing Potentially Troublesome for Provider Strategy Source:
Breakaway Policy Strategies, Eight Million and Counting: A Deeper
Look at Premiums, Cost Sharing and Benefit Design in the New Health
Insurance Marketplaces, May 2014; eHealth, Health Insurance Price
Index Report for Open Enrollment and Q1 2014, May 2014; Health Care
Advisory Board interviews and analysis. High Deductibles Dominating
Exchange Markets $6,000+ $3,000-$5,999 Individual Deductibles
Offered On Public Exchanges 2014 Median $1,000- $2,999 2014 The
Advisory Board Company advisory.com 28603A 125 Promote Continuous
Improvement Through Focused Partnership Preferred Networks Prove
Ability to Reduce Total Cost Reducing Hospitalizations at OSFs
Preferred Network Heart Failure Rehospitalization Rate All-Cause
Readmission Rate Reducing Readmissions and ED Visits at North
Shore-LIJs Affiliates Readmissions From Affiliated SNFs Reduction
in ED visits from affiliated SNFs >50% Source: Healthcare
Financial Management Association, Bridging Acute and Post-Acute
Care, available at:
http://www.hfma.org/acutepostacute/#120_Days_to_Launching_a_Continuing_Care_Network_for_Post-
Acute_Care, accessed May 3, 2014; Health Care Advisory Board
interviews and analysis. Slide 126 2014 The Advisory Board Company
advisory.com 28603A 126 Source: Health Care Advisory Board
interviews and analysis. 1)Group Purchasing Organizations.
2)Post-Acute Care. Mutual Benefit Necessary to Create Incentive
Areas of Mutual Benefit Access to Operational Resources Health
systems may provide access to functionalities like their GPOs 1 or
IT systems that PAC 2 providers would be unable to access on their
own Data Transparency Regular data reports from PAC partners ensure
that performance continues to meet high-bar; highlights areas where
additional support may be needed Shared Staff PAC providers may be
able to expand hospital capacity by taking on complex patients;
health systems may send staff to monitor high-risk patients at PAC
sites Shared Care Pathways and Training Health systems and PAC
providers have different areas of expertise and may share protocols
and training resources to improve network as a whole Key Health
System BenefitKey PAC Benefit Critical Elements of Preferred PAC
Network Slide 127 2014 The Advisory Board Company advisory.com
28603A 127 Reducing Total Costs Through Population Health Source:
Health Care Advisory Board interviews and analysis. Key Takeaways
Alignment models that allow flexibility in partner choice create
inherent performance incentives Joint contracting networks,
alliances, and ACOs offer greater ability to switch out
low-performing partners than full-asset mergers Standardizing care
according to best practice requires tight financial alignment
Though looser collaborations may allow members to pinpoint best
practices, standardizing care according to best practice will
require partnership models that bring tighter financial alignment
between partners Adding more partners reduces financial burden, but
also any potential reward Adding more partners to population health
efforts can lower financial costs, and improve care management, but
it can also spreads potential savings across greater number of
organizations Easier to contract for risk through single entity
Difficulties in analyzing and valuing risk are exacerbated when
multiple parties are negotiating and signing separate contracts
with payers Slide 128 2014 The Advisory Board Company advisory.com
28603A 128 Source: Health Care Advisory Board interviews and
analysis. Weighing the Models Model Jointly-Financed Infrastructure
Investment Continuum- Wide Data Transparency Network- Enabled
Performance Standards Comments Merger or Acquisition Long
development time for mergers lowers flexibility of partner
selection, though full financial alignment allows greater clinical
alignment Clinically- Integrated Hospital Network Investment in CI
tends to focus on joint contracting for fee-for-service contracts,
rather than population health management Accountable Care
Organization Though financial incentives are aligned to support
population health coordination, lack of strategic alignment
precludes more helpful consolidation of resources Regional
Collaborative Though number of partners may support greater
economies of knowledge, little incentive to collaborate on
population health Clinical Affiliation Agreement May incentivize
collaboration on specific clinical objectives, but broader
alignment vehicle necessary to facilitate population health
coordination Slide 129 2014 The Advisory Board Company advisory.com
28603A 129 Source: Health Care Advisory Board interviews and
analysis. Ideal Partners Common Patient Population Organizations
that share a patient population benefit when they partner to
coordinate transitions and population health, whether they are
working under fee for service or risk- arrangements Complementary
Population Health Assets All partnerships should involve some
division of accountability, or efficient allocation of resources.
Partnerships that bring together complementary assets can reduce
new expenditures, minimize the need to rationalize existing assets
Access to Claims Data Provider organizations that have access to
patient claims data, either through an owned health plan, or an
existing relationship with a payer, represent ideal partners in
population health Organizations should ensure that they negotiate
access to claims data when setting up any risk- based arrangement
with a commercial payer Three Characteristics of the Ideal Partner
Slide 130 2014 The Advisory Board Company advisory.com 130 2 3 1
Road Map Charting an Intentional Corporate Strategy Leverage Beyond
Price The New Network Advantage Slide 131 2014 The Advisory Board
Company advisory.com 28603A 131 Leverage Beyond Price the Key to
Success Source: Health Care Advisory Board interviews and analysis.
Partnerships Must Drive Market Advantage Winning Preference Through
Clinical Scope and Geographic Reach Lowering Unit Prices Through
Operational Scale Reducing Total Costs Through Population Health
Cost Advantage IIIIII Product Advantage Degree of Market Advantage
Time to Maximum Benefit Driving Network Assembly Appealing to
Network Assemblers Leveraging Low-Price Care Sites Slimming
Underlying Cost Structures Overcoming Financial Barriers Breaking
Down Information Silos Hardwiring Mutual Accountability Slide 132
2014 The Advisory Board Company advisory.com 28603A 132 Source:
Health Care Advisory Board interviews and analysis. Model Choice No
Guarantee of Success Legal Ability to Cooperate Models like
M&A, clinical integration, and shared risk provide legal
framework that enables collaboration Shared Identity Partnership
creates unified identify, whether through formal legal structure or
informal collaboration Models Set Ground Rules Cultural Alignment
Identity may be in name-only; true cultural alignment requires
robust communication plan, extensive training Stakeholder Buy-In
Governance structure no guarantee of buy-in from key stakeholders
such as physicians and board members Integration Planning Legal
framework only the enabler; benefits of collaboration only realized
through integration Alignment of Governance Partnership creates
formal governance structure; leaders may be new or pulled from
partner organizations...But Underlying Challenges Remain Slide 133
2014 The Advisory Board Company advisory.com 28603A 133 Success
Depends on Focused, Intentional Strategy and Execution Network
Strategy Must Be More Than Just a Hobby Integration as Core
Competency Scientific Approach to Cultural Fit Transactional
DisciplineClarity of PurposeProfessionally Managed Pipeline
Intentional corporate strategy starts with well-formed, clearly
articulated organizational purpose Partnership function should be
an organized, routine process, not an episodic activity Robust due
diligence process prevents partnership for the sake of partnership
Cultural affinities and possible contradictions explored in
parallel to financial due diligence Integration planning begins
long before partnership is finalized and continuous indefinitely
through rigorous monitoring Five Characteristics of Intentional
Corporate Strategy 123 4 5 Source: Health Care Advisory Board
interviews and analysis. Slide 134 Slide 135 Slide 136 2445 M
Street NW I Washington DC 20037 P 202.266.5600 I F 202.266.5700
advisory.com
