Health Care R(r)eform. Outline Setting the Stage Rational for Reform Access and Reform The Economics of Exchanges/Marketplaces Looking into 2015 and beyond

Health Care R(r)eform

Outline Setting the Stage Rational for Reform Access and Reform The Economics of Exchanges/Marketplaces Looking into 2015 and beyond

The Goals: Access Cost Quality Economists have assumed that you cant improve one area without harming at least one of the others Setting the Stage for Reform Value

Access Nonelderly Americans Source of Health Insurance Coverage, 2011 People (millions)Percentage of Population Total Population266.4100% Private163.862% Employment-Based148.756% Individual Market15.16% Public54.721% Uninsured47.918%

Cost/Quality The average value of medical advance is very high The average 45-year-old will spend $30,000 more on cardiovascular disease care than the equivalent person did in 1950 He/she will live another 3 years because of this care We have spent a lot, but have gotten a lot more Most estimates suggest that 20 to 30 percent of medical spending could be eliminated with no adverse effects on patient outcomes

Cost/Quality Beyond A is unambiguous waste Between C and A could be waste if benefits

>$94,200 for a family of four; >400% of FPL Job-based coverage, or Full-cost coverage in the exchange $70,650-$94,200; 300-400% of FPL Job-based coverage, or Subsidized exchange coverage: premiums capped at 9.5% of income $47,100-$70,650; 200-300% of FPL Job-based coverage, or Subsidized exchange coverage: premiums capped at 6.3 9.5% of income $31,322-$47,100; 133-200% of FPL CHIP Job-based coverage, or Subsidized exchange coverage: premiums capped at 3% - 6.3% of income

>$94,200 for a family of four; >400% of FPL Job-based coverage, or Full-cost coverage in the exchange $70,650-$94,200; 300-400% of FPL Job-based coverage, or Subsidized exchange coverage: premiums capped at 9.5% of income $47,100-$70,650; 200-300% of FPL Job-based coverage, or Subsidized exchange coverage: premiums capped at 6.3 9.5% of income $31,322-$47,100; 133-200% of FPL CHIP Job-based coverage, or Subsidized exchange coverage: premiums capped at 2% - 6.3% of income

Source: Centers for Medicare and Medicaid Services; Health Care Advisory Board interviews and analysis. BPCI 1 Participation by State Over 6000 Providers Participating in BPCI 1 50-100 providers 100-200 providers 200-300 providers >300 providers August 2014 1)Bundled Payments for Care Improvement.

Number of ACOs Continues to Grow Source: Oliver Wyman, ACO Update: Accountable Care at a Tipping Point, April 2014; Leavitt Partners, Growth and Dispersion of ACOs, June 2014; Marketing and Planning Leadership Council interviews and analysis. Total Number of Operating ACOs May 2014 Widening Reach of ACOs 1 67% Portion of U.S. population living in a primary care service area with an ACO 17% Portion of U.S. population treated by an ACO 5.3M Medicare FFS beneficiaries treated by an ACO MSSP CohortPrivate Sector ACOs ACOs without announced contracts Pioneer ACO Model Total Private & Public ACOs 1)As of April 2014.

Where the Medicare ACOs Are 23 Pioneer and 343 Shared Savings Program ACOs Source: Centers for Medicare and Medicaid Services; Health Care Advisory Board interviews and analysis. April 2014 Shared Savings ACOs 2013 Cohort Shared Savings ACOs 2014 CohortShared Savings ACOs 2012 Cohort Pioneer ACOs

Is all this stuff going to work?

What is happening in the Provider Market?

Modest Growth Anticipated for the Near Term Inpatient and Hospital Based Outpatient Volume Projections Inpatient Volume, CAGR 1 2013-2018 Hospital-Based Outpatient Volume, CAGR 1 2013-2018 Source: Advisory Board Inpatient and Outpatient Market Estimators; Advisory Board research and analysis. 1)Compound Annual Growth Rate (2.3%) 3.1%

Volumes Continuing to Shift Outpatient 59 Source: Report to the Congress: Medicare Payment Policy, MedPAC, March 2014, available at: www.medpac.gov; Marketing and Planning Leadership Council interviews and analysis.www.medpac.gov 1)Outpatient services represent entire market regardless of site of service (includes hospital-based settings, ASCs, other freestanding providers and physician offices) Medicare Volume Growth Cumulative Percent Change All Payer Volume Growth Projections 1 2013-2018 28.5% (12.6%) 20062012 Cardiac Services Vascular Services Orthopedics Neurosurgery

Source: CMS, 2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, May 31, 2013, available at: http://downloads.cms.gov/files/TR2013.pdf; Health Care Advisory Board interviews and analysis. http://downloads.cms.gov/files/TR2013.pdf Medicare to Become Majority of Volume by 2022 Projected Number of Medicare Beneficiaries Millions of Beneficiaries Average Inpatient Case Mix By Volume n = 785 Hospitals Medicare Medicaid Commercial Self-Pay 20142016201820202022

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; annual reductions rounded. 2)Disproportionate Share Hospital. Medicare FFS Payment Cuts Continue ACAs Medicare Fee-for-Service Payment Cuts Reductions to Annual Payment Rate Increases 1 $415B in total fee-for-service cuts, 2013-2022 $260B Hospital payment rate cuts, 2013-2022 $56B Reduced Medicare and Medicaid DSH 2 payments, 2013-2022 $151B Reduced Medicare payments due to sequestration and 2013 budget bill

Mergers and Acquisitions Continue to Rise Source: AHA Hospital Fast Facts, available at www.aha.org; GE Capital Survey, available at: www.gehealthcarefinance.com; Kaufman Hall, Number of Hospital Transactions Grew in 2013, available at: www.kaufmanhall.com; Advisory Board interviews and analysis. 1)September 2013. Hospital Mergers and Acquisitions M&A Plans for the Next 12 Months 1 Number of Hospitals Part of a Health System 2000-2012 n=189 No M&A Activity Planned Planning to Pursue M&A Within the Next 12 Months

New Partnerships Aim at Integration Without M&A Partnerships and Affiliations On the Rise New Hanover Regional Medical Center, Wilmington Health, BCBSNC agree to accountable care alliance Medium-sized academic medical center partners with smaller rival to fill cath lab service deficiencies Large academic medical center signs preliminary partnership agreement with six rival hospitals to better compete with bigger systems Source: The Advisory Board Company, Cardiovascular Regionalization and Network Strategy, Washington, DC; Duke-Lifepoint Healthcare, Duke University Health System and LifePoint Hospitals Partner to Create Innovative Options for Community Hospitals, available at: http://www.dlphealthcare.com, accessed May 3, 2011; Accountable Care Alliance, Omaha, NE; http://www.accountablecarealliance.com/partners/; Crosby J, HealthPartners, Allina form a 'lab' for health reform, StarTribune, available at http://www.startribune.com/business/133126273.html; accessed November 5 th, 2011; Marketing and Planning Leadership Council interviews and analysis. Baylor, CHI form community hospital joint venture to explore joint affiliation options Allina and HealthPartners affiliate to create a testing lab for accountable care Large medical center agrees to sell CON- approved open-heart surgery suite to competitor Growth Goals for Partnerships Ambulatory footprint Access to new regions New clinical program Brand equity

Primary Care: A Growing Network of Immediate Access Choices Markets Responding to Unmet Needs Source: Mehrota A et al, "Visits To Retail Clinics Grew Fourfold From 2007 To 2009, Although Their Share Of Overall Outpatient Visits Remains Low," Health Affairs, August 2012; Health Care Advisory Board interviews and analysis. Traditional Access Points Consumer- Oriented Access Points Retail Clinic Urgent Care Center Virtual Visit Primary Care Office Low AcuityHigh Acuity Emergency Department Consumer-Oriented Service Delivery Sites Filling the Gap Driving Provider Questions: Should we partner to establish retail clinics? Should we build or expand our urgent care footprint? Is virtual care something that we should provide? When should we enter into partnerships to meet patient demands?

Major Opportunity to Shift Primary Care Volumes Redistributing Non-emergent Care to Appropriate Lowest-Acuity Sites Source: CDC/NCHS, "National Ambulatory Medical Care Survey, National Hospital Ambulatory Medical Care Survey," 2009-2010; Primary Care Physician Shortages Could be Eliminated Through Use of Teams, Nonphysicians, and Electronic Communication, Health Affairs 32:1. Jan 2013. Health Care Advisory Board interviews and analysis. Annual Visits to PCPs Annual ED Visits Visits Eligible for NP-Led Care 103M 47M 132M Non-urgent ED Visits Shifted to Other Care Sites 573M 18% of PCP visits could be handled by NPs at convenient care sites Non-urgent ED visits could be treated at urgent care, retail or primary care Visits At Risk of Shifting to Other Sites of Care

Purchaser Behavior

Particularly Severe for Out-of-Network Care Source: Kaiser Family Foundation and Health Research & Educations Trust, Employer Health Benefits 2013 Annual Survey, August 2013; PwC, Medical Cost Trends: Behind the Numbers 2014, June 2013, available at: www.pwc.com; Health Care Advisory Board interviews and analysis. www.pwc.com Employer Shifting Risk by Increasing Cost-Sharing Average In- and Out-of-Network Deductibles for Group Plans n = 1,100 employers Percent of Covered Workers Enrolled in a Plan with a $1,000+ Deductible by Firm Size Single Coverage

Payers Responding to Anticipated Premium Sensitivity Source: Gottleib S, Hard Data on Trouble Youll Have Finding Doctors in Obamacare, Forbes, March 8, 2014, www.forbes.com; McKinsey & Company, Hospital Networks: Configurations on the Exchange and Their Impact on Premiums, December 2013; Medical Group Strategy Council interviews and analysis. www.forbes.com Public Exchange Plans Mainly Narrow Network Majority of Public Exchange Plans Exclude >30% of Largest Hospitals 20 Urban Markets, December 2013 Excludes 30% of 20 largest hospitals Ultra-Narrow Narrow Broad Excludes 70% of 20 largest hospitals

Will Employers Maintain Coverage, and How? Employers Traditional Employer Coverage Eroding ActivationAbdication Convert to Self-Funding Pros: Close control over network design Exemption from minimum benefits requirements Cons: Greater financial risk Network assembly challenging Shift to Private Exchange Pros: Responsiveness to employee preference Predictable, defined contributions Cons: Disruption to benefit design Risk employees may underinsure Spectrum of Options for Controlling Health Benefits Expense Drop Coverage Pros: Escape from cycle of rising premium costs Cons: Employer mandate penalty Labor market disadvantage Source: Health Care Advisory Board interviews and analysis.

Low-Wage Employers Most Active Today, but Skilled Industries in the Wings Source: Accenture, Are You Ready? Private Health Insurance Exchanges are Looming; privatehealthexchange.com; Health Care Advisory Board interviews and analysis. Huge Growth Forecast for Private Exchanges Potential Growth Path for Private Exchange Enrollment Prominent Employers Using Private Exchanges For Active Employees:For Retirees: (Medicare Advantage, Medigap plans) Private exchange operators as of October 2014 172

Source: Gabel JR et al., Small Employer Perspectives On The Affordable Care Acts Premiums, SHOP Exchanges, And Self-Insurance, Health Affairs, 32(11): 2032-39; Health Care Advisory Board interviews and analysis. Self-Funding Strategies Steadily Gaining Ground ACA Benefits Standards Avoidable Through Self-Funding Modified Community Rating Essential Health Benefits Guaranteed Issue and Renewability Medical Loss Ratio Requirements Percentage of Covered Workers in Self-Funded Plans

The Consumer

Catalyzing a Shift in Network Demands Source: Health Care Advisory Board interviews and analysis. Market Forces Turning Patients into Consumers Traditional MarketRetail Market Growing number of buyers 1 Proliferation of product options 2 Increased transparency 3 Reduced switching costs 4 Greater consumer cost exposure 5 Passive employer, price-insulated employee Activist employer, price-sensitive individual Broad, open networksNarrow, custom networks No platform for apples-to- apples plan comparison Clear plan comparison on exchange platforms Disruptive for employers to change benefit options Easy for individuals to switch plans annually Constant employee premium contribution, low deductibles Variable individual premium contribution, high deductibles Characteristics of a Traditional vs. Retail Market 73

Patient Experience Vital For Securing Purchaser Choice Year Over Year Source: Health Care Advisory Board interviews and analysis. Welcome to the Renewals Business Day 1 Day 365 Care Decision Network Selection and Ongoing Experience Care Decision Clinical interactions represent repeated opportunities to reinforce patient preference through superior experience Annual network selection in fluid insurance market implies consistent reevaluation of network performance Patient Experience 74

Conclusion Not much formally in the ACA to bend the cost curve Health (r)eform the market experimenting with alternative financing models Provider driven? Give providers incentives to keep people healthy ACOs, Population Health Management, etc. Give providers incentives for price competition Narrow Networks Consumer driven? Give consumers incentives to stay healthy Health savings accounts, technology, entrepreneurism.

Documents

Health Care R(r)eform. Outline Setting the Stage Rational for Reform Access and Reform The Economics of Exchanges/Marketplaces Looking into 2015 and beyond