1

Methodist Le Bonheur Healthcare

Memphis, TN

HFMA Capital Conference

Overview of Methodist Le Bonheur

• Currently operate 8 hospitals

• 6 in Shelby County TN

• 1 in Fayette County TN

• 1 in Desoto County MS - opened in Aug. 2013

• Joint venture partner with HealthSouth on 2 rehab

hospitals

• Rated A+ by S&P and A2 by Moody’s

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Overview of Methodist Le Bonheur

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• Key financial statistics

• Total assets - $2.0 billion

• Total operating revenue - $1.5 billion

• Cash and investments - $0.8 billion

• Long term debt - $0.6 billion

Market Dynamics

• High levels of uninsured and under insured

• Unemployment remains above national average at 8.4%

• % of households with income below $25k – 26%

• % of population covered by Medicaid – 26%

• % of population uninsured – 16%

• Impact on Methodist Le Bonheur in volume & total

losses

• Medicaid – 24% of volume with losses of $100 million

• Uninsured – 9% of volume with losses of $90 million

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Market Dynamics

• Very consolidated hospital market

• Methodist and Baptist have over 70% market share

• Tenet is a distant third

• Very consolidated payor market

• Cigna, United and Blue Cross largest plans with over

75% market share

• Steered managed care market with exclusivity –

plans have either Methodist or Baptist but not both

• Plans are actively considering excluding Tenet in

future contracts

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Market Dynamics

• Historically a fragmented physician market

• Majority of physicians in small group practices

• No large private multispecialty practice

• Most physician groups practiced at both Methodist and

Baptist

• Consolidation of physician market is occurring

• Majority of primary care, cardiology and oncology are in the

process of being employed or legally affiliating with hospitals

• Methodist and Baptist are the primary choices with Tenet a

distant third

• Le Bonheur has over 90% of pediatric subspecialists in

ULPS

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CRITTENDEN

COUNTY

FAYETTE COUNTY

TIPTON COUNTY

DESOTO

COUNTY

SOUTH SHELBY

CENTRAL

SHELBY

EAST

SHELBY

NORTH SHELBY

Major Hospitals

Methodist

Baptist

St. Francis / Tenet

Crittenden Memorial

Service Area Chart

Total PSA Population: 1.2 million

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Market Leader in Stable Market

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Market share should increase when 2013 data is available

Market Share Rising

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2005 2006 2007 2008 2009 2010 2011 2012

Methodist 39.4% 38.8% 37.2% 36.8% 37.3% 38.6% 39.9% 40.3%

HealthSouth 1.7% 1.6% 1.5% 1.5% 1.6% 1.6% 1.7% 1.8%

Baptist 31.6% 31.1% 32.8% 33.1% 33.3% 33.8% 33.7% 33.2%

Tenet/St Francis 14.1% 14.4% 14.3% 15.2% 15.1% 13.9% 13.6% 13.7%

The MED 10.6% 11.3% 11.4% 10.7% 9.8% 9.3% 8.5% 8.4%

Delta Medical 2.7% 2.8% 2.8% 2.7% 2.8% 2.7% 2.7% 2.6%

Managed Care Leader

Managed Care Covered Contract

Company Lives % Primary Provider(s) Expires

Cigna 250,000 44% Methodist, St. Francis 12/31/15

United 70,000 12% Methodist, St. Francis 6/30/15

Blue Select 65,000 12% Methodist, St. Francis 12/31/17

Blue Cross of AR 25,000 4% Methodist 10/31/14

Blue Preferred 40,000 7% Methodist, St. Francis, Baptist auto renewal

PHCS 10,000 2% Baptist, St. Francis

Aetna/Coventry 60,000 11% Baptist

Blue Cross of MS 25,000 4% Baptist

Humana 18,000 3% Baptist

Total 563,000 100%

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Data: Estimated Covered Lives provided by Plans

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Community Support Through Donations

Committed Funds:

• Le Bonheur Capital Campaign - $107 million

• Hospice Inpatient House - $8.6 million

• FedEx Family House - $7.0 million

• Center For Faith and Health - $2.5 million

• Sickle Cell Campaign - $1.6 million

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Community Support Through Donations

Foundations

Urban Child Institute

Assisi Foundation

Plough Foundation

Hyde Foundation

Children’s Foundation

Kemmons Wilson Found.

Cigna Foundation

First TN Foundation

Companies/Groups

FedEx (Comp & Execs)

AutoZone

Smith and Nephew

Canadian Nat Railroad

Le Bonheur Clubs

Methodist Associates

Methodist Physicians

Methodist Board

FedEx Employees

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Strategic Focus Areas

• Targeted growth

• Improve quality outcomes

• Improve service outcomes

• Implement patient and family centered care culture

• Maintain margins through implementation of

operational improvements

• Implement major fund raising campaigns

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Strategic Focus Areas

Targeted Growth:

• Physician alignment/employment

• Olive Branch hospital

• Continue to grow regional referrals at Children’s

hospital

• Leverage academic relationship

• Work with managed care partners to grow

market share and lower costs for employers

• Successfully execute insurance exchange

strategy 14

Physician Alignment

• Primary goal is to build tightly aligned multispecialty

group that will be successful in both the current fee

for service and future accountable care environments

• Long term plan is to combine private and academic

practices into single group

• Key factors considered are:

• Culture fit

• Efficient utilization with high quality outcomes

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Physician Alignment

Current employed/aligned physicians

• Employed adult primary care physicians- 75

• Employed specialists – 105 (Includes academic)

• Joint venture employed pediatric specialists with UT – 125

• PSA agreement with cancer physicians – 39

• Employed hospitalists - 24

• Employed physicians in minor med/urgent care clinics – 16

• Employed administrative (CMO’s, CMIO etc) - 9

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Physician Alignment

• Current losses on physician groups are exceeding

our original expectations due to payor mix declines

and operational issues (speed impact of EMR, lower

than expected volumes due to over expansion by all

Health systems, etc.)

• Plans are to focus on improving performance of

current aligned physicians and limit any new

transactions or increased employment into existing

groups

• Any new deals will have to be strategically significant

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Regional Growth Le Bonheur

• Continue to build programs of distinction with the

continued recruitment of nationally recognized physicians.

Key success areas have been neuro sciences, cardiology,

orthopedics, trauma, and respiratory.

• Expand outreach presence in key referral markets which

include Tupelo, MS, Jonesboro, AR, and Jackson,TN.

• Continue to improve clinic operations in Memphis to allow

immediate scheduling of all requested consults and follow

up care needs.

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Regional Growth Le Bonheur

West Tennessee-

Jackson Hub Arkansas-

Jonesboro Hub •Trauma Network

•Transport Strategy

•Subspecialty Clinics

•CME

•Strategic Networks and Alliances

•Telemedicine

Mississippi-

Tupelo Hub

•New Facility Presence for

Expanded Specialty Clinics

•Compete Head To Head with

Vandy

•Primary Pediatrics

•Telemedicine

•Formal Alliances with NMMC

NICU (ECHO, OPTHA)

Trauma

ED

MFM

Education

•Large Multispecialty Clinic

•Telemedicine

Managed Care Partnerships • Methodist does not want to develop its own insurance plan

• Methodist wants to partner with the strongest insurance plans

in the market to leverage the strengths of both parties and

avoid unnecessary and costly duplication

• To be successful we have to move from current fee for service

relationship that focuses primarily on price to a relationship that

focuses on cost effective/high quality/efficient care with shared

savings for reduced PMPM costs

• Key goal is to bend cost curve for employers and patients

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Managed Care Partnerships

• Working with our major plans on all of their product lines

which includes Commercial, Medicare Advantage, Exchange,

and TennCare

• Activities include medical home pilot projects, bundling

opportunities, information sharing and shared savings

payment models

• Actively working to develop new care models that provide

care in the lowest cost setting and eliminates unnecessary or

expensive care

• Most plans are in the process of implementing more

restrictive networks which will exclude both Tenet and Baptist

facilities and docs 21

Insurance Exchange

• Have contracted with both Blue Cross and Cigna

• Have contracted with both plans for rates that are near

commercial levels in exchange for:

• Narrow network that only includes Methodist and the Med

• Products can only be sold on the exchange and cannot be

sold as a commercial product to employers

• Working with both plans to have a focused strategy to

aggressively identify and sign up uninsured patients but

success has been very limited.

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Improve Quality Outcomes

• Key goal is to perform at top quartile nationally on all key

quality goals

• Goals are moving from process measures to outcome

measures

• Key goals include mortality, readmissions, patient harm

(wounds/hospital acquired infections/avoidable

injuries/etc) patient flow, and evidence-based care

process measures

• All results are reported on web site and impact bonuses

for all levels of management

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Improve Quality Outcomes

• Results remain strong for evidence-based care (process)

measures but opportunities exist for all others

• Very active Quality Committee of Board which reviews all

quality measures at each meeting along with detailed root

cause analysis of patient harm events that have occurred

in the past quarter

• Senior leaders along with Board members participate in

safety walk arounds at each hospital (these occur

weekly)

• Quality discussions carry equal weight as Finance at

Board meetings

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Improve Service Outcomes

Outcomes:

• HCAPS scores are highest in market and above national

and state averages. Achieved composite score of 78.3%

in 2013 which is similar to 2012 level.

• Associate engagement – utilize Moorhead for survey and

score improved from 4.22 in 2011 to 4.26 in 2012 to 4.32

in 2013. Methodist currently in the top decile of

Moorhead database.

• Turnover – 2013 performance at 9.9% which is lower

than the 2012 level of 10.8%.

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Patient and Family Centered Culture

• Primary goal is to have patient/family fully informed

and involved in all aspects of care

• Family councils established at each hospital and they

actively participate in key management meetings

including our System quarterly management meetings

• Involved families include those that had good and bad

experiences with their care

• Parents have been actively involved in all major

construction projects including new hospital at Le

Bonheur and Olive Branch along with all major

renovations

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Patient and Family Centered Culture

Other key successes:

• Open ICU’s at all hospitals

• Parents at Le Bonheur allowed to stay with child during

all aspects of care including pre-op areas, post-op

areas and in the surgery suite prior to anesthesia

being administered

• Bed side shift change reporting that includes input

from patient and family members

• Development of family faculty program where family

members educate staff members on issues important

to patients and families 27

Cancer Fund Raising Goals

• Ultimate goal of cancer campaign is to raise $35 to

$50 million

• Initial phase is to raise $16 million to support 8

designated institutes – raise $2 million for each

institute

• Fund raising effort being led by well respected

retired oncologist. He has assembled a strong

support team

• Expect quick success on initial phase

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Fund Raising Le Bonheur

• Plan is to build on success experienced in capital

campaign for new hospital

• Ultimate goal is raise $50 million to build an endowment

to allow Le Bonheur to:

• Continue to support recruitment of specialized

clinical and research talent

• Support growth of programs of distinction

• Support research efforts

• Provide funds to support Le Bonheur’s commitment

to treat all children regardless of ability to pay 29

Consistent Financial Performance

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2.7% 2.8%

4.6%

2.2%

3.1%

5.0%

4.4%

2.7%

3.5% 3.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Mar

gin

%

Operating Margin %

Consistent Financial Performance

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10.2% 10.3%

12.0%

9.4%

10.4%

11.8% 11.4% 11.4%

11.0% 10.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Mar

gin

%

EBITDA Margin %

Inpatient Volumes Increasing

in a Declining Market

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66,072

64,401 63,811

60,282 60,892

61,276 61,599

62,919 62,990 63,307

40,000

45,000

50,000

55,000

60,000

65,000

70,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Inpatient Discharge Trends

Outpatient Volumes Increasing

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33,298 34,218 34,931 34,658

37,107 38,149

41,378 45,418

60,438

65,450

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

65,000

70,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Outpatient Equivalent Disch Trends

Operating Costs Flattening

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% change 6.3% 5.5% 5.6% 10.9% 1.2% -2.1% 2.1% 1.0% 2.3% 1.9%

8,312

8,773

9,264

10,278 10,400 10,184

10,401 10,509 10,750

10,956

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Oper Expense Per Adjusted Discharge Excl Depreciation

Payment Rates Flattening

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% change 4.6% 5.7% 7.6% 7.8% 2.3% -0.5% 1.7% 1.0% 1.9% 1.7%

9,254

9,778

10,522

11,345 11,603 11,546

11,743 11,858 12,079

12,280

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

$11,000

$12,000

$13,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Total Revenue Per Adjusted Discharge Excludes Bad Debts

Strong Balance Sheet Methodist Healthcare

Summary of Historical and Projected Cash and Debt

DATA FOR GRAPH:

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Unrestricted Cash Debt Debt w/Leases

Le Bonheur

Merger

Exit

MS Market

Sell

West TN

Current Debt Structure 12/31/13

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• Outstanding Debt: $600 million

• Fixed: $330m

• Variable swapped to fixed: $270m

• Standby – expires Mar 2015 in process of renewing

• Swaps insured – no collateral posting

• Ultimate goal is to reduce swap exposure

• All new debt issued as traditional fixed

• Eliminate swaps & convert VRDBs to fixed

• Have ability to issue up to $150 million in new debt but will

only move forward if market conditions are appropriate on

both debt side and investment side.

Current Operating Investments

12/31/13

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• Operating investments - $814 million

• Short term highly liquid - $132m

• Long term diversified - $682m

• Allocation of long term assets 12/31/13:

• Capital appreciation (equity/hedge funds) - 46%

• Capital preservation (fixed income/real estate) - 54%

Operating Investments – LT Tier

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• LT goal: Reduce volatility & downside risk

• Move capital appreciation to 25%

• Move capital preservation to 75%

• Not prudent to reallocate under current fixed income market

conditions

• Will move over time based on preset fixed income rate

targets

• Ultimate goal is to earn returns above cost of debt at

reasonable risk levels

Pension

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Pension Funding Status Trends

$ in millions 2007 2008 2009 2010 2011 2012 2013

Market Value of Assets 331.4$ 238.9$ 294.9$ 354.4$ 359.8$ 426.7$ 520.6$

Discount Rate 6.8% 6.7% 6.0% 5.5% 4.5% 3.9% 4.8%

Proj Benefit Obligation 361.3$ 384.4$ 429.3$ 474.4$ 550.3$ 624.3$ 569.9$

Acum Benefit Obligation 327.6$ 351.4$ 398.7$ 439.5$ 519.1$ 592.6$ 544.3$

Funding % PBO 92% 62% 69% 75% 65% 68% 91%

Funding % ABO 101% 68% 74% 81% 69% 72% 96%

Future Outlook/Challenges

Margin pressure has increased significantly in first qtr:

• Negative impact occurring from Accountable Care Act

• TN and MS did not expand Medicaid

• Limited number of uninsured are signing up

• Thus reductions in Medicare and Medicaid

payments not being offset by lower uninsured

• State Medicaid program implementing second year of

rate corridor adjustments which is a $26 million

negative for Methodist (amount has not been finalized)

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Future Outlook/Challenges

• High deductible health plans are reducing commercial

insurance volumes – largest impact in outpatient areas

(example – ER visits in total down 8% with commercial

ER down 18% and self pay up)

• Continued focus on medical homes and eliminating

unnecessary utilization is working with greatest impact

in commercial volumes

• Net result overall volume down slightly but revenue per

patient actually declining which is lowering margins

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Reaction to Challenges

• Must continue to restructure costs to keep costs in line with

reimbursement levels

• Have targeted $40 million in cost reductions to be

implemented during 2014 – full year impact 2015

• Restructuring care processes to lower variable cost per

patient and overall fixed cost structure

• For past 5 years our average increase in cost per patient

has only been 1% - so easy costs have been removed.

• This round (and the next) will be more difficult

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Reaction to Challenges

• Target areas for improvement:

• Staffing based on benchmarking with Parallon (HCA) and

focused improvements in patient flow and scheduling

• Supply chain with major push on standardization and reduced

number of vendors

• Revenue cycle with key focus on documentation and denial

management.

• Overhead based on hard review of all areas and discretionary

costs including relook at all insourcing/outsourcing activity

• Focus on improving existing aligned physician practices – no

new deals

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Future Outlook Conclusions

• We remain optimistic that we have an

excellent balance of opportunities and

challenges.

• We are confident we will be able to balance

these opportunities and challenges and

continue to achieve operating margins

between 1% and 3% during these difficult and

challenging times.

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Conclusions

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Methodist well positioned for LT success:

• Market leader in stable market

• Long term exclusive managed care contracts

• Strong community support (fundraising and

selection of system for health services)

• Strong political ties

• Strong Board

• Unduplicated services

• Successfully integrating premier physician

practices in the market

Conclusions

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Methodist well positioned for LT success:

• Consistent financial performance

• Proven ability to adapt in difficult times

• Strong balance sheet

• Excellent quality and service outcomes

• Focused strategies

• Well positioned for health reform

• Conservative debt/investment strategies