Ben Umansky Carolinas Healthcare System Rehab Summit 11 6

Health Care Advisory Board
The Emerging Era of Choice

Restructuring Health System Strategy for the Retail Revolution
6
An Industry Built on a House of Cards

“Cord Cutters” and “Cord Nevers” Giving Up Broad Networks
U.S. Households
6.5% With Internet
But No Cable, 2013
Paying for More Than You Use
“This is the battle hymn of the cord cutter: You
are paying too much for television, and you
U.S. Adults Age 18-34 aren’t watching most of what you’re paying for.”
18.1% With Netflix or Hulu
But No Cable, 2013 Farhad Manjoo, The New York Times
Source: Experian Marketing Services, “Cross-Device Video Analysis,” April 17, 2014, available at: www.experian.com; Manjoo F, “Comcast vs. the
©2014 The Advisory Board Company • advisory.com • 28603A Cord Cutters,” The New York Times, February 15, 2014, available at: www.nytimes.com; Health Care Advisory Board interviews and analysis.
7
Revisiting a Tenuous Business Model

Most Hospitals Staying Afloat Through Cross-Subsidization
Traditional Hospital Cross-Subsidy
Commercial Insurance Public Payers

• Above-cost pricing • Steady price growth
• Robust fee-for-service • Only one component of
volume growth our total business
Above Cost Below Cost
149% 86%
Hospital Payment-to-Cost Hospital Payment-to-Cost
Ratio, Private Payer, 2012 Ratio, Medicare, 2012
Source: American Hospital Association, “Trendwatch Chartbook

2014,” available at: www.aha.org; Health Care Advisory Board
©2014 The Advisory Board Company • advisory.com • 28603A interviews and analysis.
8
Cross-Subsidy Depends on Inefficient Markets

Entrenched Payers, Insulated Patients Unlikely to Upset Status Quo
Assumptions Underlying Provider Growth Strategy
Entrenched Payer Established Provider Price-Insulated Patient

• High employer switching • Commercial pricing • Open access to broad
costs impede competition growth steady provider network standard
• Handful of broad networks • Network inclusion • Modest cost-sharing
satisfy majority of passive likely for most plans obscures true prices
employers • Patient volume • Physician recommendation
• Excess cost growth easily depends largely on dominates point-of-care
passed on to employers referral patterns decisionmaking
through premium increases
©2014 The Advisory Board Company • advisory.com • 28603A Source: Health Care Advisory Board interviews and analysis.
9
The Retail Revolution

Four Years Post-Reform, New Paradigm Finally Becoming Clear
Major Themes Reshaping Provider Strategy
Medicare Reforms and

1
the Transition to Risk
2 Coverage Expansion and the Rise

of Individual Insurance
3 Activist Employers and

the Primacy of Value
Medicare Reforms and the Transition to Risk 10
Public-Payer Reimbursement Still in the Crosshairs

Medicare Payment Cuts Becoming the Norm
ACA’s Medicare Fee-for-Service Payment Cuts Not the End of the Story
Reductions to Annual Payment Rate Increases 1
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
“Notwithstanding
($4B) recent favorable
($14B)
($21B)
($25B) developments…
($32B)
($42B)
Medicare still
($53B) faces a substantial
($64B) financial shortfall
($75B)
($86B)
that will need to be
addressed with
further legislation”
$260B $56B $151B Office of the
Hospital payment Reduced Medicare Reduced Medicare
and Medicaid DSH2 payments due to Actuary, CMS
rate cuts, payments, 2013-2022 sequestration and
2013-2022 2013 budget bill
1) Includes hospital, skilled nursing facility, hospice, and
home health services; excludes physician services. Source: CBO, “Letter to the Honorable John Boehner Providing an Estimate for H.R.6079, The Repeal of Obamacare Act,” July 24,
2) Disproportionate Share Hospital. 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
©2014 The Advisory Board Company • advisory.com • 28603A analysis.
11
Steady Shift Toward Risk-Based Payment

More Mandatory Risk On the Horizon
Medicare Value-Based Purchasing Program Other Mandatory Risk Programs

Performance Criteria
Weight in Total Performance Score Hospital-Acquired
Condition
10% Clinical Process Penalties
20%
45% 25% Patient Experience
70% 30% Readmission
Penalties
40% Outcomes of Care
30%
30%
30% 25% 25% Efficiency No Trivial Thing

20%
FY 2013 FY 2014 FY 2015 FY 2016 Medicare revenue at
6% risk from mandatory

pay-for-performance
programs2, FY 2017
1) Includes Value-Based Purchasing Program, Hospital Readmissions Source: The Advisory Board Company, “Mortality Rates Are Only One of Many VBP
Reduction Program, and Hospital-Acquired Conditions Program. Changes to Come,” December 4, 2013, available at: www.advisory.com; CMS, “Request for
Information on Specialty Practitioner Payment Model Opportunities,” February 2014,
©2014 The Advisory Board Company • advisory.com • 28603A available at: www.innovation.coms.gov; Health Care Advisory Board interviews and analysis.
12
More Providers Taking the Hint

Dismal Outlook for Fee-for-Service Motivating a Look at Risk-Based Options
Medicare ACO Program Entrants The Broader Picture
123 375
106 626 20.5M

Total ACO count, Americans enrolled in
114 including commercial or attributed to
and Medicaid ACOs, Medicare, Medicaid,
32 May 2014 or commercial ACOs
Series1
2012
Pioneer
2012
MSSP1
2013
MSSP
2014
MSSP
Total
46M-52M
ACO Cohorts Cohort Cohort Patients treated by ACOs
Model as of April, 2014
1 in 10
Medicare FFS beneficiaries
attributed to an ACO
1) Medicare Shared Savings Program

Source: CMS, “More Partnerships Between Doctors and Hospitals Strengthen Coordinated Care for
©2014 The Advisory Board Company • advisory.com • 28603A Medicare Beneficiaries,” December 23, 2013; Health Care Advisory Board interviews and analysis.
13
Some Pioneers Changing Course

Performance, Persistence Closely Correlated
7.1%
Pioneer ACO Performance (max)
Gross Savings as Percentage of Benchmark 1
First-year performance
Second-year performance
Dropped out after program year -5.6%
(min)
“The model was financially detrimental…despite favorable

underlying utilization and quality performance”
Alison Fleury, CEO
1) Dropped out after second year; second-year
Sharp HealthCare ACO
performance not reported
Source: Centers for Medicare and Medicaid Services, http://innovation.cms.gov/Files/x/PioneerACO-Fncl-PY1PY2.pdf; “San Diego-Based Sharp
©2014 The Advisory Board Company • advisory.com • 28603A HealthCare Pulls Out of Pioneer ACO Program,” California Healthline, August 28, 2014; Health Care Advisory Board interviews and analysis.
14
Medicare Shared Savings Program a Mixed Bag

Pending Program Updates Crucial for Future Participation
Medicare Shared Savings Program Issues to Watch for in Updated

ACO Performance Regulations
First Performance Year
Will second-term ACOs
Held Spending really have to bear
Below Benchmark, downside risk?
53 Earned Shared
Did Not Hold Savings Payment Will benchmarks be
Spending calculated differently?
115
Below
Benchmark 52 Held Spending
Below Benchmark, Will the share of savings
but Did Not Earn paid to ACOs be higher?
Shared Savings
Will beneficiaries be
attributed to ACOs
Shared savings earned by prospectively?
$297M MSSP ACOs in first performance

year1 Will ACOs have any ability to
prevent network leakage?
1) Includes one participant’s $4M repayment of shared losses

Source: Centers for Medicare and Medicaid Services, “New Affordable Care Act tools and payment models deliver
©2014 The Advisory Board Company • advisory.com • 28603A $372 million in savings, improve care,’ September 16, 2014; Health Care Advisory Board interviews and analysis.
15
Transition to Risk Hardly Stalled

Policymakers and (Some) Providers Angling for Higher-Octane Options
Bill in Brief:
“The ACO Improvement Act” The Bigger Question: What Should
• Bipartisan bill (H.R. 5558) introduced Medicare ACO Programs Be?
by Representatives Diane Black (R-
TN) and Peter Welch (D-VT) Permanent middle grounds between
fee-for-service, capitation?
Key Features
• ACOs would receive capitated Adaptive environments involving
payments, not shared-savings progressively more risk?
adjustments
• Patients would proactively select a
Training grounds for other risk models?
primary care provider rather than be
(e.g., Medicare Advantage)
retroactively attributed
• ACOs could discount primary care
services to encourage network loyalty
Source: H.R. 5558, http://welch.house.gov/uploads/ACO%20Bill%20Text.pdf;

©2014 The Advisory Board Company • advisory.com • 28603A Health Care Advisory Board interviews and analysis.
16
Medicare Advantage Gaining Momentum

Shift Signals Individualization of the Medicare Market
Projected Medicare Advantage Enrollment Provider Benefits Over Shared

Savings Models
29.5% of 19.0M
Medicare Unambiguous incentive for
beneficiaries population health management
Greater provider control over

network integrity
10.4M
Less frequent patient churn
2009 2020
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,
©2014 The Advisory Board Company • advisory.com • 28603A available at: www.modernhealthcare.com; Health Care Advisory Board interviews and analysis.
Coverage Expansion and the Rise of Individualized Insurance 17
ACA (and Recovery) Making a Dent in Uninsurance

But Every Silver Lining Has Its Cloud
Percentage of U.S. Adults Without Health Insurance
2013 Q3 2014 Q3
Insurance Medicaid Employer-sponsored
18.0% exchanges launch expansion
begins
coverage grows 13.4%
(highest on (lowest on
record) record)
A Bargain Still Unbalanced
$5.7B $14B
Reduction in
uncompensated
vs. ACA-related
reductions in Medicare
care, 2014 fee-for-service
payment, 2014
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,”
©2014 The Advisory Board Company • advisory.com • 28603A http://aspe.hhs.gov/health/reports/2014/UncompensatedCare/ib_UncompensatedCare.pdf; Health Care Advisory Board interviews and analysis.
Medicaid Expansion 18
Medicaid Expansion Contentious—and Consequential

23 States Still Foregoing Expansion
State Participation in Medicaid Expansion Financial Impact
As of October 2014
“For-profit health
systems…report far better
financial returns through
the first half of the year
than expected, owed in
large part to expanded
Medicaid”
PricewaterhouseCoopers
Participating Not Currently Participating
8M1 5% 2.4%
Increase in Medicaid, Average Medicaid Advisory Board estimate of impact of
CHIP2 enrollment, enrollment increase across Medicaid expansion on typical hospital’s
October 2013-July 2014 non-expansion states 10-year operating margin projection
1) Estimate- does not include CT or ME. Source: The Advisory Board Company, “Where the States Stand on Medicaid Expansion,” September 4, 2014, available at: www.advisory.com; CMS,
2) Children’s Health Insurance Program. “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
©2014 The Advisory Board Company • advisory.com • 28603A System Haves and Have Nots,” Health Care Advisory Board interviews and analysis.
19
Expanding or Not, States Pushing Medicaid Innovation

Responsibility Migrating to Payers, Providers, Patients
Competing Philosophies on Medicaid Reform
Full Medicaid
Managed Care
E.g., Florida’s Statewide Medicaid
Managed Care Program
Provider-Led Care
Management
Traditional State- E.g., Oregon’s “Coordinated
Run Program Care Organizations”
Exchange-Based
Privatization
E.g., Arkansas’ “Private
Option”
20
Arkansas Turning to Private Market

Exchange-Based Medicaid Drawing Interest, But Broader Uptake Uncertain
Arkansas’s “Private Option” CMS Wary of Other Modifications
1 Pennsylvania application for

Arkansas residents eligible for similar waiver denied over
expanded Medicaid coverage inclusion of work requirements
select plans on exchange
Arkansas proposal to require

individual health savings account
2 contributions still pending
Using federal matching funds,
State pays full cost of silver plan;
beneficiary pays no premium Program Likely Not Budget-Neutral
3 Increase in cost of expansion

Beneficiary holds private
insurance; cost sharing based
$778M under exchange system relative
to GAO estimate of cost under
on existing Medicaid rules traditional Medicaid
Source: Kaiser Family Foundation, “Medicaid Expansion in Arkansas,” October 8, 2014; Government Accountability
Office, “Medicaid Demonstrations: HHS’s Approval Process for Arkansas’s Medicaid Expansion Waiver Raises Cost
©2014 The Advisory Board Company • advisory.com • 28603A Concerns,” August 8, 2014; Health Care Advisory Board interviews and analysis.
Insurance Exchanges 21
One Year In, Insurance Exchanges Generally on Track

Aggregate Numbers in Line With Expectations; Enrollee Mix Older
Initial Public Exchange Enrollment1
2013-2014
3.8M 8.0M
91%
7.0M Of enrollees still enrolled
(Original CBO as of September 2014
Projection)
2.1M
2.2M
25M Projected exchange
enrollment by 2018
October to January to March Total 28%

December February Enrollees
aged 18-34
1) Numbers do not add precisely due to rounding. 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
©2014 The Advisory Board Company • advisory.com • 28603A See Brighter Obamacare Skies,” Politico, April 15, 2014, available at: www.politico.com; Health Care Advisory Board interviews and analysis.
22
Individuals Gravitating Toward Leaner Plans

Premium Sensitivity Manifest at Two Levels
Level 1: Choice of Metal Tier Level 2: Plan Choice Within Metal Tier
All Metal Levels1
Gold
Platinum
9% 5% Catastrophic
2% Lowest-
Any Other
36% 43% Cost Plan
Plan
Bronze
20%
65%
21%
Silver
Second-Lowest-Cost Plan
Factors Influencing Metal Level Premium Levers Beyond Benefit Design
Deductible Non-Essential Scope of Non-Essential Benefits

Services Covered
Copays Network Composition Negotiated Payment Rates to Providers
Out-of-Pocket
Negotiated Rates Utilization Patterns, Trends
Maximum
1) Data from federally-facilitated exchanges only. Source: HHS, “Health Insurance Marketplace: Summary Enrollment Report for the Initial
Annual Open Enrollment Period,” May 1, 2014; Health Care Advisory Board interviews and
23
High Deductibles Dominating Exchange Markets

Aggressive Cost Sharing Potentially Troublesome for Provider Strategy
Individual Deductibles Offered On Challenges for Providers

Public Exchanges
2014
High out-of-pocket
$2,500 $6,250 costs discourage

appropriate utilization
Median Maximum
Individual Deductibles Chosen on

Large patient obligations
eHealth Individual Marketplace
lead to more bad debt,
<$1,000 charity care
16%
39%$6,000+
$1,000-
$2,99916% Price-sensitive patients
more likely to seek lower-
cost options
30%
$3,000-$5,999
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
©2014 The Advisory Board Company • advisory.com • 28603A Report for Open Enrollment and Q1 2014,” May 2014; Health Care Advisory Board interviews and analysis.
24
Premium Sensitivity Supporting Narrow Networks

Payers Betting Individual Consumers Value Affordability Over Broad Choice
Average Percent of PPO Network Specialists Breadth of Hospital Networks in
Included in Exchange Plan Networks1 Exchange Plans
Anthem BlueCross BlueShield, 2014 20 Urban Markets, December 2013
100% PPO Network Breadth Broad

30
%
38
% “Ultra-Narrow”
32
“Narrow” %
62% 59% 59% Exclude 30% of Exclude 70% of

48% 20 largest hospitals 20 largest hospitals
OB/GYNs Orthopedists Oncologists Cardiologists
26%
Median premium reduction directly
attributable to network narrowing2
1) “Pathway X” bronze plans compared to leading PPO plan offering across nine states.
2) Comparing products by the same carrier of the same tier, across 7 carriers. Source: Gottleib S, “Hard Data On Trouble You’ll Have Finding Doctors in Obamacare,” Forbes, March 8, 2014,
available at: www.forbes.com; McKinsey & Company, “Hospital Networks: Configurations on the Exchange and
©2014 The Advisory Board Company • advisory.com • 28603A Their Impact on Premiums,” December 2013; Health Care Advisory Board interviews and analysis.
25
Proper Risk Pricing Still Essential

Is It Worth Winning Share With Unsustainable Premiums?
Low Premiums Moving the Market… …but Perhaps Not the Right One
2013: 2014:
• PreferredOne offers • PreferredOne exits exchange
lowest Silver plan • Will still offer individual
premium in country; coverage through other
• wins massive market successful channels with
share on Minnesota different risk profile
exchange (MNsure)
2% 58% “Continuing to provide this

Market share Market share coverage through MNsure
in 20121 in 2014 is not sustainable.”
Marcus Merz
CEO, PreferredOne
1) Pre-exchange individual market

Source: Crostby J, “Top Selling Insurer on MNsure Won’t Be Back This Year,” Minneapolis Star
©2014 The Advisory Board Company • advisory.com • 28603A Tribune, September 16, 2014; Health Care Advisory Board interviews and analysis.
What Next for the Exchanges? 26
Increased Insurer Participation Driving Competition

Robust Marketplaces Beginning to Develop
Issuers Offering Qualified Health Plans “We had a very modest

footprint in 2014. We do
248 have a bias to increase
191
that participation in
2015. […] The size of
the overall market is
61 67 positive.” Gail Boudreaux, EVP
UnitedHealth Group
Federally-Facilitated State-Based Marketplace Competition At Work

Marketplace (36 states) (8 states reporting)
Estimated reduction in
2014 2015 4% second-lowest-cost silver
premium of one new issuer
entering market
Source: “UnitedHealth to Expand Exchange Presence as Profits Dip,” ModernHealthcare, April 17,
2014; Department of Health And Human Services, “Health Insurance Marketplace Will Have 25 Percent
©2014 The Advisory Board Company • advisory.com • 28603A More Issuers in 2015,” September 23, 2014; Health Care Advisory Board interviews and analysis.
27
What to Watch for on the Exchanges

Second Round of Open Enrollment Will Reveal True Dynamics
Trends We’ll Be Watching:
1 Enrollment:
• Are the technical glitches really fixed?
• Will higher individual mandate penalties change anyone’s mind?
• Will the young and healthy turn out in force?
2 Choice and Mobility:

• How will automatic reenrollment affect consumer behavior?
• Will last year’s bargain hunters regret choosing high deductibles
and narrow networks?
• Can plans that raise premiums maintain market share?
3 Market Reaction:
• How aggressively will providers court the newly insured?
• Will employers dump workers onto the exchanges?
©2014 The Advisory Board Company • advisory.com • 28603A

Activist Employers and the Primacy of Value 28
Employer-Sponsored Insurance at a Crossroads

Will Employers Maintain Coverage, and How?
Spectrum of Options for Controlling Health Benefits Expense
“Abdication” “Activation”
Drop Coverage Shift to Private Exchange Convert to Self-Funding
Pros: Pros: Pros:

• Escape from cycle of • Responsiveness to • Close control over
rising premium costs employee preference network design
Cons: • Predictable, defined • Exemption from
contributions minimum benefits
• Employer mandate
requirements
penalty Cons:
Cons:
• Labor market • Disruption to benefit
disadvantage design • Greater financial risk
• Risk employees may • Network assembly
underinsure challenging
29
Huge Growth Forecast for Private Exchanges

Low-Wage Employers Most Active Today, but Skilled Industries in the Wings
Potential Growth Path for Private Exchange Enrollment
40M
30M
19M 172
9M Private exchange
3M operators as of
October, 2014
2014 2015 2016 2017 2018
Prominent Employers Using Private Exchanges

For Active Employees: For Retirees:
(Medicare Advantage, Medigap plans)
Source: Accenture, “Are You Ready? Private Health Insurance Exchanges are Looming;”
©2014 The Advisory Board Company • advisory.com • 28603A privatehealthexchange.com; Health Care Advisory Board interviews and analysis.
30
Beyond the Buzzword

Understanding Why Private Exchanges Matter
Crucial Differences Between Private Exchanges, Traditional Group Markets
In the group market, On a private exchange,

Changes in network or carrier may Individuals can switch networks,
require employer-level decisions insurance carriers on their own
Provider networks must be broad Narrow networks can appeal to

enough to serve entire workforce specific employee segments
Defined benefit plans insulate Defined contribution plans expose

employees from differences in cost employees to cost differences
31
Self-Funded Strategies Steadily Gaining Ground

Small Employers Also Beginning to Show Interest
Percentage of Covered Workers in ACA Benefits Standards Avoidable

Self-Funded Plans Through Self-Funding
70%
65%
61%
59%
60% Essential Health Guaranteed Issue
54% Benefits and Renewability
55%
49%
50%
45%
40% Modified Medical Loss Ratio

2000 2005 2010 2014 Community Rating Requirements
of small employers’1 brokers

26% have discussed with them the
possibility of self-insurance
1) 3 to 50 FTEs. Source: Gabel JR et al., “Small Employer Perspectives On The Affordable

Care Act’s Premiums, SHOP Exchanges, And Self-Insurance,” Health Affairs,
©2014 The Advisory Board Company • advisory.com • 28603A 32(11): 2032-39; Health Care Advisory Board interviews and analysis.
32
Hands-On Network Management Increasingly Feasible

Custom Network Builders Offering Local Solutions
IHS1 “Custom Provider Network” Solution

Self-funded employer submits list of
physicians, hospitals, and ancillary care
“Working with the TPA
and employer, we IHS negotiates cost-effective provider
agreements using Medicare-based pricing
replace the ‘one size
IHS continually evaluates network providers
fits all’ network with a to “ensure competitive price contracts”
cost-effective
customized network
Case in Brief:
created around the Innovative Healthware Services
needs of your • Private company based in Arnold, Maryland
business and your that markets software solutions for PPOs,
TPAs, providers, and payers
employees.” • “Custom Provider Network” limits a self-funded
Innovative Healthware employer’s network to selected list of hospitals,
Services physicians, and ancillary care
Source: Innovative Healthware Services, Inc., Arnold, MD; Health Care

©2014 The Advisory Board Company • advisory.com • 28603A Advisory Board interviews and analysis.
33
Aggregators Pooling Employers, Providers

Exporting Walmart’s Centers of Excellence Program
Case in Brief: Health Design Plus “It would be prohibitive for a

• Third-party administrator based in small employer…When you
Hudson, Ohio that creates Centers of
Excellence (COE) programs for self- spread the administrative
funded employers
costs over a number of
• Assembled Walmart’s centers of
excellence bundled payment network employers, it becomes more
attractive.” Bruce Sherman
Two New Employer Coalition Partnerships Medical Director,
Employers Health Coalition
Pacific Business Group
on Health
(San Francisco,
California) Employers Health Coalition
• 60 large employer (Canton, Ohio)
members • 300+ employer members with
• Employees in all 50 employees in all 50 states
states • 3M covered lives
• 10M covered lives
Source: Walmart, “Walmart, Lowe’s And Pacific Business Group On Health Announce A First Of Its Kind National
Employers Centers Of Excellence Network,” October 8, 2013; Health Design Plus, “Health Design Plus & Employers
Health Announce National Centers of Excellence Initiative,” June 11, 2013; Chen C, “Providers Using Bundled Payments,
Quality to Entice Employers,” Health Data Management, March 11, 2014,; Health Care Advisory Board interviews and
34
Some Providers Taking Lead in Network Assembly
Intel-Presbyterian Partnership
5,400 Covered lives in

contract
Narrowing of Health Plan Options

Intel reducing number of health plan
options from 8 to 4; two remaining plans $8-10M Projected savings,
2013-2017
are narrow networks of PHS1 providers
Shared Accountability
Upside and downside risk for health care
spending compared to projected target
Case in Brief: Intel Corporation
Customized Care Offerings • Large multinational employer
Addition of depression screening into headquartered in Santa Clara, California
customary provider workflow • Entered into narrow-network contract
with Presbyterian Healthcare Services,
Infrastructure for Care Management an 8-hospital system in New Mexico, for
Conversion of Intel’s on-site clinic into full employees at Rio Rancho plant
service patient-centered medical home
Source: Intel Corporation, “Employer-Led Innovation for Healthcare Delivery and Payment Reform: Intel
1) Presbyterian Healthcare Services. Corporation and Presbyterian Healthcare Services,” Santa Clara, California; Evans M, “Slimming Options,” Modern
Healthcare, July 13, 2013, available at: www.modernhealthcare.com; Health Care Advisory Board interviews and
35
Providers Must Win Share at Two Points of Sale

Multiple Opportunities to Appeal to Decision-Makers
Decision Processes Shaping Provider Choice
1 2
Secure Enrolled Lives Win Share of Volumes
Network Assembly Network Selection Care Decision

Being chosen by payers, employers, Being chosen by Being chosen by patients,
exchange operators, custom network individuals during plan referring physicians at the
builders, and accountable physician enrollment point of care
entities to be offered as a network option
36
Recognizing New Channels for Growth

Key Decision-Makers in Traditional and New Growth Channels
Secure Enrolled Lives Win Share of Volumes
Traditional Growth Channels

Entrenched Relationship-Based
Payer Established Referring Physician
Provider
New Growth Channels

Custom Network
Builder
Activated
Employer Cost-Conscious
Referring Physician
Vulnerable
Payer
Exchange Care Delivery Price-Sensitive

Operator Network Consumer
Accountable
Physician Entity
Individual
Insurance Shopper
37
All Signs Point to a Retail Market

New Dynamics Unfamiliar in Health Care, But Not in Broader Economy
Traditional Market Retail Market

Passive employer,
price-insulated employee
1 Activist employer,
price-sensitive individual
Growing number of buyers
Broad, open networks 2 Narrow, custom networks

Proliferation of product options
No platform for apples-to-

apples plan comparison
3 Clear plan comparison
on exchange platforms
Increased transparency
Disruptive for employers

to change benefit options
4 Easy for individuals to
switch plans annually
Reduced switching costs
Constant employee
premium contribution, 5 Variable individual
premium contribution,
low deductibles Greater consumer cost exposure high deductibles
38
Redefining the Value Proposition

Delivering Desirable Network Attributes at Low Cost
Four Imperatives for Health Systems
Low Cost Desirable Network Attributes
Competitive Unit Total Cost Control Geographic Reach Clinical and Service
Prices and Clinical Scope Quality
Strategic Imperatives: Strategic Imperatives: Strategic Imperatives: Strategic Imperatives:
• Avoid reactive • Develop population • Match service • Present
position vis-a-vis health model to portfolios, footprints unimpeachable
price cuts, control cost trend to target purchasers clinical credentials to
transparency • Clearly • Explore partnership wholesale buyers
• Radically restructure communicate total strategies that • Emphasize access,
cost structures to cost advantage to strengthen market experience
sustain lower potential purchasers presence advantages to
unit prices individual consumers
39

40
Low Premiums Shaping More than Network Selection

Care Choices, Network Assembly Dynamics Driven by Premium Pressure
Consequences of Premium Sensitivity
Price Sensitivity at
Point of Care
Premium Sensitivity at
Point of Coverage
Total Cost Scrutiny in

Network Assembly
“Our price is now given by the market. Our

business is changing from cost-based pricing
to price-based costing.”
Health Care Executive
41
Price Sensitivity at the Point of Care

Cost-Conscious Behavior Affecting Pillars of Profitability
Consumers Paying More Out-of-Pocket MRI Price Variation Across

Washington, DC
Fall within HDHP deductible2 $2,183
$18K $730
Fall within PPO

$9K $411
deductible3
$6K
$900
$2K
$900 $1K $1,269
$150 $275 $400
• Price-sensitive shoppers
will be acutely aware
t
on
t
on
t
py
ry
si
si
en
un
ge
Vi
Vi
si
si
co
m
so
is
is
of price variation
r
e
ce
s
Su
is
dm
m
ar
do
a
al
la
ltr
Ad
C
ci
En
ct
ep
U
e
y
ra
re
• MRI prices range from

Sp
R
ar
r
a
ilu
ilu
im
ip
at
Fa
Fa
H
C
$400 to $2,183
Pr
al
rt
ea
en
1) High-deductible health plan.

H
2) $2,086; based on KFF report of average HDHP Source: KFF, “2012 Employer Health Benefits Survey,” available at: www.kff.org; New Choice Health, “New Choice Health
deductible. Medical Cost Comparison,” available at: www.newchoicehealth.com; Healthcare Blue Book, “Healthcare Pricing,” available
3) $733; based on KFF report of average PPO deductible. at: www.healthcarebluebook.com; Kliff S, “How much does an MRI cost? In D.C., anywhere from $400 to $1,861,”
Washington Post, March 13, 2013, available at: www.washingtonpost.com; Health Care Advisory Board interviews and
42
Walmart Bringing Everyday Low Prices to Health Care

Low-Cost Access Potentially Just the Beginning
Probably Worth Paying Attention
Care Clinic Model
Pricing:
“Our goal is to be the number
$4 For Walmart
employees $40 For Walmart
customers one health-care provider in
Hours: the industry.”
Labeed Diab
President of Health & Wellness
Weekdays Saturday Sunday
Walmart
8AM-8PM 8AM-5PM 10AM-6PM
Service:
• Two nurse practitioners provider 130M 150M
primary care services on site Annual emergency Weekly visits to
department visits Walmart stores
• Clinic refers to external
specialists, hospitals as
appropriate
Source: Canales MW, “Wal-Mart Opening Clinic in Cove,” Killeen

Daily Herald, April 18, 2014, available at: www.kdhnews.com; Health
©2014 The Advisory Board Company • advisory.com • 28603A Care Advisory Board interviews and analyais.
43
Broadening Our Concept of Cost Advantage

Network Assemblers Looking at More Than Unit Price
Two Cost-Focused Strategies for Appealing to Network Assemblers
Low Unit Price Total Cost Control
Price Cut Trend Control

Improve efficiency to Implement care management
offer lower fee schedule to control cost growth trend
Degree of Cost Control
44
Creating Cost-Conscious PCPs

CareFirst PCMH Total Cost Incentive Model
Risk-adjusted PMPM1 Cost Total cost target set
by trending baseline
PMPM Cost risk-adjusted PMPM
Target cost by average
regional cost growth
Actual PMPM Panel shares in

Cost savings if risk-
adjusted PMPM
“Virtual panel” of cost is below target
10-15 PCPs
Baseline Year 1 Year 2
Case in Brief: CareFirst BlueCross BlueShield 1M Members covered

by PCMH program
• Not-for-profit health services company serving 3.4 million
members in Maryland, D.C., and northern Virginia
• In 2011, launched PCMH program providing opportunities
for virtual panels of 10-15 PCPs to earn bonuses based on
80% Eligible PCPs
participating
quality and total cost metrics
Average pay
• Provides PCPs with color-coded rankings of specialists
based on risk-adjusted PMPM costs 29% increase for PCPs
receiving bonuses
1) Per member per month. Source: Overland D, “CareFirst Medical Home Saves More in Second Year,”
FierceHealthPayer, June 7, 2013, available at: www.fiercehealthpayer.com;
45
Steering Care to Most Efficient Specialists

Total Cost Transparency Key to Referral Changes
Specialists Color-Coded By Total Cost
Difference in risk-adjusted
27% PMPM cost between top-
and bottom-quartile PCPs
PCP Virtual Panels
66% Percent of panels earning
bonuses, 2012
$98M Savings from PCMH

program, 2012
Employed Employed Independent “We’re seeing that [the data]

Specialist A
(Red)
Specialist B
(Yellow)
Specialist C
(Green)
changes the patterns.
There’s a hubbub among the
panels to see what their
choices are, and what it
Hospital A Hospital B costs them.” Chet Burrell
President & CEO
CareFirst BlueCross BlueShield
46
The Value of a Second Opinion

Discerning When Not to Operate
Large Employers and Hospitals Participating in Centers of Excellence Programs
Pepsi Co.
In 2011, offered employees
free cardiac and complex
Walmart joint replacement surgery at
In 2013, expanded Johns Hopkins Medicine
Centers of Excellence
program to cover
cardiac, spine, and
hip/knee replacement
surgery
Lowe’s
In 2010, offered employees
free heart surgery at
Cleveland Clinic
30-50%
Of referred patients do
not undergo surgery
Source: The Advisory Board Company, “Commercial Bundled

Payment Tracker,” October 9, 2013, available at: www.advisory.com;
47
Making the Case for Care Management Capabilities

Assuring Employers of Ability to Manage Future Costs
Powerful Ways to Signal Care Management Capabilities
Investment in Clinical and Claims Demand for Out-of- Telehealth Platforms

Data Analytics Data Integration Network Claims Data and Programs
Shows capability to Illustrates advantage Shows commitment to Demonstrates ability
assess patient risk over traditional continuously manage to keep low-acuity
and pinpoint health plan care for attributed cases in most
interventions population appropriate care site
“In our market, there is plenty of talk about ‘accountable

care’, but we are differentiating with the organizational
commitment and the infrastructure investment to sustain a
new economic model.” Chief Marketing Officer
Large Health System
48
Promising Total Cost Savings to Employers
Savings Guaranteed Off Of Projected Costs Two Separate Products with

Different Payer Partners
Baseline spending
projected using
three years’ Aetna Whole Health
historical spending Guaranteed 1
Savings
(Aetna)
Employer
Health Blue Priority
2
Spending (Anthem Blue Cross
and Blue Shield)
Roundy’s Supermarkets, Inc.

Time was first large employer client
10% Case in Brief: Aurora Health Care

• 15-hospital, not-for-profit health system based in Milwaukee, Wisconsin
Average savings
guaranteed to • Announced separate narrow network products with Aetna and Anthem
employers over Blue Cross and Blue Shield that offer employers guaranteed savings
three years over three years
Source: Commins J, “Aurora Health Offers Employers a Savings Guarantee,” HealthLeaders Media, July
30, 2012, available at: www.healthleadersmedia.com; Aurora Health Care, “Roundy’s Offers Employees
Innovative Health Care Plan Through Anthem’s Blue Priority & Aurora Accountable Care Network,” October
©2014 The Advisory Board Company • advisory.com • 28603A 24, 2012, available at: www.aurorahealthcare.org; Health Care Advisory Board interviews and analysis.
49

50
Which Would You Choose?
Broad Geographic Reach… …or Deep Clinical Scope?
Network in Brief: Crescent Health1 Network in Brief: Silica Healthcare1

• National hospital provider with hospital • 6-hospital system in the Midwest with
campuses across the country employed physician network
• Despite broad geography, limited clinical • Care sites concentrated in roughly half
depth at local level of single metropolitan area
1) Pseudonym.
51
Full Care Continuum Important for Payer Partners

Four Reasons PinnacleHealth System Selected for Risk-Based Product
Sample Clinical Services
Primary Care
Pediatric Care
Favorable Pricing Comprehensive
Structure Clinical Scope Imaging
Cardiovascular Care
Orthopedics
Physical Therapy and Rehab
Broad Provider 6-12 Months’ Experience
Inpatient Care
Geographic Footprint Under Performance Incentives
Case in Brief: CareConnect Point of Service

• Accountable care narrow network plan for mid-sized employers, created around
PinnacleHealth System and offered by Capital BlueCross in central Pennsylvania
• Network is open for specialty and inpatient care but narrowed to PinnacleHealth
System’s PCPs for primary care
• Will be expanded to individual market in 2015
52
Combining Geographies to Match Purchaser Footprint

Addressing Individual Limits in Geographic Reach
Partnering to Expand Geographic Reach

Network in Brief:
Healthcare Solutions
Cincinnati-based
Network
employers have TriHealth
employees living on • Joint venture collaboration
both sides of river between Cincinnati, Ohio-
Ohio based TriHealth and
Edgewood, Kentucky-
based St. Elizabeth
Kentucky Healthcare
• Offers health insurers
St. Elizabeth access to a unified, high-
Healthcare quality, low-cost network
that covers the entire
Tristate region
Neither Organization Able to Offer • Both organizations offering
Adequate Geographic Coverage Alone the network to their current
employees and dependents
53
Geographic and Clinical Demands Intertwined

National and Hyper-Local Competition Reshaping Notions of Sufficiency
Purchasers’ Geographic Preferences for Clinical Services
Balancing an Increasing Demand for Convenience with an Increasing Willingness to Travel
• Alternative access points • Disease management, • Transplants

(e.g. retail, urgent care) care navigation • Neurosurgery
• E-visits, remote • Digestive health • Complex cardiac (e.g.
monitoring • Women’s midlife TAVR1)
• Home health • Sports medicine • Clinical trials
Potential
Differentiators • Midwifery
• Primary care • Emergency • Routine • Cardiac surgery

• Pediatrics • Dialysis orthopedics • Technology-
• Imaging • Rehab • SNF intensive procedures
• Ambulatory surgery • Stroke • Pediatric
Core specialty
Services • Radiation therapy • Cardiology
• Oncology
• Medical oncology • OB/Gyn
Neighborhood Local Regional/National

Conveniences Offerings Destinations
1) Transcatheter Aortic Valve Replacement.
54

55
“Quality” Means Different Things for Different People
Quality Demands of Network Assemblers and Individuals
Network Assemblers Individuals

Network Selection Care Decision
Facility-level clinical Network-level Actual ease of

process, outcome quality, access, access, care
measures service ratings experience
56
Custom Network Builders Scrutinizing Performance

Steering Care Toward High-Quality Providers
Provider Evaluation Process at Imagine Health
National Top Quartile Case in Brief:

Clinical Performance
Imagine Health
Step 1:
• Company based in
Evaluation of
Clinical 1
Cottonwood Heights,
Performance Data Utah that builds custom,
high-performance
provider networks for
self-funded employers
• Selects participating
provider systems using
clinical performance data
and an RFP process
• Steers volumes to in-
Step 2: RFP network providers
Evaluation of through benefit design
Additional Factors Per capita Efficiency of Care experience and employee education
cost of care care utilization programs
1) Sample metrics include mortality rate,
complication rate, and readmissions rate.
57
Providers Must Also Deliver on Ease of Access

Winning Contracts By Meeting Access Demands
Boeing’s Access Requirements

Case in Brief: Providence-Swedish
Health Alliance
• Alliance between Providence Health Systems,  Same-day PCP appointment
Swedish Health Services in Seattle, WA (acute conditions)
• Awarded contract to serve as Boeing’s narrow  3-day PCP appointment
ACO network option (any condition)
 10-day specialist appointment
 Extended hours of operations
“[Geographic] access is critical.
 Extended urgent care hours
But we can’t lose sight of the
 Centralized 1-800 number at ACO
patient experience. Health care level with care navigators for triage
consumers need to see a and advocacy
 Member website
positive change in how they are
 Phone apps
able to access healthcare.
Chris Gorey
Chief Marketing Officer
Providence Health Systems
58
Online Access Becoming the New Baseline

An Expected Part of the Patient Experience
Consumers Demanding Portal Features
KP.org Portal Key Features
n = 1,000 U.S. Consumers
82%
77% 76% 74% Communicate Assign proxy
with physician access
View medical Fill

record prescriptions
Schedule View lab

Access to Online Prescription Receiving
Medical Appointment Refill E-Mail/Text
appointments results
Records Booking Requests Reminders
Case in Brief: Kaiser Permanente Northern California

• Nation’s largest not-for-profit health plan based in Oakland, California; serves 9 million
members nationwide and 3.3 million in Northern California
• Began offering online health services in 1996; fully deployed KP.org patient portal in 2007
Source: Terry K, “Patients Seek More Online Access to Medical Records,” InformationWeek, September 17, 2013,
available at: www.informationweek.com; Silvestre, et al., “If You Build It, Will They Come? The Kaiser Permanente Model
©2014 The Advisory Board Company • advisory.com • 28603A of Online Health Care,” Health Affairs, March/April 2009: 334-344; Health Care Advisory Board interviews and analysis.
59
Welcome to the Renewals Business

Patient Experience Vital For Securing Purchaser Choice Year Over Year
Network Selection and Ongoing Experience
Annual network
selection in fluid
Day 1 insurance market
Day 365 implies consistent
reevaluation of
network performance
Care Decision Care Decision

Clinical interactions
represent repeated
Patient opportunities to
Experience reinforce patient
preference through
superior experience
Care Care
Decision Decision
60
Recipe for Success Becoming Far More Complex

Not Immediately Obvious Which Advantages Will Dominate
Network Assemblers Individual Consumer
Network Assembly Network Selection Care Decision
All providers included in nearly all Employees have little choice of Most decisions made by
Traditional Market networks; only compete on price networks referring physician
negotiations
• Low total per-member cost • Low premium • Low out-of-pocket

Cost • Promise of total cost savings • Low employee contribution cost
Threshold Differentiating
Factors Factors
Reach and • Broad geographic footprint • Inclusion of preferred • Proximity to access
Retail Market
• Comprehensive clinical scope physicians points

Scope
• High clinical process, outcomes • High population health quality • Great care experience
performance ratings • On-demand access
Clinical and • Adherence to evidence-based care • High member satisfaction options
Service • On-demand access options ratings • Prompt appointment
• Centralized navigation services • Positive brand association times
Quality • Prompt appointment times • On-demand access options • Extended hours
• Extended hours
Expanding Arena of Competition
Strategic Advantage #1: Scale 61
Consolidation on the March

Search for Financial, Geographic Scale Driving Hospital M&A
Case in Brief:
Advocate NorthShore Health Partners Combined system’s
• 16-hospital merger of Advocate Health $6.5B expected annual
revenue
Care, NorthShore University HealthSystem
• Creates strong clinical, geographic
presence in Chicago area
Other Notable Hospital M&A Activity

“Combined, we will create
economies of scale that will
allow us to reduce the trend
of rising health care costs.” Baylor + Mount Sinai + Beaumont +
Michele Richardson Scott and Continuum Botsford +
Advocate Board Chair White Health Partners Oakwood
Source: “Advocate and NorthShore Combine to Create Preeminent Health Care System,” Northshore
University Health System; Herman B, “Advocate-NorthShore merger continues trend toward regional
©2014 The Advisory Board Company • advisory.com • 28603A supersystems,” Modern Helathcare, Spetember 12, 2014; Health Care Advisory Board interviews and analysis.
62
Aggregation Always Subject to Regulatory Scrutiny

Policy Tensions Remain Between Integration, Competitiveness
Allowances for Effective Coordination… …But Market Power Still a Red Flag
Bundled payment programs April 2014:

open door to gainsharing U.S. Court of Appeals orders
with Medicare revenues ProMedica to unwind its 2010
acquisition of St. Luke’s Hospital
Clinical Integration safe harbors January 2014:

allow joint contracting between Federal judge blocks merger of St.
independent physicians Luke’s Health System and Saltzer
Medical Group
CMS incentivizes, promotes ACO January 2014:

programs FTC rules CHS must divest two
hospitals to complete HMA acquisition
Strategic Advantage #2: Integration 63
Vivity Betting on Coordination over Consolidation

Insurer, Seven Competing Systems Offer Market-Wide Solution
“What we are
Anthem
recognizing is that the Blue Cross
most effective delivery UCLA Health PIH Health
model is an integrated
delivery model. We can Cedars-
• 7 health systems Huntington
reduce waste, improve Sinai
Medical Memorial
• 14 hospitals
quality of care, provide Center Hospital
• 6,000 physicians
people access to the top
Good Torrance
facilities in the nation, Samaritan Memorial
frankly, and do that in an Hospital Health
MemorialCare
integrated way.” Health System
Pam Kehaly
Anthem Blue Cross
Source: “Anthem, Seven California Health Systems Team Up To Form HMO,“ California Healthline, September
17, 2014; Commins J, “Anthem Blue Cross, 7 CA Health Systems Create New Challenger, Business Model,”
©2014 The Advisory Board Company • advisory.com • 28603A HealthLeaders Media, September 18, 2014; Health Care Advisory Board interviews and analysis.
64
New Partnerships Aim at Integration Without M&A

But Will Less-Intensive Arrangements Yield Sufficient Gains?
Four health Seven
Five health systems ally to form systems form systems in
accountable care initiative regional NY, NJ, MA,
Quality Health Solutions alliance Health and PA form
Innovations Allspire
Six hospitals form BJC Ohio Network
Collaborative:
Five health systems

join Vanderbilt
Health Affiliate Four health systems
Network ally to form Noble
14 systems ally to Health Alliance
form Stratus
Health Care
Five SC systems
form cost saving
Initiant Healthcare
Collaborative
Two Systems form Georgia
Health Collaborative
Strategic Advantage #3: Efficiency 65
The Community Hospital Resurgent?

Born Out of Necessity, No-Frills Approach Suddenly Compelling
Common Challenges Potential Advantages
Medicare, Medicaid- Already managing to The Community

heavy payer mix public-payer margins Hospital Initiative
• Dedicated research and
Limited service Fewer unjustifiable service effort included
portfolio fixed costs within Health Care Advisory
Board membership
• Focuses on issues facing
Physician Early experience with team-
shortages based care, telemedicine – Smaller organizations
– Independent hospitals
Rural or Labor costs lower than – Rural facilities
exurban setting urban competitors
• For more information,
contact Ben Umansky at
Smaller patient More focused patient [email protected]
population engagement efforts
Health Care Advisory Board
The New Network Advantage

Assembling the Scale, Scope, and Assets Needed to
Secure Profitable Growth
67
Road Map
1 Leverage Beyond Price
2 The New Network Advantage
3 Charting an Intentional Corporate Strategy
©2014 The Advisory Board Company • advisory.com

68
Insecurity Abounds
Consolidation Dominating Industry Mindshare
What Was Your Reaction?
$10 Billion or Bust?

August 5, 2013 “Any health system is going to need $10 billion
in revenue to survive in tomorrow’s market”
Overheard at 2014 J.P. Morgan

Healthcare Conference
SURVIVAL
OF THE
BIGGEST The End of Independence?
CHS-HMA merger
puts more pressure on “We want to stay independent. But when I
stand-alones to seek look at where things are going, I just don’t
partners see how we can compete without being part
-Page 6 of something bigger.”
CEO, standalone 200-bed hospital
69
New Partnerships Aim at Integration Without M&A

But Will Less-Intensive Arrangements Yield Sufficient Gains?
Four health Seven
Five health systems ally to form systems form systems in
accountable care initiative regional NY, NJ, MA,
Quality Health Solutions alliance Health and PA form
Innovations Allspire
Six hospitals form BJC Ohio Network
Collaborative
Five health systems

join Vanderbilt
Health Affiliate Four health systems
Network ally to form Noble
14 systems ally to Health Alliance
form Stratus
Health Care
Five SC systems
form cost saving
Initiant Healthcare
Collaborative
Two Systems form Georgia
Health Collaborative
70
No Shortage of Alternative Models

Five Major Varieties of Provider Partnership
Merger or Clinically- Accountable Care Regional Clinical Affiliation
Acquisition Integrated Organization Collaborative
Hospital
Network
Description Formal purchase of Collection of Independent entity, Flexible umbrella Typically bilateral
one organization’s hospitals owned by one or structure, often agreement to
assets by another, contracting several encompassing cooperate around
or the combination jointly in order to independent many independent a particular
of two organizations’ support organizations, that organizations of initiative or service
assets into a single improved accepts risk-based similar geography, line; may involve
entity coordination, contracts and that may serve as local or national
outcomes; distributes shared foundation for partners
modeled after savings further integration
physician CI
networks
Examples • Baylor Scott and • Long Island • Quality Health • Allspire Health • Evergreen
White Health Solutions (WI) Partners Healthcare with
• Community Network • Arizona Care • Stratus Virginia Mason
Health • Vanderbilt Network Healthcare • Mayo Clinic
Systems/Health Health • Accountable • BJC Care Network
Management Affiliated Care Alliance Collaborative • Cleveland Clinic
Associates Network • Noble Health Affiliate
• Trinity Alliance Program
Health/Catholic • Health
Healthcare East Innovations Ohio
• Tenet/Vanguard
71
Protection Not the Right Motivation

Defenses Around Old Business Model Unlikely to Hold
Typical Advantages of Market Power
Size confers
Higher prices price leverage Lower prices
charged to payers paid to suppliers
Diminishing Returns to Traditional Strategy
Regulators scrutinizing any Volume-based negotiating Increasingly competitive

arrangement conferring strategies like GPOs nearing markets punishing inflexible,
undue market power their limit high-cost providers
72
Leverage Beyond Price the Key to Success

Partnerships Must Drive Market Advantage
Product Advantage Cost Advantage
Influence on Network Control Over Underlying Impact on Entire

Degree of Market Advantage
Assembly Cost Structures Care Continuum
Winning Preference Lowering Unit Reducing Total

Through Clinical Scope Prices Through Costs Through
and Geographic Reach Operational Scale Population Health
Time to Maximum Benefit
73
The New Network Advantage

I II III
Winning Preference Through Lowering Unit Reducing Total
Clinical Scope and Prices Through Costs Through
Geographic Reach Operational Scale Population Health
Driving Network Assembly Leveraging Low-Price Care Sites Overcoming Financial Barriers
1. Comprehensive Network Product 3. Top-of-site Referral Partnerships 6. Jointly-Financed Infrastructure
Investment
Appealing to Network Assemblers Slimming Underlying Cost Structures
Breaking Down Information Silos
2. Portfolio-Enhancing Clinical 4. Clinical Footprint Rationalization
Partnerships 7. Continuum-Wide Data
5. Next-Generation Shared Services
Transparency
Hardwiring Mutual Accountability
8. Network-Enabled
Performance Incentives
©2014 The Advisory Board Company • advisory.com • 28603A Source: The Advisory Board Company interviews and analysis.
74
Meaningful Integration About More than the Model

Discrete Elements of Partnership Support Specific Goals
Potential Elements of Potential Benefits

Provider Integration
Payer Contracting Strengthens negotiating position, allows access to larger purchasers
Brand/Identity Confers reputational benefits, signals strength of integration
Strategic Plan Allows rationalized investments/divestitures
Governance Ensures stability and implementation of other shared elements
Operations Enables process efficiencies, knowledge exchange
Broadens perspective over care continuum; reveals

Clinical IT opportunities for reducing total cost of care
Care Model Reduces fragmentation in care delivery; improves outcomes
Expertise Flattens learning curves; promotes best practices
75
Concrete Decisions Beyond Legal Structure

Choice of Model Only Determines Environment for Pursuing Integration
Bra
i ng nd Questions for Every
act /Ide
ntr nti Partnership
Co ty
Independence
• Which strategic and operational
functions should be included in
Str
tise
your organization’s partnership
at
Collaboration
egi
er
strategy?
cP
Exp
• For each function: Is it better to
la n
centralize the function by
Centralization combining it with that of a
partner, or is it better to
collaborate with a partner while
ce
Ca
maintaining separate but aligned
n
re
rna
versions of the same function?
Mo
ve
de
Go
• Does the legal structure of an
l
existing or proposed partnership

facilitate the appropriate degree
Clin ns
i cal atio of integration for each function?
r
IT Ope
76
Road Map

77
Winning Preference Through

Clinical Scope and Geographic Reach
Driving Network Assembly

1. Comprehensive Network Product
Appealing to Network Assemblers
2. Portfolio-Enhancing Clinical Partnerships
78
Which Would You Choose?
Broad Geographic Reach… …or Deep Clinical Scope?
Network in Brief: Crescent Health1 Network in Brief: Silica Healthcare1

• National hospital provider with hospital • 6-hospital system in the Midwest with
campuses across the country employed physician network
• Despite broad geography, limited clinical • Care sites concentrated in roughly half
depth at local level of single metropolitan area
1) Pseudonym.
79
Developing a Targeted Network Strategy (or Three)

Flexible Approach Meets the Demands of a Wide Range of Purchasers
A Multi-Layered Approach to Network Development
Partnership-driven Network in Brief:

Whitehaven Health1
• Integrated health
Super-Regional delivery system in the
Midwest
Geographic Reach
Discussing • Segments market

Regional
possibility of strategy by geography
Local additional
Partnership with • Health system footprint
partnerships to form
like-minded, state-wide network is sufficient for
Individual footprint geographically able to contract with appealing to local
sufficient to contiguous health state employers purchasers; regional
appeal to small system provides and super-regional
employers in local flexibility to sign
networks assembled
market larger regional
contracts
through partnership
Number of contracting possibilities

1) Pseudonym.
80
Deciding Whether to Take the Lead
A Key Decision at Every Level
Local Regional Super-Regional

• Small employers • Large employers • State/national employers
• Local payers • National payers • International purchasers
What is your organization’s network strategy?
Driving Network Appealing to

Assembly Network Assemblers
81
Leveraging Partnership to Appeal to Purchasers

Collaboration Provides a Financially-Sustainable, Proactive Approach
Driving Network Appealing to

Assembly Network Assemblers
Build or Buy Brand Marketing
Committed to Pitfall: Pitfall:

Independence Extremely slow and capital- Increasingly difficult for all but niche
intensive; may require moving providers to confidently position
away from core competencies organization as “must-have”
1 2
Comprehensive Portfolio-Enhancing
Open to
Network Product Clinical Partnerships
Collaboration
82
Combining Geographies to Match Purchaser Footprint

Addressing Individual Limits in Geographic Reach
Partnering to Expand Geographic Scope

Network in Brief:
Healthcare Solutions
Cincinnati-based
Network
employers have TriHealth
employees living on • Joint venture collaboration
both sides of river between Cincinnati, Ohio-
Ohio based TriHealth and
Edgewood, Kentucky-
based St. Elizabeth
Kentucky Healthcare
• Offers health insurers
St. Elizabeth access to a unified, high-
Healthcare quality, low-cost network
that covers the entire
Tristate region
Neither Organization Able to Offer • Both organizations offering
Adequate Geographic Coverage Alone the network to their current
employees and dependents
83
Using Expanded Reach to Target Local Employers

Selling Narrow Network Product Through Commercial Insurers
Creating a Purchaser-Focused Network Solution
Insurer sells HSN as a

narrow network product
Combined
geography
sufficient to TriHealth Local Employers
support large
Cincinnati
Healthcare
employers
Solutions Network
St. Elizabeth’s Public Payers
Key Partnership Elements
Historical Relationship Governance Quality Alignment

Previous collaboration Organization CEOs Aligning quality targets
around insurance serve as Co-CEOs with to work towards
products key to support of existing demonstrable quality
ensuring mutual trust management teams improvements
84
Aligning to Expand Clinical Scope

Creating a Comprehensive High-Value Network Through Partnership
Beginning with Cardiac and Neuroscience Care
Virginia Mason EvergreenHealth

Virginia Mason quaternary facility tertiary facility EvergreenHealth
Gains access to home Gains access to
care services and fills quaternary facility with
gap of secondary proven clinical
facilities east of Seattle outcomes and access
with a partner with a EvergreenHealth Virginia Mason to expanded
proven reputation for home care clinics geography
value
Network in Brief: EvergreenHealth and Virginia Mason

• EvergreenHealth is a 318-bed medical center and integrated health system based in Kirkland,
Washington; Virginia Mason is a 336-bed medical center and group practice based in Seattle
• In 2012, partnered to create a broader network of care in the Puget Sound region with the
purpose of continuous improvement in quality and safety, reduction in cost of care, improving
patient experience, and shared recruitment to avoid oversupply of physicians
• Partnership leverages strengths of both organizations and broadens each partner’s scope of
services and expanded geographic reach
85
Ensure A Cohesive Bond

Built on a Foundation of Shared Vision
Linking a Network Without an LLC
Develop a Ensure
“We set out to form an extremely
Long-Term Vision Physician Support
durable and long-term
Contractual partnership Both partners demonstrate
partnership that allows us to
agreement spans 20 years, clinical quality and outcomes
ensuring both parties are fully
come together and create a
committed to partnership high-value network of care. To
do that, we forged a board-
driven, 20-year agreement that
ensures the partnership’s
strength and stability, ultimately
increasing the quality and value
Secure Track
of care available in our
Support Performance
community.”
Steering committee contains Quality dashboards track progress
equal representation from on clinical areas; partnership Gary Kaplan MD, CEO, Bob Malte, CEO,
both partners (CEOs, dashboard tracks progress on Virginia Mason EvergreenHealth
CMOs, COOs) priority activities aligned with
strategic partnership goals
Tactic #2: Portfolio-Enhancing Clinical Partnerships 86
Bringing High-End Expertise to the Local Market

Telemedicine Partnerships Allow Complex Care to Remain In-House
Systems and AMCs Also Seeking to Enhance Portfolios
Network in Brief: Mayo

Clinic Care Network
• 26-member network;
partnership model that
extends Mayo physicians
and expertise to
members
• In addition to direct
access to clinical
expertise, members are
able to brand themselves
1. eConsult: Specialists 2. AskMayoExpert: Web- as members of Mayo
can connect with Mayo based system allows Clinic Care Network
Clinic experts when they members to access Mayo
want additional input on perspective on hundreds of
complex patient care medical conditions
Source: Health Care Advisory Board interviews and analysis; Mayo Clinic Care
©2014 The Advisory Board Company • advisory.com • 28603A Network, available at: http://www.mayoclinic.org/about-mayo-clinic/care-network.
87
Competitive Dynamics Threaten Local Partnerships

Conflicting Incentives a Risk When Partnering Regionally
Multi-Layered Collaboration Promises Benefit…

Case in Brief: Nielsen
Park Hospital1
• Small, rural community
hospital in the South Co-branding Telemedicine Shared Staff
• Partnered with large Community hospital Allows community Physicians from
tertiary system to able to brand itself as physicians to consult with tertiary hub travel to
enable local access to affiliate of tertiary hub specialists in real-time community hospital
high-end specialty
services such as
cardiology, oncology …Tensions Over Referrals Threatens Affiliation
• Despite promising start
to partnership,
competition for
volumes between
partners threatening
sustainability of Tertiary hub looking to draw Community hospital trying to
affiliation as many referrals as possible retain as many volumes as
from community partner possible within local community
1) Pseudonym.
©2014 The Advisory Board Company • advisory.com • 28603A Source: Health Care Advisory Board interviews and analysis
88
Weighing a Local or National Partner

Ideal Geography a Key Tension in Clinical Affiliation Decisions
Consider Local Partner if…. Consider National Partner if….
 Local providers with same service  Local competition for volumes in

gap are interested in collaboration targeted service area is high
 Local providers that currently offer  Local demand for service is
service are interested in partnering insufficient to justify full-time staff
for mutual benefit
 Targeted service may easily be
 Demand for service is low enough provided through telemedicine or
that local providers are willing to virtual physician-to-physician
share staff, equipment consults
 Patients value brand familiarity over  Patients recognize and value
national reputation national reputation
 Ultimate aim of partnership is joint  National providers have significant
contracting or shared population quality advantage over any local
health management partnership options
89
Key Takeaways
Winning Preference Through Clinical Scope and Geographic Reach
Shared vision and strategy key Creation of a health plan may be a

to partnership around network component of network strategy,
product but should not be the sole strategy
It is difficult to make the necessary The most successful networks ensure
investments to ensure network flexibility in contracting options;
growth without a shared vision and a achieving this means leading with a
significant amount of trust among provider network that can also
network partners. contract with commercial payers.
Certain models faster at bringing a Competitive tendencies can

network together but may restrict threaten the success of regional
contracting ability clinical affiliations
M&A and CI joint contracting Competition for volumes can
arrangements are slower to market, undermine regional affiliations; clear
but allow for tighter network integration referral protocols are necessary to
than faster models such as regional ensure each partner retains
alliances and clinical affiliations. appropriate volumes.
©2014 The Advisory Board Company • advisory.com • 28603A Source: Health Care Advisory Board interviews and analysis
90
Weighing the Models
Comprehensive Portfolio-Enhancing
Model Comments
Network Product Clinical Partnerships
M&A clearly expands geographic reach and

Merger or clinical scope; however, it is a much slower and
Acquisition more capital-intensive approach than other
models.
Clinically- CI is probably the most common means of

Integrated pursuing joint contracting; this model will be
Hospital essential for those organizations looking to
Network partner around a narrow network offering.
Accountable Sharing risk is probably the quickest way to

Care enable joint contracting; however, starting an
Organization ACO involves costs and cultural shift.
Collaboratives often involve more members so

Regional there is greater potential to expand reach and
Collaborative scope; however, attempts to contract jointly will
likely invite significant regulatory scrutiny.
These, typically bi-lateral agreements, are well-

Clinical
suited to filling a specific clinical gap; however,
Affiliation
they often span large geographies and thus tend
Agreement
to limit opportunities to contract jointly.
91
Ideal Partners
Five Characteristics of the Ideal Partner
Complementary Complementary Strong Shared Strategic Willingness to

Clinical Assets Geography Brand Name Vision Share Referrals
Partners that span For the purposes of Consider whether Particularly Clinical affiliations
a different part of expanding reach or patients value important for those in particular require
the care continuum sharing referrals, national brands or organizations clarity around
are ideal for partners with prefer a local looking to jointly referral protocols
bringing new contiguous partner (i.e. the own and sell a and where volumes
capabilities to the geography are “best hospital in market-facing will be retained to
network ideal; national town” or the network; affiliations ensure competitive
partners ideal for hospital that they of this nature tensions do not
telemedicine have been to require long-term undermine
partnerships before) commitment partnership
92
Lowering Unit Costs Through

Operational Scale
Leveraging Low-Price Care Sites

3. Top-of-Site Referral Partnerships
Slimming Underlying Cost Structures
4. Clinical Footprint Rationalization
5. Next-Generation Shared Services
93
High Cost Driving Price Rigidity

Limited Ability to Compete Against Low-Cost Providers
High Fixed Cost Production Model
Struggling to offset
Difference in Average Price for expensive fixed cost
Common Imaging Procedures1 base
HOPD2 vs. Freestanding Imaging Facilities, 2011
Lack of back-office
57% lower efficiency
$779
$334
vs.
Low-Cost Narrow-Focus Care Sites

Hospital Outpatient Freestanding
Department Imaging Center Facilities with
low-fixed costs
Streamlined focus on
narrow set of services
1) MRI, CT, Radiography, Nuclear Medicine, Ultrasound,

Mammography, and PET.
2) Hospital Outpatient Department.
Source: Regents Health Resources, “Imaging Market File,” Radiology Business
©2014 The Advisory Board Company • advisory.com • 28603A Journal , April 2011; Health Care Advisory Board interviews and analysis.
94
Use Networks to Build Operational Scale

Three Tactics for Increasing Price Flexibility
Leveraging Low-Price Slimming Underlying Cost

Care Sites Structures
3 4 5
Top-of-Site Referral Clinical Footprint Next-Generation

Partnerships Rationalization Shared Services
Tactic #3:Top-of-Site Referral Partnerships 95
Re-envisioning Top-of-Site Care

Sending Patients to the Right Site, at the Right Cost
An Expanding Network of Low- Three Main No-Regrets Focus
Acuity Partners Areas for Volume Shifts
Urgent Pediatric
Care Urgent
Pediatric Care Tertiary
After
Hours Women’s 1 Hospital to
Clinic Community
Hospital
Chronic Full
Disease Worksite Emergency
Clinic Clinic
Department to
2 Urgent Care
Medical Mental Provider
Home Health
Urgent
Care Primary Care
Retail E-Visits 3 Office to
Clinic
Retail Clinic
Advanced School
Care Clinic
Center
96
More Than Just Theoretical

Faulkner’s Stubbornly Low Prices Show Benefit of Strategy
Brigham Faulkner
and Women’s Hospital Proving the Point
Merged1 General admissions

1997 13.7% shifted from BWH to
Faulkner since 2005
Lower commercial
2013 Case
Mix Index
1.38 0.80
19% prices at Faulkner vs.
BWH, as of 2012
Attractive Strategy In Negotiations with Purchasers
BWH contracts with local HVMG received BWH able to retain contract
multispecialty group (Harvard attractive terms from by offering to shift more
Vanguard Medical Group) another local hospital lower-acuity volumes to
came up for renegotiation Faulkner at lower unit price
Source: Sussman et al, “Integration of an Academic Medical Center and a

1) Came together under common corporate parent Community Hospital: The Brigham and Women’s/Faulkner Hospital Experience,”
Journal of Academic Medicine, 2005; Health Care Advisory Board interviews and
98
Removing Obstacles to Volume Reallocation

Integration of Clinical Programs Needed to Encourage Top-of-Site Care
Key Elements of the Brigham and Women’s-Faulkner Volume Reallocation Effort
Integrated Teaching Programs Joint Clinical Programs

Brigham surgery and medicine Due to limited operating room
residents perform a portion of availability at Brigham, unfilled
training at Faulkner rooms at Faulkner made available
to BWH surgeons
Co-branding Opportunity
Patient Convenience Cross-Branding Opportunity

Less travel, availability of private Combining the two organization’s
rooms, better parking all seen as name resonated with patient focus
improving the patient experience groups and held pushback at bay
from both entities
Source: Sussman et al, “Integration of an Academic Medical Center and a Community

Hospital: The Brigham and Women’s/Faulkner Hospital Experience,” Journal of Academic
©2014 The Advisory Board Company • advisory.com • 28603A Medicine, 2005; Health Care Advisory Board interviews and analysis.
Tactic #4: Clinical Footprint Rationalization 99
Right-Sizing Facility Footprint a Clear Opportunity

Most Markets Far From Rationalized
Despite Reductions in Hospital Beds, Significant Opportunity for Savings in
Most Organizations Still Have Excess Capacity Reducing Excess Bed Capacity
U.S. Inpatient Beds, Occupancy Rate Estimated Cost Savings from Eliminating
1980-2009 Expectedly Empty Beds in Rhode Island1
1.46 M
1.36 M
$25-106K
78% 1.21 M Per bed when removing
1.08 M 0.98 M beds piecemeal, includes
0.95 M
70% reduction in supply and
66% 69% staff expenses
66%
68%
$580K
Per bed when closing
1980 1990 1995 2000 2008 2009 entire facilities, includes
facility, supply, and
Inpatient Beds Occupancy Rate staffing cost reductions
1) Calculated by taking 18% of the average cost per bed, by

bed type, from the 2009 and 2010 Medicare Cost Report
Data, inflated at 2% annually to reflect natural price growth.
Source: Alicia Caramenico, “Council: Eliminate excess hospital beds to save $116M,”
©2014 The Advisory Board Company • advisory.com • 28603A Fierce Healthcare, May 2013; Health Care Advisory Board interviews and analysis.
100
First, Do No Harm
Strategic Alignment Allows for More Efficient Planning for Future Capacity
Avoids Duplication of Services
within Shared Market
Northwest Metro Alliance
Combined Planning Process
Example: HealthPartners and Allina

Health are joint owners of two outpatient
• Alliance creates guiding imaging centers in the market
principles and rules
• Shared incentives under
HealthPartners’ health plan Network in Brief: Northwest Metro
encourages cooperation Alliance
• Allows for collaborative planning • Partnership between Bloomington-based
across the entire population HealthPartners and Minneapolis-based
Allina Health, centered in northwest
suburbs of Minneapolis
• Joint planning done through alliance
reduces duplicative efforts
Source: HealthPartners and Allina Hospitals and Clinics, available at:
https://www.healthpartners.com/ucm/groups/public/@hp/@public/documents/documents/
cntrb_008919.pdf, accessed 3 May 2014; Health Care Advisory Board interviews and
©2014 The Advisory Board Company • advisory.com • 28603A analysis
101
Address All Stakeholder Incentives

Consolidation of More Lucrative Services May Require Financial Alignment
HSHS-Prevea Partnership Finds Opportunity to Components of Alignment Necessary to
Rationalize Duplicative Imaging Capacity in Execute on Capacity Rationalization
Wisconsin
Cultural Alignment
• Long working relationship
since 1995
Strategic Alignment
• Shared vision of regional growth
• Launched three-way joint venture
with Dean Health
• Collaborating on a number of
population health management
projects
Financial Alignment
• Agreed to sign PSA with Prevea
physicians ensuring physician
compensation at fair market value
103
Limit to What Can Be Achieved Without Full Merger

Byron1 Merger Showcases Potential of Full-Service Line Consolidation
Decision to Consolidate Duplicative CV Services at Byron Health 1
Bells Medical Center1 Clarkes Hospital1

• 900 cases/year • 200 cases/year
• Large campus with excess capacity • Capacity constraints for other services
Large Profitability Differential Close Geographic Proximity Operational Gains

Bells program clearly more Programs within 5 miles of each Potential cost savings from
profitable than Clarkes other, serving same population consolidated staffing, space
program
Staffing Cost Savings
0% 25%
Loss in market-share Reduction in number of Cardio-
after consolidation Pulmonary Perfusionists needed
1) Pseudonym.
Tactic #5: Next-Generation Shared Services 105
Creating Advantage Through ‘Internal Outsourcing’

Applying the “Shared Services” Concept to Health Care
Attributes of a Top-Performing Shared Services Organization
Treats operational units Strategy, functionality Focus on process Transfer of insight from
as clients, competes for driven by needs at standardization and high-performing units to
business vs. outside operational unit level continuous improvement low performing units
vendors
Concept in Brief: Shared Services Organization

• Single service organization performs selection of business support activities on
behalf of multiple operating units
• “Shared” processes moved out of individual operating units and into separately
managed shared services organization (SSO)
• An SSO has same expectations, responsibilities and accountabilities as external
vendor does to its clients, making it more than just a centralization function
106
Translating Cost Savings into Competitive Pricing

Significant Opportunity to Improve Network Attractiveness
Savings Reallocation Options for Hypothetical Medium-Size U.S Hospital
Margin Improvement
1 • Improve margins from 6.5% to 9%
New Investments
• e.g. Two new 1.5 T MRI Scanners
2 • e.g. Four new 64 Slice CT scanners
• e.g. One new IMRT1 Machine
• 150-bed hospital carries out Universal Price Reductions

successful cost-savings initiative 3 • Reduce prices overall by up to 5.9%
• Manages to cut $2 million from while still maintaining existing margins
operating expenses
Service-Specific Price Reductions
4 • e.g. reduce outpatient imaging
prices up to 35% while still
maintaining existing margins
1) Intensity Modulated Radiation Therapy
107
Key Takeaways
Lowering Unit Costs Through Operational Scale
Scale no guarantee of cost Cross-organizational transparency

savings necessary to unlock full benefits of
Regardless of the model chosen, consolidation
successful consolidation requires an Though non-merger models have the
investment in a dedicated cross- ability to centralize and consolidate
organizational consolidation function. costs, mergers provide an extra level
No model guarantees such a of cross-organizational transparency
function. and therefore a greater opportunity to
cut costs.
Integration of clinical programs Rationalization of underutilized

necessary to promote top-of-site capacity historically elusive
volume allocation
Potential merger savings based
Models that encourage clinical on consolidation and closure of
alignment will facilitate more efficient facilities should be highly
volume reallocation. scrutinized.
108
Weighing the Models
Next
Top-of-Site Clinical
Generation
Model Referral Footprint Comments
Shared
Partnerships Rationalization
Services
Greatest possibility for consolidation of business

Merger or functions, rationalization of referrals and clinical
Acquisition capacity though success requires partnership
beyond financial integration.
Clinically- Contracting leverage gained through CI offers

Integrated incentive for clinical collaboration but little
Hospital incentive for operational consolidation and
Network rationalization.
Huge incentive for rationalization of referrals,

Accountable
though less for consolidation of operations;
Care
strategic alignment offers possibility to prevent
Organization
duplication of future clinical investment.
Potential, though limited, to consolidate and

Regional
centralize business operations, and gain
Collaborative
leverage over vendors, suppliers.
Focus on operational alignment limits potential to

Clinical
consolidate business operations, though may
Affiliation
help to rationalize referral patterns, prevent
Agreement
future duplication of investment.
109
Ideal Partners
Five Characteristics of the Ideal Partner
Complementary Low Cost Willingness to Cultural Existing

Case Mix Structure Consolidate Closeness Capabilities
Partnerships between Organizations with Consolidation Consolidation and Partners with
organizations that a low existing cost requires centralization are already highly
have complementary structure represent commitment and highly political efficient operational
service capabilities good opportunities close cooperation; process; a high functions provide
provide opportunity to expand low-price ideal partners are degree of cultural best opportunity
for mutual benefit by sites of care. committed to alignment is for consolidation
reallocating volumes executing on necessary across all as scaling existing
between sites. centralization and organizational levels functions is easier
consolidation to prevent significant than building anew.
possibilities. pushback.
110
Reducing Total Costs

Through Population Health
Overcoming Financial Barriers

6. Jointly-Financed Infrastructure Investment
Breaking Down Information Silos
7. Continuum-Wide Data Transparency
8. Network-Enabled Performance Incentives
111
Providers Judged by Ability to Reduce Utilization

Controlling Unit Costs Only Part of the Equation
Three Provider Strategies to Appeal to Network Assemblers on Cost
Low Unit Price Total Cost Control
Price Cut Utilization Management Trend Control

Improve efficiency to Rationalize utilization to Implement care
offer lower fee schedule secure referral management to control
preference cost growth trend
Degree of Cost Control
112
A Clear Path for Improvement

Steps To Total Cost Management Well Established
Attaining Financial Success From Patient Management
Hig
h- Trade high-cost services for
low-cost management
Risk
Avoid unnecessary higher-

Rising-Risk
Pati
Patients acuity, higher-cost spending
ents
Low-Risk Patients Keep patient healthy, loyal

to the system
Study in Brief: Playbook for Population Health

• Study summarizes the key leadership and care model capabilities needed for financial
success under population health
• Available at advisory.com/pophealthplaybook
113
Population Health a Difficult Ambition Acting Alone

Partnership Offers a Path Forward
Problem #1: Insufficient Problem #2: Fragmented Problem #3: Lack

financial capital data and expertise of shared accountability
Reducing Breaking Down Hardwiring Mutual

Financial Barriers Information Silos Accountability
6 7 8
Jointly-Financed Continuum-Wide Data Network-Enabled
Infrastructure Investment Transparency Performance Standards
Tactic #6: Jointly-Financed Infrastructure Investment 114
Population Health Requires Extensive Investment
Common Areas of Investment
Care management Disease

staffing Registry
An Undeniable Financial
Burden
Electronic Post-Acute
Medical Record Care network
$12M
AHA’s1 estimate Patient-Centered Management
of ACO start-up costs Medical Home resources
fora 5-hospital system
Legal and Predictive
consulting support analytics
$14.1M Health Information PCP
AHA’s estimate of
ongoing annual ACO costs Exchange recruitment
for a 5-hospital system
Specialist Patient
network engagement tools
Source: American Hospital Association, “Activities and Costs to Develop an Accountable

1) American Hospital Association. Care Organization,” available at: http://www.aha.org/content/11/aco-white-paper-cost-dev-
©2014 The Advisory Board Company • advisory.com • 28603A aco.pdf, accessed May 5, 2014; Health Care Advisory Board interviews and analysis.
115
Partnership Reduces Individual Financial Burden

Shared Care Management Investment Through ACO
Arizona Care Network Shared Staffing Model
Abrazo Shared Investment Areas

Health • Care management teams (RN,
community resource specialist,
pharmacist)
Arizona Care • Physician support staff (e.g. for
Network quality training)
Dignity Health Jointly-owned physician-
Arizona • IT infrastructure
led ACO and CI network
Network in Brief: Arizona Care Network

• Physician-led ACO and CI network; jointly-owned by Abrazo Health and Dignity Health Arizona
• Population health infrastructure investments made at network level, allowing Abrazo and
Dignity to share costs of resources such as staffing, IT
Tactic #7: Continuum-Wide Data Transparency 116
Pool Data Across Network to Pinpoint Efforts

Partners Benefitting from Master Patient Index
Regional Utilization Trends Reveal Top Population Health Opportunities
Network in Brief: Dallas-Fort

Worth Hospital Council
Foundation 80 area hospitals feed patient
• Consortium of 156 hospital utilization data into enterprise
and associate members in data warehouse
Northern Texas
Master patient index matches
• Provides educational
patient records across facilities
programs, collaborative and organizations
efforts, strategic alliances, and
advocacy with the local and Data is fed into analytic tools that
state governments provide insight into regional
• Discovered that 25% of trends in utilization
readmitted patients in the
Paying members receive access
region did not return to their
to quality dashboard that helps
original hospital for care, pinpoint population health efforts
making it difficult to accurately
predict readmission rates
Source: Healthcare Financial Management Association, “Dallas-Fort Worth Hospitals Share
Data for Dramatic Improvements,” available at: https://www.hfma.org/Content.aspx?id=22078,
©2014 The Advisory Board Company • advisory.com • 28603A accessed May 5, 2014; Health Care Advisory Board interviews and analysis.
117
Putting the Master Patient Index into Practice

Ensures Management of Riskiest Population Segments
Real-Time Data Enables Targeted Resource Deployment at One Member Hospital
1 2
z
12% 9%
Examination of region- Analytic tools reveal Reduction in 30-day acute
wide, cross-facility clinical, demographic myocardial infarction
utilization patterns trends among patients readmission rate at one member
reveals readmissions who had been hospital
as area of opportunity readmitted in the past
16% 12%
4 3 Reduction in 30-day
z pneumonia readmission
rate at one member hospital
Aggressive case Member hospital uses

management of
identified patients
population-level insight
to identify patients at
20%
leads to reduction in increased risk for Reduction in readmissions
readmissions readmission across all member hospitals
Source: Healthcare Financial Management Association, “Dallas-Fort Worth Hospitals Share
Data for Dramatic Improvements,” available at: https://www.hfma.org/Content.aspx?id=22078,
©2014 The Advisory Board Company • advisory.com • 28603A accessed May 5, 2014; Health Care Advisory Board interviews and analysis.
118
Drilling Down to the Individual Patient Level

Four Approaches to Real-Time Data Sharing Among Network Partners
Manual Data-Sharing Agreements EMR Look-Ups

Key to Partnership: Consensus on how Key to Partnership: Shared or linked EMR
often to proactively push data systems
Example: Visiting Nurse Service of New Example: Through their partnership in the
York sends home health assessment to Northwest Metro Alliance, Allina and
three hospital partners every day HealthPartners have read only-access to
each other’s Epic systems
ADT1 Feed Regional HIE

Key to Partnership: Ideal partner has Key to Partnership: Shared funding to
access to out-of-system utilization data ensure financial sustainability
Example: Blue Shield of California Example: Medical Home Network in
provides real-time utilization data with Chicago has set up a regional HIE that
provider partners through CalPERS ACO provides participants with last 90 days of
patient data
Source: Chicago Tribune, available at: http://articles.chicagotribune.com, accessed October 1, 2012 ; Health Affairs, “Four Years Into
A Commercial ACO For CalPERS: Substantial Savings And Lessons Learned,”; HealthPartners and Allina Hospitals and Clinics,
1) Admission, Discharge, Transfer.
available at: https://www.healthpartners.com/ucm/groups/public/@hp/@public/documents/documents/cntrb_008919.pdf, accessed 3
©2014 The Advisory Board Company • advisory.com • 28603A May 2014 Health Care Advisory Board interviews and analysis.
119
Establish a Common Network Language

Shared Processes Eliminate Gaps in Stand-Alone Efforts
Consolidating Risk Scores First Step to Aligned Care Management
Analysis of Top 1,000 Riskiest

Patients Revealed:
• Each individual algorithm failed to
identify some high-risk patients
• Inconsistent identification reduced
ability to prevent:
 ER visits
Prior to creation of CalPERS Risk scores consolidated
ACO, each participant had  Admissions from ER into single process and
individual risk scoring process  Inpatient readmissions single IT platform
Source: Blue Shield of California, “An Accountable Care Organization Pilot: Lessons
Learned,” available at: https://www.blueshieldca.com/employer/documents/knowledge-
center/features/EKH_ACO%20Lessons%20Learned%20Case%20Study.pdf, accessed
©2014 The Advisory Board Company • advisory.com • 28603A 3 May 2014; Health Care Advisory Board interviews and analysis.
Tactic #8: Network-Enabled Performance Incentives 121

Two Promising Strategies to Hold Partners Accountable
Formal Shared Membership-Based

Risk Incentive
Including partners in formal Positioning membership in the

risk-based arrangements (e.g. network itself as performance
shared savings, global incentive (e.g., preferred
payment contracts) referral network)
Candidates: Candidates:
• Hospital ACO partners • Clinical Integration Network
• Employed physicians • Post-Acute Care Providers
• Ancillary providers
122
Extend Shared Risk Beyond Hospital and Physicians

Bringing Ancillary Providers to the Table Through Shared Savings
MMC Physician-Hospital Organization ACO
Home Health SNF

PHO has worked with each
Included because of Included because of
provider to identify relevant
high Medicare high Medicare utilization
performance metrics;
utilization
focusing specifically on 33
metrics from MSSP to
promote performance
Lab Behavioral Health against value-based
Included due to relevance Included in case of metrics across sites
for any population expansion to Medicaid
Network in Brief: MMC Physician-Hospital Organization

• PHO composed of 1,100 physicians from the Community
5%
Physicians of Maine and the seven MaineHealth hospitals; Portion of savings that
based in southern and coastal Maine will be distributed to
“other providers”, i.e.
• As part of participation in the Medicare Shared Savings
not hospitals, PCPs, or
Program, will be sharing savings with ancillary providers
specialists
based on value performance measures
Source: MMC Physician-Hospital Organization, available at: http://www.mainehealth.org/mhaco,
©2014 The Advisory Board Company • advisory.com • 28603A accessed May 3, 2014; Health Care Advisory Board interviews and analysis;
123
Creating the Incentive to Keep Up

Implementing Lessons from Physician CI 1
Creating Motivation to Meet Network Standard
Threat of Probation Incents Improvement Benefits to Network Inclusion
• All physicians must meet a minimal

• Favorable payer rates from
performance threshold on “CI score”
joint contracting
• Physicians who score below minimum
• Access to IT infrastructure
threshold placed on probation for one year
Network in Brief: Cronulla Health Care 2

• Clinically integrated physician network affiliated with six Cronulla Health Care
hospitals in the Midwest
• Instituted CI score, non-negotiable membership requirements to improve unity,
quality of physician partners in network
1) Clinical integration.
2) Pseudonym.
124
Extending Network Exclusivity to the PAC World

Promise of Increased Referrals Creates Performance Incentive for PACs
Setting Out Strict Quality Standards to Requiring Monthly Reporting to
Achieve and Maintain Preferred Status Ensure Continuous Performance
SNF Standards Monthly SNF Scorecard

 Overall rating of four or five stars _____ Long-term care mortality rate
 Quality rating of three, four, or five stars _____ Long-term hospitalization index
 Registered nurses on-site 24/7 _____ Total readmission rate within 30 days
 Ability to start IV lines 24/7 _____ Total readmission rate within 72 hours
 Ability to admit patients within two hours
Network in Brief: OSF Healthcare Network in Brief: North Shore-LIJ

• Eight-hospital, not-for-profit health • 16-hospital, not-for-profit health system
system based in Peoria, Illinois based in Great Neck, New York
• As part of Pioneer ACO strategy, • In 2008, created a SNF affiliate network
created a preferred SNF network limited of 19 from list of potential 266
to 17 facilities who met target criteria
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-
©2014 The Advisory Board Company • advisory.com • 28603A Acute_Care, accessed May 3, 2014; Health Care Advisory Board interviews and analysis.
125
Preferred Networks Prove Ability to Reduce Total Cost

Promote Continuous Improvement Through Focused Partnership
Reducing Hospitalizations at OSF’s Reducing Readmissions and ED Visits
Preferred Network at North Shore-LIJ’s Affiliates
Heart Failure Rehospitalization Rate Readmissions From Affiliated SNFs
6% 27%
11%
2%
2010 2012 2011 2013
All-Cause Readmission Rate
13%
7.5% >50% Reduction in ED visits

from affiliated SNFs
2010 2012
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-
©2014 The Advisory Board Company • advisory.com • 28603A Acute_Care, accessed May 3, 2014; Health Care Advisory Board interviews and analysis.
126
Mutual Benefit Necessary to Create Incentive
Critical Elements of Preferred PAC Network
Key PAC Benefit Key Health System Benefit
Access to Operational Resources Data Transparency

Health systems may provide access to Regular data reports from PAC partners
functionalities like their GPOs1 or IT ensure that performance continues to
systems that PAC2 providers would be meet high-bar; highlights areas where
unable to access on their own additional support may be needed
Shared Care Pathways and Training Shared Staff

Health systems and PAC providers have PAC providers may be able to expand
different areas of expertise and may hospital capacity by taking on complex
share protocols and training resources patients; health systems may send staff
to improve network as a whole to monitor high-risk patients at PAC sites
Areas of Mutual Benefit

1) Group Purchasing Organizations.
2) Post-Acute Care.
127
Key Takeaways
Reducing Total Costs Through Population Health
Alignment models that allow Standardizing care according

flexibility in partner choice create to best practice requires tight
inherent performance incentives financial alignment
Joint contracting networks, alliances, Though looser collaborations may
and ACOs offer greater ability to allow members to pinpoint best
switch out low-performing partners practices, standardizing care
than full-asset mergers according to best practice will require
partnership models that bring tighter
financial alignment between partners
Adding more partners reduces Easier to contract for risk

financial burden, but also any through single entity
potential reward
Difficulties in analyzing and
Adding more partners to population valuing risk are exacerbated
health efforts can lower financial costs, when multiple parties are
and improve care management, but it negotiating and signing separate
can also spreads potential savings contracts with payers
across greater number of organizations
128
Weighing the Models

Network-
Jointly-Financed Continuum-
Enabled
Model Infrastructure Wide Data Comments
Performance
Investment Transparency
Standards
Long development time for mergers

lowers flexibility of partner selection,
Merger or though full financial alignment allows
Acquisition greater clinical alignment
Clinically- Investment in CI tends to focus on joint

Integrated contracting for fee-for-service
Hospital contracts, rather than population
Network health management
Though financial incentives are aligned

to support population health
Accountable coordination, lack of strategic
Care alignment precludes more helpful
Organization consolidation of resources
Though number of partners may

Regional support greater economies of
Collaborative knowledge, little incentive to
collaborate on population health
May incentivize collaboration on

Clinical specific clinical objectives, but broader
Affiliation alignment vehicle necessary to
Agreement facilitate population health coordination
129
Ideal Partners
Three Characteristics of the Ideal Partner
Common Complementary Access to

Patient Population Population Health Assets Claims Data
Organizations that share a All partnerships should involve Provider organizations that have
patient population benefit when some division of accountability, or access to patient claims data,
they partner to coordinate efficient allocation of resources. either through an owned health
transitions and population health, plan, or an existing relationship
Partnerships that bring together
whether they are working under with a payer, represent ideal
complementary assets can
fee for service or risk- partners in population health
reduce new expenditures,
arrangements minimize the need to rationalize Organizations should ensure that
existing assets they negotiate access to claims
data when setting up any risk-
based arrangement with a
commercial payer
130
Road Map

131
Partnerships Must Drive Market Advantage

Leverage Beyond Price the Key to Success
I II III
Winning Preference Lowering Unit Prices Reducing Total Costs
Through Clinical Scope Through Operational Scale Through Population Health
Degree of Market Advantage
and Geographic Reach
• Leveraging Low-Price • Overcoming

Care Sites Financial Barriers
• Slimming Underlying • Breaking Down
• Driving Network Cost Structures Information Silos
Assembly
• Hardwiring Mutual
• Appealing to Network Accountability
Assemblers
Time to Maximum Benefit
132
Model Choice No Guarantee of Success
Models Set Ground Rules… ...But Underlying Challenges Remain
Legal Ability to Cooperate Integration Planning

Models like M&A, clinical Legal framework only the
integration, and shared risk enabler; benefits of
provide legal framework that collaboration only realized
enables collaboration through integration
Alignment of Governance Stakeholder Buy-In

Partnership creates formal Governance structure no
governance structure; leaders guarantee of buy-in from key
may be new or pulled from stakeholders such as
partner organizations physicians and board members
Shared Identity Cultural Alignment

Partnership creates unified Identity may be in name-only;
identify, whether through true cultural alignment requires
formal legal structure or robust communication plan,
informal collaboration extensive training
133
Network Strategy Must Be More Than Just a Hobby

Success Depends on Focused, Intentional Strategy and Execution
Five Characteristics of Intentional Corporate Strategy
1 2 3
Clarity of Purpose Professionally Managed Pipeline Transactional Discipline
Intentional corporate strategy Partnership function should be Robust due diligence process
starts with well-formed, clearly an organized, routine process, prevents “partnership for the
articulated organizational purpose not an episodic activity sake of partnership”
4 5
Scientific Approach to Cultural Fit Integration as Core Competency
Cultural affinities and possible Integration planning begins long before

contradictions explored in parallel partnership is finalized and continuous
to financial due diligence indefinitely through rigorous monitoring

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Health Care Advisory Board

The Emerging Era of Choice

An Industry Built on a House of Cards

Revisiting a Tenuous Business Model

Traditional Hospital Cross-Subsidy

Commercial Insurance Public Payers

Above Cost Below Cost

Source: American Hospital Association, “Trendwatch Chartbook

Cross-Subsidy Depends on Inefficient Markets

Assumptions Underlying Provider Growth Strategy

Entrenched Payer Established Provider Price-Insulated Patient

The Retail Revolution

Major Themes Reshaping Provider Strategy

Medicare Reforms and

2 Coverage Expansion and the Rise

3 Activist Employers and

Public-Payer Reimbursement Still in the Crosshairs

Steady Shift Toward Risk-Based Payment

Medicare Value-Based Purchasing Program Other Mandatory Risk Programs

30% 25% 25% Efficiency No Trivial Thing

FY 2013 FY 2014 FY 2015 FY 2016 Medicare revenue at

6% risk from mandatory

More Providers Taking the Hint

Medicare ACO Program Entrants The Broader Picture

106 626 20.5M

1) Medicare Shared Savings Program

Some Pioneers Changing Course

“The model was financially detrimental…despite favorable

Medicare Shared Savings Program a Mixed Bag

Medicare Shared Savings Program Issues to Watch for in Updated

$297M MSSP ACOs in first performance

1) Includes one participant’s $4M repayment of shared losses

Transition to Risk Hardly Stalled

Source: H.R. 5558, http://welch.house.gov/uploads/ACO%20Bill%20Text.pdf;

Medicare Advantage Gaining Momentum

Projected Medicare Advantage Enrollment Provider Benefits Over Shared

Greater provider control over

Less frequent patient churn

Source: Jacobson G et al., “Projecting Medicare Advantage Enrollment: Expect the

ACA (and Recovery) Making a Dent in Uninsurance

Percentage of U.S. Adults Without Health Insurance

A Bargain Still Unbalanced

Medicaid Expansion Contentious—and Consequential

Expanding or Not, States Pushing Medicaid Innovation

Competing Philosophies on Medicaid Reform

Arkansas Turning to Private Market

1 Pennsylvania application for

Arkansas proposal to require

3 Increase in cost of expansion

One Year In, Insurance Exchanges Generally on Track

October to January to March Total 28%

Individuals Gravitating Toward Leaner Plans

Factors Influencing Metal Level Premium Levers Beyond Benefit Design

Deductible Non-Essential Scope of Non-Essential Benefits

High Deductibles Dominating Exchange Markets

Individual Deductibles Offered On Challenges for Providers

$2,500 $6,250 costs discourage

Individual Deductibles Chosen on

Premium Sensitivity Supporting Narrow Networks

100% PPO Network Breadth Broad

62% 59% 59% Exclude 30% of Exclude 70% of

OB/GYNs Orthopedists Oncologists Cardiologists

Proper Risk Pricing Still Essential