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Health Care Advisory Board

Health System Strategy at the Tipping Point Forces Shaping Provider Strategy in the New Health Care Economy

©2013 The Advisory Board Company • advisory.com


Health Care Advisory Board Project Director Ben Umansky Design Consultant Christina Lin Managing Director Christopher Kerns

LEGAL CAVEAT

IMPORTANT: Please read the following.

The Advisory Board Company has made efforts to verify the accuracy of the information it provides to members. This report relies on data obtained from many sources, however, and The Advisory Board Company cannot guarantee the accuracy of the information provided or any analysis based thereon. In addition, The Advisory Board Company is not in the business of giving legal, medical, accounting, or other professional advice, and its reports should not be construed as professional advice. In particular, members should not rely on any legal commentary in this report as a basis for action, or assume that any tactics described herein would be permitted by applicable law or appropriate for a given member’s situation. Members are advised to consult with appropriate professionals concerning legal, medical, tax, or accounting issues, before implementing any of these tactics. Neither The Advisory Board Company nor its officers, directors, trustees, employees and agents shall be liable for any claims, liabilities, or expenses relating to (a) any errors or omissions in this report, whether caused by The Advisory Board Company or any of its employees or agents, or sources or other third parties, (b) any recommendation or graded ranking by The Advisory Board Company, or (c) failure of member and its employees and agents to abide by the terms set forth herein.

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1. The Advisory Board Company owns all right, title and interest in and to this Report. Except as stated herein, no right, license, permission or interest of any kind in this Report is intended to be given, transferred to or acquired by a member. Each member is authorized to use this Report only to the extent expressly authorized herein. 2. Each member shall not sell, license, or republish this Report. Each member shall not disseminate or permit the use of, and shall take reasonable precautions to prevent such dissemination or use of, this Report by (a) any of its employees and agents (except as stated below), or (b) any third party. 3. Each member may make this Report available solely to those of its employees and agents who (a) are registered for the workshop or membership program of which this Report is a part, (b) require access to this Report in order to learn from the information described herein, and (c) agree not to disclose this Report to other employees or agents or any third party. Each member shall use, and shall ensure that its employees and agents use, this Report for its internal use only. Each member may make a limited number of copies, solely as adequate for use by its employees and agents in accordance with the terms herein. 4. Each member shall not remove from this Report any confidential markings, copyright notices, and other similar indicia herein. 5. Each member is responsible for any breach of its obligations as stated herein by any of its employees or agents. 6. If a member is unwilling to abide by any of the foregoing obligations, then such member shall promptly return this Report and all copies thereof to The Advisory Board Company.


Health Care Advisory Board

Health System Strategy at the Tipping Point Forces Shaping Provider Strategy in the New Health Care Economy

6

©2013 The Advisory Board Company • 27497A

Road Map

1

A Crumbling Cross-Subsidy

2

The New Logic of Choice

3

The Rise of Productive Growth


Not the Smoothest of Starts

©2013 The Advisory Board Company • 27497A

Federal Exchange Slow to Answer the Bell

8

Some State Exchanges Faring Better Enrollment Slow, But Most Websites Working State Decisions on Exchange Participation 16 States, District of Columbia Running Own Exchanges

Federal Exchange

State-Based Exchange 17

>40,000

Completed applications in New York

16,311

Completed applications in California

12,955

Completed applications in Kentucky

326

Completed applications in Maryland

27 7 Partnership Exchange

©2013 The Advisory Board Company • 27497A

State Exchange Enrollment Within First Week of Launch

Source: Kaiser Family Foundation, “State Decisions for Creating Health Insurance Exchanges, as of May 28, 2013,” available at: www.kff.org; CNBC, “One Washington gets Obamacare Right,” available at: http://www.cnbc.com/id/101096445, Kentucky Governor’s Office, “2.6 Million Page Views on Kynect for Affordable Health Insurance,” available at: http://migration.kentucky.gov/newsroom/governor/20131005kynect.htm; Health Care Advisory Board interviews and analysis.


9

Observation #1: Affordable Premiums

Post-Subsidy Premiums Within Reach for Many But Penalties Still Smaller than Cost of Coverage Weighted Average Monthly Premiums for Adult Individual Aged 27

Penalties for Non-compliance Year

For Second Cheapest Silver Plan, by State, 2014, Pre and Post subsidy1 for Income of $30,000

$344

Annual Penalty

2014

$95 or 1% of income

2015

$325 or 2% of income

2016

$695 or 2.5% of income

$286 $255

Annual Penalty $214

$214

$214

Income: $30,000

$154 $154

$750 ©2013 The Advisory Board Company • 27497A

$600 $300 Tennessee

Florida

Before Subsidy

Mississippi

Alaska

After Subsidy 2014

2015

2016

Source: Kaiser Family Foundation, “Kaiser Health Tracking Poll,” March 2013, available at: kff.org; PwC, “Health Insurance Exchanges: Long on Options, Short on Time,” October 2012, available at: www.pwc.com; Health Care Advisory Board interviews and analysis.

10

Observation #2: Low Reimbursement

Trading Price for Volume on the Public Exchanges Reimbursement Information Still Anecdotal , but Rates Not Generous Anticipated Provider Reimbursement Rates for Exchange Plans

Catholic Health Initiatives Modest discounts from commercial rates

©2013 The Advisory Board Company • 27497A

Millern Medical Center1 20% below commercial rates

WellPoint Inc. Between Medicare and Medicaid rates

Meyers Health1 10% above Medicare rates

Tenet Healthcare Up to 10% below commercial rates Meriwether Hospital1 5% below commercial rates

1) Pseudonym.

Source: Mathews AW and Kamp J, “Another Big Step in Reshaping HealthCare,” Wall Street Journal, February 28, 2013, available at: www.online.wsj.com;; Health Care Advisory Board interviews and analysis.


11

Observation #3: Narrow Networks

Lower Prices through Narrower Networks Monthly Health Insurance Premiums

Prominent Health Systems Largely on the Sidelines

Select California Exchange Plans, 20141 Actual Premiums

$450

$222

$254

Cedars-Sinai Medical Center not participating in any exchange plan networks

$294

UCLA Health System participating in only one exchange plan network

©2013 The Advisory Board Company • 27497A

Milliman Projection

Health Net

Anthem

Kaiser Permanente

5M

13

36%

80%

Individuals expected to be eligible for Covered California exchange, 2014

Insurers offering plans on Covered California exchange

Blue Shield of California network physicians in payer’s exchange plans

California physicians, hospitals participating in at least one exchange plan

1) Silver plan premiums for 40-year old individual, before subsidy; actual rates represent HMO plans in Northern Los Angeles.

Source: Covered California, “Health Plans & Rates for 2014: Making the Individual Market in California Affordable, May 23, 2013, available at: www.coveredca.com; Kliff S, “California Obamacare premiums: No ‘rate shock’ here,” Washington Post, May 23, 2013, available at: www.washingtonpost.com; Terhune C, “Insurers limit doctors, hospitals in state-run exchange plans,” LA Times, May 24, 2013, available at: www.articles.latimes.com; Health Care Advisory Board interviews and analysis.

12

Still Time to Work Out the Kinks Six Months of Open Enrollment Ahead (And More Every Year) Insurance Exchange Enrollment Timeline January 1, 2014 • Exchange-purchased coverage goes into effect • Individuals without insurance have three months to purchase coverage, avoid penalty

©2013 The Advisory Board Company • 27497A

October 1, 2013 Exchange websites officially open

Open enrollment period

October 15, 2014 2015 open enrollment period begins

March 31, 2014 • Open enrollment period ends • Individuals still uninsured subject to tax penalty in 2014 filing

Publication in Brief: Navigating Health Insurance Exchanges, October 2013 An overview of the federal health insurance exchanges with questions, implications for providers; available at advisory.com

Source: Health Care Advisory Board interviews and analysis.


13

Enrollment Support an Immediate Imperative Potential Benefit to Providers Depends on Uninsured Turnout Projected Federal Subsidies1

Possible Provider Tactics for Facilitating Enrollment

CBO2 Projections, 2014-2022 $115B

$106B

$128B

Existing infrastructure for Medicaid eligibility checks

$74B 2014 average $5,150 per subsidized enrollee

$19B

2014

2016

2018

2020

On-site or communitybased information booths 2022

Awareness campaigns, advertising ©2013 The Advisory Board Company • 27497A

New Money Flowing Into System Certified Application Counselor status

$40B

86%

Projected premium revenue from exchanges in 2014

Percentage of exchange enrollees projected to qualify for subsidies

Financial support to cover post-subsidy premiums

Source: Congressional Budget Office, “CBO's February 2013 Estimate of the Effects of the Affordable Care Act on Health Insurance Coverage,” available at: www.cbo.gov; PwC, “Health Insurance Exchanges: Long on Options, Short on Time,” available at: www.pwc.com, accessed March 3, 2013; Health Care Advisory Board interviews and analysis.

14

The Bigger Danger: Collapse of the Cross-Subsidy Assumptions About Future Growth Beginning to Falter

©2013 The Advisory Board Company • 27497A

Three Axioms of Hospital Economics

Robust EmployerSponsored Coverage

Steady Public-Payer Pricing Growth

Predictable Volume Channels

New Danger: Cost concerns, innovative options driving employers to restructure benefits; changes unlikely to yield health system advantage

New Danger: Medicare rate cuts, contingent payments widening gap to goal for feasible crosssubsidization

New Danger: Falling utilization rates coupled with non-traditional competition narrowing potential volume streams

Source: Health Care Advisory Board interviews and analysis.


15

Faltering Assumption #1: Robust Employer-Sponsored Coverage

Employer-Sponsored Coverage at a Crossroads Employers Choosing Between Abdication, Activation Spectrum of Options for Controlling Health Benefits Expense “Abdication”

“Activation”

©2013 The Advisory Board Company • 27497A

No Health Benefits

Self-Funded Benefits

Defined Contribution/ Private Exchange

Pros:

Pros:

Pros:

• Total escape from cycle of rising premium costs

• Health benefits still part of compensation package

• Full control over networks

Cons:

• Predictable, controllable cost growth

• Exemption from minimum benefits requirements

Cons:

Cons:

• Fundamental disruption in benefit design

• Greater exposure to unexpected expenditures

• Fine for violating employer mandate • Loss of important labor market differentiator

• Employees may underinsure

• Complex network negotiations Source: Health Care Advisory Board interviews and analysis.

16

Option 1: Drop Coverage

Employers Already Scaling Back Coverage Erosion of Employer-Sponsored Coverage Well Underway Individuals Covered by ESI1

Contribution to Insurance Premiums

Non-elderly Population

Coverage for Family of Four Employer

69.7%

Worker

$11,429

59.5%

11.5M fewer individuals

95% growth

$5,866

$4,316 102% growth

$2,137

©2013 The Advisory Board Company • 27497A

2000

1) Employer-sponsored insurance. 2) Consumer-directed health plan.

2011

2002

2012

25%

23%

Insured non-elderly adults with deductibles $1,000 or higher, 2012

Employers planning to offer CDHP2 as only plan option, 2014

2002

2012

Sources: Sonier J, et al., “State-Level Trends in Employer-Sponsored Health Insurance,” Robert Wood Johnson Foundation, April 2013, available at: www.rwjf.org; Collins R, et al., “Insuring the Future,” The Commonwealth Fund, April 2013, available at: www.commonwealthfund.org; Towers Watson, “Reshaping Health Care,” 2013, available at: www.towerswatson.com; Health Care Advisory Board interviews and analysis.


17

Some Employers Dodging Their Mandate Despite Delay, Employers Finding Ways to Avoid Insurance Requirement

©2013 The Advisory Board Company • 27497A

Strategies to Avoid ACA Penalties

Memo to Managers

Cut jobs to remain under 50 FTEs1

Convert full-time employees to part-time status

Hire all new employees at part-time status

Split into smaller companies with fewer than 50 FTEs

31%

Franchisees that plan to cut jobs to stay under 50-employee threshold2

32%

Retail and hospitality companies that plan to “change workforce strategy” to avoid penalties3

1) Full-time equivalents. 2) n=72 franchisees, all industries. 3) n=1,203 employers.

To comply with the Affordable Care Act, Regal had to increase our health care budget to cover those newly deemed eligible based on the law's definition of a full time employee. To manage this budget, all other employees will be scheduled in accord with business needs and in a manner that will not negatively impact our health care budget…

Case in Brief: Regal Entertainment Group • In March 2013, reduced number of work shifts for non-salaried employees to ensure part-time status • First public company to institute policy

Source: Reynolds J and Merin J, “Business Leaders Give 2013 Outlook Mixed Reviews,” International Franchise Association, January 2013, available at: www.franchise.org; Mercer, “Health Reform Poses Biggest Challenges to Companies with the Most Part-Time and Low-Paid Employees,” August 8, 2012, available at: www.mercer.com; “Regal Entertainment Group Cuts Employee Hours, Explicitly Blames Obamacare in Memo: Report,” The Huffington Post, April 17, 2013, available at: www.huffingtonpost.com; Health Care Advisory Board interviews and analysis.

18

Option 2: Private Health Insurance Exchanges

New Path for Employer Cost Shifting Private Health Insurance Exchanges Open for Business Private Health Insurance Exchanges

©2013 The Advisory Board Company • 27497A

• Benefits offered by nine national, regional carriers

15% Employers considering private exchange model for 2014

• Launching private health insurance exchange in nine states • Expect to serve employers covering approximately 30,000 individuals

• Offering suite of exchange exchang offerings to employers ff i l • Will include coverage from 10 major insurers

• Over 100,000 employees enrolled in Aon Hewitt’s private health insurance exchange in fall 2012

Responding to Market Demands “The high-caliber carrier participation in Mercer’s private benefits exchange matches the increasing interest displayed by our clients and prospects.” Julio A. Portalatin President and CEO, Mercer Source: Towers Watson, “18th Annual Towers Watson Employer Survey on Purchasing Value in Health Care,” 2013, available at: www.towerswatson.com; Wall JK, “Mercer Courts Employers with Private Exchange,” Indianapolis Business Journal, April 22, 2013, available at: www.ibj.com; Health Care Advisory Board interviews and analysis.


19

The Future of Employer-Sponsored Insurance? Private Exchanges Poised For Rapid Growth Projected Private Exchange Enrollment

Factors Influencing Move to Private Exchange Models

40M 30M

Logistical difficulty of benefit renegotiations

19M 9M 1M

2014

2015

2016

2017

Internal politics of benefit changes

2018

©2013 The Advisory Board Company • 27497A

27%

Attractiveness of other options

Percentage of consumers receiving employer-sponsored coverage today projected to receive benefits through private exchanges in 2018

Source: Accenture, “One-in-Four Consumers Will Receive Employer Health Benefits Through Insurance Exchanges in Five Years, Accenture Research Shows,” available at: http://newsroom.accenture.com/news/one-in-four-consumers-will-receive-employer-health-benefits-throughinsurance-exchanges-in-five-years-accenture-research-shows.htm, Health Care Advisory Board interviews and analysis.

20

Igniting a Race to the Bottom Exchange Shoppers Trading Premiums for Deductibles

Results of Open Enrollment Process 2012

70%

2013

47%

©2013 The Advisory Board Company • 27497A

PPO1

18% 14%

HMO 2

12%

39%

42% Employees on Aon Hewitt health insurance exchanges selecting plans less rich than the previous year

High-Deductible Plan

Case in Brief: Sears, Darden Restaurants • For 2013 open enrollment, self-insured large employers redesigned benefits to reduce health spend through defined contribution model • Employers offered employees lump sum credit to choose coverage in Aon Hewitt’s online marketplace 1) Preferred provider organization. 2) Health maintenance organization.

Source: Mathews AW, “To Save, Workers Take On Health-Cost Risk,” Wall Street Journal, March 17th, 2013, available at: www.wsj.com; Health Care Advisory Board interviews and analysis.


21

Not the Commercial Insurance We’re Used To Individually-Purchased Coverage No Longer an Afterthought Projected Individual Market Size, Composition

Implications of Shift to Individually-Purchased Insurance

87M

65M

40M

19M

©2013 The Advisory Board Company • 27497A

1M

31M

Price Sensitivity at Point of Coverage •

Lower premiums

Narrower networks

Higher deductibles, copays

25M

22M

7M

Price Sensitivity at Point of Care

17M

16M

16M

2014

2016

2018

Non-Group Public Exchanges Private Exchanges

Ascendance of cost to patient as competitive differentiator constrains pricing strategy

Continued, even intensified, imperative for effective collections threatens revenue outlook

Patient reluctance to seek non-essential care undermines volumes and population health efforts

Source: Congressional Budget Office, May 2013 Estimate of the Effects of the Affordable Care Act on Health Insurance Coverage, available at: http://www.cbo.gov/sites/default/files/cbofiles/attachments/44190_EffectsAffordableCareActHealthInsuranceCoverage_2.pdf, Health Care Advisory Board interviews and analysis.

22

Option 3: Self-Funded Benefits

Significant Shift Toward Self-Funding Employers Bearing More Risk, Turning to Providers as Allies Percentage of Self-Insured Employers Partially or Completely Self-Insured

60%

Employer Interest in Provider-Oriented Strategies Adopt new accountable payment models

6%

20%

57% 55%

Contract directly with hospitals, physicians, ACOs

52%

7% 13%

49%

©2013 The Advisory Board Company • 27497A

Offer incentives for care coordination

2000

2003

2006

2009

2012

Offer performancebased payments

In Place in 2013

8% 21% 12% 29%

Planned for 2014

Source: Kaiser Family Foundation, “2012 Employer Health Benefits Survey,” available at: www.kff.org; Towers Watson, “18th Annual Towers Watson Employer Survey on Purchasing Value in Health Care,” 2013, available at: www.towerswatson.com; Health Care Advisory Board interviews and analysis.


23

Self-Insurance Looking More and More Attractive Self-Funded Status Shelters Groups From Many ACA Requirements Applies to fully insured smallgroup plans

Consumer Protection Under Affordable Care Act

Applies to selffunded smallgroup plans

Bans annual and lifetime plan limits Bans rescissions by insurers

1000-2000

Bans discrimination against patients with preexisting conditions

Average employee base typically required to justify a self-funded insurance plan

Requires coverage of dependent children up to age 26

©2013 The Advisory Board Company • 27497A

Requires coverage of preventive services with no cost sharing Requires plans to maintain 80:20 medical loss ratio Requires insurers to use modified community rating

Self-funded employers exempt from many ACA mandates

Requires plan to offer minimum package of essential health benefits in 10 categories

Requires guaranteed issue and renewability Source: US Department of Health and Human Services, “rights and Protections,” available at http://www.healthcare.gov/law/features/rights/index.html; Calsyn M and Lee EO, “The Threat of Self-Insured Plans Among Small Businesses,” Center for American Progress, June 19, 2013; Health Care Advisory Board interviews and analysis.

24

Faltering Assumption #2: Steady Public Payer Pricing Growth

Public Payer Reimbursement Already a Prime Target Medicare Payment Cuts Becoming the Norm ACA’s Medicare Fee-for-Service Payment Cuts Reductions to Annual Payment Rate Increases1 2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

($4B) ($14B)

($21B) ($25B)

$415B in total fee-for-service cuts, 2013-2022

($32B) ($42B) ($53B) ($64B) ($75B)

©2013 The Advisory Board Company • 27497A

($86B)

$260B

$56B

Hospital payment rate cuts, 2013-2022

Reduced Medicare and Medicaid DSH2 payments, 2013-2022

1) Includes hospital, skilled nursing facility, hospice, and home health services; excludes physician services. 2) Disproportionate Share Hospital.

Source: CBO, “Letter to the Honorable John Boehner Providing an Estimate for H.R.6079, The Repeal of Obamacare Act,” July 24, 2012, available at: www.cbo.gov; Health Care Advisory Board interviews and analysis.


25

No Question About Further Cuts, Just Methods Medicare Cuts Central to Long-Term Deficit Reduction Plans Simpson-Bowles Commission

Bipartisan Policy Center

Brookings Institution

A Bipartisan Path Forward to Securing America’s Future April 2013

A Bipartisan Rx for PatientCentered Care and SystemWide Cost Containment April 2013

Bending the Curve: PersonCentered Health Care Reform April 2013

• Increase Medicare eligibility age from 65 to 67

• Reduce payments for hospital, post-acute care, and drugs

• Transition to “Medicare Comprehensive Care” organizations that receive global capitation payment

• Establish mandatory bundled payments nationally • Equalize office visit payments

• Cap Medicare payment growth to per capita GDP rate

$585B

$560B

$360B

Total estimated health care savings, 2013-2023

Total estimated health care savings, 2013-2023

Total estimated health care savings, 2013-2023

• Expand bundled payments and pay-for-performance ©2013 The Advisory Board Company • 27497A

• Establish ACO-like “Medicare Networks,” create strong incentives for participation

Source: Bowles E and Simpson A, “A Bipartisan Path Forward to Securing America’s Future,” Moment of Truth Project, April 2013, available at: www.momentoftruthproject.org; Daschle T, et al., “A Bipartisan Rx for Patient-Centered Care and System-Wide Cost Containment,” Bipartisan Policy Center, April 18, 2013, available at: bipartisanpolicy.org; Antos J, et al., “Bending the Curve: Person-Centered Health Care Reform,” Brookings Institution, April 2013, available at: www.brookings.edu; Health Care Advisory Board interviews and analysis.

26

Contingent Payment Models Becoming the Norm Reimbursement Increasingly Tied to Performance Mandatory Medicare Pay-forPerformance Programs

Medicare Payment Rates Potential Chest Pain Treatment Paths

Maximum Payment Penalty $4,100 Hospital Value-Based Purchasing Program

1%-2%

Hospital Readmissions Reduction Program

©2013 The Advisory Board Company • 27497A

Hospital-Acquired Condition Penalty

$1,800 $0

2%-3% Inpatient

Observation

"Improperly" Admitted

1%

RAC Reaction Spilling Over to Volume

25%

1.6M

69%

Hospitals mandated to face hospital-acquired condition penalty

Observation stays nationwide, 2011

Increase in number of Medicare beneficiaries under observation, 20062011

Source: CMS, Bundled Payments for Care Improvement Initiative, 2012, available at: innovation.cms.gov; Source: The Advisory Board Company Daily Briefing, “Clement: What Medicare is doing to limit observation status,” May 28,2013, Washington, DC; Jaffe S, “Medicare Seeks to Limit Number of Seniors Placed In Hospital Observation Care,” Kaiser Health News, May 3, 2013, available at: www.kaiserhealthnews.org; Gengler A, “The Painful New Trend in Medicare,” CNN Money, August 7, 2012, available at: money.cnn.com; Health Care Advisory Board interviews and analysis.


27

Faltering Assumption #3: Predictable Volume Channels

Volumes Still Soft Post-Downturn Consumers Still Tightening their Belts Households Postponing or Cancelling Medical Care

Percentage of primary care physicians reporting that patients rationing or forgoing medications, treatments due to financial concerns

20%

16%

2009

2006

©2013 The Advisory Board Company • 27497A

95%

Is it Cyclical…

…Or Is It An Enduring Trend?

“In 2009, despite the economic downturn, the number of prescription drugs dispensed rebounded to prerecession rates of growth.”

“We have a very weak economy and it’s just a different environment for the elective parts of healthcare. This could go beyond the recession. Being a less aggressive consumer of healthcare is here to stay.”

Health Affairs, 2011

Paul Ginsburg, Economist, Center for Studying Health System Change

Source: Martin A, et al., “Recession Contributes to Slowest Annual Rate of Increase in Health Spending in Five Decades,” Health Affairs, 2011, 30: 11-22; Johnson A, Rockoff J, & Mathews A, “Americans Cut Back on Visits to Doctor,” Wall Street Journal, July 29, 2010; Health Insurance, “With or Without Health Insurance, Americans Skipping Doctors Visits, Surgeries,” available at: http://www.insureme.com/health-insurance/orwithout-health-insurance-americans-skipping-doctor-visits-surgeries, accessed September 21, 2011; Thomson Reuters, “Thomson Reuters Study Finds More Patients Postponing Medicare Care Due to Cost,” available at: http://thomsonreuters.com, accessed September 21, 2011; Health Care Advisory Board interviews and analysis.

28

Population Health Efforts Shaping Volume Outlook Utilization Patterns Difficult to Predict Inpatient Volume Under Different Population Health Assumptions 42.6M

41.9M

40.8M 40.5M 40M

©2013 The Advisory Board Company • 27497A

39.6M

2012

39.5M

2017

Quite a Difference

7.6% Total inpatient volume growth, 2012-2022, with no additional population health management effort

1.1% 2022

No Additional Population Health Management

Total inpatient volume growth, 2012-2022, with aggressive population health management efforts

Typical Management Aggressive Management

Source: Health Care Advisory Board interviews and analysis.


29

New Competitors Emerging in Ripest Markets Walgreens Entering the Care Management Industry 2013: Launches three ACOs; begins diagnosing and managing chronic disease

2009: Launches flu vaccine campaign Vaccinations and Physicals

©2013 The Advisory Board Company • 27497A

2007: Acquires Take Care Health Systems

Chronic Disease Monitoring

Simple Acute Services

Chronic Disease Diagnosis and Management

2012: Offers three new chronic disease tests

Case in Brief: Walgreen Co.

Not Just a Drugstore

• Largest drug retail chain in the United States, with 372 Take Care Clinics

“Our vision is to become ‘My Walgreens’ for everyone in America by transforming the traditional drugstore into a health and daily living destination...”

• In April 2013, became first retail clinic to offer diagnosis and treatment of chronic diseases

Walgreen Co. Overview

Source: Japsen B, “How Flu Shorts Became Big Sales Booster for Walgreen, CVS,” Forbes, February 8, 2013, available at: www.forbes.com; “Take Care Clinics at Select Walgreens Expand Service Offerings,” Reuters, May 31, 2012, available at: www.reuters.com; Murphy T, “Drugstore Clinics Expand Care into Chronic Illness,” The Salt Lake Tribune, April 4, 2013, available at: www.sltrib.com, Walgreens, “Company Overview,” available at: www.walgreens.com; Health Care Advisory Board interviews and analysis.

30

Savvy Providers Targeting Growing Market Segments Medicare-Focused Providers Offering Compelling Specialized Service JenCare’s Recent Expansion

Adults Aged 45-64, DeKalb County, Georgia

169K

• JenCare Neighborhood Medical Centers opens new clinic in Atlanta metro region • 12,000-square-foot space caters to low-, moderate-income Medicare beneficiaries

37K

2000

2010

©2013 The Advisory Board Company • 27497A

Case in Brief: JenCare Neighborhood Medical Centers • Senior-oriented physician practices in Georgia, Kentucky, Virginia, Illinois, and Louisiana operated by Florida-based ChenMed • Practices focus on rapidly-growing market for Medicare-insured primary care services

38% Reduction in inpatient days for senior ChenMed patients

Source: Crossroads News, “JenCare Mecical One-Stop Center Caters Wholly to Seniors,” available at: http://crossroadsnews.com/news/2013/sep/20/jencare-medical-one-stop-center-caters-whollyseni/, Health Care Advisory Board interviews and analysis.


31

A Giant Finding Its Footing BigCo Poised to Disrupt Referral Chains BigCo’s1 Migration into Primary Care 1

2

3

Space Leased to Provider Partners

Self-run Screenings, Wellness Services

“Integrated Care Center”

• Limited success through non-owned retail clinics

• Screenings, educational services offered through instore clinics

©2013 The Advisory Board Company • 27497A

• Valuable experience gained

• Patient engagement

• Full primary care services • Referrals to selected provider partners

Case in Brief: BigCo • Large corporation with over 4,000 retail stores in the United States

• Phasing out current retail clinic model, extending primary care access through virtual and in-store delivery channels 1) Pseudonym.

Source: Health Care Advisory Board interviews and analysis.

32

Nearing the Limits of Extractive Growth Strategies Legacy Growth Levers Increasingly Time-Limited Traditional Hospital Growth Strategy

©2013 The Advisory Board Company • 27497A

Consolidate Market Position

Lock Up Referral Streams

Demand Price Increases

Emerging Limitations:

Emerging Limitations:

Emerging Limitations:

• High degree of existing consolidation in major markets

• Increasingly competitive battlefield for physician affiliations

• Dilution of traditional commercial coverage

• Heightened scrutiny of hospital mergers

• Physician cost accountability calling historical system loyalties into question

• Limited appetite for full acquisitions

• Languid overall demand

• Market pressures intensifying price competition • Direct, indirect cuts to public payer reimbursement widening gap to goal

• Rise of disruptive competition

Source: Health Care Advisory Board interviews and analysis.


33

Tomorrow’s Growth All About Winning Share Securing Preference from Purchasers, Physicians, Patients Three Key Decision-Makers

Wholesale Purchasers (Payers, Employers)

Referring Providers

Consumers

©2013 The Advisory Board Company • 27497A

System Growth

Source: Health Care Advisory Board interviews and analysis.

34

©2013 The Advisory Board Company • 27497A

Road Map

1

A Crumbling Cross-Subsidy

2

The New Logic of Choice

3

The Rise of Productive Growth


35

Understanding the New Logic of Choice Three Groups Responsible for Allocating Market Share Decision Makers and Their Priorities Wholesale Purchasers (Payers, Employers)

Referring Providers

Today’s Priority: Low total cost of care for entire populations

©2013 The Advisory Board Company • 27497A

Provider Wishlist:

• Comprehensive network

Consumers

Today’s Priority: High-quality, low-cost episodic care

Today’s Priority: Affordability, on-demand access, and tailored service

Provider Wishlist:

Provider Wishlist:

• Best-in-class outcomes

• Multifunctional range of access options

• Data access, connectivity

• Proven population health management capabilities

• Appropriate match of price level to service quality

• Cross-continuum collaboration

Source: Health Care Advisory Board interviews and analysis.

36

Commercial Payers

Commercial Payers Demanding More Value Taking Measures to Keep Employers in the Game Commercial Payer Cost Control Initiatives Price Transparency Tools • Health Care Service Corp. Benefits Value Advisor program • UnitedHealthcare’s myHealthcare Cost Estimator

90%

Benefits Value Advisor program participants eligible for savings by choosing alternative provider

$2K

Average savings per claim

Bundled Payment • BCBS of Western NY, Kaleida Health cardiac surgery bundle

©2013 The Advisory Board Company • 27497A

• ConnectiCare, St. Francis Hospital hip and knee replacement bundle

Narrow Networks, Steerage • Harvard Pilgrim Focus Network • Anthem BCBS Compass SmartShopper Program

Case in Brief: Benefits Value Advisor Program • Program offered by Health Care Service Corp., operator of BCBS plans in four states • Health care expert uses data, cost estimators, provider-finders to help consumers choose low-cost alternatives

Source: Hostetter M and Klein S, “Health Care Price Transparency: Can It Promote High-Value Care?”, The Commonwealth Fund, April/May 2012, available at: www.commonwealthfund.org; Appleby J, “HMO-Like Plans May Be Poised to Make Comeback in Online Insurance Markets,” Kaiser Health News, January 22, 2013, available at: www.kaiserhealthnews.org; Health Care Service Corporation, “Health Care Consumers Realize Significant Cost Savings Through Benefits Value Advisor Program,” April 17, 2013, available at: www.hcsc.com; Health Care Advisory Board interviews and analysis.


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Employers

Shared Accountability Necessary for Success Best Performing Employers Collaborate Closely with Providers Average Annual Employer Health Cost Growth 10.3%

Study in Brief: 18th Annual Towers Watson/National Business Group on Health Employer Survey

5.9% 2.2% Best Performers

Median

Low Performers

• Annual survey tracks employers’ strategies to manage health benefits and their results

Best Performers More Likely to Focus on Provider Strategies

©2013 The Advisory Board Company • 27497A

Adopt new accountable payment models

2%

Contract directly with hospitals, physicians, ACOs Offer incentives for care coordination Offer performancebased payments Best Performers

• Identified “best performers” as employers who held cost growth below median benchmarks for at least four consecutive years

16%

13%

• Best performers more likely to use supply-side strategies, share total cost responsibility with providers

7% 16% 4%

22%

• Pricing and benefit design tactics did not differentiate employers

5% Low Performers

Source: Towers Watson, “18th Annual Towers Watson/National Business Group on Health, Employer Survey on Purchasing Value in Health Care: Reshaping Health Care Best Performers Leading the Way,” available at: www.towerswatson.com, accessed March 15, 2013; Health Care Advisory Board interviews and analysis.

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Shopping Carefully for Acute Care Services Walmart Steering Employees to Preferred Providers for Surgical Care Walmart Centers of Excellence Partners

©2013 The Advisory Board Company • 27497A

• • • • • •

Cleveland Clinic Geisinger Medical Center Mayo Clinic Mercy Hospital Springfield Scott & White Memorial Hospital Virginia Mason Medical Center

Case in Brief: Walmart Centers of Excellence • Walmart entered into bundled payment agreements with six health systems covering heart, spine, and transplant surgeries • Program launched in January 2013; includes 1.1 million covered lives • Providers selected based on convenience, quality, and potential for cost savings Source: Walmart News, “Walmart Expands Health Benefits to Cover Heart and Spine Surgeries at No Cost to Associates,” October 12, 2012, available at: www.news.walmart.com; Health Care Advisory Board interviews and analysis.


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Rewarding Care Management Expertise Large Employer Contracts Directly with Health System

5,400 Key Components of Partnership Narrowing of Health Plan Options Intel reducing number of health plan options from 8 to 4; two remaining plans are narrow networks of PHS1 providers

©2013 The Advisory Board Company • 27497A

Shared Accountability Upside and downside risk for health care spending compared to projected target Customized Care Offerings Addition of depression screening into customary provider workflow Infrastructure for Care Management Conversion of Intel’s on-site clinic into full service patient-centered medical home 1) Presbyterian Healthcare Services.

$8-10M

Covered lives in contract Projected savings through contract, 2013-2017

Case in Brief: Intel Corporation • Large, multinational employer headquartered in Santa Clara, California • Entered into narrow-network contract with Presbyterian Healthcare Services, an 8-hospital system in New Mexico, for employees at Rio Rancho plant

Source: Intel Corporation, “Employer-Led Innovation for Healthcare Delivery and Payment Reform: Intel 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 analysis.

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Demonstrate Network Reliability Provider Value Proposition Must Match Employer Need Three Employer Prerequisites

Comprehensive Care Capability • Diverse suite of clinical services within health system

©2013 The Advisory Board Company • 27497A

• Reliable access to network of specialty providers • Effective coordination across continuum

Adequate Geographic Scope • Sufficient network coverage for all employees • Convenient access points to ensure timely utilization, promote continuous engagement

Flexible Relationship Model • Staged implementation based on employer’s readiness, provider’s ability to earn trust • Incremental path to exclusive relationship

Source: Health Care Advisory Board interviews and analysis.


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Physicians

Physicians Still at the Center of Referral Decisions Specialist, Hospital Choices Especially Physician-Driven Information Sources Used to Select a Specialist Physician1 2008

2008

n=13,500

n=13,500

58% rely solely on referral from PCP

Referral from PCP

©2013 The Advisory Board Company • 27497A

Information Sources Used to Select a Facility for a Procedure1

69%

Doctor Performing the Procedure

Friends or Relatives

20%

Another Doctor

Another Doctor or Health Care Provider

18%

Friends or Relatives

Health Plan

Health Plan

11%

Internet

Internet

7%

69% rely solely on referring doctor

74%

15%

10%

7%

3%

Source: Tu HT and Lauer JR, “Word of Mouth and Physician Referrals Still Drive Health Care Provider Choice,” Center for Studying Health System Change, December 2008; Health Care Advisory Board interviews and analysis.

1) Survey respondents given option to “select all that apply.”

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Physicians Increasingly Responsible for Cost, Quality CMS, Third-Party Aggregators Providing Financial Tailwind Accountable Care Organizations, by Sponsoring Entity

Financial Support for Physician ACOs

As of October, 2013

• Health insurer specializing in Medicare Advantage plans, partners with providers to establish MSSP1 ACOs

©2013 The Advisory Board Company • 27497A

Hospital Systems

187

202

Physician Groups

• Currently operates 31 Medicare ACOs with 2,000+ physician partners; covers ~300,000 Medicare beneficiaries in 13 states

37 Other

• 35 participants in Advance Payment ACO Model • Provides upfront and ongoing financial support to independent physician ACOs

1) Medicare Shared Savings Program.

Source: Centers for Medicare and Medicaid Services, available at www.cms.org; Health Affairs, “Continued Growth Of Public And Private Accountable Care Organizations,” available at: http://healthaffairs.org; Universal American Corp.; Health Care Advisory Board interviews and analysis.


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Re-evaluating Historical Referral Decisions Physicians Actively Destroying and Directing Demand Three Options for Accountable Providers

1

2

©2013 The Advisory Board Company • 27497A

Physician Group

3

Prevent Utilization through Medical Management •

Heart failure

Pneumonia

Demand Direction as Important as Destruction

50%

Retain Utilization Within Network

Specialty referrals

Imaging

Percentage of total savings attributed to lower cost referrals for organizations participating in BCBS Massachusetts’ Alternative Quality Contract

Direct Unavoidable Utilization to Low-Cost, High-Quality Partner • Inpatient, outpatient procedures • Select inpatient medical care Source: Song Z, et al, "The ‘Alternative Quality Contract,’ Based On A Global Budget, Lowered Medical Spending And Improved Quality." Health Affairs, 31:8 (2012): 1885-1894; Health Care Advisory Board interviews and analysis.

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Securing Preference from Accountable Decisionmakers Contingent Upon Continuous Collaboration, Clinical Excellence Delivering on Accountable Decisionmakers’ Top Priorities

©2013 The Advisory Board Company • 27497A

Provide Real-Time Utilization Feedback

Guarantee Continued Influence Over Care Pathway

• Immediate knowledge of patient admission, discharge, transfer

• Input into treatment decisions, care protocols, referral partners

• Access to patient records during inpatient stay

• Oversight of post-discharge care management responsibilities

Assemble Reliable Specialist Network

Deliver Superior Acute Care Outcomes

• Seamless access to comprehensive specialty expertise

• Consistent low-cost, high-quality clinical performance

• Shared commitment to episodic cost control, collaborative workflow

• Proven results from reducing readmissions, error rates

Source: Health Care Advisory Board interviews and analysis.


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Seeking a Collaborative Partner New Preferred Partnership Driven by Shared Vision Partnership Goals Partner on Care Coordination Atrius Health

Collaborate on Total Cost Management

• Dedicated resources for care coordination initiatives

• Targeted focus on episodic cost control

• Development, adoption of unified care standards

• Coordinated leadership, governance

• Seamless patient integration

• Principled referral decisions

Ideal Partner

©2013 The Advisory Board Company • 27497A

Case in Brief: Atrius Health, Beth Israel Deaconess Medical Center • Atrius Health, an independent alliance of six physician groups and one home health/hospice provider in eastern and central Massachusetts; Beth Israel Deaconess Medical Center (BIDMC), a 649-bed academic medical center located in Boston, MA • Atrius Health issued request for proposal for tertiary hospital partner to collaborate on Triple Aim goals with emphasis on care coordination, cost control • Designed partnership contract around shared care coordination goals Source: Health Care Advisory Board interviews and analysis.

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Ensuring Enterprise-Wide Coordination New Partners Collaborate Across Clinical, Operational Processes Commitments to Delivering High Value Care

©2013 The Advisory Board Company • 27497A

Data Sharing

Care Coordination

• Real-time utilization feedback for PCPs; can dictate patient transfer to Atrius Health facility

• Atrius Health care managers on-site, collaborate with floor RNs; responsible for care management, follow-up

• Interoperability between physician, hospital IT systems

• Mutually-defined standards of care

Discharge Planning

• Atrius Health-preferred network honored

Atrius HealthBIDMC Partnership

Strategic Alignment

• PCP notified of patient discharge, collaborates on discharge care plan

• Dedicated seats for Atrius staff on multiple BIDMC committees

• “Care Continuation” office manages care transitions based on patient history, Atrius Health-preferred providers

• Co-investments for planning, development of service expansions

Source: Health Care Advisory Board interviews and analysis.


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Consumers

Anticipating the “Activated” Patient Consumer Role in Decision Making Increasingly Important High-Deductible Health Plan Enrollment

Consumer Viewpoint on Role in Care Decision Making n=2,071

Individuals with Deductible of $1000 or More 25%

6%

Doctor and patient make a join treatment decision

10% 7%

©2013 The Advisory Board Company • 27497A

0%

Doctor makes the decisions with some input from patient

18%

2003

Doctor is completely in charge of treatment decisions

29%

Patient makes final decision with some input from their doctor

2005

2010

2012

38%

Patient is completely in charge of treatment decisions

26%

43%

33%

Decline in proportion of individuals with a deductible under $5001

Respondents age 25 to 34 preferring fully active role in care decision making

1) From 2003 to 2012.

Source: Collins R, et al., “Insuring the Future,” The Commonwealth Fund, April 2013, available at: www.commonwealthfund.org; Altarum Institute, “Altarum Institute Survey of Consumer Health Care Opinions,” Fall 2012, available at: www.altarum.org; Health Care Advisory Board interviews and analysis.

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Price Shopping Abetted by Transparency Free Apps, Tools Offer Platform for Comparison Shopping Taking “Consumer-Driven” to the Next Level

Innovation in Brief: PokitDok • Website, mobile app marketed to individuals with high-deductible health plans

©2013 The Advisory Board Company • 27497A

• Offers database of over three million providers

Service:

Carpal Tunnel Surgery

Location:

TravelSurgeryUSA, Charleston, SC

Budget:

$ 4,000

Payment Type:

Cash

Negotiate HSA

Insurance Request Quote

“What Castlight Health is to people with employer-provided health insurance, PokitDok is to people with high-deductible plans. The new ‘set your price’ service for basic healthcare services may be what ‘consumer-driven healthcare’ needs to become a realistic option.” MedCity News Source: MedCityNews, “PokitDok Makes Cash Payments Easier for Doctors and Patients,” April 17, 2013, available at: www.medcitynews.com; Health Care Advisory Board interviews and analysis.


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Convenience a Critical Element of Choice Patients Seeking Alternatives to the Standard Office Visit Rising Popularity of Retail Clinic Visits 6.0M

On-Demand Services Attracting Patients

42% Consumers age 18 to 24 preferring independent, retail pharmacy for primary care

1.5M

2007

Same-day appointment booking online, through mobile app Physician email consultations for minor illnesses, ongoing management

2009

Coordinated tests, treatments, specialist referrals, hospitalizations

©2013 The Advisory Board Company • 27497A

Top Reasons for Increase in Retail Clinic Use

Case in Brief: One Medical Group Nearby Location

Reduced Wait Times

Service, Price Transparency

• 90-physician network based in San Francisco, California • Patients pay $149 to $199 for annual membership

Source: The Advisory Board Company Daily Briefing, “Retail clinic visits soar, especially after hours,” August 17,2012, Washington, DC; PwC Health Research Institute, “The new gold rush: Prospectors are hoping to mine opportunities from the health industry,” available at: www.pwc.com; One Medical Group, “Our Services,” available at: www.onemedical.com; Health Care Advisory Board interviews and analysis.

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Finding Care the Way You Find Dinner Suddenly Subject to the Marketplace of Opinion Wave of Tools to Search Health Care Consumer Ratings Marcus Welby, MD General Practice

Consumer Willingness to Spend Out-of-Pocket for Health-Related Tools Health Apps or Programs $0.7B

497 reviews (read below)

$8.9B $4.0B

©2013 The Advisory Board Company • 27497A

Other available apps, websites: •

Consumer Reports

Vitals

HealthGrades

ZocDoc

RateMDs

PatientsLikeMe

48%

Consumers reading health-related reviews online

Resources That Rate Physicians and Hospitals

Health-Related Video Games

33%

Consumers using healthrelated online reviews to decide where to get care Source: PwC, “Scoring Healthcare: Navigating Customer Experience Ratings,” “The New Gold Rush: Prospectors are Hoping to Mine Opportunities from the Health Industry,” both available at: www.pwc.com; Health Care Advisory Board interviews and analysis.


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©2013 The Advisory Board Company • 27497A

Road Map

1

A Crumbling Cross-Subsidy

2

The New Logic of Choice

3

The Rise of Productive Growth

52

Understanding the New Logic of Choice Are We Prepared to Meet the Market’s Demands? Decision Makers and Their Priorities Wholesale Purchasers (Payers, Employers)

Today’s Priority: Low total cost of care for entire populations ©2013 The Advisory Board Company • 27497A

Provider Wishlist: • Comprehensive network • Proven population health management capabilities

Referring Providers

Consumers

Today’s Priority: High-quality, low-cost episodic care

Today’s Priority: Affordability, on-demand access, and tailored service

Provider Wishlist:

Provider Wishlist:

• Best-in-class outcomes

• Multifunctional range of access options

• Data access, connectivity • Cross-continuum collaboration

• Appropriate match of price level to service quality

Source: Health Care Advisory Board interviews and analysis.


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Competing Under Distinct Identities Carving a New Growth Path Four Emerging Provider Identities Best-in-Class Acute Care Destination

• Consistently delivers efficient, effective acute care episodes

• Maintains extensive network of outpatient care sites

• Ensures reliable coordination, communication, data sharing across the care continuum

• Offers convenient primary care, diagnostic, procedural services at competitive prices

Full-Service Population Health Manager ©2013 The Advisory Board Company • 27497A

Consumer-Oriented Ambulatory Network

Financially-Integrated Delivery System

• Assumes delegated risk from payers and/or employers

• Assumes full risk by offering health plan to subscribers

• Prioritizes care management, coordination to limit avoidable demand

• Unifies care financing and delivery into single coordinated care enterprise

Source: Health Care Advisory Board interviews and analysis.

54

Scrambling to Assemble Attractive Assets Providers Seeking Capital, Geographic Reach, Clinical Scope, and More Wide Range of Partnership Activity Long Island Health Network Hospital alliance contracts jointly without need for formal merger or acquisition

SSM Health Care, Dean Clinic SSM strengthens physician base; Dean bolsters financial, clinical foundations

©2013 The Advisory Board Company • 27497A

Dignity Health, U.S. Healthworks Dignity expands ambulatory care foundations in new markets

Baylor Scott and White Health Merges adjacent markets for greater geographic scale

Cleveland Clinic, Community Health Systems Affiliation spreads Cleveland Clinic brand, clinical expertise

Source: Health Care Advisory Board interviews and analysis.


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Developing an Intentional Corporate Strategy Haphazard, Reactive Dealmaking Unlikely to Support Strategic Aims Five Signs of Effective Corporate Strategy Well-Reasoned Ambition

Rigorous Assessment

Defined Ends

Distinct Criteria for Deal Sourcing

Opportunities assessed on the basis of how they help build a more valuable product to sell to consumers

©2013 The Advisory Board Company • 27497A

Proactive Execution

Strategy and criteria for assessing prospective partnerships written, communicated, and clear

Pluralistic Means

Day One Integration Planning Integration planning integrated into strategy and criteria for partnerships, continues throughout negotiation process

Scientific Approach to Cultural Fit

Spectrum of partnership vehicles considered before M&A, including affiliations, joint ventures

Financial assessment complemented with battery of analyses to assess cultural fit

Source: Health Care Advisory Board interviews and analysis.

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Toward an Economics of Value Adapting to New Rules of Competition Health System Strategy, 2013-2023

“Price-Extractive Growth”

“Value-Based Growth”

Grow by being bigger: Leverage market dominance to secure prime pricing, network status

Grow by being better: Leverage cost, quality, service advantage to attract key decision makers

Key Success Factors

• Expand market share • Strengthen service lines • Exert pricing leverage

• Solidify referrals • Secure physicians • Increase utilization

• Expand covered lives • Compete on outcomes • Minimize total cost

• Assemble network • Offer convenience • Expand access

Target of Strategy

• Commercial payers • Government purchasers

• Physicians

• Employers • Individuals

• Population health managers

Performance Metrics

• Discharges • Service line share • Fee-for-service revenue

• Pricing growth • Occupancy rate • Process quality

• Share of lives • Geographic reach • Risk-based revenue

• Share of wallet • Outcomes quality • Total cost of care

Competitive Dynamics

• Service line competition • Centers of excellence

• Referral channels • Physician loyalty

• Comprehensive care • Patient engagement

• Clinical quality • Service quality

• Inpatient capacity • Outpatient imaging centers

• Clinical technology • Ambulatory surgery centers

• Primary care capacity • Care management staff and systems

• IT analytics • Post-acute care network

Description

©2013 The Advisory Board Company • 27497A

Health System Strategy, c. 2003

Critical Infrastructure

Key Leaders 1) Chief physician executive. 2) Chief transformation officer. 3) Chief integration officer.

• CEO • CFO • COO

• CMO • CNO • Board

• CEO • CFO • COO

• CMO • CNO • Board

• CPE1 • CTO2 • CIO3

Source: Health Care Advisory Board interviews and analysis.


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Ju ppi healthcare policy conference ford koles presentation (2013) (1)