6/16/2017. Market Overview. Reduced Readmission Rates. Growth of High Deductible Plans. The New Future of Rural Healthcare

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1 The New Future of Rural Healthcare 15 th Annual Western Region Flex Conference June 15, 2017 Hilton Waikoloa Village Waikoloa, Hawaii Eric K. Shell, CPA, MBA Market Overview High Deductible Health Plans Non Healthcare CEO quote: We just renewed our High Deductible Plan going into our third year, and guess what...5% reduction in premium!!! Needless to say everyone is thrilled. Not sure what the average HSA balance is, but I think it is high. Doing what it is supposed to do, turning health care patients into consumers. Underinsurance State Budget Deficits Recovery Audit Contractors Reduced Re-admissions Accelerating shift to outpatient care MACRA Bipartisan Budget Act of B Attacks 2 Growth of High Deductible Plans Reduced Readmission Rates Source: CMS: 2,665 PPS hospitals to receive penalties in fiscal 2016 (Source:

2 Market Overview Results MACRA Rate Changes Summary Declining Patient Volumes Source: Kaiser State Health Facts, kff.org Source: "Health Policy Brief: Medicare's New Physician Payment System," Health Affairs, April 21, Bipartisan Budget Act of B Program Under Continued Attack 7 8 2

3 Market Overview Healthcare Reform Coverage Expansion By 1/1/14, expand Medicaid to all non-medicare eligible individuals under age 65 with incomes up to 133% FPL based on modified AGI Currently, Medicaid covers only 45% of poor ( 100% FPL) 16 million new Medicaid beneficiaries; mostly traditional patients FMAP for newly eligible: 100% in ; 95% in 2017; 94% in 2018; 93% in 2019; 90% in Establishment of State-based Health Insurance Exchanges Subsidies for Health Insurance Coverage Individual and Employer Mandate Trump s Principles for ACA Overhaul (2/28 address to Congress) Ensuring access to coverage for those with preexisting conditions and a smooth transition for the 20 million people enrolled in individual insurance coverage Providing tax credits and health savings accounts (HSAs) to help individuals purchase coverage Giving governors resources and flexibility for Medicaid operations Establishing liability reforms for patients and physicians that drive insurance costs and reducing drug costs Allowing the purchase of health insurance across state lines Provider Implications Insurance coverage will be extended to 32 million additional Americans by 2019 Expansion of Medicaid is major vehicle for extending coverage May release pent-up demand and strain system capacity Traditionally underserved areas and populations will have increased provider competition Have insurance, will travel! 9 10 CBO Report: How Repealing Portions of the Affordable Care Act Would Affect Health Insurance Coverage and Premiums The Congressional Budget Office (CBO) and JCT (Joint Committee on Taxation) estimate that repealing portions of the Affordable Care Act would affect the federal deficit, insurance coverage and premiums primarily in these ways: The Congressional Budget Office (CBO) estimated repeal of the ACA would increase the federal deficit by $137 $353 billion over 10 years ( The number of people who are uninsured would increase by 18 million in the first new plan year following enactment of the bill. Later, after the elimination of the ACA s expansion of Medicaid eligibility and of subsidies for insurance purchased through the ACA marketplaces, that number would increase to 27 million, and then to 32 million in Premiums in the nongroup market (for individual policies purchased through the marketplaces or directly from insurers) would increase by 20 percent to 25 percent relative to projections under current law in the first new plan year following enactment. The increase would reach about 50 percent in the year following the elimination of the Medicaid expansion and the marketplace subsidies, and premiums would about double by Source: Congressional Budget Office report 1/17 American Healthcare Act (March 6, 2017) Retroactively repeal the ACA requirement that most Americans buy health insurance as of the end of 2015 Repeal of individual and employer mandates End enhanced federal funding at the end of 2019 for states to expand Medicaid Convert Medicaid to a program of capped per-capital federal grants to the states starting in per capita expenditures updated by medical CPI between 2016 and

4 American Healthcare Act (March 6, 2017) (continued) Establish age-based, refundable premium tax credits to help people buy insurance, with credits phasing down starting at income levels of $75K/individuals and $150K/families Note ACA credits are based on income Phased out in 10% increments Beginning in 2018, repeal most of the ACA taxes that finance premium subsidies, Medicaid expansion, and Medicare benefit enhancements E.g. Repeal of Medicare payroll tax on high income individuals and surtax on investment income Retain the ACA s Cadillac tax on high-value plans but delay it until 2025 Eliminate the ACA s minimum essential benefits at the end of 2019 Offer states $100B over nine years to establish high-risk pools or other mechanisms for stabilizing the individual insurance market Let insurers charge individuals who buy insurance after letting their coverage lapse a 30% premium penalty for one year, to encourage people to maintain continuous coverage American Healthcare Act (March 6, 2017) (continued) Allow insurers to charge older customers five times higher premiums than younger people, up from the ACAs 3 to 1 age differential Repeal the ACA s cut in funding for Medicaid disproportionate share payments, which has not yet taken effect Repeal the ACA s subsidy to reduce low-income enrollees cost-sharing in private health plans, effective at the end of 2019 Prohibit federal Medicaid funding for Planned Parenthood or any organization that performs abortions, and bar use of tax credits for purchase of any health plan that covers abortions American Health Care Act Manager s Amendments 3/20/17 The MacArthur Amendment 4/13/17 Reinstate Essential Health Benefits as the federal standard GOP leaders released changes to their bill that were primarily designed to win over ultraconservatives and those concerned about CBO projections that the bill will make insurance less affordable for those The so-called manager s amendments would: End most of the ACA's taxes at the end of this year, one year earlier than in the original bill. Bar any new states from expanding Medicaid to low-income adults and receiving enhanced federal funding for that population. Establish a work requirement for Medicaid enrollee adults who aren't disabled, elderly or pregnant; states that institute a work requirement would receive a 5% extra administrative payment. Give states the option to receive federal Medicaid funding in the form of fixed block grants not based on number of enrollees, or to receive it in the form of percapita allocations. Increase the growth rate of capped federal payments to the states for elderly and disabled beneficiaries by the medical component of the consumer price index plus one percentage point; the growth rate for other beneficiary groups would be the medical component of CPI, which lags behind actual per-capita Medicaid spending by 0.7 percentage points, according to the CBO. Delay implementation of the ACA's excise tax on high-value employer health plans for an additional year, from 2025 to Penalize New York state for requiring some counties to contribute to Medicaid funding. Modern Healthcare 3/20/17 GOP leaders amend ACA repeal bill, mostly to the right by Harris Meyer Maintain the following provisions of the AHCA: Prohibition on denying coverage due to preexisting medical conditions Prohibition on discrimination based on gender Guaranteed issue of coverage to all applicants Guaranteed renewability of coverage Coverage of dependents on parents plan up to age 26 Community Rating Rules, except for limited waivers States could seek Limited Waivers for the following standards: Essential Health Benefits Community rating rules, except for the following categories, which are not waivable: Gender, Age (except for reductions of the 5:1 age ratio previously established), and Health Status (unless the state has established a high risk pool or is participating in a federal high risk pool) States must attest that the purpose of their requested waiver is to reduce premium costs, increase the number of persons with healthcare coverage, or advance another benefit to the public interest in the state, including the guarantee of coverage for persons with pre-existing medical conditions. Source: MacArthur Amendment to the American Health Care Act 4/13/17 via POLITICO

5 Fred Upton Amendment 5/3/17 AHCA Passage 5/4/17 $8B over 5-year period ( ) to fund high risk pool for the purpose of providing assistance to reduce premiums or other outof-pocket costs of individuals who are subject to an increase in monthly premium rate for health insurance coverage as a result of such waiver Updated Updated CBO Report 5/24/17 Updated Updated CBO Report 5/24/17 Increase the number of uninsured by 14M in 2018, growing to 23M in

6 Market Overview Healthcare Reform Medicare and Medicaid Payment Policies Medicare Update Factor Reductions Annual updates will be reduced to reflect projected gains in productivity Medicare and Medicaid Disproportionate Share Hospital (DSH) Payment Reductions Medicare Hospital Wage Index Independent Payment Advisory Board (IPAB) Charged with figuring out how to reduce Medicare spending to targets with goal of $13B savings between 2014 and 2020 Summary Impact Final IPPS 2017 (August 22, 2016) Market Overview Healthcare Reform Medicare and Medicaid Payment Policies (continued) Provider Implications Payment changes will increase pressure on hospital margins and increase competition for patient volume Do more with less and then less with less Medicaid pays less than other insurers and will be forced to cut payments further Market Overview Healthcare Reform Medicare and Medicaid Delivery System Reforms Expansion of Medicare and Medicaid Quality Reporting Programs Medicare and Medicaid Healthcare-Acquired Conditions (HAC) Payment Policy By Oct. 2014, the 25% of hospitals with the highest HAC rates will get a 1% overall payment penalty Medicare Readmission Payment Policy Hospitals with above expected risk-adjusted readmission rates will get reduced Medicare payments Value based purchasing Medicare will reduce DRG payments to create a pool of funds to pay for the VBPP 1% reduction in FFY 2013, Grows to 2% by FFY 2017 Bundled Payment Initiative Accountable Care Organizations Each ACO assigned at least 5,000 Medicare beneficiaries Providers continue to receive usual fee-for-service payments Compare expected and actual spend for specified time period If meet specified quality performance standards AND reduce costs, ACO receives portion of savings

7 Market Overview Healthcare Reform Where Are Medicare ACOs Forming? Medicare and Medicaid Delivery System Reforms (continued) Medicare Accountable Care Organizations (continued) 154 ACOs effective August ACOs effective January ACOs effective January ACOs effective January ACOs effective January ACOs effective January 2017 The CMS expects 359,000 clinicians to participate in four alternative payment models this year 12.3 million Medicare beneficiaries, or about 34% of total Medicare fee-for-service beneficiaries, now in Medicare ACOs 64 ACOs are in a risk-bearing track including SSP, Pioneer ACO Model, Next Generation ACO Model, and Comprehensive ESRD Care Model The Next Generation ACO model, which falls under the purview of the CMS Innovation Center, more than doubled in 2017, with 28 new participants bringing the total number to Source: HHS Press Release, January 11, 2016; Modern Healthcare 1/20/ ACO Growth ACO Growth

8 ACOs New Regulations ACO Investment Model (AIM) October 15, 2014 Goal: help rural providers offset the cost of operating a MSSP ACO Benefits: New MSSP candidates receive upfront fixed payment ($250K) and variable payment based on attributed beneficiary ($36/beneficiary), and monthly variable payment based on attributed beneficiary ($8) Upfront payments will be recovered out of shared savings Pre-payments act as forgivable loan if applicant remains in MSSP for 3 years and meets eligibility and performance requirements Eligibility Accepted into MSSP Less than 10K lives No hospital unless CAH or rural hospital > 100 beds Competitive grant with positive points for providers willing to take downside risk 41 Participants effective January 1, 2016 ACOs New Regulations Next Generation ACO Model March 10, 2015 Goal: Test ACO capacity to take on near-complete financial risk in combination with a stable, predictable benchmark and payment mechanism Design/Benefits Prospectively-set benchmark that incorporates historical and regional costs Future trend to incorporate regional trend, patient acuity, and quality/efficiency discount Payment options including normal FFS payment, normal FFS plus monthly infrastructure payment, population based payment; and capitation Choice of one of two risk sharing arrangements that determine portion of savings or losses that accrue to the ACO Minimum of 10K attributed beneficiaries or 7.5K if deemed rural 21 Participating ACOs effective January 1, ACOs New Regulations January 28, 2016 New ACO Model: Medicare ACO Track 1+ Model On December 20, 2016 CMS announced a new ACO model, the Medicare Accountable Care Organization (ACO) Track 1+ Model, that will test a payment design that incorporates more limited downside risk than is currently present in Tracks 2 or 3 of the Medicare Shared Savings Program (Shared Savings Program). The Model is designed to encourage more practices, especially small practices, to advance to performance-based risk, and also allows hospitals, including small rural hospitals, to participate. Modify process for resetting the benchmarks Incorporate factors based on regional FFS expenditures including: Using regional versus national trends Adjusting subsequent rebased benchmarks using a % of difference between actual and FFS This new opportunity, beginning in 2018, will allow clinicians to join an Advanced Alternative Payment Model (APM) to improve care and potentially earn an incentive payment under the Quality Payment Program, which implements the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA). Stakeholders, including physician groups, have requested this type of ACO model be added to the portfolio of options, and CMS used feedback from stakeholders to design the Model. ACOs will have the opportunity to join the Track 1+ Model as part of the 2018, 2019 and 2020 Shared Savings Program application cycles. The application cycle will align with that for Shared Savings Program Tracks 1, 2, and 3. Source: DHHS Centers for Medicare & Medicaid Services Fact Sheet 1/20/

9 2015 Medicare ACO Quality and Financial Results The CMS 2015 quality and financial performance results for Medicare ACOs show that ACOs continue to improve the quality of care for Medicare beneficiaries, while generating financial savings Over 400 Medicare ACOs generated over $466 million in total program savings in 2015 Of these, 125 qualified for shared savings payments Pioneer ACOs decreased in number by nearly a third, but still generated over $37m in savings Six of the eight Pioneer ACOs that generated savings earned shared savings Of the four that generated losses, one owed shared losses The mean quality score among Pioneer ACOs increased to percent in PY4 from 87.2 percent in PY3 Nine of the 12 Pioneer ACOs had overall quality scores above 90 percent for PY4 MSSP ACOs generated over $429m in savings 83 MSSP ACOs had health care costs lower than their benchmark, but did not qualify for shared savings, as they did not meet the minimum savings An increasing proportion of ACOs have generated savings above their minimum savings rate each year ACOs with more experience in the program were more likely to generate savings above their MSR 45% of ACOs participating in the Advance Payment model or ACO Investment Model generated savings above their MSR Shared Savings Program ACOs that reported quality in both 2014 and 2015 improved on 84 percent of the quality measures that were reported in both years. Source: Fee-For-Service Financial Model Assumptions Utilization Inpatient and Outpatient Impact of ACA Impact of Blue Cross steerage initiatives Revenue Third party price increases Cost based Medicare revenue DSH payments (Zeroed out in 2014) Bad debt % of patient service revenue (75% reduction in 2014) Impact of ACA Meaningful use incentive payments Other operating revenue Non-operating gains and Expenses Salaries, wages and benefits Productivity Supplies and other Fee-For-Service Financial Model Results Fee-For-Service Financial Model Results When operating income becomes negative in 2016, cash reserves start to decline 3.00% Medicare Margins by Hospital Type 2.00% 1.00% 0.00% -1.00% % -3.00% -4.00% -5.00% Operational improvement and shared service economies of scale are insufficient to combat declining utilization Can t cut your way to sustainability -6.00% -7.00% Rural (excluding CAHs) Rural (including CAHs)

10 Market Overview Healthcare Reform Medicare and Medicaid Delivery System Reforms (continued) Provider Implications Hospitals are taking the lead in forming Accountable Care Organizations with physician groups that will share in Medicare savings Value based purchasing program will shift payments from low performing hospitals to high performing hospitals Acute care hospitals with higher than expected risk-adjusted readmission rates and HAC will receive reduced Medicare payments for every discharge Physician payments will be modified based on performance against quality and cost indicators There are significant opportunities for demonstration project funding Challenges Affecting Rural Providers Factors that will have a significant impact on rural hospitals over the next 5-10 years Difficulty with recruitment of providers and aging of current medical staff Struggle to pay market rates Increasing competition from other hospitals and physician providers for limited revenue opportunities Small hospital governance members without sophisticated understanding of small hospital strategies, finances, and operations Consumer perception that bigger is better Severe limitations on access to capital for necessary investments in infrastructure and provider recruitment Facilities historically built around IP model of care Increased burden of remaining current on onslaught of regulatory changes Regulatory Friction / Overload Payment systems transitioning from volume based to value based Increased emphasis of quality as payment and market differentiator Reduced payments that are Real this time 3rd party steerage (surgery, lab, and Imaging), RAC audits We Have Moved into a New Environment! Subset of most recent challenges Payment systems transitioning from volume based to value based Increased emphasis as quality as payment and market differentiator Reduced payments that are Real this time New environmental challenges are the TRIPLE AIM!!! Market Competition on economic driver of healthcare: PATIENT VALUE Future Hospital Financial Value Equation Definitions Patient Value X Population Accountable Care: A mechanism for providers to monetize the value derived from increasing quality and reducing costs Accountable care includes many models including bundled payments, value-based payment program, provider self-insured health plans, Medicare defined ACO, capitated provider sponsored healthcare, etc. Different this time Providers monetize value Government All In New information systems to manage costs and quality Agreed upon evidence-based protocols Going back is not an option

11 Future Hospital Financial Value Equation ACO Relationship to Small and Rural Hospitals Revenue stream of future tied to Primary Care Physicians (PCP) and their patients Small and rural hospitals bring value / negotiating power to affiliation relationships as generally PCP based Smaller community hospitals and rural hospitals have value through alignment with revenue drivers (PCPs) rather than cost drivers but must position themselves for new market: Alignment with PCPs in local service area Develop a position of strength by becoming highly efficient Demonstrate high quality through monitoring and actively pursuing quality goals Future Hospital Financial Value Equation Economics As payment systems transition away from volume-based payment, the current economic model of increasing volume to reduce unit costs and generate profit is no longer relevant New economic models based on patient value must be developed by hospitals, but not before the payment systems have converted Economic model: FFS Rev and Exp VS. Budget Based Payment Rev and Exp Market Overview Conclusions New administration has created uncertainty for future of ACA Provider strategies must be flexible to accommodate uncertainty Changes related to the ACA will likely be moderated before finalized Risk that 14M to 23M people could lose health insurance with full ACA repeal Payment reductions, federal and state and those created by market transformations, will create increased pressure on operating margin Maintaining the traditional fee-for-service payment model in an environment of reduced sick care will be difficult for providers Market forces are reducing sick care demand and forcing price competition Thus, transitioning to value-based payment models is critical Market Overview Final Thoughts Traditional fee-for-service payment will continue to transition to value-based payment May require provider pull rather than governmental push Pressure for operational efficiencies and human and capital resources will continue to accelerate Clinical integration will create advantages to systems of accountable care (Value based payment, re-admission rates and preventable re-admissions, bundled payments, accountable care organizations, etc.) Flexibility must be ingrained into any short to medium term strategies as a direct result of increased regulatory and environmental uncertainty

12 The Challenge: Crossing the Shaky Bridge Payment Transition CMMI (Dr. Rajkumar 3/2016) Fee for Service Payment System Population Based Payment System The Premise Implementation Framework What Is It? Macro-economic Payment System Government Payers Changing from F-F-S to PBPS Private Payers Follow Government payers Steerage to lower cost providers Provider Imperatives F-F-S Management of price, utilization, and costs PBPS Management of care for defined population Providers assume insurance risk Provider organization Evolution from Independent organizations competing with each other for market share based on volume to Aligned organizations competing with other aligned organizations for covered lives based on quality and value Network and care management organization New competencies required Network development Care management Risk contracting Risk management

13 Initiative I Operating Efficiencies, Patient Safety and Quality Hospitals not operating at efficient levels are currently, or will be, struggling financially Operating Efficiencies, Patient Safety and Quality Focus on Quality and Patient Safety As a strategic imperative As a competitive advantage Efficient is defined as Appropriate patient volumes meeting needs of their service area Revenue cycle practices operating with best practice processes Expenses managed aggressively Physician practices managed effectively Effective organizational design Graphic: National Patient Safety Foundation Initiative II Primary Care Alignment Initiative III Rationalize Service Network Understand that revenue streams of the future will be tied to primary care physicians, which often comprise a majority of the rural and small hospital healthcare delivery network Thus small and rural hospitals, through alignment with PCPs, will have extraordinary value relative to costs Physician Relationships Hospital align with employed and independent providers to enable interdependence with medical staff and support clinical integration efforts Contract (e.g., employ, management agreements) Functional (share medical records, joint development of evidence based protocols) Governance (Board, executive leadership, planning committees, etc.) Potential Model for Rural: New PHO Develop system integration strategy Evaluate wide range of affiliation options ranging from network relationships, to interdependence models, to full asset ownership models Interdependence models through alignment on contractual, functional, and governance levels, may be option for rural hospitals that want to remain independent Explore / Seek to establish interdependent relationships among small and rural hospitals understanding their unique value relative to future revenue streams Identify the number of providers needed in the service area based on population and the impact of an integrated regional healthcare system Conduct focused analysis of procedures leaving the market Understand real value to hospitals Under F-F-S Under PBPS (Cost of out of network claims)

14 Rationalize Service Network Profitability Analysis Demonstrating Value of CAHs - Contribution Margin Affiliation Value Curve Payment System Strategy Initiative I Payment System Strategy Initiatives II and III Develop self-funded employer health plan Initiative II: Implementation planning for transitional payment models Hospital is already 100% at risk for medical claims thus no risk for improving health of employee population Change benefits to encourage greater consumerism Differential premium for elective risky behavior Enroll employee population in health programs health coaches, chronic disease programs, etc. FFS Quality and Utilization Incentives Maximize FFS incentives for improving quality or reducing inappropriate utilization (e.g., inappropriate ER visits, re-admissions, etc.) Transitional payment models include: FFS against capitation benchmark w/ shared savings Shared savings model Medicare ACOs Shared savings models with other governmental and commercial insurers Partial capitation and sub-capitation options with shared savings Prioritize insurance market opportunities Take the initiative with insurers to gauge interest and opportunities for collaborating on transitional payment models Explore direct contracting opportunities with self-funded employers Initiative III: Develop strategy for full risk capitated plans

15 Population Health Strategies Phase I Implementation Framework In Review Phase I: Develop Population Health building blocks Goal: Infrastructure to manage self insured lives and maximize FFS Utilization and quality incentives Initiatives: PCMH or like structure Care management Discharge planning across the continuum Transportation, PCP, meds, home support, etc. Transitions of care (checking in on treatment plan) Medication reconciliation Post discharge follow-up calls (instructions, teach back, medication check-in) Identifying community resources Maintain patient contact for 30 days Develop claims analysis capabilities/infrastructure Develop evidenced based protocols Conclusions/Recommendations For decades, rural hospitals have dealt with many challenges including low volumes, declining populations, difficulties with provider recruitment, limited capital constraining necessary investments, etc. The current environment driven by healthcare reform and market realities now offers a new set of challenges. Many rural healthcare providers have not yet considered either the magnitude of the changes or the required strategies to appropriately address the changes Core set of new challenges represents the Triple Aim being played on in the market Locally delivered healthcare (including rural and small community hospitals) has high value in the emerging delivery system Shaky Bridge crossing will required planned, proactive approach Finance will lead function and form Maintain alignment between delivery system models and payment systems building flexibility into the delivery system model for the changing payment system Conclusions/Recommendations (continued) Important strategies for providers to consider include: Increase leadership awareness of new environment realities Strategic plan to be updated to incorporate new strategic imperatives Bridge Strategy Improve operational efficiency of provider organizations Adapt effective quality measurement and improvement systems as a strategic priority Align/partner with medical staff members contractually, functionally, and through governance where appropriate Seek interdependent relationships with developing regional systems CONCLUSIONS / RECOMMENDATIONS 59 CONCLUSIONS / RECOMMENDATIONS 60 15