THE FUTURE OF ROCKEFELLER INSIGHTS. David K. Song, M.D., Ph.D., CFA Senior Portfolio Manager and Managing Director

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1 ROCKEFELLER INSIGHTS THE FUTURE OF H E A LT H C A R E David K. Song, M.D., Ph.D., CFA Senior Portfolio Manager and Managing Director Rolando Morillo Equity Analyst and Vice President R O C K C O.C O M 2016 by Rockefeller & Co., Inc. All rights reserved. Does not apply to sourced material. Products and services may be provided by various subsidiaries of Rockefeller & Co., Inc.

2 17.0 HEALTHCARE COSTS CURRENTLY ACCOUNT FOR 17% OF U.S. GDP AND 10% OF GDP GLOBALLY THE FUTURE OF HEALTHCARE 1 OECD:

3 The Future of Healthcare UNITED STATES Global healthcare systems have been experiencing increased pressures. Healthcare costs currently account for 17% of U.S. gross domestic product (GDP) and 10% of GDP globally, and it is believed that healthcare costs will outpace global GDP over the medium-term. 2 Even though the levels of healthcare spending differ globally, countries are facing medical inflation exceeding GDP growth, stemming from aging populations and the burden of chronic disease. At Rockefeller & Co., we believe that as a result of unsustainable cost burdens, healthcare systems are in the process of a radical shift, both domestically and internationally. Some newly adopted systems have been quite innovative with respect to healthcare delivery, seeking higher quality at lower costs. We believe most countries will eventually look to modernize their healthcare systems. $750 billion in unnecessary health spending in 2009 alone Institute of Medicine, OECD: THE FUTURE OF HEALTHCARE

4 The Issue: Unsustainable Health Care Costs Historically, the healthcare industry has been guided by a fee-for-service model, which champions the quantity of services offered, promoting excess and wasteful spending. In contrast, a multitude of factors have driven a transition toward fee-for-value approach, which emphasizes the quality and outcome of care delivered. Our team of sector and ESG (Environmental, Social and Governance) analysts believe that this emerging trend could present interesting investment opportunities. When attempting to discern the underlying currents propelling the shift, beyond the steady rise in healthcare costs and increasing burden placed on consumers, we have identified three factors that we believe have advanced the adoption of a fee-for-value model. THE FUTURE OF H E A LT H C A R E The Affordable Care Act (ACA) has placed tremendous pressure on the U.S. healthcare system by increasing coverage to millions of previously uninsured individuals. 3 Misaligned industry incentives have also fed increased inefficiencies and limited access in the healthcare system. the 2016 election results, we believe affordability will continue to be a significant problem. As such, we believe value-based reimbursement initiatives, which garner bipartisan support, will drive structural changes in the healthcare sector. Consequently, the issue of rising healthcare costs has become more acute and has catalyzed efforts to improve efficiency and squeeze more value out of dollars spent on healthcare. As a result of these acute forces, stakeholders from employers, to consumers, to healthcare providers are seeking to address these issues and extract greater clinical value out of the healthcare system. The digitization of healthcare, like many other sectors of the global economy, has driven real change in the industry. Born out of the American Recovery and Reinvestment Act of 2009, the implementation of technology has enabled the improvement of care delivery, promotion of wellness, and has the ability to analyze large amounts of data to understand and predict cost and quality trends. The Enabler: Technology The ACA (at the time of writing) may undergo significant changes or be repealed as a result of 3 U.S. Department of Health and Human Services

5 Transitioning to Fee-For Value The Stars Aligning Payment Reforms: The Affordable Care Act has resulted in pilot programs that test new ways for delivering healthcare services, paying healthcare providers, and designing benefits. One area that has shown potential has been a value-based alternative reimbursement model, which bundles payments for certain orthopedic surgeries. A G I N G P O P U L AT I O N Medicare Reimbursement Private Investment In 2015, the U.S. Department of Health and Human Services (HHS) announced sweeping changes to Medicare reimbursement, shifting from a volume model to value. HHS also tied these changes to a strict timeline. Considering that Medicare is the largest payer in the U.S. healthcare system, private insurers have been motivated to offer more fee-for-value arrangements. M E D I C A L I N F L AT I O N Across the industry, there has been increased investment into innovative models that seek to improve healthcare system delivery. Beyond financial backing, creative investment from places like Silicon Valley in the form of human capital has accelerated the possibility for smart solutions within the context of fee-for-value. H E A LT H C A R E A C C E S S I N E Q U A L I T Y HEALTHCARE STRUCTURE CURRENT MODEL NEW MODEL ESG/FINANCIAL IMPACT PAYMENT Fee-for-service Fee-for-value Improved health outcomes INCENTIVE Volume Value Alignment of cost FOCUS Siloed attention Population health Increased patient access INFORMATION Retrospective and inefficient Predictive analysis Preventative care PROVIDER High cost structure Shared savings Accountability and integration Source: Cleveland Clinic THE FUTURE OF H E A LT H C A R E

6 Rockefeller & Co., Inc. supports the Sustainable Development Goals The United Nations Sustainable Development Goals The Sustainable Development Goals (SDGs), adopted by the United Nations in 2015, have also laid the groundwork for the shift in healthcare. The SDGs identify 17 long-term goals that integrate economic, social and environmental objectives. Of particular interest to us is SDG Three, which focuses on ensuring healthy lives for everyone at all ages and has equity as a central issue in health. At its core, we believe sustainable development goals, such as SDG Three, can be achieved through the adoption of the value-based model. Value-based incentives are a sustainable conduit to transform the global healthcare system, promote preventative care, and handle global societal challenges such as access to healthcare and aging populations. The value-based concept also cuts across other sustainable development goals, such as SDG Nine, which focuses on building resilient infrastructure, promoting sustainable industrialization and fostering innovation. SDG Ten, which focuses on reducing inequality within and among countries, also touches on the necessity for a shift in the way healthcare is conducted. A Reimagined Landscape: Potential Winners & Losers As the changes play out, the resulting landscape for the healthcare industry will likely look differently than it does today. Considering that this shift is a multi-year process, we believe existing businesses that are able to evolve can survive and thrive, but that companies which are unable to adapt could lose market THE FUTURE OF H E A LT H C A R E share or go out of business, and certain business models may become obsolete. Not surprisingly, venture capital backed healthcare companies could have much to gain, though regulation and lack of domain knowledge could stymie efforts from Silicon Valley. That said, we believe information technology companies with either disruptive technologies or deep healthcare domain knowledge are poised to benefit from the transition to fee-for-value medicine. We believe several medical device companies (though most certainly not all) are better prepared than other product

7 Potential Winners & Losers cont d. companies for the transition to a value-based healthcare system. Within this group, diagnostics companies, particularly those developing liquid biopsies or other non-invasive tests that detect disease earlier or predict response to drugs, appear to be well positioned. Beneficiaries may also include service companies offering medical or surgical interventions at cheaper settings of care than the traditional acute care setting. Potential losers may include high-margin service companies that benefit from inefficiencies in healthcare, such as lack of pricing transparency, and rely heavily on volumes and medical inflation to support their cost structures. We have observed that many providers with structurally high cost structures have been less prepared to meet challenges in value-based healthcare. The outlook for biotechnology and pharmaceutical companies is situationally dependent. On the one hand, gene therapies herald the promise of a one-shot cure for devastating illnesses opening up the possibility of more cost-effective treatments than sustaining chronic therapies. On the other hand, many biopharma companies have been slow to adopt this new environment in their operating model, possibly because companies have a tendency to lean on the prospects of drugs out of large legacy research and development costs spread over years. Winners (+) Information Technology or Health IT Diagnostics Alternative Site Providers Mixed (+/-) Devices (ex. Diagnostics) Drugs Managed Care Losers (-) Acute Care Facilities The Future of Healthcare and Rockefeller & Co. s Impact While much of the ground work has been laid for a fee-for-value model, industry players have differing outlooks for when the model will be fully adopted. We believe that, while ambitious, global stakeholders are becoming aligned with the goal of tackling the issue of healthcare costs. There are providers that are proactive in this movement, providers that are watching the early innovators closely and taking some steps in preparation, and providers that are stuck in a feefor-service world. On behalf of our investors, we maintain ongoing dialogues with management teams and industry thought leaders on value-based reimbursement. We also want to know whether companies are implementing sustainable pricing practices. At Rockefeller & Co., we seek to identify forward-thinking companies with the potential to benefit from this sea change. In addition to improving overall human health, the notion of minimizing burdens to consumers and governments through the context of scarce economic and environmental resources is appealing to us from an ESG perspective. As long-term investors, we want to be partners in a healthcare industry that is being held accountable for its impact on the society as a whole. THE FUTURE OF HEALTHCARE

8 I N S I G H T R O C K C O.C O M NEW YORK, NY WA S H I N G T O N, D C 10 Rockefeller Plaza N e w Yo r k, N Y T th Street NW Washington, DC T ROCKEFELLER TRUST C O M PA N Y, N. A. THE ROCKEFELLER TRUST C O M PA N Y ( D E L AWA R E ) 10 Rockefeller Plaza N e w Yo r k, N Y T B O S T O N, M A 99 High Street, 17th Floor Boston, MA T N. Market Street, Suite 1401 Wilmington, DE T These materials are being provided for informational purposes only and are not intended, and should not be construed as investment advice. The views expressed are as of a particular point in time and are subject to change without notice. Certain information contained in these materials may constitute forward-looking statements and/or may be obtained from, or based on, third party sources that Rockefeller & Co., Inc. believes to be reliable. No representations or warranties are made as to the accuracy or completeness of such statements, and actual events or results may differ materially from those reflected or contemplated. Although the information provided is carefully reviewed, Rockefeller & Co., Inc. cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided. Past performance is no guarantee of future results and no investment strategy can guarantee profit or protection again losses. These materials may not be copied, reproduced or distributed without Rockefeller & Co., Inc. s prior written consent. Cover and interior images: Shutterstock