Health Reform: Where Are We Now?

Health Reform: Where Are We Now? Andrew Croshaw President, Leavitt Partners Consulting Geologic tectonic forces create our current landscape 2

November 13, 1963 South of Iceland 3 A new landscape emerges (within 16 days) 4

The island of Surtsey forms within three years 5 Societal tectonics create new health care landscapes Tectonic Shifts Social Compassion Economic Dispassion Tech Power Demographics Government & ACA 6

Societal tectonics create new health care landscapes Tectonic Shifts Social Compassion Economic Dispassion Tech Power Demographics Government & ACA 7 Societal tectonics create new health care landscapes Tectonic Shifts Social Compassion Economic Dispassion Tech Power Demographics Government & ACA 8

The ACA continues the trend of compassionate entitlement programs SS Insurance Unemployment AFDC Medicare Medicaid SSI CHIP TANF Medicare (Part D) ACA 1935 Roosevelt 1965 Johnson 1974 Nixon 1997 Clinton 2006 Bush 2010 Obama 9 Societal tectonics create new health care landscapes Tectonic Shifts Social Compassion Economic Dispassion Tech Power Demographics Government & ACA 10

Deficit spending to fund consumption is not sustainable Source: CBO Report, The Budget and Economic Outlook, 2014 11 Entitlement spending is a major driver of overspending Source: CBO, Budget and Economic Outlook: Fiscal Years 2013 to 2023, Feb 2013 12

Human compassion vs. global economic dispassion Human Compassion Economic Dispassion Social Security Medicare Medicaid Supplemental Security CHIP Medicare Part D PPACA Debt = $17.5 trillion (and counting) 13 Societal tectonics create new health care landscapes Tectonic Shifts Social Compassion Economic Dispassion Tech Power Demographics Government & ACA 14

The ACA boils down to three elements Risk-capital Silver Health Plan Public Exchange Preexisting Conditions Risk corridors Adjusted Community Rating Electronic Medical Records Advanced Premium Tax Credit Increases Insurance Industry Regulation Increases Access to Health Care ACA Individual Mandate Employer Mandate Accountable Care Organizations Bronze Health Plan Reinsurance Establishes Minimum Benefits Gold Health Plan Small-Business Health Options Program Guaranteed Issue Special Enrollment Period Essential Health Benefits Aggregated Risk Pools Preventative and Wellness Services 15 ACA impacts remain uncertain Administration audibles Election outcomes at state/federal level Regulatory/rule-making process Congressional action Influence of the Courts 16

Potential future changes to the ACA pre-2016 Light Pressure Medium Pressure Heavy Pressure IPAB cancelled Device Tax cancelled (Unlikely pre-2016) Expanding providers bearing risk Increased flexibility for Medicaid expansion Increased disclosure information Narrow Networks Employer mandate cancelled Continuation of risk corridors Subsidies Patient Out-of-Pocket Costs 17 Senate up for grabs in 2014 Source: Real Clear Politics 18

Societal tectonics create new health care landscapes Tectonic Shifts Social Compassion Economic Dispassion Emerging Landscapes Population Health Tech Power Demographics Government & ACA 19 ACO activity is robust, but uneven Estimated ACO Penetration by Hospital Referral Region, Leavitt Partners Center for Accountable Care Intelligence, 2014 20

# of ACOs An increasing number of ACO covered lives 20 18 16 14 Covered Lives Over Time Lives (millions) 12 10 8 6 4 2 0 Leavitt Partners Center for Accountable Care Intelligence 2014 21 Physicians and hospitals are both experimenting 300 260 266 250 200 150 109 147 159 145 150 197 186 201 197 203 203 238 247 100 73 60 46 49 50 55 50 31 35 29 32 54 20 33 53 12 11 6 0 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Physician Group Hospital System Insurer Other Leavitt Partners Center for Accountable Care Intelligence 2014 22

Robust government program participation Approximately 14% of Medicare FFS lives are under one of these programs 23 Some private payers are exceptionally active 307 - Payment Arrangements 86 - Unique Payers 55 - Payers With Only 1 Arrangement Top 7 Payers Cigna Aetna UnitedHealthcare BCBS of Massachusetts Anthem Blue Shield of California Blue Cross Blue Shield of Michigan # of Payment Arrangements 171 Top 7 Payers 136 All Other Payers Leavitt Partners Center for Accountable Care Intelligence 2013 24

Non-Class Insurance Millions Non-Class Insurance Non-Class Insurance Millions Millions ACO Projections: The two extremes Number of ACO Lives Number of ACO Lives 160 25 140 120 20 100 15 80 60 10 40 20 5 0 2010 2012 2014 2016 2018 ~150m lives (2018) Model 1: A relatively low level of replacement (failure) of the first batch of ACOs and predicts a much higher total market potential, approximately 150 million lives Predicted Actual 0 2010 2012 2014 2016 2018 ~20m lives (2018) Model 2: A higher rate of replacement (failure) and predicts a much lower total market potential approximately 23 million lives 25 ACO Projections: The middle of the road A majority of early adopter ACOs are able to show savings while maintaining or improving profitability, though some organizations fail and leave the program Other organizations will imitate the more successful models but will move towards accountable care at a more cautious pace 120 100 80 60 40 20 Number of ACO Lives 0 Oct-06 Jul-09 Apr-12 Dec-14 Sep-17 Jun-20 Mar-23 Dec-25 Period ~100m lives (2018) Predicted Actual A smaller rate of replacement (failure) and predicts a more modest total adoption nearing 100 million lives by 2018 26

Leavitt Partners seeking additional research partners 1. Active Tracking of ACOs 600+ ACOs and growing Secondary research 2. Interviewing ACO Leadership 100+ interviews and growing Primary research Surveying 3. Analyzing ACO Trends Data analysis Expert insight 4. Performing Local Market Research Interviews with local stakeholders Helps project local trends 5. Products Benchmarking Reports ACO Categories Collaboration Opportunities Leavitt Partners invites ALL providers to participate in our accountable care survey process 27 Societal tectonics create new health care landscapes Tectonic Shifts Social Compassion Economic Dispassion Tech Power Emerging Landscapes Population Health Insurance Exchanges Demographics Government & ACA 28

Enrollment s slow start and final month surge 29 Enrollment of young invincibles varies across the U.S. Percentage of Exchange Enrollment Comprised of Ages 18-34 Actuaries generally agree that the right risk balance requires 40% of enrollees to be between 18-34 If 33% of enrollees are 18-34, costs will be approximately 1.1% higher than premium revenues If 25% of enrollees are 18-34, costs will be approximately 2.4% higher than premium revenues Source: HHS & State-based exchange data 30

High cost sharing for Exchange products 5% 2% 9% 20% 65% Bronze Gold Catastrophic Silver Platinum 31 Year 2 Exchange Open Enrollment What s Ahead? Healthcare.gov 2.0 States on the move Improved exchange capabilities Product portfolio increase Employer Penalty pressure Basic Health Plan with uncertain future SHOP Exchange lull Ascendance of private exchanges 32

Societal tectonics create new health care landscapes Tectonic Shifts Social Compassion Economic Dispassion Tech Power Demographics Emerging Landscapes Population Health Insurance Exchanges Consumer Sovereignty Government & ACA 33 Network arrangements will test consumer choice 30 51 35 14 30 11 2013 2014 41% 150% 173% Broad Network* Have less than 30% of 20 largest hospitals by bed size not participating Narrow Network Have 30-69% of 20 largest hospitals by bed size not participating Ultra-Narrow Network Have at least 70% of 20 largest hospitals by bed size not participating Used as a tool to create a more competitive price (and cost) model for plans Portends the beginning of unique pricing pressures from plans Collateral damage to high-cost specialty practices Ultra Narrow Narrow Broad Source: McKinsey; LP analysis *Networks in our sample of select markets are categorized as follows: a) broad networks have less than 30 percent of 20 largest hospitals by bed size in the relevant area (area within 50 miles of rating area s most populous zip code) not participating, b) narrow networks have 30-69 percent of 20 largest hospitals not participating, c) ultra-narrow networks have at least 70 percent of 20 largest hospitals not participating; largest 20 hospitals represent ~80-85% of beds on average across rating areas. 34

Consumers choosing more high deductible plans Growth of HSA-Qualified High Deductible Health Plan Enrollment, Covered Lives (Millions), March 2005 to January 2013 Source: AHIP Center for Policy Research 35 Defined contribution may enable consumer choice 70% of respondents expect large employers to move to a defined contribution model in 5 years 93% of respondents believe there will come a time when defined contribution is the preferred model for offering benefits Array Health Survey on Private Exchanges October 2013 13% of employers have already adopted or are very likely to adopt a defined contribution approach in the next 2 years Private Exchange Evaluation Collaborative Executive Summary Dec. 2013 36

Patient engagement activity is advancing Mechanisms for provider and payer ability to influence patient behavior include: Patient Profiling Clinical Infrastructure Remote Services Care Management Decision Support Tools Data Analytics 37 Societal tectonics create new health care landscapes Tectonic Shifts Social Compassion Economic Dispassion Tech Power Demographics Government & ACA Emerging Landscapes Population Health Insurance Exchanges Consumer Sovereignty Medicaid as a Lever 38

Just under half the states are moving forward with Traditional Medicaid Expansion Current as of 03/25/2014 Moving Forward (22 states & DC) Undecided Submitted a waiver for an alternative expansion Actively exploring an alternative expansion 39 Medicaid is migrating from Public Assistance to Insurance Enrollment Growth Newly eligible Woodwork / Welcome Mat Application portal/exchange interface Simplified eligibility MAGI Changing Face of Enrollees Childless adults Younger, healthier Older, high need Behavioral health needs 40

Medicaid can be a lever for broader system reform State Purchasing Leverage Coordinated Strategies: Medicaid, public employees/retirees, other state funded populations Multi-payer Initiatives Example: Health Care Payment Improvement Initiative (AR) State Innovation Model (SIM) Broad based impact on Medicaid, CHIP, Medicare and commercially covered Data Infrastructure and Analytics APCDs, health information exchange, accountability frameworks 41 Tectonic shifts create new health care landscapes Tectonic Shifts Emerging Landscapes Social Compassion The future is already here it's just not evenly distributed. Population Health Economic Dispassion -William Ford Gibson Insurance Exchanges Tech Power Demographics Government & ACA Consumer Sovereignty Medicaid as a Lever 42

A health care intelligence business To participate with Leavitt Partners in the accountable care research survey: Email me [Andrew] at: Info@leavittpartners.com