state of the industry

State of the IndustryMarket Trends at the Intersection of Philanthropy and Health Care

NACCDO April 25, 2013

Michael Hubble [email protected]

Philanthropy Leadership Council

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Giving on a Slow Rebound?

Source: Giving USA 2011: The Numbers; “U.S. charitable giving shows modest uptick in 2010 following two years of declines,” June 20, 2011, available at: http://www.philanthropy.iupui.edu/news/2011/06/pr-GUSA.aspx; Philanthropy Leadership Council analysis.

1) Adjusted for inflation.2) Includes clinics, hospitals, health related research facilities , disease-specific organizations for

research or patient/family support, mental health services or research, and health policy centers.

Change in Charitable Contributions1

Overall

5

To Health Organizations2

2008 2009 2010 2011 2008 2009 2010 2011

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The Real Picture

Source: Giving USA 2011: The Numbers; “U.S. charitable giving shows modest uptick in 2010 following two years of declines,” June 20, 2011, available at: http://www.philanthropy.iupui.edu/news/2011/06/pr-GUSA.aspx; Philanthropy Leadership Council analysis.

1) Adjusted for inflation.2) Includes clinics, hospitals, health related research facilities , disease-specific organizations for

research or patient/family support, mental health services or research, and health policy centers.

Change in Charitable Contributions Indexed to 2007To Health Organizations

6

2008 2009 2010 20112007

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Three Flashpoints in Health Care Policy7

Source: Advisory Board interviews and analysis.

June 2012:• Individual mandate upheld• Medicaid expansion upheld, but

states may “opt out” without impact on existing Medicaid funds

November 2012:• Economy issues central to elections• Medicaid budgets influence state elections• Potential House & Senate majorities shift

Supreme Court Ruling 2012 Elections End-of-Year Budget Debate

December 2012:• “Doc fix” worth $18B set to expire • Bush tax cuts set to expire• Federal government hits debt

ceiling limit of $16.39T• $1.2T Sequester cuts take effect,

including 2% cuts to Medicare• Debt ceiling deal further cuts

spending

Event Timeline

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Health Care Likely On the Chopping BlockBut Little Agreement on How

Source: www.whitehouse.gov; Health Care Advisory Board interviews and analysis.

1) Includes spending for Medicare, Medicaid, CHIP, substance abuse and mental health services, National Institutes of Health, and Food and Drug Administration.

Distribution of Spending in 2012 Budget (Estimate)

29%

24%27%

8%12%

Health Care1

DefenseSocial Security

Interest on Debt

Other

Possible Approaches to Reducing Health Care Spending

Decreased supplemental payments

Eligibility changes Provider rate cuts

Payment model overhaul(i.e. voucher system)

Fraud, waste reduction

Cost shifting to beneficiaries

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Hardly a More Critical Time of NeedHospitals and Health Systems Under Immense Margin Pressure

Source: Daily Briefing, “Moody's: Hospital revenue growth at 20-year low, in 'critical condition‘, August 10, 2011, http://www.advisory.com/Daily-Briefing/2011/08/10/Moodys-Hospital-revenue-growth-at-20-year-low-in-critical-condition; Daily Briefing, “Moody's: Hospital downgrades return to credit crisis levels,” July 18, 2011, http://www.advisory.com/Daily-Briefing/2011/07/18/Moodys-Hospital-downgrades-return-to-credit-crisis-levels; Moody’s Investor Service, “Moody's: Not-for-profit hospitals face revenue reductions across the board,” August 9, 2011, available at: http://www.moodys.com/ research/Moodys- Not-for-profit-hospitals-face-revenue-reductions-across-the?lang=en&cy=global&docid=PR_224301#; Advisory Board analysis.

Hospital Operating Margins

Moody’s Rated Hospitals

20%

63%

17%

0% – 5%

> 5%

< 0%

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DeceleratingPrice Growth

Continuing Cost Pressure

ShiftingPayer Mix

DeterioratingCase Mix

• Medical demand from aging population threatens to crowd out profitable procedures

• Incidence of chronic disease, multiple comorbidities rising

• No sign of slower cost growth ahead• Drivers of new cost growth largely

non-accretive

• Baby Boomers entering Medicare rolls• Coverage expansion boosting

Medicaid eligibility• Most demand growth over the next

decade comes from publicly insured patients

• Federal, state budget pressures constraining public payer price growth

• Payments subject to quality,cost-based risks

• Commercial cost shiftingstretched to the limit

Four Forces Shaping Future Margins10

Financial, Clinical Profiles Shifting Dramatically

Source: Health Care Advisory Board interviews and analysis.

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New Baseline Already Challenging11

Affordable Care Act Significantly Reduces Public Payments

Source: US House of Representatives, “Amendment in the Nature of a Substitute to H.R. 4872, as Reported,” accessed March 18, 2010; US Senate, The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act,” accessed December 24, 2009; Health Care Advisory Board interviews and analysis.

Decelerating Price Growth

Impact of Affordable Care Act on Provider Rates

Cumulative Federal Revenue from Decreased Medicare and Medicaid DSH Payments

$110 BCuts to Medicare

Fee-For-Service rates

$36 BCuts to Disproportionate Share

Hospital (DSH) payments

2014 2015 2016 2017 2018 2019

Medicare Medicaid

$22.0 B

$14.0 B

$500 M$0 B

$3.6 B

$12.6 B

$7.6 B

$17.0 B

$8.4 B

$3.5 B$1.7 B$1.1 B

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Cost-Shifting Possible, But For How Long?12

Commercial Subsidy Under Ever-Greater Pressure

Source: American Hospital Association Chartbook, available at: http://www.aha.org/aha/research-and-trends/chartbook/index.html, accessed April 26, 2011; Health Care Advisory Board interviews and analysis.1) Includes Medicaid Disproportionate Share Hospital payments.

Payment-to-Cost Ratios, by Payer1

Private Payer

Medicaid

Medicare

2009 Ratio

90.1%

89.0%

20092000

134.1%


Running on Empty

“If we could squeeze more out of our payers, we would. But I don’t think there’s much left to squeeze.”

CEO”

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Deceleration in Private Payer Pricing Likely13



Pressures on Commercial Pricing

4

Quality performance risk increasingly prevalent

5

New payment models demanding utilization management

Regulatory scrutiny of premium increases intensifying

Exchange-based coverage diluting average commercial price

Employers increasingly willing to restrict choice

1 32

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Long-Term Cost Growth Continuing14

Market, Regulatory, Demographic Pressures Mounting

Source: American Hospital Association Chartbook, available at: http://www.aha.org/aha/research-and-trends/chartbook/index.html, accessed April 29, 2011; Health Care Advisory Board interviews and analysis.

Continuing Cost Pressure

Expenses per Adjusted Admission Drivers of Continued Cost Growth:

Market pressures pushing up unit costs of labor, other inputs

Overhead expenses swelling as new IT mandates take hold

Aging, sicker population requiring increasingly complex, costly care pathways1989 20091999

$6,509

$10,045

$4,588

Cost Growth, 1989-1999:3.6%

Cost Growth, 1999-2009:4.4%

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Baby Boomer Surge Beginning15

Medicare Rolls in Line to Increase Dramatically

Source: U.S. Census Bureau, available at: http://www.census.gov, accessed on September 13, 2011; Kaiser Family Foundation, available at: http://www.kff.org/medicare/h08_7821.cfm, accessed on September 13, 2011; Health Care Advisory Board interviews and analysis.

Shifting Payer Mix

2011 US Population Distribution By Age

~7,000/dayNewly eligible Medicare

beneficiaries

23%Percentage of

population covered by Medicare in 2030

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

75 M Baby Boomers

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Moving Ever Closer to Single Payer16

Medicare to Constitute Majority of Discharges by 2021


Shifting Payer Mix

52%

20%

27%

Inpatient Volume by Payer Class

Medicaid

Commercial

Self Pay

Medicare

0.3%

37%

22%

35%

5%

Medicaid

Commercial

Self Pay

Medicare

2011 2021

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Future Demand Will Not Fund Capacity ExpansionEven at Current Prices, Public Payments Fail to Cover Total Costs

1) Fully-allocated costs.2) Includes Medicaid Disproportionate Share Hospital payments.

Average Payment Relative To Cost1

By Payer

Series1

134%

90% 89%

Medicare, Medicaid volume growth unable to finance capacity expansion

100%

Commercial Medicare Medicaid2

Source: American Hospital Association Chartbook, available at http://www.aha.org/aha/research-and-trends/chartbook/index.html, accessed April 26, 2011; Health Care Advisory Board interviews and analysis.

Shifting Payer Mix

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61%39% 73%27% 76%24%

More Medicine On the HorizonPublic Payer Volumes Composed of Predominantly Medical Cases


Deteriorating Case Mix

Medical and Surgical Shares of Volume, by Payer

Medical Medical Medical

Surgical Surgical Surgical

Commercial Medicare Medicaid

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Chronic Disease Growth Outpacing Population Growth

Source: Milken Institute, available at: http://www.milkeninstitute.org/ pdf/chronic_disease_report.pdf, accessed April 27, 2011; Health Care Advisory Board interviews and analysis.


Projected Increase in Chronic Disease Cases2003-2023

Stroke

Pulmon

ary C

onditio

ns

Hypert

ensio

n

Heart D

iseas

e

Diabetes

Mental

Diso

rders

Cancer

29.0% 31.0%39.0% 41.0%

53.0% 54.0%62.0% 19%: Projected

population growth, 2003-2023

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Shift in Case Mix Posing Powerful Margin ThreatDestabilizing our Second Pillar of Cross-Subsidy

Source: Medicare Cost Reports; Health Care Advisory Board interviews and analysis.


1) Top quartile by share of inpatient discharges paid by Medicare or Medicaid.

Inpatient Contribution IncomeWeighted Per-Case Average

Surgery Medicine

$6,110

$2,927

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Key Characteristics

Welcome to Pleasantville21

Average Care for Average People


Case in Brief: Pleasantville Hospital

• Health Care Advisory Board model hospital

• Revenue, cost, and operational inputs based on national averages

• Inputs adjusted to forecast impact on future financial performance

• Offers insight into relative opportunity of pulling various margin improvement levers

300Number of beds

2.2%Operating

margin

73%Medical share

of case mix

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The Unsustainable Acute Care Enterprise22

An Untenable Future Without Major Improvements


Case in Brief:Pleasantville Hospital

• Health Care Advisory Board model hospital

• Revenue, cost, and operational inputs based on national averages

• Inputs adjusted to forecast impact on future financial performance

• Offers insight into relative opportunity of pulling various margin improvement levers

300Number of beds

2.2%Operating

margin

73%Medical share

of case mix

Key Characteristics

Series1

2.2%

(15.8%)

4.0%

Overall Impact of Market Forces at Pleasantville2022

19.8%:TotalGap-to-Goal

Current Margin

Projected Operating

Margin, 2022

Goal

Includes effects of:• Price growth trends• Cost growth trends• Payer mix shift• Case mix deterioration

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Achieving the New Performance Standard23

Inaction Not an Option


Nine Imperatives for Achieving the New Performance Standard

1. Maximize Revenue Capture2. Excel Under Performance Risk3. Bend Labor Cost Curves4. Standardize Clinical Care Pathways5. Redesign Inpatient Care Models

6. Build Effective Capacity7. Reassess Supply of Less Profitable Services8. Deflect Demand of Less Profitable Services9. Secure Surgical Market Share

More relevant implications for health care philanthropy

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Demand Growth to Outpace Physical Capacity24

Long-term Capacity Constraints In Play as Demand Grows

Imperative #6: Build Effective Capacity

Capacity Crunch at Pleasantville Projected Occupancy Without Capacity Expansion

2011 2021

73%80%

103% 5,118 uncaptured discharges

Practical limit of average occupancy


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It Makes Sense To Fill the Bed…Growth is Good, as Long as You Have a Place for It

Contribution Profit per Case Effect of Demand Growth Without Capacity Constraints


Medicaid

Medicare

Commercial

22%

43%

55%

Impact of Fully Captured Demand

(3%)Change in

inpatient revenue per case

38% 33%Change in inpatient volume

Change in total inpatient

revenue

Hospital significantly below maximum occupancy; able to absorb all new demand

Volume growth mitigates negative impact of worsening case mix

By Payer

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…But Not to Build the BedImproved Throughput Most Feasible Way to Capture Excess Demand

Pleasantville Capacity Crunch

Option 2: Overloading Current Resources

Option 3: Expediting Patient Throughput

Option 1: Constructing New Facilities

• Incurs significant capital expense

• Future prices less able to pay fixed costs

• Extra beds must be staffed, supplied

• No space for above-average census days

• Raises serious patient safety concerns

• Generates unsustainable workload

• Creates capacity for more discharges without raising number of patient days

• Requires investment in better care pathways, but does not explicitly raise fixed, variable costs

Action: Build 85 New Beds Action: Operate at 104% Average Occupancy

Action: Lower Average LOS to 3.7 Days

Staffed Beds: 300Average LOS: 4.8 daysAverage Occupancy Limit: 80%Excess Demand: 5,118 discharges


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The End of the Cornerstone Capital Project?

Source: Philanthropy Leadership Council Member Topic Poll 2011, interviews and analysis.

Comprehensive

Capital42%

46%

Mini-Campaign

5% 7%Other

n=76

Percent of Council Members Currently Conducting Campaigns, by Type

Jeopardizing Our Primary Campaign Priorities

Impact on Representative Comprehensive Campaign

Priorities:

1. New Patient Tower

2. Cancer Center Pavilion3. Nursing Scholarships4. Endowed Chairs5. Research

Goal: $100 M

Timeline: 6 years

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Optimal Service Portfolio Not Just About the Money28

Many Factors to Consider When Assessing Service Offerings


Imperative #7: Reassess Supply of Less Profitable Services

1) Pseudonym.

Service Line Evaluation Process at Bassoon Health System1

Financial Criteria(10 points each):• EBITDA• Net Income• Overall Financial

Strength

Scorecard:• <20 Points:

Seriously consider divestiture

• 20-30 Points: Borderline case, attempt to reposition

• >30 Points: Keep and maintain

Case in Brief: Bassoon Health System• Four-hospital health system located in the South• Employs standard template to evaluate viability of “non-core” service line offerings• Identifies services that must be kept, can be divested, or should be repositioned for growth• Financial performance, strategic considerations, practical factors all considered

Non-Financial Criteria(5 points each):• Strategic Necessity• Mission/Community Benefit• Brand• Internal Politics• Risk Factors• Management Resource

Requirements

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Service Offerings Not on a Lightswitch29

Community Pressures, Core Business Restrict Supply-Side Options

Community Obligation Diffuse Responsibility


Q: If you wanted to avoid treating diabetic complications, what service line would you cut?

CFO

• Non-negotiable services• Not specific to diabetes

If Not Us, Then Whom?“We have to have some unprofitable services because we’re a public hospital and there is no one else who wants to offer them. You can divest from services if you’re in a market where there is someone else to offer them, but we don’t have that luxury.”

CFO

”Inpatient

Medicine?Emergency

Department?

General Surgery?

Hospitalist Program?

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Establishing the Medical Perimeter30

Extensive Ambulatory Care Network Addresses Medical Demand


Medical Management Investments

Health Information Exchanges

Electronic Medical Records

Medical Home Infrastructure

Primary Care Access

Population Health

Analytics

Patient Activation

Post-Acute Alignment

Disease Management

Programs

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A New Breed of Funding PrioritiesCan We Make the Case for Reducing Demand?

InformationTechnology

• Electronic medical records• Health information exchanges• Patient online portals

ProgrammaticSupport

• Disease management programs• Prevention initiatives• Community partnerships

Primary Care Infrastructure

• Medical homes• Outpatient offices • Off-campus clinics

Source: Philanthropy Leadership Council interviews and analysis.

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