Date

Use Facility Image if available

Affiliation Planning — Final Report

Sitka Community Hospital SouthEast Alaska Regional Health Consortium

March 27, 2017

Agenda

1

I. Executive Summary

II. Planning Process

III. External Assessment

IV. Internal Assessment

V. Collaboration Rationale

VI. Collaboration Vision and Goals

VII. Scope of Alignment

VIII. Assessment of Structure

IX. Next Steps

Appendix A — About ECG

Appendix B — Interview Findings

Appendix C — Collaboration Tactics

Appendix D — Status Quo Modeling Assumptions

2638.001\388559(pptx) DD 3-27-17

2

I. Executive Summary

2638.001\388559(pptx) DD 3-27-17

3 2638.001\388559(pptx) DD 3-27-17

I. Executive Summary Purpose of Engagement

In Spring 2016, Sitka Community Hospital (SCH) and SouthEast Alaska Regional

Health Consortium (SEARHC) retained ECG to develop a combined future vision for

healthcare in Sitka, evaluating options for collaboration between the two

organizations.

» Complete an internal and external situational assessment detailing

organizational strengths, identifying gaps, and summarizing services

and infrastructure opportunities.

» Align the goals and intentions of each party by developing a combined

future vision for healthcare in Sitka.

» Analyze the potential structural options for collaboration and alignment.

» Recommend a strategic alignment model and provide a roadmap and

next steps.

E N G A G E M E N T O B J E C T I V E S

4

I. Executive Summary Recap of Affiliation Efforts

The planning process to-date has included three phases: an initial planning phase

with the steering committee, a socialization and approval phase, and mostly

recently a more detailed planning phase. Still, considerable work remains before

an arrangement between the parties can be finalized.

2016 2017

August 25

Final Phase One

steering committee

meeting confirming

strategic direction

October 28

Presentation at

SEARHC Board

meeting

November 21–22

Summary

presentation at Sitka

Assembly meeting

and meeting with

steering committee

to review the LOI

January 17

Steering committee

meeting to review

key issues and

governance

provisions

September 26–27

Summary

presentation to SCH

Board and at SCH

all-staff meeting

December 22

LOI signed by SCH

and SEARHC

January 26

Letter summarizing

steering committee

meeting and next

steps reviewed with

hospital boards

2638.001\388559(pptx) DD 3-27-17

July 19

Steering Committee

Meeting developing

shared goals and

areas for opportunity

July 6

First Steering

Committee meeting

reviewing the

environmental

assessment and

interview findings

I. Executive Summary Environmental Summary Findings and Implications

5 2638.001\388559(pptx) DD 3-27-17

F i n d i n g s

» Medicare and Medicaid rate freezes, combined with

Alaska’s state budget crisis, could result in up to a

5%−10% decrease in SCH’s Medicaid funding.

» Medicare reimbursement reform and other payors

will continue to emphasize quality and data tracking.

» Cash infusions from the City and Borough of Sitka

are unlikely to continue, further challenging SCH’s

long-term financial sustainability.

» The community is unlikely to see meaningful

population growth; rather, the average age will

increase as residents move into the 65 and over

cohort.

» Stakeholder interviews and physician inventory

compared with provider demand indicate the need

for more specialty providers in the service area.

» On average, Sitka has 60% excess capacity of

costly inpatient space.

An environmental analysis indicates it will become more difficult for two healthcare

organizations to maintain the current scope and quality of services in Sitka, absent

collaboration. However, collaboration presents an opportunity to expand the breadth

of care, enabling patients to access more care locally.

I m p l i c a t i o n s

» Other sources of revenue and cost efficiencies

should be explored to strengthen financial

sustainability and decrease reliance on public funds.

» SCH and SEARHC will continue needing to upgrade

their information systems for quality reporting and

infrastructure for capital upgrades.

» The community will not experience the growth

necessary to sustain two health systems in their

current configurations.

» Collaborating, instead of competing for the same

patient populations and duplicating services, would

enable SCH and SEARHC to expand specialty

services for the community.

Continued Financial Pressure

Stagnant Care

Delivery

6 2638.001\388559(pptx) DD 3-27-17

EXPAND

SERVICES

A collaboration will lead to enhanced

access to existing services, the

development of new programs, and

the recruitment of new providers to

reduce the need for patients to

leave the community for care.

ACCESS

CAPITAL

A tight integration could

enable capital investments for

new and improved buildings

and equipment that are

currently financially and

operationally not possible.

IMPROVE

STABILITY

Affiliating could mitigate operating

risks arising from competitive

threats and the changing

reimbursement landscape, as well

as difficulties recruiting and

retaining providers and staff.

CONTROL

EXPENSES

Financial sustainability may be

achieved by realizing economies of

scale, reducing duplication, and

utilizing more favorable purchasing

rates for supplies and

pharmaceuticals.

I. Executive Summary Potential Impact Through Geographic Coordination

SEARHC

SCH

Since SEARHC draws from a larger service area, collaborating will allow the Sitka

community to access healthcare services, cost structures, and infrastructure

scaled to the much larger population of southeast Alaska. These capabilities would

not be available to Sitka’s population in isolation.

Metric Sitka

Service Area

(Excluding

Juneau)

Total Population 10,004 24,351

Population Age 65+ 1,460 3,650

Population AN/AI 1,703 4,434

Five-Year Population

Growth 0.7% 1.2%

I. Executive Summary Collaboration Shared Vision, Values, and Goals

2638.001\388559(pptx) DD 3-27-17 7

V I S I O N

To become the premier healthcare provider in the communities we serve,

improving community health through the sustainable provision

of a broad array of high-quality clinical services.

Create a financially thriving

enterprise that enables the

expansion of services

in our community.

Enhance patient care, quality,

experiences, and clinical

outcomes.

Provide services tailored to the

needs of patients and the community.

VA L U E S

Attract and retain high-quality

providers and staff.

Improve access to primary and

specialty services close to home.

Ensure equal access to care for

all patients.

Ensure equitable employment opportunities.

Provide high-quality, culturally appropriate care.

G OA L S

The steering committee drafted the following shared vision, values, and goals to

help guide alignment efforts:

» Improve the community’s

understanding of the services

offered and the policies at each

facility.

» Collaborate on health promotion

initiatives.

» Collaborate on training and

cross-coverage opportunities for

staff.

» Combine overhead services such

as housekeeping, food services,

maintenance, and materials

management.

8

» Develop shared behavioral health

and substance abuse programs.

» Grow the LTC program at SCH.

» Jointly recruit specialists to Sitka

(e.g., cardiology, GI, OB,

pediatrics, dermatology).

» Develop a single program for

itinerant physicians.

» Improve billing office

performance.

» Create shared medical staff

policies and management

structure.

» Share specialist clinics to

increase volumes and patient

access for visiting providers.

» Create additional geriatric

services, such as a dedicated

geriatric clinic.

» Combine primary care practices

into a single program.

» Integrate EHRs to create clinical

data exchanges for patients

visiting both facilities.

» Consolidate OB to one facility.

» Consolidate emergency

departments.

» Optimize the use of available

reimbursement programs.

L O W H I G H L E V E L O F C O M P L E X I T Y /

C O M M U N I T Y B E N E F I T

I. Executive Summary Breadth of Tactics Considered

2638.001\388559(pptx) DD 3-27-17

A range of potential tactics, in support of the strategic goals were identified. The

more complex and impactful tactics require closer alignment between SCH and

SEARHC.

9

S a m p l e C o l l a b o r a t i o n Ta c t i c s

Sta

tus Q

uo

Se

lec

tive

an

d

Co

ord

ina

ted

Co

mp

reh

en

siv

e

an

d In

teg

rate

d

Collaborate on health promotion initiatives.

Grow the LTC program and expand other geriatric services.

Develop viable behavioral health and substance abuse programs.

Combine overhead services such as housekeeping, food services, maintenance, and materials

management.

Improve billing office performance.

Optimize the use of available reimbursement programs.

Jointly recruit specialists to Sitka (e.g., cardiology, GI, OB, pediatrics, dermatology).

Collaborate on training and cross-coverage opportunities for staff.

Create shared medical staff policies and management structure.

Integrate EHRs to create clinical data exchanges for patients visiting both facilities.

Consolidate OB to one facility.

While a range of alignment options were considered, the comprehensive and

integrated option best aligns with the shared goals and provides access to the most

benefits for the organizations and community.

Shared Goals

Access Finance Retention Quality

I. Executive Summary Programmatic Outcomes

2638.001\388559(pptx) DD 3-27-17

I. Executive Summary Structural Models Considered

10 2638.001\388559(pptx) DD 3-27-17

Two structural frameworks were identified for a comprehensive and integrated

SCH/SEARHC affiliation: a joint venture and a full merger.

Joint Venture Merger

SCH and SEARHC would contribute

hospital assets to a new, jointly

owned entity that would manage and

control hospital services in Sitka.

SEARHC would purchase SCH’s

assets, and SCH’s operations would

be incorporated into SEARHC.

SEARHC Governance Structure

City

Representation

11 2638.001\388559(pptx) DD 3-27-17

K E Y I S S U E S I M P O RTA N T TO T H E C O M M U N I T Y

I. Executive Summary Affiliation Guidance

As the steering committee sought to define a potential SCH/SEARHC affiliation they

considered both the strategic direction crafted over the summer, and issues

important to the Sitka community.

1) Protection of Services — Process addressing maintaining or expanding healthcare services in

Sitka.

» Commitment to Provide Services — Agreement to establish a process addressing proposed

changes to the service commitments.

» Option to Expand Services — Process to identify opportunities for service expansion and

process to enable SCH or the city to provide services if SEARHC declines.

2) Job Stability — Assurance that all employees will be hired and retained for a period of time.

3) Financial Commitments — Minimization of City and Borough of Sitka’s financial risks and

obligations.

4) Governance and Contract Terms

» Method for Community Input — Defining the structure and communication process for the

Sitka community to maintain a voice in healthcare decisions.

» Protections for Key Policies — Protection for the community from changes in discrimination-

related policies.

12

I. Executive Summary Joint Venture Valuation

2638.001\388559(pptx) DD 3-27-17

» The valuation takes into account

current performance, as well as likely

future performance in a go-it-alone

scenario.

» For SCH, property, plant, and

equipment were valued; also, market

transaction data for similar

organizations was considered.

» For SEARHC, the valuation was largely

based on the present value of future

cash flows for services in Sitka.

Valuation

The business valuation of SCH and SEARHC’s operations would be used to

determine each organization’s respective ownership percentages in a joint venture.

ECG performed a high-level, preliminary valuation of the two businesses.

SCH

Valuation

SEARHC

Valuation

$7.6 Million $37.2 Million

17% Ownership in

Joint Venture

83% Ownership in

Joint Venture

This is a preliminary, nonbinding

assessment of value and does not represent

agreement or commitment by either party.

I. Executive Summary Financial Commitment for the City and Borough of Sitka

Status Quo

Joint

Venture Merger3

Working Capital1 $ 0M $ 4.3M $0

Routine and Other Capital Investments2 2.0M+ 17.5M 0

Total $2.0M $21.8M $0

13 2638.001\388559(pptx) DD 3-27-17

SCH Capital Commitments

1 SCH’s portion of working capital cash and A/R with 17% ownership in the joint venture. 2 Status quo includes the capital cost of the new Cerner EHR per the January 2017 Hospital Board Packet detailing the EHR System Proposal from

Cerner and confirming SCH’s FY 2017 capital budget of $419,976. A majority of the funding for the EHR will be requested by the city. Joint venture

capital includes an average of the high and low estimate of building a new hospital in Sitka with 17% ownership in the joint venture. 3 Merger figures do not reflect revenue received from a possible sale of SCH’s assets or retention of the tobacco tax.

The merger and integration framework better protects the financial obligations of the

city. The city would not have ongoing capital obligations to SCH or be responsible for

any operating losses; as well, it may be able to retain the yearly $800,000 of tobacco

tax revenue and city capital support for other programs within Sitka.

14

I. Executive Summary Governance Structure

The delivery of healthcare services in Sitka will be overseen by formal governing

bodies and the terms and conditions of the affiliation legal agreement.

Joint Venture

» SCH’s 17% ownership will translate to one

representative on a seven member joint venture

board.

» Ownership percentages may change over time,

dependent on the ability of either organization to

contribute required ongoing capital to the joint

venture. This would impact the makeup of the JV

governing board.

G O V E R N A N C E R E P R E S E N TAT I O N

Merger

» SEARHC’s governance structure would be

amended to include two representatives from the

Sitka community on its AGB.

» In addition, SEARHC would establish an Advisory

Council including SEARHC leadership but

dominated by Sitka representatives.

» Governance roles and reserve powers would be

contractually obligated for the term of the

arrangement.

Joint Venture

Board

2638.001\388559(pptx) DD 3-27-17

15 2638.001\388559(pptx) DD 3-27-17

The steering committee has reviewed SEARHC’s policies that result in hiring the

most qualified candidates. In the merger, all employees would be offered a position

in the combined organization, which cannot be guaranteed in the status quo or joint

venture scenarios.

Provisions in the affiliation agreement

can provide ongoing protection from

future policy changes.

I. Executive Summary Job Stability

» Staffing will be assessed

based on the needs and

financial capacity of the

JV.

» There is no commitment

regarding job

preservation.

» Benefit structures may

be more costly.

» Employees would be

offered jobs by

SEARHC.

» SEARHC’s employment

structure and

credentialing would

remain in place,

resulting in a quicker

and less costly

implementation timeline.

» SCH will continue

conducting efficiency

studies to achieve a

positive operating

budget.

» Layoffs are possible

within this scenario.

Joint Venture Merger Status Quo

I. Executive Summary Protection of Services

» The definitive agreement may afford specific reserve rights to SCH and/or the City

of Sitka related to healthcare operations in Sitka. Issues that may be addressed

include:

› Changes in policies/procedures related to hiring practices.

› Changes in policies/procedures related to access to care.

› Elimination of certain services (e.g., the requirement to continue operating a

hospital).

» Typically, reserve rights are fashioned as veto rights, enabling SCH or the city to

prevent SEARHC or the JV from taking certain actions.

» Once incorporated into the definitive agreement, reserve rights typically endure for

the term of the arrangement.

16 2638.001\388559(pptx) DD 3-27-17

In the merger, the community would realize benefits from reduced duplication of

services. Covenants in the definitive agreement under either the JV or merger

scenario would provide long-term protection for the city’s interests and are not

contingent on SCH’s ownership percentage.

17

I. Executive Summary Summary Impact on Key Community Issues

ECG believes that the Merger model best achieves all of the objectives articulated

by the City of Sitka.

2638.001\388559(pptx) DD 3-27-17

Status Quo JV Merger

Financial

Commitment

» 100% risk

» Unlikely to resolve liabilities

from hospital operations

» $21.8 million in capital to

start

» Ongoing liabilities from

JV performance or

capital needs

» No ongoing financial

commitment

» Most liabilities covered

» City able to retain

tobacco tax revenue

Governance 100% SCH representation 17% SCH, may decrease

based on ability to fund

future needs

» Two seats on SEARHC’s

Accreditation Governing

Body (AGB)

» Creation of community

advisory board

Job Stability » Operational efficiencies

needed to minimize ongoing

city support

» Strong potential for layoffs if

operations do not improve

Likely most employees will

have jobs

» Job offers to all SCH

employees in good

standing

» SEARHC has indicated

plans for no staffing

reductions

Access to

Care

Declines based on financial

performance

Increases, but constrained

by ability to invest in JV

Meaningful improvements

and strongest potential to

expand services

I. Executive Summary Summary Recommendation

» Current system is wasteful — Costly duplication of services and excess capacity are not

affordable and divert resources from other important investments.

» SCH is not financially sustainable — Reimbursement cuts, a weak balance sheet, and

significant deferred capital investments all indicate future financial problems.

» Timing is right — The City of Sitka can presently negotiate favorable terms for an affiliation.

SCH is exhibiting several warning signs of a troubled institution that may face a deteriorating

negotiating position.

» A merger makes sense — The merger model for an affiliation with SEARHC is efficient,

simple, and allows for significant governance input for Sitkans in perpetuity. The JV model is

complex and costly to set up/administer, requires the City of Sitka to make an upfront

investment, and leaves the city vulnerable to future financial problems.

» Merger leads to service expansion — In the merger, high-need services such as dermatology,

ENT services, urology, expanded geriatric services, and pediatrics can be brought to Sitka.

» Preliminary terms are favorable — Early discussions with SEARHC have yielded favorable

terms, including reserve powers over key care delivery and employment issues, significant

governance representation, employment guarantees, and lack of city financial support.

18 2638.001\388559(pptx) DD 3-27-17

ECG believes the long-term interests of the residents of Sitka and shared vision of

SCH and SEARHC will be best served by a business combination between SCH and

SEARHC, with a merger being the preferred option for this alignment.

DUE DILIGENCE INTEGRATION

STRATEGY EXECUTION

Partnership Process and Milestones

Stakeholder

Education

Preliminary

Evaluation of

Partnership

Options

Selection of

Preferred

Model

Detailed

Design and

Financial

Modeling

Development

of Definitive

Documents

Implementation

Planning

Transaction Closing

Closing and

Implementation

Execution

Questions? Contact us.

Matt Sturm, Senior Manager

(206) 689-2243| msturm@ecgmc.com

I. Executive Summary Next Steps

19 2638.001\388559(pptx) DD 3-27-17

If SEARHC and the Sitka Assembly agree on an alignment structure, the next steps

will entail SEARHC submitting a merger proposal for the Sitka Assembly to review.

The Assembly will decide the best course of action to approve or reject the

proposal.

20

II. Planning Process

2638.001\388559(pptx) DD 3-27-17

21 2638.001\388559(pptx) DD 3-27-17

ECG was contracted by both organizations to

serve as an independent and impartial strategic

and technical adviser.

II. Planning Process Purpose of Engagement

In Spring 2016, Sitka Community Hospital (SCH) and SouthEast Alaska Regional

Health Consortium (SEARHC) retained ECG to develop a combined future vision for

healthcare in Sitka, evaluating options for collaboration between the two

organizations.

» Complete an internal and external situational assessment detailing

organizational strengths, identifying gaps, and summarizing services and

infrastructure opportunities.

» Align the goals and intentions of each party by developing a combined

future vision for healthcare in Sitka.

» Analyze the potential structural options for collaboration and alignment.

» Recommend a strategic alignment model and provide a roadmap and next

steps.

E N G A G E M E N T O B J E C T I V E S

22 2638.001\388559(pptx) DD 3-27-17

II. Planning Process Partnership Planning Process

SCH and SEARHC are nearing completion of the first of four phases in the planning

process for an affiliation.

DUE DILIGENCE INTEGRATION

STRATEGY EXECUTION

Partnership Process and Milestones

Stakeholder

Education

Preliminary

Evaluation of

Partnership

Options

Selection of

Preferred

Model

Detailed

Design and

Financial

Modeling

Development

of Definitive

Documents

Implementation

Planning

Transaction Closing

Closing and

Implementation

Execution

Questions? Contact us.

Matt Sturm, Senior Manager

(206) 689-2243| msturm@ecgmc.com

We are here

II. Planning Process Steering Committee Membership and Meeting Summaries

23

The Steering Committee, during the preliminary evaluation of partnership options,

included leaders from SCH and SEARHC who reviewed and provided feedback on

proposed alignment and collaboration options.

SCH SEARHC

Rob Allen, CEO Charles Clement, CEO

Steve Hartford, Director of Operations Dan Neumeister, COO

Kay Turner, Long-Term Care (LTC)

Administrator, Director of Outpatient Services

David Vastola, MD, Mt. Edgecumbe Hospital

(MEH) Interim Medical Director

Meeting One

July 6

Meeting Two

July 19

Meeting Three

August 25

» Introduced the project

structure and approach

» Reviewed internal and external

assessments and interview

findings

» Provided an overview of

contracts, structures, and

regulatory considerations

» Developed the collaboration

shared vision, values, and

goals

» Identified a range of potential

areas of opportunity for

collaboration

» Reviewed a range of scenarios

and alignment models to

realize the shared goals

» Assessed the feasibility,

benefits, and implications of

three strategic options

» Selected a recommended

strategic direction and

framework for the collaboration

» Created an action plan for the

reviewing process and

collaboration next steps

2638.001\388559(pptx) DD 3-27-17

24

II. Planning Process Recap of Affiliation Efforts

Since the initial phase of work, efforts has been focused on building support for the

concept of a SAEARHC-SCH collaboration. Beginning in 2017 the steering

committee, with board chairs from each organization, began examining structural

and other considerations associated with affiliation.

2638.001\388559(pptx) DD 3-27-17

2016 2017

August 25

Final Phase One

steering committee

meeting confirming

strategic direction

October 28

Presentation at

SEARHC Board

meeting

November 21–22

Summary

presentation at

Sitka Assembly

meeting and

meeting with

steering committee

to review the LOI

January 17

Steering committee

meeting to review

key issues and

governance

provisions

September 26–27

Summary

presentation to

SCH Board and at

SCH all-staff

meeting

December 22

LOI signed by SCH

and SEARHC

January 26

Letter summarizing

steering committee

meeting and next

steps reviewed with

hospital boards

July 19

Steering

Committee Meeting

developing shared

goals and areas for

opportunity

July 6

First Steering

Committee meeting

reviewing the

environmental

assessment and

interview findings

25

III. External Assessment

2638.001\388559(pptx) DD 3-27-17

III. External Assessment Eight National Trends

26 2638.001\388559(pptx) DD 3-27-17

ECG identified eight trends that will impact healthcare organizations as the system

continues the evolution from volume to value-based reimbursement.

National Healthcare Trends

1) Consolidation trends will remain strong.

2) New payment models will force providers to understand their costs.

3) Data management will be key.

4) Patient engagement may be the most important factor in impacting value.

5) Consumers will “shop” based on cost, quality, and convenience.

6) Patient access will evolve to meet new consumer demands.

7) Staff will be asked to expand roles and develop new skills.

8) Population health will be defined by processes and outcomes.

51 57 58 60

52

72

93 105

88 99 102

88

249

149

78 80

125

160

242

293

175

265

0

50

100

150

200

250

300

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Number of Deals Number of Hospitals

ACA

Passage

Post-ACA —

Transition to Value

Fee for Service —

Volume-Based Care

Since the passage of ACA, healthcare organizations are increasingly pursuing

alignment strategies to both achieve traditional scale benefits and position

themselves for a value-based care strategy.

Source: AHA Trendwatch Chartbook 2016, Chart 2.9: Announced

Hospital Mergers and Acquisitions, 1998–2015.

Common Objectives for Alignment

III. External Assessment Market Consolidation and Alignment

» Achieve economies to scale

and spread costs over a larger

base of business.

» Better integrate and coordinate

care and share best practices.

» Eliminate unnecessary

duplication of services.

» More effectively recruit scarce

physicians.

» Participate in payment reform

initiatives.

» Develop population health

management capabilities in a

more robust and coordinated

manner.

2638.001\388559(pptx) DD 3-27-17 27

III. External Assessment Affiliation — Hospital Consolidation

2638.001\388559(pptx) DD 3-27-17 28 28

On average, independent hospitals are smaller than hospitals in a system.

» Average beds —117 in independent hospitals versus 167 in system hospitals

» Average IP admissions — 4,000 in independent hospitals versus 7,000 in

system hospitals

34% of hospitals were

independent in 2015.

47% of hospitals were

independent (i.e., not part of

a system) in 2002.

Healthcare affiliations have significantly reduced the number of independent

hospitals since 2002, a trend that will likely continue.

29

III. External Assessment Rural Hospitals — Adjusting to Uncertainty

2638.001\388559(pptx) DD 3-27-17

32% of U.S.

rural hospitals

are vulnerable

or at risk for

closure.1

» In 2013, federal spending cuts

went into effect, including a 2%

Medicare spending cut.

» Because of funding deficits,

payments for Medicaid claims

have historically been delayed by

the state, reducing the inflow of

cash for operations.

SEQUESTRATION

» Recent announcements from the

state indicated Medicaid cuts of

5% for the FY 2018 budget.

» Alternative payment models

necessitate cost reductions despite

Medicare cost-based

reimbursement.

» The market shift to high-deductible

plans results in more cost-

conscious healthcare consumers.

UNCERTAIN

REIMBURSEMENT

BAD DEBT

» CAHs were eligible to receive up

to 100% reimbursement for bad

debt, but the PPACA reduced this

in several stages, down to a final

reimbursement level of 65%.

» This cut increased pressure to

drive efficiency.

Rural hospitals will remain vulnerable due to cost containment efforts at the federal,

state, and local levels.

1 iVantage 2016 Vulnerability Index, in which 673 rural hospitals are classified as vulnerable out of 2,078 included in the analysis. Accessed via

http://www.chartis.com/resources/files/INDEX_2016_Rural_Relevance_Study_FINAL_Formatted_02_08_16.pdf.

III. External Assessment Affiliation — Factors That Threaten Hospital Independence

2638.001\388559(pptx) DD 3-27-17 30 30

No Ambulatory Presence

Off the Main Campus

Difficulty Creating

Efficiencies to Maintain

Margin

Medical Staff Relationships

Deteriorating

Unmet IT Requirements

Increasing Competitive

Threats

Inability to Recruit

Physicians

Consistently Deferring

Capital Costs

Limited Success Organizing

Continuum of Care Within

Community

People Wearing Too

Many Hats

Financial Position Eroding

31

» The Association of American Medical Colleges projects that by 2025, the physician shortage will be

between 46,000 and 90,000.

» The lower ranges of the shortage estimates reflect increased utilization of advanced practice clinicians.

» Creating a combined strategy and critical mass for population health is becoming an increasingly greater

need as healthcare transitions to value-based care.

Under current care delivery models, the United States is projected to face a shortage

of physicians due to both decreasing supply and increasing demand.

PHYSICIAN SUPPLY

» Historically stagnant

medical school admissions

» Aging physician workforce

» Changing composition of

the physician workforce

PHYSICIAN DEMAND

» Growing aging population

» Prevalence of chronic

diseases

» Advances in technology

and the treatment of

diseases

» Expanded health insurance

coverage

PHYSICIAN

SHORTAGE

III. External Assessment Environmental Trends — Physician Shortages

2638.001\388559(pptx) DD 3-27-17

III. External Assessment Affiliation — The Most Responsible Moment Flowchart

32 2638.001\388559(pptx) DD 3-27-17

An independent organization should consider its opportunity to execute a

partnership in its “most responsible moment” rather than when it is under duress.

Successful

Aggressive

Restructuring?

No No

Yes

“Last Possible

Moment”

“Most

Responsible

Moment”

Strategic

Consideration

Perform Successfully

Under Payment Risk/

Population Health

Advance Physician

Alignment and Integration

Transform Cost Structure

and Drive Operational Efficiency

Strengthen Clinical Care

Delivery

Historical Focus: Growth and Positioning

Patient Access/Experience

+ Clinical Portfolio

Geographic Reach

Physician Alignment

Strategic Imperatives

Merger/Affiliation

Exit/Sale

Closure

JOA/Merger

Clinical Affiliation

Successful

Strategy

Execution?

» Sitka public health nonprofits benefiting mental and behavioral health have

experienced public funding cuts.

» Decreased funding for nonprofits further increases the burden on SCH and SEARHC.

III. External Assessment Regional Healthcare Trends

33 2638.001\388559(pptx) DD 3-27-17

In addition to the national trends, there are a number of regional economic trends that will

impact SEARHC and SCH.

Decreased

Oil Prices

» Forecasts from the World Bank and International Monetary Fund show a slow recovery

of oil prices (+/- 5% per year) over the next decade.

» Prices are not expected to return to their 2013 peak.

Declining

State

Revenue

» Given the Alaska government’s dependence on oil revenue, the prospects for near-

term financial improvement for the state are not favorable.

» Continued budget cuts at the state level are likely as Alaska adapts to the new

economic realities.

Declining

Public

Funding

Since FY 2012, revenues to the City and Borough of Sitka have declined by:1

» 70% from the state (to $922,600 in FY 2016).

» 20% from federal sources (to $1.5 million in FY 2016).

Increased

Nonprofit

Pressure 1 “Wellness Strategies for Health Community Health Assessment”, SouthEast Alaska Regional Health Consortium in partnership with Sitka Health Summit.

III. External Assessment Service Area Definition

34 2638.001\388559(pptx) DD 3-27-17

The analysis is based on SCH’s and SEARHC’s defined service area. As the community

hospital, SCH’s primary service area is Sitka, while SEARHC draws patients from all of

Southeast Alaska, except for the Ketchikan Borough.

ZIP Code City/Borough Region

99835 Sitka Sitka Metro

99820 Angoon North

99921 Craig Southeast

99824 Douglas Juneau Metro

99826 Gustavus North

99829 Hoonah Sitka Metro

99922 Hydaburg Southeast

99801 Juneau Juneau Metro

99830 Kake Southeast

99950 Kasaan Southeast

99925 Klawock Southeast

99827 Haines/Klukwan North

99833 Petersburg Southeast

99840 Skagway North

99929 Wrangell Southeast

99689 Yakutat North

III. External Assessment Population Growth by Age Cohort

35 2638.001\388559(pptx) DD 3-27-17

Area Population

Ages

<15

Ages

15–24

Ages

25–44

Ages

45–64

Ages

65–74

Ages

75+

Sitka Metro 10,004 -1.2% 4.2% -4.0% -5.1% 26.3% 10.7%

Southeast 9,619 -1.7% 2.7% 1.9% -7.4% 21.5% 25.9%

Juneau Metro 32,796 0.4% 1.4% 0.1% -1.9% 33.6% 34.2%

North 4,728 1.9% -1.9% -3.4% -3.2% 22.8% 23.1%

Total 57,147 -0.1% 1.9% -0.6% -3.6% 28.9% 26.1%

2016–2021 Population Growth by Age Bracket1

1 Nielsen Claritas survey data. 2 Census Area Population Projection Data Sheets, Alaska Department of Labor Workforce Development, Research and Analysis section.

While the service area population is expected to grow 1.7% between 2016 and 2021, the

majority of growth will be among those aged 65 or older as other age cohorts are

expected to see minimal or negative population growth.

Percentage of Population Aged 65+1,2

Area 2016 2020 2025 2030 2035

Sitka 14.6% 17.5% 21.3% 23.1% 23.4%

Alaska 10.3% 13.1% 15.5% 16.9% 16.8%

36

The increased focus on high-value care, as well as the shifting demographics, will

create changing service needs, balancing costs and improving overall health for

Sitka’s population.

Distribution of Inpatient Versus

Outpatient Hospital Revenues, 1994–2014

Source: American Hospital Association Chartbook, Table 4.3.

0%

10%

20%

30%

40%

50%

60%

70%

80%

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

Gross Outpatient Revenue Gross Inpatient Revenue

III. External Assessment Implications — Shifting Service Needs

15%

18%

21%

23% 23%

10%

13%

16% 17% 17%

0%

5%

10%

15%

20%

25%

2016 2020 2025 2030 2035

Sitka Alaska

Percentage of Population Aged 65+ 1,2

1 Nielsen Claritas survey data. 2 Census Area Population Projection Data Sheets, Alaska Department of

Labor Workforce Development, Research and Analysis section.

2638.001\388559(pptx) DD 3-27-17

III. External Assessment Conclusions

37 2638.001\388559(pptx) DD 3-27-17

Analysis of the external market in Sitka and its surrounding areas indicates an

increased need for market collaboration in advance of regulatory and

reimbursement changes.

Sitka is seeing overall declines in federal and state funds. These pressures

will be amplified for Sitka in the future as the population ages, since persons

over the age of 65 are exempt from sales and property taxes. Therefore,

revenues from these taxes will continue to decline.

DECLINING PUBLIC

REVENUES

Creating a combined strategy and critical mass for population health is

becoming an increasingly greater need as healthcare transitions to value-

based care. The community needs assessment suggested a need for a

variety of preventive and chronic health management services in Sitka.

POPULATION HEALTH

PAYMENT PRESSURES

» Medicare reimbursement reform, which emphasizes quality and data

tracking, will increase revenue pressures; the impact will be amplified as

Sitka’s patient population ages into Medicare.

» Increased costs for reporting and compliance as well as a decrease in

revenue from reimbursement reforms is likely to result in thinner operating

margins.

38

IV. Internal Assessment

2638.001\388559(pptx) DD 3-27-17

SEARHC

39 2638.001\388559(pptx) DD 3-27-17

IV. Internal Assessment Organizational Snapshots

Statistic SCH SEARHC

Organizational and Volume

Total Revenue $25,401,750 $125,834,917

Admissions 229 1,001

Outpatient Visits 38,975 168,157

FTEs — Provider 33.1 77.15

FTEs — Non-Provider 123.1 625.85

Average Daily Census

Acute and Swing 3.5 10.8

Long-Term Care 9.9 N/A

Beds

Inpatient Acute Care/Swing 12 25

Long-Term Care 15 0

Total 27 25

NOTE: Data for SCH is for FY 2016 per the June 2016 Financial Report and provider FTE data is

furnished by Cynthia Brandt on May 27, 2016. SEARHC data except for revenue is annualized

from October 2015−August 2016 per emails from Dan Neumeister received on September 12,

2016 and includes detail from all services including dental and optometry. SEARHC total revenue

is from the FY16 income statement ending September 30, 2016 received from Dan Neumeister

on November 16, 2016.

Key Statistics

SCH and MEH are located approximately two miles apart in Sitka, both providing inpatient

services. Organization-wide, SEARHC operates clinics in 18 communities throughout Southeast

Alaska and provides other community services such as dental and optometry.

SCH

Other Competitors

IV. Internal Assessment SCH and SEARHC Census Trends

40 2638.001\388559(pptx) DD 3-27-17

2011 2012 2013

Acute 1.39 1.07 0.86

Swing 1.42 1.11 1.23

Total 2.81 2.18 2.09

Alaska Critical Access Hospital Average

Daily Census Benchmark Data2

From 2011 to 2013, the average daily

census for other CAHs in Alaska fell by

26%, while SCH and SEARHC combined

trended better at a 21% decline.

From FY 2012–FY 2015, the average daily census in Sitka fell by 35%, and in 2016,

SEARHC’s census increased for the first time since 2012. Overall between SCH and

SEARHC, inpatient beds in Sitka have an excess capacity of over 60%.

2011 2012 2013 2014 2015 2016

SCH 3.7 3.5 3.4 3.7 4.1 3.5

SEARHC 12.4 12.6 9.3 8.2 6.4 10.8

Total 16.1 16.1 12.7 11.9 10.5 14.3

0

2

4

6

8

10

12

14

16

18

Average Daily Census — Acute and Swing1

Additionally, SCH has 15 long-term care beds,

which are historically at two-thirds capacity.

1 Data for SEARHC is per operational data received by Litia Garrison on June 23, 2016 and 2016 is annualized from October 2015 – August 2016 per email received from Dan Neumeister

on September 12, 2016. SCH FY 2011–FY 2015 received by Ida Eliason at SCH, and FY 2016 is per the June 2016 year end financials. 2 Benchmark data for Critical Access Hospitals (CAHs) is per the Flex Monitoring Team Data Summary Reports: Summary of Indicator Medians by State, 2013 data published March 2016,

2012 data published October 2014, and 2011 data published May 2014. Accessed via http://www.flexmonitoring.org/publications/annual-financial-indicator-reports.

IV. Internal Assessment Volume Trends

41 2638.001\388559(pptx) DD 3-27-17

In theme with the small population growth and aging population, yearly deliveries

in Sitka have remained flat in recent years. Total ED visits for the community have

risen in FY 2016 despite fewer inpatients—perhaps indicating access challenges to

clinics.

FY13 FY14 FY15FY16

Projected

Total 92 78 76 79

SCH 35 36 36 25

SEARHC 57 42 40 54

0

20

40

60

80

100

120

Yearly Deliveries at SCH and SEARHC1

FY13 FY14 FY15FY16

Projected

Total 4,735 4,673 4,686 5,102

SCH 2,011 2,128 2,212 2,090

SEARHC 2,724 2,545 2,474 3,012

-

1,000

2,000

3,000

4,000

5,000

6,000

Yearly ED Visits DPC Note – Do

Not Delete:

Source =

366275(xlsx) -

Financial

Exhibits tab

1 Data for SEARHC is per the RPMS system and operational statistics received by Litia Garrison on June 27, 2016. SCH FY 2013–FY 2015 received

by Ida Eliason at SCH, and FY 2016 is per the FY 2017 budget presentation.

-10.3%

6.7%

-4.4%

4.0%

7.2%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

SCH SEARHC

FY 2014 FY 2015 FY 2016

-15.3%

IV. Internal Assessment Organizational Financial Performance

42

1 SCH operating margin and revenue is per the 2015 and 2016 audited financials. SEARHC operating margin and revenue is per the 2015 audited financials and FY 2016

income statement ending September 30, 2016 received from Dan Neumeister on November 16, 2016. 2 Benchmarks are derived from Moody's Investors Service U.S. not-for-profit hospital 2014 medians.

Benchmark2 = 2.6%

SEARHC operates at a positive operating margin, above industry benchmarks,

while SCH has been unable to attain a positive operating margin. Additionally,

SEARHC is a much larger organization, with revenues approximately five times that

of SCH.

SEARHC

$23 Million $29 Million

$25 Million

$120 Million $119 Million $126 Million

$-

$20,000,000

$40,000,000

$60,000,000

$80,000,000

$100,000,000

$120,000,000

$140,000,000

2014 2015 2016

SCH SEARHC

Yearly Operating Revenues1

2638.001\388559(pptx) DD 3-27-17

Yearly Operating Margin1

Capital Support

2638.001\388559(pptx) DD 3-27-17

Historically, SCH’s financial solvency has been dependent on cash infusions (i.e.,

line of credit, tobacco tax, and capital support) from the City and Borough of Sitka.

While the tobacco tax is a dedicated fund to SCH, city capital support may be

discontinued in the future and the line of credit is unlikely to be increased.

1 Source: SCH FY 2017 budget presentation and June 2016 year-end financials. 2 Source: http://www.kcaw.org/2016/10/11/october-11-2016-whats-happening-tonights-assembly-meeting/.

IV. Internal Assessment SCH Historical City Support

$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

FY 2014 FY 2015 FY 2016 FY 2017

Operating Loss Before Transfers Tobacco Tax Support

SCH Operating Loss Before

Transfers Compared to City Support1

- $

2,2

54

,07

3

$88

2,2

21

$74

7,9

25

$67

4,0

25

$83

6,9

12

- $

1,1

27

,55

8

- $

1,2

43

,20

3

- $

83

2,9

47

FY 2017 Budget

43

K E Y P O I N T S

» Capital support averaged $182,753

between FY 2014 and FY 2016, reaching

a low in FY 2015 of $61,472.

» Between FY 2014 and FY 2016, city

support averaged $768,000, which

covered less than half of the average loss

before transfers of $1.54 million per year.

» The City and Borough of Sitka has a

$3.5 million FY 2018 budget deficit. The

city has considered efforts to cover the

shortfall, such as an increase in sales tax,

which will also increase financial strain on

the community.2

44 2638.001\388559(pptx) DD 3-27-17

IV. Internal Assessment SEARHC Revenues

$60,056,072

$50,918,773

$12,607,229

$-

$20,000,000

$40,000,000

$60,000,000

$80,000,000

$100,000,000

$120,000,000

$140,000,000

2016 Revenues

Indian Health Service Compact Net Patient Revenue Grants and Contracts Other

SEARHC receives revenue for operations from a variety of sources, including IHS

compact revenue to provide care to Alaska Natives, as well as reimbursement from

Medicare, Medicaid, and third-party payors. It has large grant revenues to support

a variety of other programs.

Net Patient Revenue

IHS Compact Revenue

Grants and Contracts

Other

$702,148 K E Y P O I N T S

» As a cosigner of the Alaska Tribal

Health Compact, SEARHC receives

compact funds through the IHS to

provide health and hospital patient care

services for Alaska Native beneficiaries.

» SEARHC bills Medicare, Medicaid, and

other payors for services provided to all

patients, including Alaska Natives and

often has access to more favorable

reimbursement terms than other

organizations.

SEARHC 2016 Revenues

Source: FY16 income statement ending September 30, 2016 received from Dan Neumeister on November 16, 2016. “Other” includes interest income, rental income,

rural healthcare program assistance, investment loss, and miscellaneous income.

IV. Internal Assessment Sitka Physician Inventory and Demand

SCH SEARHC — Sitka Total Supply

Estimated

Demand

(excludes

Juneau)

Surplus/

(Shortage)

Primary Care Providers

Primary Care (FP, IM, pediatrics) 3.38 14.33 17.71 15.31 2.40

Medical Specialists

Cardiologist 0.05 0.03 0.08 1.70 (1.62)

Dermatologist - - - 0.78 (0.78)

Gastroenterologist - - - 0.90 (0.90)

Hematologist-Oncologist - - - 0.79 (0.79)

Neurologist - 0.08 0.08 0.87 (0.79)

Psychiatrist - 1.00 1.00 2.91 (1.91)

Medical Specialists Total 0.05 1.11 1.16 7.95 -6.79

Surgical Specialists

OB/GYN 0.23 1.05 1.28 2.80 (1.52)

Ophthalmologist - 0.07 0.07 1.26 (1.19)

General Surgeon 1.00 2.00 3.00 1.77 1.23

Orthopedic Surgeon - 1.30 1.30 1.60 (0.30)

Surgical Specialists Total 1.23 4.42 5.65 7.43 -1.78

NOTE: Provider inventory for SCH is per information furnished by Cynthia Brandt on May 27, 2016, as well as from Patrick Williams, Clinic Manager at Mountainside Family Healthcare,

and the SCH website. Provider inventory for SEARHC is per Litia Garrison, with estimates for visiting specialty providers, received on June 21 and 29, 2016. Pediatric estimates

are based on the 2016 population under age 15. SEARHC has recently recruited an orthopedic surgeon, which is included in SEARHC’s supply estimates.

Physician inventory compared with provider demand in the service area shows the

need for more specialty providers in Sitka. As the population continues to age, the need

for internal medicine providers specializing in geriatrics will increase.

SCH and SEARHC Provider Inventory and Demand Estimates

2638.001\388559(pptx) DD 3-27-17

DPC NOTE —

DO NOT

DELETE: RED

NUMBERS IN

TABLE OK AS IS.

45

IV. Internal Assessment Sitka Community Interviews and Needs Assessment

46

Interviews with community members and physician and staff representatives from

SCH and SEARHC, coupled with the community health survey conducted by SEARHC in

2015, revealed a number of priorities related to managing and improving healthcare in

Sitka.

1 SEARHC in partnership with Sitka Health Summit, “Wellness Strategies for Health

Community Health Assessment.”

Most Important Issues Sitka Needs to

Address (Low Score Is Most Important)1 Interview Highlights

» Stakeholders want all Sitkans and surrounding

community members, regardless of cultural

background, to be able to receive high-quality

services in Sitka, which would help sustain the

health of the community and reduce out-migration.

» Interviewees recognize that consolidating

duplicative services, such as obstetrics (OB) and

support services, would create opportunities for

enhancement.

» Most interviewees voiced a desire for additional

and expanded specialty services within the

community, including orthopedics, infusion

services, pediatric care, ophthalmology, and

dermatology.

2638.001\388559(pptx) DD 3-27-17

IV. Internal Assessment Interview Themes

2638.001\388559(pptx) DD 3-27-17

Topics emerged from the interviews regarding the vision for healthcare in Sitka,

opportunities for collaboration, and barriers to alignment. APPENDIX B contains the

detailed interview findings.

Topic One

Topic Two

Topic Three

Topic Four

Topic Five

Stakeholders desire enhanced healthcare in Sitka.

Interviewees recognize current areas of duplicative

services.

Interviewees see opportunities to coordinate care in

the community.

Interviewees have a desire for additional services

within the community.

The community has reservations about combining

the organizations.

47

IV. Internal Assessment Organizational Assessment Key Takeaways

48

The internal review of SCH and SEARHC indicates excess inpatient capacity,

aggregate revenue and workforce size differences, and pressure on operating

margins.

SCH and SEARHC have a combined 37 acute care and swing beds, and

the current average daily census is 14.3. While the area experiences some

cyclicality, Sitka in aggregate has 61% excess capacity of costly inpatient

space.

As per each hospital’s mission, SCH primarily draws patients from the

Sitka Borough, while SEARHC operates throughout Southeast Alaska.

SEARHC, as measured by revenue and FTEs, is approximately five times

larger than SCH.

SCH’s operating margin remains negative. SCH is still dependent on cash

infusions from the City and Borough of Sitka to remain solvent. SEARHC

operates at a positive operating margin above industry benchmarks.

2638.001\388559(pptx) DD 3-27-17

EXCESS INPATIENT CAPACITY

ORGANIZATION SIZE DIFFERENCES

TIGHTER OPERATING

MARGINS

49

V. Collaboration Rationale

2638.001\388559(pptx) DD 3-27-17

V. Collaboration Rationale Environmental Summary Findings and Implications

50 2638.001\388559(pptx) DD 3-27-17

An environmental analysis indicates it will become more difficult for two healthcare

organizations to maintain the current scope and quality of services in Sitka, absent

collaboration. However, collaboration presents an opportunity to expand the breadth

of care, enabling patients to access more care locally.

F i n d i n g s

» Medicare and Medicaid rate freezes, combined with

Alaska’s state budget crisis, could result in up to a

5%−10% decrease in SCH’s Medicaid funding.

» Medicare reimbursement reform and other payors

will continue to emphasize quality and data tracking.

» Cash infusions from the City and Borough of Sitka

are unlikely to continue, further challenging SCH’s

long-term financial sustainability.

» The community is unlikely to see meaningful

population growth; rather, the average age will

increase as residents move into the 65 and over

cohort.

» Stakeholder interviews and physician inventory

compared with provider demand indicate the need

for more specialty providers in the service area.

» On average, Sitka has 60% excess capacity of

costly inpatient space.

I m p l i c a t i o n s

» Other sources of revenue and cost efficiencies

should be explored to strengthen financial

sustainability and decrease reliance on public funds.

» SCH and SEARHC will continue needing to upgrade

their information systems for quality reporting and

infrastructure for capital upgrades.

» The community will not experience the growth

necessary to sustain two health systems in their

current configurations.

» Collaborating, instead of competing for the same

patient populations and duplicating services, would

enable SCH and SEARHC to expand specialty

services for the community.

Continued Financial Pressure

Stagnant Care

Delivery

51 2638.001\388559(pptx) DD 3-27-17

EXPAND

SERVICES

A collaboration will lead to enhanced

access to existing services, the

development of new programs, and

the recruitment of new providers to

reduce the need for patients to

leave the community for care.

ACCESS

CAPITAL

A tight integration could

enable capital investments for

new and improved buildings

and equipment that are

currently financially and

operationally not possible.

IMPROVE

STABILITY

Affiliating could mitigate operating

risks arising from competitive

threats and the changing

reimbursement landscape, as well

as difficulties recruiting and

retaining providers and staff.

CONTROL

EXPENSES

Financial sustainability may be

achieved by realizing economies of

scale, reducing duplication, and

utilizing more favorable purchasing

rates for supplies and

pharmaceuticals.

V. Collaboration Rationale Potential Impact Through Geographic Coordination

SEARHC

SCH

Since SEARHC draws from a larger service area, collaborating will allow the Sitka

community to access healthcare services, cost structures, and infrastructure

scaled to the much larger population of southeast Alaska. These capabilities would

not be available to Sitka’s population in isolation.

Metric Sitka

Service Area

(Excluding

Juneau)

Total Population 10,004 24,351

Population Age 65+ 1,460 3,650

Population AN/AI 1,703 4,434

Five-Year Population

Growth 0.7% 1.2%

52

V. Collaboration Rationale Future Impact Through Collaboration

An affiliation between SEARHC and SCH has the potential to generate numerous benefits

(e.g., a coordinated healthcare delivery model, elimination of service duplication, access

to additional revenue streams) that neither organization could achieve otherwise.

2638.001\388559(pptx) DD 3-27-17

» Competition for patients

» Duplicative services and

equipment

» Decreasing

reimbursement

» Declining city support

» Staffing shortages

» Intermittent specialty care

availability

Coordinated workforce, resulting in more reliable staffing

Shared patient pool to expand specialty offerings to

orthopedics and cardiology, enhance care quality through

higher patient volumes, and optimize reimbursement

programs

Improved access to capital for new equipment, provider

recruitment, data tracking, or facility improvements

Less excess capacity of costly inpatient space

Community Members

Increased access and decreased wait times for primary

and specialty care and behavioral health

Reliable and secure employment opportunities in Sitka

More choice to receive care at home in Sitka

Future Impact

SCH and SEARHC

Present State

53

VI. Collaboration Vision and Goals

2638.001\388559(pptx) DD 3-27-17

54 2638.001\388559(pptx) DD 3-27-17

A fundamental aspect of strategic planning is defining a clear, shared vision and

goals for collaboration. Determining SCH and SEARHC’s unique shared values,

goals, and priorities will aid in developing a successful plan for collaboration.

VI. Collaboration Vision and Goals Drafting a Shared Vision

V I S I O N

G O A L S

S T R AT E G Y

TA C T I C S

VI. Collaboration Vision and Goals Drafting a Shared Vision

55 2638.001\388559(pptx) DD 3-27-17

SCH and SEARHC have closely aligned missions and visions today. Establishing a

shared vision will help to guide alignment efforts.

“To become the premier healthcare provider in the communities we

serve, improving community health through the sustainable provision of

a broad array of high-quality clinical services.”

Shared

Vision

Mission — Restore, maintain, and improve

the health of those in our community

through competent and compassionate

delivery of care.

Vision — SCH is an integral part of the

community where all individuals reach their

highest potential for health.

SCH

Mission — Alaska Native People working in

partnership to provide the best healthcare

for our communities.

Vision — To improve the health status of

Native people in Southeast Alaska and other

partners to the highest possible level.

SEARHC

VI. Collaboration Vision and Goals Collaboration Shared Vision, Values, and Goals

2638.001\388559(pptx) DD 3-27-17 56

V I S I O N

To become the premier healthcare provider in the communities we serve,

improving community health through the sustainable provision

of a broad array of high-quality clinical services.

Create a financially thriving

enterprise that enables the

expansion of services

in our community.

Enhance patient care, quality,

experiences, and clinical

outcomes.

Provide services tailored to the

needs of patients and the community.

VA L U E S

Attract and retain high-quality

providers and staff.

Improve access to primary and

specialty services close to home.

Ensure equal access to care for

all patients.

Ensure equitable employment opportunities.

Provide high-quality, culturally appropriate care.

G OA L S

The steering committee drafted the following shared vision, values, and goals to

help guide alignment efforts.

Goal Four

VI. Collaboration Vision and Goals Collaboration Tactics Introduction

57 2638.001\388559(pptx) DD 3-27-17

A range of tactics that support the affiliation goals were identified and evaluated.

A summary evaluation of the tactics are

included in APPENDIX C.

Attract and retain

high-quality

providers and staff.

Improve access to

primary and specialty

services.

Create a financially

sustainable

enterprise to ensure

the continuity of

services in our

community.

Goal Two

Goal One

Goal Three

Enhance care quality

and achieve clinical

best practices.

» Improve the community’s

understanding of the services

offered and the policies at each

facility.

» Collaborate on health promotion

initiatives.

» Collaborate on training and

cross-coverage opportunities for

staff.

» Combine overhead services such

as housekeeping, food services,

maintenance, and materials

management.

58

» Develop shared behavioral health

and substance abuse programs.

» Grow the LTC program at SCH.

» Jointly recruit specialists to Sitka

(e.g., cardiology, GI, OB,

pediatrics, dermatology).

» Develop a single program for

itinerant physicians.

» Improve billing office

performance.

» Create shared medical staff

policies and management

structure.

» Share specialist clinics to

increase volumes and patient

access for visiting providers.

» Create additional geriatric

services, such as a dedicated

geriatric clinic.

» Combine primary care practices

into a single program.

» Integrate EHRs to create clinical

data exchanges for patients

visiting both facilities.

» Consolidate OB to one facility.

» Consolidate emergency

departments.

» Optimize the use of available

reimbursement programs.

L O W H I G H L E V E L O F C O M P L E X I T Y /

C O M M U N I T Y B E N E F I T

VI. Collaboration Vision and Goals Breadth of Tactics Considered

2638.001\388559(pptx) DD 3-27-17

The more complex and impactful tactics require closer alignment between SCH

and SEARHC.

59

VII. Scope of Alignment

2638.001\388559(pptx) DD 3-27-17

60

Option One:

Basic

Option Two:

Selective and

Coordinated

Option Three:

Comprehensive

and Integrated

Three options were developed to illustrate the scope of tactics that may be realized

through various SCH and SEARHC affiliation models. The slides that follow delve

deeper into the scope of services for each option.

2638.001\388559(pptx) DD 3-27-17

VII. Scope of Alignment Introduction to Strategic Options

L O W

L E V E L O F

I N T E G R A T I O N A N D

C O M P L E X I T Y

A G G R E S S I V E

61

Status Quo Selective and Coordinated Comprehensive and Integrated

Summary Each organization continues

without collaborating.

The organizations create a shared plan

for geriatric services, primary care, and

centralized OB services.

There would be substantial

consolidation and expansion of

services.

Top Risks » Less access to funding

» Decreased or interrupted

services

» Beyond FY 2019, SCH

viability likely in question

» Organizations still in competition for

services outside JOA

» Incremental impact possibly not

enough for SCH to reach financial

viability

» JOA model is complex to develop

and manage with fewer

organizational benefits

» Community apprehension

» Less autonomy

» Complex, with longest timeline for

implementation

Benefits » Organizational autonomy

» Simplest option to

implement

» Expense control through reduction

of some duplication and shared

overhead

» Incremental expansion of clinical

services

» Opportunity for expansion of

partnership in future years

» Access to higher reimbursement,

funding, and cost savings

» Expansion of clinical programs and

elimination of duplication within

community

Structure Unchanged. JOA. New healthcare delivery enterprise.

The committee analyzed three options with differing levels of formal integration and

structural complexity to illustrate the scope of tactics that may be realized through a

collaboration between SCH and SEARHC.

VII. Scope of Alignment Strategic Options Reviewed

2638.001\388559(pptx) DD 3-27-17

62 2638.001\388559(pptx) DD 3-27-17

Status Quo

» Scope of Services — Each organization would

continue to focus on its own strategic priorities.

Duplication of services and infrastructure is likely to

increase as each organization seeks to optimize its

individual financial performance.

» Workforce — Remain separate.

» Infrastructure — No impact.

» Management and Governance — No impact.

» Financial Alignment — Minimal; may collaborate on

health promotion activities.

This is an option if SCH

and SEARHC choose not

to collaborate and remain

competitors.

VII. Scope of Alignment Option One: Status Quo

Continuing with the status quo will result in increased competition between SCH and

SEARHC, continued fragmentation of healthcare for the community, and a reduced

opportunity to expand services.

As explored on the following pages, there are

significant concerns about SCH’s continued

financial viability under this model.

2638.001\388559(pptx) DD 3-27-17

(20)

(10)

-

10

20

30

40

50

60

70

80

FY 2016 FY 2017 FY 2018 FY 2019

Optimistic

Moderate

Declining

While SCH and SEARHC have overcome financial challenges in the past, financial

pressures continue to present a real risk in the coming years. Based on financial

assumptions, retaining the status quo of the competing organizations will result in SCH’s

inability to remain operationally viable for the community.

SCH Days Cash on Hand

Projections by Scenario Optimistic Moderate Declining

Revenue

Growth

Increases 5% yearly

over the FY 2017

budget

Increases 2% yearly over FY

2016 actuals » Inpatient and outpatient revenue

increases 2% yearly

» Long-term care revenue declines

50% between FY 2016 and

FY 2019

Expense

Projections » Projections utilize FY 2014 to FY 2016 average expense-to-revenue ratios by line item

» Salaries fluctuate with patient revenue

» Benefits comprise 55% of salaries, which is the average of the benefits-to-compensation

ratio between FY 2014 and FY 2017

Capital

Budget

$816,000 yearly, which

matches the FY 2017

budgeted depreciation

amount

$419,000 yearly, which is the

current FY 2017 capital

budget

» $200,000 in FY 2017, which is

half the current capital budget

» $0 in FY 2018 to FY 2019,

reflecting depleted cash reserves

to reinvest in the business

City Tobacco

and Capital

Support

Remains at FY 2017

budgeted support

10% yearly decline, which

represents scale-down of city

capital support

15% yearly decline, which represents

termination of city capital support by

FY 2019

City Line of

Credit

Repayment

$400,000 in FY 2017 $400,000 in FY 2017 $0

Repayments

to Payors » Medicare: $0

» Medicaid: $736,000

in FY 2018

» Medicare: $1,000,000 in

FY 2018

» Medicaid: $736,000 in

FY 2018

» Medicare: $2,000,000 in

FY 2018

» Medicaid: $736,000 in

FY 2018

Financial Projection Assumptions

VII. Scope of Alignment Option One: Summary SCH Financial Projections

63 See APPENDIX D for modeling of each status

quo scenario.

IMPLICATIONS BENEFITS

» SCH and SEARHC will continue to

compete for patient volumes. As the

smaller organization with less

resources and reserves, SCH is

unlikely to remain operationally viable

or reinvest in capital after FY 2019.

» Community will need to continually

justify funding duplicative clinical

programs.

» As a result of each organization

supporting a duplicative infrastructure,

neither is likely to be able to expand

service offerings.

» SCH and SEARHC preserve individual

autonomy to pursue strategic priorities

as desired.

» Community retains multiple options for

healthcare providers.

» This option is the simplest to implement

with the least short-term disruption.

64 2638.001\388559(pptx) DD 3-27-17

VII. Scope of Alignment Option One: Risks and Benefits

The most significant risks in continuing with the status quo are competing for static

patient volumes and SCH’s decreased access to funding.

65 2638.001\388559(pptx) DD 3-27-17

VII. Scope of Alignment Option Two: Selective and Coordinated

Selective and

Coordinated

This option creates a

JOA to reach more

complex goals of

reducing duplication,

expanding services, and

strengthening clinic

operations.

» Scope of Services — Focus on creating a shared plan for

geriatric services and primary care patient access. Obstetrics

(OB) could be centralized at SEARHC and long-term care at

SCH.

» Workforce — Share infrastructure by consolidating providers into

a single entity, recruit for select specialty providers such as a

cardiologist, and share in workforce cross-training opportunities.

Create a shared services agreement for bringing more visiting

specialists to Sitka, such as a dermatologist or additional

psychiatrist, and an agreement for shared support services.

» Infrastructure — Limit capital investments to programs operated

through the JOA.

» Management and Governance — Create governance

framework for services operated through the JOA and to govern

the overall SCH–SEARHC relationship.

» Financial Alignment — Achieve economic alignment through

shared performance of combined services.

A joint operating agreement (JOA) would enable SEARHC and SCH to consolidate

clinical and administrative services as needed and to combine efforts on high-

opportunity programs.

66

VII. Scope of Alignment Option Two: Model Overview

JOA Advisory

Board

SCH

A JOA model was considered in which SCH and SEARHC would consolidate select

administrative (e.g., overhead) and clinical (e.g., OB, LTC) services to reduce

duplication and expand care availability.

SEARHC

» Governs OB and geriatric services

» Jointly recruits specialists to Sitka

Spending Category

Range of Net

Community Impact

Duplicative Services and

Overhead Savings1

$0.50M–$0.75M

Service Expansion2 0.25M–0.40M

Total Yearly Impact $0.75M–$1.15M

1 Duplicative services and overhead savings include estimates from

consolidated OB programs, consolidated overhead departments, and

efficiencies resulting in a reduction in traveler usage. Aggregate volumes are

not expected to increase. 2 Service expansion includes recruiting for a cardiologist and expanding the

LTC program.

MSA

Contract for

overhead services

2638.001\388559(pptx) DD 3-27-17

While this model offers expense savings

and reduces duplication, the financial benefits

are incremental compared to a more integrated

scenario and may not stabilize SCH

in the long term.

IMPLICATIONS BENEFITS

» Collaboration is limited to high-priority

programs; organizations continue to

compete in other services.

» Community retains duplicate clinical

infrastructure in service lines outside

scope of the JOA.

» Revenue impact will take several years to

be realized because of time to recruit

specialty providers and ramp up volumes.

» The complex JOA contractual relationship

is potentially difficult to develop,

administer, and amend.

» Creates economic value by reducing

duplication and realizing economies of

scale in select services.

» Expands specialty services offered to the

community through both organizations

collaborating on specialists’ recruitment

and clinic time.

» Supports physician recruitment and

retention through an aligned medical

group and clinical efforts.

» Does not require significant financial

investment.

» SCH and SEARHC retain current

identities and governance mechanisms.

67 2638.001\388559(pptx) DD 3-27-17

VII. Scope of Alignment Option Two: Risks and Benefits

The selective and coordinated option creates a platform for a SCH and SEARHC

collaboration that can be expanded over time.

68 2638.001\388559(pptx) DD 3-27-17

VII. Scope of Alignment Option Three: Comprehensive and Integrated

Comprehensive and

Integrated

This option is the most

integrated and includes

creating a new corporate

entity with a shared board

between SCH and

SEARHC, as well as a

shared financial investment

from both parties.

» Scope of Services — Consolidate all clinical and support

services into a new acute care hospital, and develop SCH

into a long-term care facility.

» Workforce — Consolidate providers into a single entity,

and recruit for an additional geriatrician as well as

additional specialists in the community. Employees on the

PERS Defined Benefit plan could be leased to the new

entity in order to preserve pension benefits.

» Infrastructure — Reduce duplicative equipment and

infrastructure. Investigate development of a new hospital

and neutral brand name for the shared entity that is a

fresh start for the community.

» Management and Governance — Create a new

corporate entity with a board composed of both SCH and

SEARHC representatives.

» Financial Alignment — Achieve full economic integration.

The most integrated model would enable substantial clinical consolidation,

expansion of services, and financial stability for Sitka.

69

VII. Scope of Alignment Option Three: Model Overview

Shared

Governance

Structurally, in a fully integrated model, SEARHC and the City and Borough of Sitka

would form a new healthcare delivery enterprise that can optimize reimbursement

and expense control, as well as combine efforts for provider recruitment and service

expansion.

SEARHC City and

Borough of Sitka

Spending Category

Range of Net

Community Impact

Incremental Annual Revenue

From SEARHC Reimbursement1

$2.00M–$2.50M

Duplicative Services and

Overhead Savings2

0.50M–0.75M

Service Expansion3 0.25M–0.40M

Total Yearly Impact $2.75M–$3.65M

1 SEARHC reimbursement rates were estimated compared to SCH FY 2015

inpatient and outpatient volumes.

2 Duplicative services and overhead savings include estimates from

consolidated OB programs, consolidated overhead departments, and

efficiencies resulting in a reduction in traveler usage. Aggregate volumes are

not expected to increase. 3 Service expansion includes recruiting for a cardiologist and expanding the

LTC program.

2638.001\388559(pptx) DD 3-27-17

Integrated Delivery Enterprise

70 2638.001\388559(pptx) DD 3-27-17

VII. Scope of Alignment Option Three: Risks and Benefits

A fully integrated affiliation between SCH and SEARHC will stabilize healthcare

delivery for the community, align resources to sustain operations through future

financial challenges, and create a number of strategic opportunities to provide

expanded care to the community.

IMPLICATIONS BENEFITS

» There would be loss of autonomy for

both organizations, with protections

written into the agreement for SCH as

minority stakeholder.

» Community may be apprehensive about

tight alignment, requiring consistent

education and transparent policy

implementation.

» Solution would be required for SCH

employees who are members of PERS

Defined Benefit plan.

» It optimizes use of SEARHC’s favorable

reimbursement programs to improve

financial stability.

» Greater clinical and physician capacity

would create opportunities for

expanded specialties in the community

as well as health promotion and

outreach activities throughout the

service area.

» More capital would be available to

recruit providers, expand services, and

update facilities.

71

The comprehensive and integrated option best aligns with the shared goals and

provides access to the most benefits for the organizations and community.

VII. Scope of Alignment Programmatic Outcomes

2638.001\388559(pptx) DD 3-27-17

S a m p l e C o l l a b o r a t i o n Ta c t i c s

Sta

tus Q

uo

Se

lec

tive

an

d

Co

ord

ina

ted

Co

mp

reh

en

siv

e

an

d In

teg

rate

d

Collaborate on health promotion initiatives.

Grow the LTC program and expand other geriatric services.

Develop viable behavioral health and substance abuse programs.

Combine overhead services such as housekeeping, food services, maintenance, and materials

management.

Improve billing office performance.

Optimize the use of available reimbursement programs.

Jointly recruit specialists to Sitka (e.g., cardiology, GI, OB, pediatrics, dermatology).

Collaborate on training and cross-coverage opportunities for staff.

Create shared medical staff policies and management structure.

Integrate EHRs to create clinical data exchanges for patients visiting both facilities.

Consolidate OB to one facility.

Shared Goals

Access Finance Retention Quality

72

VIII. Assessment of Structure

2638.001\388559(pptx) DD 3-27-17

VIII. Assessment of Structure Structural Models Considered

73 2638.001\388559(pptx) DD 3-27-17

Within the comprehensive and integrated framework, two structural frameworks

were identified that may meet the goals of the affiliation—a joint venture and a full

merger.

Joint Venture Merger

SCH and SEARHC would contribute

hospital assets to a new, jointly

owned entity that would manage and

control hospital services in Sitka.

SEARHC would purchase SCH’s

assets, and SCH’s operations would

be incorporated into SEARHC.

SEARHC Governance Structure

City

Representation

74 2638.001\388559(pptx) DD 3-27-17

VIII. Assessment of Structure Affiliation Guidance

A set of assessment criteria was defined for an evaluation of the two structural

models, based on key considerations from the City of Sitka.

K E Y I S S U E S I M P O RTA N T TO T H E C O M M U N I T Y

1) Protection of Services — Process addressing maintaining or expanding

healthcare services in Sitka.

» Commitment to Provide Services — Agreement to establish a process

addressing proposed changes to the service commitments.

» Option to Expand Services — Process to identify opportunities for service

expansion and process to enable SCH or the city to provide services if

SEARHC declines.

2) Job Stability — Assurance that all employees will be hired and retained for a

period of time.

3) Financial Commitments — Minimization of City and Borough of Sitka’s financial

risks and obligations.

4) Governance and Contract Terms

» Method for Community Input — Defining the structure and communication

process for the Sitka community to maintain a voice in healthcare decisions.

» Protections for Key Policies — Protection for the community from changes in

discrimination-related policies.

JOINT VENTURE

NEWCO

75

SEARHC SCH

In the joint venture, SCH and SEARHC are aligned through shared ownership of a

new corporation (NEWCO). Each party contributes assets or cash in exchange for

ownership; NEWCO profit/loss of the is distributed based on ownership.

VIII. Assessment of Structure Joint Venture — Summary Structure

Profit/Loss

Assets and/or

Cash Investment

Profit/Loss

Assets and/or

Cash Investment

Future capital contributions are also based on

each hospital’s ownership percentage. 2638.001\388559(pptx) DD 3-27-17

76

S t r u c t u r e I m p l i c a t i o n s

Ownership and

Autonomy

Each organization

would contribute its

current businesses, with

ownership apportioned

according to value.

» Separation of SEARHC and MEH — SEARHC and MEH would be

separated for purposes of conducting a valuation and ongoing operations,

requiring significant accounting work and development of service contracts

between the entities.

» Financial Risk — The combined net income/loss for the joint services

would be allocated to SCH and SEARHC based on each hospital’s

ownership share. The city would thus retain financial responsibility for the

venture’s performance proportional to its ownership position.

» Governing Power — SCH would have a minority stake in the venture.

While SCH would have a voice in all decisions, the minority stake would

give SCH reduced power over decision making.

Capital Contribution

Contribution process

would be clearly

defined.

Fluid Ownership — Ownership percentages may change over time,

dependent on the ability of either organization to contribute required ongoing

capital to the joint venture.

VIII. Assessment of Structure Joint Venture — Structure and Implications

2638.001\388559(pptx) DD 3-27-17

In a joint venture, each party would contribute assets to a new company that would

provide healthcare services in Sitka.

77

S t r u c t u r e I m p l i c a t i o n s

Operating

Structure

A new management

structure is required

to operate/oversee

the new entity.

» Complex Implementation — New employment structures,

renegotiated payor contracts, and credentialing/accreditation for

the new entity will need to be addressed.

» Financial Relationship — There would be an ongoing financial

relationship between the joint venture and SEARHC, including

payments for services to IHS patients and the purchase of

management services. Relationships like this are often

challenging, given the impact on the joint venture’s financial

performance.

» Delayed Timeline — Setting up the new structure will be time-

consuming and expensive, potentially risking the SCH’s solvency

and delaying services for the community.

VIII. Assessment of Structure Joint Venture — Structure and Implications (continued)

2638.001\388559(pptx) DD 3-27-17

A joint venture would be complex to structure and manage, is less stable, and may be

more financially risky for the city, as each organization is responsible for the

venture’s performance.

» Both parties will be required

to contribute working capital

for daily operations and

funding for capital

investments through the joint

venture.

» Constructing a new hospital in

Sitka is the primary

investment need and has

been estimated to cost

approximately $103 million.1

» Establishing value of the

businesses is critical to

determining the relative

ownership of each party.

» The valuation takes into

account current performance,

as well as likely future

performance in a go-it-alone

scenario.

78 2638.001\388559(pptx) DD 3-27-17

The business valuation of SCH and SEARHC’s operations will be used to determine

each organization’s respective ownership percentages.

VIII. Assessment of Structure Joint Venture — Valuation and Capital Contribution

Valuation Capital Contribution

1 Per hospital project cost data received by Dan Neumeister on March 14, 2017. Cost includes the midpoint of project cost in current and future

dollars for a new inpatient building.

79 2638.001\388559(pptx) DD 3-27-17

VIII. Assessment of Structure Joint Venture — Business Valuation Methodology

Typically, a business valuation considers three widely accepted approaches to value: the

income approach, the market approach, and the asset approach. Different approaches were

used to value SCH and SEARHC based on what is most appropriate for each organization.

Estimates value by utilizing

pricing or revenue multiples

from other similar

organizations that have

been sold.

Values the organization

based on the assets

owned.

Calculates the present value

of anticipated future cash

flows of the services

contributed to the joint

venture.

1) Income Approach 2) Market Approach 3) Asset Approach

Approach for SEARHC Valuation

» SEARHC operates at a positive operating income,

which is necessary for income approach.

» For the market approach, multiples were applied to

revenue and EBITDA for SEARHC operations in

Sitka; however cash flows are the best estimate of

a business’ future operations and was weighted at

100% for valuing SEARHC.

Approach for SCH Valuation

» Assets such as 56,655 square feet of property

and equipment from SCH’s depreciation schedule

were assessed at fair market value.

» Market approach used multiples from similar

transactions for hospitals that operate with a

negative EBITDA.

VIII. Assessment of Structure Joint Venture — Valuation Output

80

ECG calculated a low and high range for SCH and SEARHC’s valuation based on the

two approaches previously described. The average of the low and high values are

used for upcoming scenario analyses for the joint venture and merger options.

1 Based on the discounted cash flows method for the income approach. The discounted cash flow method was solely relied upon given this

represents the estimated future cash flow of the business. Praveen Makala, SEARHC CFO, allocated the portion of SEARHC’s income

statement to operations in Sitka. ECG conducted the valuation and applied a revenue growth rate beginning at 2.5% in Year 1 and decreasing

to 1.0% in Year 5 to project the future income statement. A discount factor of 14.5%, which is the calculated weighted average cost of capital

(WACC), was used. 2 SCH utilized the market approach and the asset approach. Square footage and an asset cost and depreciation schedule for SCH was provided

by Cynthia Brandt, SCH CFO. A total of 56,555 square feet is owned by the City and Borough of Sitka. Reviewing similar properties in Sitka,

property was assessed at a rate of $108.96 per square foot, totaling $6.2 million. Assets were appraised by ECG’s fair market value team at a

total of $1,349,000. ECG reviewed featured transaction market multiples for other hospitals with a negative operating margin, and the median

market multiple was found to be 0.30, which was applied to SCH’s FY 2016 revenues.

Low High Average

SEARHC1 $35,040,000 $39,430,000 $37,235,000

SCH2 $7,510,000 $7,620,000 $7,565,000

Valuation Output

2638.001\388559(pptx) DD 3-27-17

81

VIII. Assessment of Structure Joint Venture — Ownership Estimates

Based on the preliminary valuation, SCH would have a minority ownership position

in the joint venture.

SCH and SEARHC Joint Venture

Ownership

SCH Ownership Percentage

17%

SEARHC Ownership Percentage

83%

2638.001\388559(pptx) DD 3-27-17

SCH

Valuation

SEARHC

Valuation

$7.6 Million $37.2 Million

17% Ownership in

Joint Venture

83% Ownership in

Joint Venture

This is a preliminary, nonbinding

assessment of value and does not represent

agreement or commitment by either party.

82 2638.001\388559(pptx) DD 3-27-17

VIII. Assessment of Structure Joint Venture — Capital Funding Requirements

SEARHC has expressed plans to develop a new hospital in Sitka. Preliminary

planning efforts indicate the cost for the new facility to be approximately $103

million. In the joint venture, SCH will be responsible for contributing a share of the

new facility cost.

Facility Cost1 $103,000,000

Status Quo

SCH Plan and Finance

Own Hospital

JV Cost Share

SCH — 17% Ownership $17,500,000

SEARHC — 83% Ownership $85,500,000

Merger Cost Share

City and Borough of Sitka $0

SEARHC $103,000,000

New Facility Cost Allocations

» SCH was built in 1983, is

nearing the end of its 40-

year useful life, and has

significant deferred capital

needs.

» MEH was built in the

1940s and has been

updated but is also near

the end of its life. SEARHC

is planning for the facility’s

replacement.

Current State

1 Per hospital project cost data received by Dan Neumeister on

March 14, 2017. Cost includes the midpoint of project cost in

current and future dollars for a new inpatient building.

NOTE: Figures may not be exact due to rounding.

83 2638.001\388559(pptx) DD 3-27-17

VIII. Assessment of Structure Joint Venture — Working Capital Considerations

In the joint venture, SCH and SEARHC will each be responsible for contributing

start-up working capital needs. With a 17% ownership stake SCH could be

responsible for $4.3 million in required start-up costs.

If SCH has a larger ownership percentage in

the joint venture, its capital commitment would

also increase.

Amount

Cash Build-Up

Combined Operating Expenses

(excludes depreciation)1

$85,600,000

Working Capital Requirement 60 Days Cash

Working Capital Commitment $14,000,000

A/R Build-Up

Combined Net Revenue1 $91,800,000

Working Capital Requirement 45 Days

Working Capital Commitment $11,000,000

Joint Venture Working Capital Needs

1 SCH net revenue and expenses are per 2016 audited financials, ending June 2016. SEARHC net revenue and expenses are for amounts allocated to

operations in Sitka provided by Praveen Mekala, SEARHC CFO, and based on 2016 year-end financials, ending September 2016.

Amount

Working Capital Allocation

SCH — 17% Ownership $4,250,000

SEARHC — 83% Ownership $20,750,000

84 2638.001\388559(pptx) DD 3-27-17

Assets Value

Current Assets

Cash $4,423,338

Net Patient Receivables 2,716,221

Other Receivables 137,374

Inventories 362,120

Prepaid Expenses 70,162

Total Current Assets $7,709,215

Property and Equipment

Total Property and Equipment $20,591,033

Less: Accumulated Depreciation (16,271,455)

Net Property and Equipment $ 4,319,578

Deferred Outflows

Pension $ 3,538,873

Total Assets $15,567,666

SCH would contribute its property and equipment to the joint venture. The city

would likely retain current assets and liabilities, the difference of which could be

used to offset SCH’s capital requirements for the joint venture.

VIII. Assessment of Structure Joint Venture — SCH Balance Sheet

Liabilities and Fund Balance Value

Current Liabilities

Accounts Payable $ 679,931

Accrued Payroll and Vacation 1,223,641

Deferred Third-Party Payor Settlement 1,695,665

Due to Third-Party Payors 610,950

Other Payables 377,717

Line of Credit Payable 827,553

Current Portion of Long-Term Debt 76,560

Total Current Liabilities $5,152,017

Long-Term Liabilities

Note Payable $ 314,273

Net Pension Liability 15,650,585

Total Liabilities $21,116,875

Difference in Pension Costs $ 277,080

Total Net Position $(5,826,289)

Total Liabilities and Fund Balance $15,567,666

Source: SCH January 2017 Financial Reporting Package.

85 2638.001\388559(pptx) DD 3-27-17

VIII. Assessment of Structure Joint Venture — Funding Sources

At 17% ownership, SCH will need to commit approximately $21.8 million to fund the

joint venture. Liquidating the current assets and liabilities will yield about $2.5

million. The city will be responsible for contributing an additional $19.3 million to

the joint venture.

SCH

Joint Venture Commitment

Working Capital $ 4,250,000

Capital Investments $17,500,000

Total Joint Venture Commitment $21,750,000

SCH Current Assets Minus Current Liabilities $ 2,500,000

Contribution Deficit $19,250,000

After liquidation, the city will still bear the

pension liability of $15 million.

86 2638.001\388559(pptx) DD 3-27-17

It is anticipated that all profits and losses associated with the joint venture will be

allocated according to each organization’s ownership in the joint venture.

Joint Venture

Profit/(Loss)

83%

Allocated to

SEARHC

17%

Allocated to

SCH

VIII. Assessment of Structure Joint Venture — Net Income and Governing Board

» The joint venture has one P&L for the

combined services.

» Any margin that the joint venture creates is

allocated among SCH and SEARHC based

on the ownership percentages.

» SCH’s 17% ownership will translate to one

representative on a seven member joint

venture board.

» Ownership percentages may change over

time, dependent on the ability of either

organization to contribute required ongoing

capital to the joint venture. This would impact

the make-up of the JV governing board.

Joint Venture

Board

Benefits Risks

» Realizes Goals of Affiliation — Creates

economic value by establishing a joint

organization to reduce duplication and

expand specialty services offered to the

community.

» Future Opportunity — SCH and SEARHC

may expand partnership in future years.

» Capital Investment — The joint venture

requires a significant up-front capital

investment from both parties.

» Minority Ownership — SCH’s ownership

stake will be in the minority position, which

translates to a minority voice in

organizational decisions.

» Complexity — The joint venture model is

complex to develop, administer, and

manage, as it requires a longer timeline to

structure with payors and other accrediting

bodies.

» Ongoing Contributions — The city will be

responsible for ongoing capital contributions.

87 2638.001\388559(pptx) DD 3-27-17

VIII. Assessment of Structure Joint Venture — Benefits and Risks

SCH’s ownership position in the joint venture is the riskiest and could be further

diluted from ongoing capital contributions if services or facilities are expanded.

88 2638.001\388559(pptx) DD 3-27-17

In the merger option, SEARHC would purchase SCH’s assets, and SCH’s operations

would be incorporated into SEARHC. The City and Borough of Sitka would no longer

have a financial commitment to the hospital, but it may participate in SEARHC’s

governance structure through provisions in the affiliation agreement.

VIII. Assessment of Structure Merger — Summary Structure

89

VIII. Assessment of Structure Merger — Structure and Implications

2638.001\388559(pptx) DD 3-27-17

Many of the affiliation goals may be better supported through a merger and

integration framework. SCH stakeholders may retain input on key decisions

important to the community through protections written into the agreement.

S t r u c t u r e I m p l i c a t i o n s

Ownership and

Autonomy

Operations will be

completely

integrated

with SEARHC.

» SEARHC Assumes Financial Risk — With full ownership,

SEARHC would be responsible for the financial performance of

the organization. The city would be protected from ongoing

losses.

» Governing Power — The city would not have an ownership

stake; however, SCH may participate in SEARHC’s governance

structure with two seats on the Accreditation Governing Body

(AGB).

Capital

Contribution

Commitments may

be discussed in

advance of the

affiliation.

» Community Benefits From Capital Investment — SEARHC

would be solely responsible for future capital investment.

90

VIII. Assessment of Structure Merger — Structure and Implications (continued)

2638.001\388559(pptx) DD 3-27-17

A merger and integration framework is simpler and less complex to implement

compared to a joint venture, allowing for a faster implementation timeline to

achieve the goals of the affiliation.

S t r u c t u r e I m p l i c a t i o n s

Operating

Structure

SCH would become

part of SEARHC’s

organizational

structure.

» Simpler Implementation — The organization would not need to

create any new entities. SEARHC’s employment structure and

credentialing would remain in place.

» More Nimble — The organization likely would be more efficient in

responding to community needs, with a simpler management and

governance framework.

» Aligned Interests — Financial integration between SEARHC and

Sitka operations would eliminate potential financial conflicts.

» Faster Timeline — The new structure would be faster and less

costly to implement.

91

In the merger option, the city may receive payment for SCH (subject to negotiation)

which may offset the city’s ongoing liabilities, such as the pension expenses.

Further, the city will not have any ongoing financial risks associated with the

hospital.

VIII. Assessment of Structure Merger — Proceeds (Subject to Negotiation)

Category Value

Value of SCH

Inflow of Funds to City to Cover Ongoing

Liabilities

$7,600,000

Retained by the City

Ongoing Pension Liability $(15,000,000)

Excess of Current Assets to Current

Liabilities

$2,500,000

Pension Liability Remaining $(4,900,000)

» The city may receive

consideration for the sale of SCH.

» In addition, the city may retain

current assets and liabilities which

net an additional $2,500,000.

» In this option, the city would not

have ongoing capital obligations

as it would in the joint venture

option.

SCH’s yearly tobacco tax and capital support

from the city, averaging $800,000, could also be

reallocated to other programs within Sitka. 2638.001\388559(pptx) DD 3-27-17

92 2638.001\388559(pptx) DD 3-27-17

VIII. Assessment of Structure Merger — SEARHC Governance Overview

SEARHC’s governance structure consists of various committees with governing

power, advisory councils, and the SEARHC management team.

SEARHC

Board of

Directors

Accreditation Governing

Body (AGB) Executive Committee

President/Chief

Executive Officer

Wrangell Advisory

Council

SEARHC Management

Team

Operational Departments

Subcommittees

93 2638.001\388559(pptx) DD 3-27-17

VIII. Assessment of Structure Merger — SEARHC Current Board Structure

Function SEARHC Board of Directors1

Appointment

Process

» One director from each federally recognized tribe in

Southeast Alaska that gives all funding from IHS to

SEARHC (voting member).

» Advisory seat from any federally recognized tribe

that gives a portion of the tribe’s IHS funding to

SEARHC (non-voting).

Term Length No term limit.

Quorum A majority of the board members.

Voting Changes to bylaws require two-thirds vote.

Meeting

Frequency

At least four times per calendar year.

Committees » All committee members must be directors, and the

chair assigns directors to serve on committees.

» The board specifies the powers, duties, and

procedures of the committees.

1 Per Restated Bylaws of the Southeast Alaska Regional Health Consortium, amended August 29,

2014, and provided by Dan Neumeister, COO of SEARHC.

SEARHC

Board of

Directors

Board

Committees

President and

CEO of

SEARHC

SEARHC’s main governing body consists of a Board of Directors, with

representatives from the recognized tribes, that is responsible for providing

oversight on all functions and programs.

VIII. Assessment of Structure Merger — SEARHC Executive Committee and AGB

94 2638.001\388559(pptx) DD 3-27-17

The AGB is a subset of SEARHC’s board and consists of the seven Executive

Committee members. Two seats on the AGB would be reserved for members of the

Sitka community.

SEARHC

Board of

Directors

Executive

Committee

Committees Defined in SEARHC’s Bylaws

» The Executive Committee consists of seven directors

and has the authority to perform the duties and

responsibilities of the board between board meetings.

» The AGB consists of Executive Committee members

(voting) and the chief of the medical staff (nonvoting).

The AGB has authority over the following:

› Governs overall operations and programming of the

hospital and medical and dental clinics.

› Maintains decision making on provider and

employee staffing and recruitment.

› Oversees quality improvement and compliance.

programs and receives regular updates on progress.

› Directs other areas relevant to accreditation and

licensing of SEARHC facilities and programs.

AGB

95 2638.001\388559(pptx) DD 3-27-17

SEARHC

Board of

Directors

Executive

Committee

Two seats reserved

for Sitka community

members on AGB

SEARHC’s governance structure would be amended to include representation from

the Sitka community in the form of an advisory council and two additional seats on

the AGB to implement and influence effective change within the community.

VIII. Assessment of Structure Merger — Governance Structure

President/CEO

Sitka Advisory

Council

AGB

Governance roles would be contractually

obligated for the term of the agreement.

96

» Review the practices and policies of the

Wrangell clinic and recommend changes or

adjustments to SEARHC.

» Advise SEARHC on the specific health and

welfare needs of the Wrangell community.

» Recommend to SEARHC policies and

courses of action that are designed to

further the health needs of the people

treated in the service area.

C H A R T E R

» Three members selected by SEARHC.

» Wrangell Medical Center hospital

administrator.

» Southern region director.

» Three to nine at-large members initially

composed of area AICS directors and then

nominated by a designated Joint

Nominated Committee.

C O U N C I L M E M B E R S H I P

VIII. Assessment of Structure Merger — Wrangell Advisory Council Example

After SEARHC acquired Alaska Island Community Services (AICS), an advisory

council consisting of shared representation was established in the community to

advise on key issues. SEARHC would form a similar group in Sitka.

2638.001\388559(pptx) DD 3-27-17

Source: SouthEast Alaska Regional Health Consortium, Wrangell Area Advisory Council Charter draft, 12/28/2016.

97

VIII. Assessment of Structure Merger — Access to Care

» The definitive agreement may afford specific reserve rights to SCH and/or the City

of Sitka related to healthcare operations in Sitka. Issues that may be addressed

include:

› Changes in policies/procedures related to hiring practices.

› Changes in policies/procedures related to access to care.

› Elimination of certain services (i.e., requirement to continue operating a

hospital).

» Typically reserve rights are fashioned in as veto rights; thus enabling SCH or the

City to prevent SEARHC or the JV from taking certain actions.

» Once crafted into the definitive agreement, typically reserve rights endure for the

term of the arrangement.

In the merger, the community would realize benefits from reduced duplication of

services. Covenants in the definitive agreement under either JV or merger scenario

would provide long-term protection for the City’s interests and are not contingent on

SCH’s ownership percentage.

2638.001\388559(pptx) DD 3-27-17

VIII. Assessment of Structure Merger — Benefits and Risks

98 2638.001\388559(pptx) DD 3-27-17

Benefits Risks

» Participation in Governance — SCH would

have a role in SEARHC’s governance structure

without an ongoing financial commitment from

ownership.

» Better Outcomes for Community — The

community would realize healthcare benefits

from a shorter implementation timeline and

savings from reduced duplication of services;

the city will retain more funds to be used within

the community.

» Written Protections — Other protections

important to the ongoing provision of services

within Sitka may be written into the legal

documents, to be safeguarded for perpetuity.

» Community Perception — Historically there

have been divisions in the community among

SCH and SEARHC. Combining into one

healthcare organization will require a

consistent communication plan from both

parties.

» Difficulty in Unwinding — A merger is the

most comprehensive option, and the city would

be limited through the legal documents in

offering competing health services in the

future.

The merger option can best accomplish Sitka’s key issues, such as stabilizing

healthcare delivery in the community and an ongoing voice in governance, while

protecting the city from ongoing financial exposure and commitments due to an

ownership stake.

VIII. Assessment of Structure Comparison — Capital Commitment Summary

99 2638.001\388559(pptx) DD 3-27-17

The merger and integration framework better protects the financial obligations of

the city. The city would not have ongoing capital obligations to SCH or be responsible

for any operating losses; as well, it may be able to retain the yearly $800,000 of

tobacco tax revenue and city capital support for other programs within Sitka.

Status Quo

Joint

Venture Merger3

Working Capital1 $ 0M $ 4.3M $0

Routine and Other Capital

Investments2

2.0M+ 17.5M 0

Total $2.0M $21.8M $0

SCH Capital Commitments

1 SCH’s portion of working capital cash and A/R with 17% ownership in the joint venture. 2 Status quo includes the capital cost of the new Cerner EHR per the January 2017 Hospital Board Packet detailing the EHR System

Proposal from Cerner and confirming SCH’s FY 2017 capital budget of $419,976. A majority of the funding for the EHR will be

requested by the city. Joint venture capital includes an average of the high and low estimate of building a new hospital in Sitka with

17% ownership in the joint venture. 3 Merger figures do not reflect revenue received from a possible sale of SCH’s assets or retention of the tobacco tax.

100 2638.001\388559(pptx) DD 3-27-17

The steering committee has reviewed SEARHC’s policies that result in hiring the

most qualified candidates. In the merger, all employees would be offered a position

in the combined organization, which cannot be guaranteed in the status quo or joint

venture scenarios.

Provisions in the affiliation agreement

can provide ongoing protection from

future policy changes.

VIII. Assessment of Structure Comparison — Job Stability

» Staffing will be assessed

based on the needs and

financial capacity of the

JV.

» There is no commitment

regarding job

preservation.

» Benefit structures may

be more costly.

» Employees would be

offered jobs by

SEARHC.

» SEARHC’s employment

structure and

credentialing would

remain in place,

resulting in a quicker

and less costly

implementation timeline.

» SCH will continue

conducting efficiency

studies to achieve a

positive operating

budget.

» Layoffs are possible

within this scenario.

Joint Venture Merger Status Quo

101 2638.001\388559(pptx) DD 3-27-17

VIII. Assessment of Structure Comparison — Impact on Key Community Issues

ECG believes that the Merger model best achieves all of the objectives articulated

by the City of Sitka.

Status Quo JV Merger

Financial

Commitment

» 100% risk

» Unlikely to resolve liabilities

from hospital operations

» $21.8 million in capital to

start

» Ongoing liabilities from

JV performance or

capital needs

» No ongoing financial

commitment

» Most liabilities covered

» City able to retain

tobacco tax revenue

Governance 100% SCH representation 17% SCH, may decrease

based on ability to fund

future needs

» Two seats on SEARHC’s

AGB

» Creation of community

advisory board

Job Stability » Operational efficiencies

needed to minimize ongoing

city support

» Strong potential for layoffs if

operations do not improve

Likely most employees will

have jobs

» Job offers to all SCH

employees in good

standing

» SEARHC has indicated

plans for no staffing

reductions

Access to

Care

Declines based on financial

performance

Increases, but constrained

by ability to invest in JV

Meaningful improvements

and strongest potential to

expand services

VIII. Assessment of Structure Summary Recommendation

» Current system is wasteful — Costly duplication of services and excess capacity are not

affordable and divert resources from other important investments.

» SCH is not financially sustainable — Reimbursement cuts, a weak balance sheet, and

significant deferred capital investments all indicate future financial problems.

» Timing is right — The City of Sitka can presently negotiate favorable terms for an affiliation.

SCH is exhibiting several warning signs of a troubled institution that may face a deteriorating

negotiating position.

» A merger makes sense — The merger model for an affiliation with SEARHC is efficient,

simple, and allows for significant governance input for Sitkans in perpetuity. The JV model is

complex and costly to set up/administer, requires the City of Sitka to make an upfront

investment, and leaves the city vulnerable to future financial problems.

» Merger leads to service expansion — In the merger, high-need services such as dermatology,

ENT services, urology, expanded geriatric services, and pediatrics can be brought to Sitka.

» Preliminary terms are favorable — Early discussions with SEARHC have yielded favorable

terms, including reserve powers over key care delivery and employment issues, significant

governance representation, employment guarantees, and lack of city financial support.

102 2638.001\388559(pptx) DD 3-27-17

ECG believes the long-term interests of the residents of Sitka and shared vision of

SCH and SEARHC will be best served by a business combination between SCH and

SEARHC, with a merger being the preferred option for this alignment.

103

IX. Next Steps

2638.001\388559(pptx) DD 3-27-17

DUE DILIGENCE INTEGRATION

STRATEGY EXECUTION

Partnership Process and Milestones

Stakeholder

Education

Preliminary

Evaluation of

Partnership

Options

Selection of

Preferred

Model

Detailed Design

and Financial

Modeling

Development

of Definitive

Documents

Implementation

Planning

Transaction Closing

Closing and

Implementation

Execution

Questions? Contact us.

Matt Sturm, Senior Manager

(206) 689-2243| msturm@ecgmc.com

IX. Next Steps

104 2638.001\388559(pptx) DD 3-27-17

If SEARHC and the Sitka Assembly agree on an alignment structure, the next steps

include SEARHC submitting a merger proposal for the Sitka Assembly to review. The

Assembly will decide the best course of action to approve or reject the proposal.

Appendix A About ECG

2638.001\388559(pptx) DD 3-27-17 105

Appendix A About ECG

A-1 2638.001\388559(pptx) DD 3-27-17

With 230 consultants in 10 offices, ECG brings

considerable depth and breadth of expertise.

10 of the 17 members of U.S. News &

World Report’s Best Hospitals Honor Roll

40 of the 100 Great Hospitals in America as ranked by

Becker’s Hospital Review

ECG Is Recognized and Trusted by Leading Organizations

377 e n g a g e m e n t s 228 41 c l i e n t s s t a t e s

Transactions in Past Five Years

We focus on developing and implementing innovative and

customized solutions to meet our healthcare clients’

specific challenges, no matter how complex.

107

Appendix B Interview Findings

2638.001\388559(pptx) DD 3-27-17

Appendix B List of Interviewees

B-1 2638.001\388559(pptx) DD 3-27-17

ECG conducted interviews on May 17–19, 2016. The list of individuals who

participated in interviews is outlined below.

SCH SEARHC

Terissia Bell, HIM Manager Sul Thorward, M.D., Psychiatry

Kay Turner, LTC Administrator Robert Hunter, M.D., Sitka Medical Center

Mark Smith, Medical Director Dan Neumeister, COO

Elizabeth Sutton, EVS Manager Chuck Clement, CEO

Patrick Williams, Clinic Manager Martha Pearson, Director of Health Promotion

Grant Turner, IS Manager Jeff Prater, Director of MEH

Janice Conway, OR Manager David Vastola, M.D., Medical Director

David Mathson, Lab Manager Eric Gettis, Director of Practice Management

Julie Schanno, OB Coordinator Fred Olsen Jr., Board Member

Richard McGrath, M.D., Family Practice Kimberley Strong, Board Chair

Erica Pearson, Home Health Manager John Baciocco, M.D., Chief of Staff

Raine Clarke, Director of Nursing Community Members

Kat Richards, Nurse Manager Kayla Boetcher

Ronda Anderson, Radiology Manager Linda Behnken

Bryan Bertacchi, Board President Lisa Busch

Ann Wilkinson, Foundation President Mark Gorman, Municipal Administrator

Trish White, Pharmacy Bob Potrzuski, Assembly Member

Cynthia Brandt, CFO Phyllis Hackett

Charles Roesel, M.D., ED Patricia Alexander

Colleen Dahlquist, Nurse Manager Matt Hunter, Deputy Mayor

Lily Herwald

Appendix B Interview Topic One

B-2 2638.001\388559(pptx) DD 3-27-17

Interviewees expressed a concrete vision for coordinated and expanded healthcare

services in Sitka that will utilize each organization’s strengths.

» Ensure Access to Services — Stakeholders want all Sitkans and surrounding community members,

regardless of cultural background, to be able to receive high-quality services in Sitka, thus helping to

sustain the health of the community and livability of Sitka for the future.

» Maintain Long-Term Financial Sustainability — Interviewees expressed that the City and Borough of

Sitka may not be able to continue financially supporting SCH as the city budget continues to tighten; in

the past, SCH would have been unable to operate without this support. However, financial stability and

solvency of the healthcare delivery system in Sitka is a priority for all.

» Improve Quality of Care — Through targeted investments (e.g., providers, technology, facilities),

enhance the quality of care provided in Sitka.

» Create an Inspiring Environment — Create a culture that is attractive and inspiring for all staff

members (including physicians) to enhance retention and improve clinical coordination throughout the

community.

» Reduce Outmigration — By offering more expansive services, improving access, and elevating the

quality of care available in Sitka, residents will be less inclined to travel for services.

» Rational Investments — In the coming years, a number of investments will need to be made. These

investments (whether in people, equipment, or facilities) should be made in a manner that maximizes

the availability of the resources to all members of the Sitka community.

Stakeholders Have a Vision for Enhanced Healthcare in Sitka

Appendix B Interview Topic Two

B-3 2638.001\388559(pptx) DD 3-27-17

Interviewees recognize that consolidating duplicative services would position both

organizations for sustained future success and create opportunities for

enhancement.

» Obstetrics — OB, which consistently has low delivery volumes at both hospitals, presents an

opportunity to consolidate services, reduce provider burden, and increase patient quality and safety.

» EDs — Both SCH and SEARHC manage EDs that have costly infrastructure and workforce

requirements (e.g., OR, imaging equipment, on-call physicians). Many questioned the utility of

duplicative EDs in a community the size of Sitka, especially given the cost and infrastructure

requirements.

» Episodic Services — Interviewees suggested other capital-intensive clinical services (e.g., surgery,

radiology, and lab) could be consolidated if the EDs were combined.

» Support Services — Services such as environmental, facilities, materials management, and food and

nutrition are viewed as potential nonthreatening areas to consolidate efforts, take advantage of group

discount rates, and manage expenses.

Interviewees Recognize Current Areas of Duplicative Services

Appendix B Interview Topic Three

B-4 2638.001\388559(pptx) DD 3-27-17

Interviewees voiced ideas for coordinating care throughout the community to

increase patient outcomes and create the opportunity for enhanced services.

» Combine Select Workforces — Interviewees suggested there are opportunities to combine workforces

such as a nurse float pool that could then have the benefit of SCH and SEARHC utilizing less locum or

travelers.

» Coordinate Equipment Purchases — SCH and SEARHC use different equipment, such as imaging,

which has made efforts to cross-train and share call among providers difficult in the past. Adopting

similar equipment would enable staff to better float between the organizations.

» Complementary EHRs — Both organizations currently utilize separate EHRs, which makes sharing

patient data difficult. Having complementary EHRs or a patient portal could contribute positively to

patient care coordination and safety if patients receive services at both facilities.

» Collaboration on Population Health Priorities — Working together and combining efforts on health

promotion programs such as the Sitka Health Summit could have a greater impact on the community.

Interviewees See Opportunities to Coordinate Care in the Community

Appendix B Interview Topic Four

B-5 2638.001\388559(pptx) DD 3-27-17

Interviewees, particularly community members, repeatedly expressed that

alignment could result in opportunities for additional services within the

community.

» Specialty Services — Most interviewees voiced a desire for additional and expanded specialty

services within the community, including orthopedics, infusion services, pediatric care, ophthalmology,

and dermatology.

› Interviewees suggested provider recruitment and retention may be strengthened by coordinating

clinical care between SCH and SEARHC, thus giving providers access to more patient volumes.

› Sitkans regularly travel outside of Sitka, as far as Anchorage and Seattle, to receive specialty care.

Sitka community members will often remain in the other cities for weeks afterward, for postsurgical

care or physical therapy. Interviewees also voiced a desire for visiting specialists to spend more

time in the community and to be available for follow-up care.

» Same-Day Services — Interviewees voiced a desire for better access to same-day services for primary

care. Wait times for primary care services can be over a month long. SCH recently opened an Urgent

Care clinic, and SEARHC implemented a Nurse Advice Line to improve same-day assistance.

» Behavioral Health and Substance Abuse — Sitkans and the Native populations have established

needs for enhanced behavioral health and substance abuse services. The inpatient drug and alcohol

rehabilitation program closed in 2013, presenting an unmet need within the community.

Interviewees Have a Desire for Additional Services Within the Community

Appendix B Interview Topic Five

B-6 2638.001\388559(pptx) DD 3-27-17

Although the community is excited about enhanced and sustained healthcare

services in Sitka, perceptions need to be addressed to achieve a successful

collaboration.

» Ensuring Sustainability of Healthcare and Jobs in Sitka — There is confusion regarding SEARHC’s

legal ability to provide services to and employ non-native populations, which translates to hesitancy

about consolidating duplicative clinical resources from non-native community members.

› Contributing to this confusion is ANMC, which only recognizes American Indians and Alaska

Natives. While visiting specialists from ANMC treat all patients, due to the scheduling infrequency

and priority given to Native beneficiaries, some services are perceived by the community as limited

to Native beneficiaries.

› Non-native employees are confused and fearful about historical preferential hiring practices for

Natives and the present obligation for preferential hiring.

» Managing the Public Messages and Rumors — Interviewees expressed that misinformation can

spread quickly in Sitka and has been passed down through generations; however, the impact of past

actions between Native and non-natives is phasing out with the younger generation.

› Many residents have switched between the organizations over the years, often due to a single

incident that did not meet their expectations. However, those experiences created a perception of

the health system that they left.

› Interviewees suggested SEARHC Haines Health Center as a successful example of a SEARHC

facility that serves the entire Haines community, regardless of IHS beneficiary status.

The Community Has Reservations About Combining the Organizations

114

Appendix C Collaboration Tactics

2638.001\388559(pptx) DD 3-27-17

2638.001\388559(pptx) DD 3-27-17

Tactic Impact Complexity Timing

Financial

Impact

($ — $$$$)

Improve community

understanding of

services offered and

policies at each facility.

» This initiative can be expanded to be

inclusive of other community groups, such as

members of the Sitka Health Summit.

» The scope can include education around

access to care in order to dispel

misunderstandings about native preference

policies.

Low Immediate $

Collaborate on health

promotion initiatives.

Shared strategic planning and budgeting for

health promotion can enable both facilities to

have a greater impact with limited dollars.

Low 1 to 2 Years $

Share specialist clinics

to increase volumes

and patient access for

visiting providers.

» Specialists can centralize their clinics to one

facility that all patients within the community

can access.

» Increased volumes will result in specialists

being able to spend more time in Sitka or be

located permanently in Sitka in order to

reduce out-migration.

High 1 to 2 Years $$

Appendix C Tactics Aligned With Goal One: Improve Access to Primary and Specialty Services

C-1

A key tenet of the shared vision is undifferentiated access for the native and

nonnative populations to the best care possible.

2638.001\388559(pptx) DD 3-27-17

The community needs a shared plan to respond to members of Southeast Alaska’s

aging population and their changing clinical needs as well as more behavioral

health options.

Appendix C Tactics Aligned With Goal One: Improve Access to Primary and Specialty Services (continued)

C-2

Tactic Impact Complexity Timing

Financial

Impact

($ — $$$$)

Develop a shared

behavioral health and

substance abuse

program.

» Shared programs with individual and group

offerings could be created.

» Increased volumes will result in more

specialists and therapeutic services.

» Shared financial support will enable the

programs to remain viable.

Medium 1 to 2 Years $

Grow the long-term

care program at SCH.

» SCH can focus on expanded long-term care

and increasing the census to full capacity.

» Alignment can be created with SEARHC to

send long-term care patients to SCH.

Medium 1 to 2 Years $$

Create additional

geriatric services, such

as a dedicated geriatric

clinic.

» A collaborative geriatric clinic could be

created.

» A shared hospice unit can be opened.

High 2 to 3 Years $$

2638.001\388559(pptx) DD 3-27-17

Combining strategies for provider recruitment can result in specialists garnering

sustainable volumes to practice in Sitka.

Appendix C Tactics Aligned With Goal Two: Attract and Retain High-Quality Providers and Staff

C-3

Tactic Impact Complexity Timing

Financial

Impact

($ — $$$$)

Collaborate on

training and cross-

coverage

opportunities for

staff.

» Cross-training providers can result in cross-

coverage opportunities between both facilities.

» Both entities will be able to rely less on expensive

locum or traveler coverage.

» Fixed expenses can be shared for provider and

staff training as a group.

Low Immediate $

Jointly recruit

specialists to Sitka

(e.g., cardiology, GI,

orthopedics,

obstetrics [OB],

pediatrics,

dermatology).

» Patient volumes can be combined to support

provider practices.

» Joint support agreements can be developed for

practices.

Medium 1 to 2 Years $$

Develop a single

program for iterant

physicians.

» The time providers spend in the community can be

maximized by not duplicating resources.

» A rotating provider clinic could be developed to

improve logistics and minimize the cost of program.

Medium 1 to 2 Years $$

2638.001\388559(pptx) DD 3-27-17

Sharing overhead services can result in improved rates for fixed costs and

contracted services, as well as shared expenses for labor and infrastructure.

Appendix C Tactics Aligned With Goal Three: Create a Financially Sustainable Enterprise

C-4

Tactic Impact Complexity Timing

Financial

Impact

($ — $$$$)

Combine overhead

services such as

housekeeping, food

services,

maintenance, and

materials

management.

» Support services are likely to have a moderate

financial impact.

» Because these services do not directly impact

patient care, they may be less politically complex to

combine.

» Expenses can be reduced by sharing regularly

occurring and predictable processes and accessing

available purchasing rates for expensive supplies

such as pharmaceuticals.

Low to High 1 to 2 Years $$ – $$$

Improve billing

office performance.

Both facilities can improve patient satisfaction through

better billing processes.

Medium 1 to 2 Years $

Optimize the use of

available

reimbursement

programs.

» Access to SEARHC’s favorable reimbursement

rates will improve revenues and financial stability.

» Revenue from shared clinics can be allocated from

a predefined formula.

Medium to

High

1 to 2 Years $$$

2638.001\388559(pptx) DD 3-27-17

Creating greater integration among healthcare providers may result in shared best

practices between organizations, impacting access, quality, and medical staff

management.

Appendix C Tactics Aligned With Goal Four: Enhance Care Quality and Achieve Clinical Best Practices

C-5

Tactic Impact Complexity Timing

Financial

Impact

($ — $$$$)

Create shared

medical staff

policies and

management

structure.

» Combined medical staffs can result in increased

quality of care and shared utilization of support staff

resources.

» A shared medical staff would enable the

development of a single call schedule for the

community.

Medium 1 to 2 Years $$

Combine primary

care practices into a

single program.

A combined practice would further reduce duplicative

resources, increase the quality of care, and expand the

ability to explore new care models.

High 1 to 2 Years $$$

Integrate EHRs to

create clinical data

exchanges for

patients visiting both

facilities.

» Both facilities are currently preparing for new EHR

implementations.

» An integrated EHR would enable exchanging data

between facilities to improve patient care and

provider collaboration.

High 2 to 3 Years $

2638.001\388559(pptx) DD 3-27-17

Decreasing duplication within Sitka will positively impact both patient care quality

and provider satisfaction by centralizing care volumes, as well as eliminating

redundant operating expenses.

Appendix C Tactics Aligned With Goal Four: Enhance Care Quality and Achieve Clinical Best Practices (continued)

C-6

Tactic Impact Complexity Timing

Financial

Impact

($ — $$$$)

Consolidate OB to

one facility.

» This will improve the quality of care by creating

more of a critical mass.

» Duplicate call obligations would be eliminated.

» Operational efficiencies would be achieved by

eliminating infrastructure at whichever facility

discontinues service.

High 2 to 3 Years $$$

Consolidate

emergency

departments.

» Removing the emergency department will impact

the hospital's CAH designation.

» Providers can be relieved of more burdensome call

duties.

» There could be significant cost savings in support

infrastructure (lab, radiology, etc.).

» Resources would be able to be redeployed in other

manners.

Very High 2 to 3 Years $$$$

121

Appendix D Status Quo Modeling Assumptions

2638.001\388559(pptx) DD 3-27-17

D-1 2638.001\388559(pptx) DD 3-27-17

Optimistic Moderate Likely

Revenue Growth Revenue increases 5% yearly over the

FY 2017 budget.

Revenue increases 2% yearly over

FY 2016 actuals.

» Inpatient and outpatient revenue

increases 2% yearly.

» Long-term care revenue declines

50% between FY 2016–FY 2019.

Expense

Projections

» Projections utilize FY 2014–FY 2016 average expense-to-revenue ratios by line item.

» Salaries fluctuate with the change in patient revenue and with long-term care salaries isolated to the service line.

» Benefits are 55% of salaries, which is the average of FY 2014–FY 2017 ratio.

Capital Budget $816,000 yearly, which matches the

FY 2017 budgeted depreciation

amount.

$419,000 yearly, which is the current

FY 2017 capital budget.

» $200,000 in FY 2017, which is half

the current capital budget.

» $0 in FY 2018–FY 2019, reflecting

depleted cash reserves to reinvest

in the business.

City Tobacco and

Capital Support

Remains at FY 2017 budgeted

support.

10% yearly decline, representing

scale-down of city capital support.

15% yearly decline, representing

termination of city capital support by

FY 2019.

City Line of Credit

Repayment

$400,000 in FY 2017 $400,000 in FY 2017 $0

Repayments to

Payors

» Medicare: $0

» Medicaid: $736,000 in FY 2018

» Medicare: $1,000,000 in FY 2018

» Medicaid: $736,000 in FY 2018

» Medicare: $2,000,000 in FY 2018

» Medicaid: $736,000 in FY 2018

Scenario

Probability

15% 40% 45%

Key assumptions were applied to SCH financials to form optimistic, moderate, and

likely financial scenarios.

Appendix D Option One: Modeling Assumptions

D-2 2638.001\388559(pptx) DD 3-27-17

Income Statement FY 2016 FY 2017 FY 2018 FY 2019

Net Patient Revenue $23,184,581 $24,214,720 $25,425,456 $26,696,729

Other Revenue 1,872,831 367,451 367,451 367,451

Total Operating

Revenue

$25,057,412 $24,582,171 $25,792,907 $27,064,180

Salaries, Wages, and

Benefits

$17,539,268 $17,749,503 $19,076,022 $20,029,823

Depreciation 874,626 816,731 816,731 816,731

Other Expenses 7,990,269 6,989,774 7,262,330 7,596,056

Total Expenses $26,404,163 $25,556,008 $27,155,083 $28,442,610

Income (Loss) From

Operations

$ (1,346,751) $ (973,837) $ (1,362,176) $ (1,378,430)

Nonoperating

Revenue

103,550 140,890 140,890 140,890

City Support 667,857 836,192 836,192 836,192

Net Income $ (575,344) $ 3,245 $ (385,094) $ (401,348)

Uses of Cash FY 2016 FY 2017 FY 2018 FY 2019

Loan Repayment - $ 400,000 - -

Medicare Repayment - - - -

Medicaid Repayment - - $ 736,000 -

Capital Expense $ 106,775 $ 816,000 $ 816,000 $ 816,000

Projecting optimistically, SCH may retain enough cash reserves to be viable for the

foreseeable future and continue to reinvest in the business. While not included in

this scenario, events such as repaying Medicare per the cost report audit or a

reduction in Medicare and Medicaid rates will shorten the timeline.

Appendix D Option One: Financial Scenarios — Optimistic

SCH Future Cash Projections —

Optimistic

0

10

20

30

40

50

60

70

80

$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$4,500,000

$5,000,000

FY16 FY17 FY18 FY19

Cash Days Cash on Hand

D-3 2638.001\388559(pptx) DD 3-27-17

Projecting moderately, SCH may see small revenue increases; however, a heavy

expense structure results in yearly negative net income. Combined decreases in

city support and repayment of payor liabilities will reduce SCH’s days cash on hand

to below 30 days by FY 2018.

Appendix D Option One: Financial Scenarios — Moderate

0

10

20

30

40

50

60

70

80

$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$4,500,000

$5,000,000

FY16 FY17 FY18 FY19

Cash Days Cash on Hand

SCH Future Cash Projections —

Moderate

Income Statement FY 2016 FY 2017 FY 2018 FY 2019

Net Patient Revenue $23,184,581 $23,648,273 $24,121,238 $24,603,663

Other Revenue 1,872,831 367,451 367,451 367,451

Total Operating

Revenue

$25,057,412 $24,015,724 $24,488,689 $24,971,114

Salaries, Wages, and

Benefits

$17,539,268 $17,964,199 $18,323,483 $18,689,953

Depreciation 874,626 816,731 816,731 816,731

Other Expenses 7,990,269 6,976,517 7,108,575 7,243,274

Total Expenses $26,404,163 $25,757,447 $26,248,789 $26,749,958

Income (Loss) From

Operations

$(1,346,751) $(1,741,724) $(1,760,100) $(1,778,845)

Nonoperating

Revenue

103,550 140,890 140,890 140,890

City Support 667,857 836,192 752,573 677,316

Net Income $ (575,344) $ (764,642) $ (866,637) $ (960,639)

Uses of Cash FY 2016 FY 2017 FY 2018 FY 2019

Loan Repayment - $ 400,000 - -

Medicare Repayment - - $ 1,000,000 -

Medicaid Repayment - - $ 736,000 -

Capital Expense $ 106,775 $ 419,000 $ 419,000 $ 419,000

D-4 2638.001\388559(pptx) DD 3-27-17

Appendix D Option One: Financial Scenarios — Declining

If SEARHC introduces a competing LTC program, city capital funding is

discontinued, and Medicare must be fully repaid, SCH would lose all cash reserves

for daily operations by FY 2019.

SCH Future Cash Projections —

Declining

-15

0

15

30

45

60

75

$(1,000,000)

$-

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

FY16 FY17 FY18 FY19

Cash Days Cash on Hand

Income Statement FY 2016 FY 2017 FY 2018 FY 2019

Net Patient Revenue $23,184,581 $22,748,085 $22,496,399 $22,391,609

Other Revenue 1,872,831 367,451 367,451 367,451

Total Operating

Revenue

$25,057,412 $23,115,536 $22,863,850 $22,759,060

Salaries, Wages, and

Benefits

$17,539,268 $17,762,665 $17,938,050 $18,136,277

Depreciation 874,626 816,731 816,731 816,731

Other Expenses 7,990,269 6,725,173 6,654,899 6,625,640

Total Expenses $26,404,163 $25,304,569 $25,409,679 $25,578,648

Income (Loss) From

Operations

$(1,346,751) $(2,189,033) $(2,545,829) $(2,819,588)

Nonoperating

Revenue

103,550 140,890 140,890 140,890

City Support 667,857 836,192 710,763 604,149

Net Income $ (575,344) $(1,211,951) $(1,694,176) $(2,074,550)

Uses of Cash FY 2016 FY 2017 FY 2018 FY 2019

Loan Repayment - - - -

Medicare Repayment - - $ 2,000,000 -

Medicaid Repayment - - $ 736,000 -

Capital Expense $ 106,775 $ 200,000 - -