The Latest and Greatest in Pay for Performance and ACOs

1. The Latest and Greatest in Pay for Performance and ACOs

2. Introduction VMG Health

3. Introduction VMG Health strives to be a trusted advisor by providing thought leadership and valuation solutions to the healthcare industry. We seek to provide this expertise through our core values of integrity, depth of knowledge and responsiveness while providing outstanding opportunities for our professionals. VMG Health provides transaction advisory and valuation services solely in the healthcare industry • Founded in 1995 • Offices in Dallas, Texas and Nashville, Tennessee • Clients include non-profit and for-profit health systems throughout the United States in addition to ancillary health services providers, physician organizations and health plans. • The VMG team performs over 1,500 engagements each year VMG is structured in teams • Professional Service Agreement Valuations • Business Valuation • Transaction Advisory Services / JV Relationship Development • Equipment Appraisals • Real Estate Appraisals • Financial Reporting Valuations (ASC 805 & ASC 350) • Due Diligence

4. Introduction Jen Johnson, CFA Partner at VMG Health Leads Professional Service Agreements Division Previously with KPMG’s litigation department Former Finance professor from the University of North Texas Published and presented over 50 times related to physician compensation and fair market value Board meetings, articles and presentations on P4P initiatives • April 2014 HFM Magazine “Evaluating The Fair Market Value of Pay for Performance” • Finance Committee Attendance on major P4P initiatives

5. P4P Overview

6. Why the Growth in Integration & P4P? • Non P4P reasons for integration • Increased compensation: post employment or contracted arrangement • Better hospital-based reimbursement • Replace potential loss of ancillary earnings • Physicians and hospitals need to collaborate more than ever – P4P drivers • Affordable Care Act • Security – healthcare reform, changing reimbursement • Investment requirements for information technology • Participate in risk-based contracting, ACOs, quality initiatives

7. P4P Background - Quality Hospital Quality Incentive Demonstration (HQID) for over 250 hospitals: 2003-2009 Physician Group Practice Demonstration for ten physician groups: 2005-2010 In 2008, the Robert Wood Johnson Foundation and California HealthCare Foundation reported results of a national program that tested the use of financial incentives to improve the quality of health care. Tested seven projects across the nation that adjusted compensation based on performance scores – hospitals and physicians. Notable findings: • Financial incentives motivate change • Alignment with physicians is a critical activity for quality outcomes • Public reporting is a strong catalyst for providers to improve care February 2012 – Committee on Ways and Means – 1 example • UnitedHealth Group discusses results of its Premium Designation Program (PD) • Results show over 50% decrease in some complication rates

8. Savings & Quality Combined Savings alone (capitation) no longer in the mix • 13 Gainsharing Opinions (2001-2008) – quality thresholds • 2013 Results 114 ACOs in the program - 54 of the ACOs saved money - of $126 million • September 2014 ACO Business News Reports – mixed reviews • 22 of original 32 Pioneer ACO programs remain • Sharp just dropped out because it was at risk for “a significant shared loss” • Wellmark/BCBS 5 ACOs – improved quality 35% and saved $12 million over 2 years • Multiple Models and arrangements exist today beyond commercial and Medicare ACOs • 2013 Greater New York Hospital Association - 100 hospitals desired to work with participating physicians to account for the use of hospital resources. Physicians that met hospital quality targets while lowering costs could be compensated a portion of the savings.

9. Third party payors • UnitedHealth Group – largest US health insurer by sales • 2013 paid 21 different specialties based on quality • WellPoint – largest US health insurer by membership • Will increase primary care physician pay by 10% - coordinated care • Additional cost savings bonus of 20% to 30% of savings achieved • BCBS and Aetna • Growing P4P programs • Including payments for both cost savings and quality • Governmental Programs growing • State and Federal • MSSP, ACOs and bundled payments • Market Comparables for P4P Payments

10. CMS to play major role in developing P4P programs • “VBP” – quality and cost goals simultaneously • Section 3001: Hospital Value Based Purchasing 2012 • Quality Outcomes payments • Efficiency measures in 2014 • Must be reporting on Hospital Compare website for at least 1 year • DRG reductions nationwide will fund • UP to 2% can be earned • Section 3006: Value Based Purchasing Skilled Nursing Facilities and Home Health • Section 3007: Value Based Payment Modifier under the Physician Fee Schedule • Payment modifier for cost and quality • 2015 for larger groups • 2017 for all • Size of incentive not specified • ACA Provisions & P4P

11. Section 3008: Payment reduction for Hospital Acquired Conditions • Section 3021: Establishment of Center for Medicare and Medicaid Innovation within CMS, 3 of 18 models are P4P • Appropriate criteria for diagnostic imaging orders • Payments for using patient decision support tools • Payments for using evidence based guidelines for cancer care • Section 3022: Medicare Shared Savings Program • Promotes ACO development • Cost savings and quality must be met • Governmental programs – great roadmap for how much is acceptable to distribute to physicians. Consider 3rd party payors as well when defining the “P4P market”. • But…does the market know what works and how to best structure payments? • ACA provisions continued…

12. U.S. Department of Health and Human Services requested study • 129 VBP programs (91 P4P, 27 ACOs, 11 bundled payments) • Measures: clinical quality, cost, outcomes, experience • Recommendations: • Set measurable goals, use national data • Case-mix adjust outcomes measures, use broad set of measures, identify overtreatment measures, monitor • Evolve from narrow process measures to broader set emphasizing outcomes • Sponsor engage providers in design/implementation • VBP sponsors should collect a common set of factors to find best working program • Need more information: • HHS should develop a structured research agenda to address gaps in VBP knowledge base • CMS should study private-sector programs, program design information not available • Study changes and investments, experiences and challenges • 2014 RAND Report: Measuring Success in Health Care - Value Based Purchasing programs

13. P4P Arrangements & FMV

14. Standard process leading up to P4P payments • Recognized organization identifies quality metrics or average costs • Reporting measures is required, or costs are tracked • Benchmarking data is gathered • Payments for outcomes or savings is observed in market • FMV can now be established • Justification for payments changing • Payments for Reporting (ie: PQRI) • Pay for Process • Pay for Outcomes • At risk for sub-par quality • Common factors included in P4P arrangements • Lowering costs without sacrificing quality • Quality outcomes payments– individual, services line level, entire population • Use of technology • Valuation drivers • Outcomes • New dollars coming in from 3rd parties • Service line or practice level • Evolution of P4P Arrangements – What We Do Know

15. Physician Alignment Trends – P4P Professional Service Agreements (“PSA”) May be a result of joint ventures, acquisitions, employment or independent contractor arrangements. *May have a P4P component – biggest area of research and innovation for PSA Division. We will be stuck between FFS and P4P for a while

16. Physician Risk & Arrangement Types with P4P Less risk for physicians - traditional deals with P4P component • Clinical (% of base add-on) • Medical directorships (hourly rate differential) • Call coverage (portion at risk for outcomes) Medium risk - Co-management of service line = fixed + variable fee • Quality outcomes • Sometimes savings More risk for physicians • ACO type models • Upside based on actual savings -> possibly downside • Quality initiatives provide gate or extra upside • Bundled Payments

17. Agreement terms must be understood and are sometimes unclear at valuation stage, define: • What services will be provided? • How will parties be compensated? • Commercially Reasonable – gaining importance • Facility needs – check for overlap of services (numerous medical directors needed) • Operational assessment (quality metrics relevant for patient population) • There are no published standards for physician compensation valuations, P4P new • Appraisal firm should understand • Healthcare regulations • Valuation principles • Fair Market Value • Data considerations – competing hospital, extra caution • Valuation Starting Point

18. Based on the anti kickback statute, and other healthcare regulations and guidelines, any transaction between hospitals and physicians must be at Fair Market Value. • The amount at which property would change hands between a willing seller and a willing buyer when the former is not under any compulsion to buy and the latter is not under any compulsion to sell and when both have reasonable knowledge of the relevant facts, absent the consideration of referrals. • Provides a conclusion which should not reflect consideration for value or volume of referrals. • Offer equal P4P opportunities to all providers • Do not tie P4P compensation to expected referrals • P4P comparables • Stick to regulatory guidance when it comes to paying for quality or shared savings • Governmental programs and third party payors are good market comparables • Fair Market Value Definition

19. Fixed Fee + Variable Fee = Co-Management Fee Structure • Co-Management - The Basics • Hospital and physicians enter into an agreement where physicians are jointly responsible with hospital for managing a defined service line • Various arrangement types exist in the market • Joint Ventures • Contractual arrangements • Payments contained in the agreement • Will vary based on services outlined • Should be linked to actual services and/or outcomes

20. Physician service related payments are justified by need for clinical expertise • Time dedicated to meetings designed to improve the overall quality of care for a specific service line. • May also include • Medical Directorship • Non-physician services • Billing • Management/administration • Call coverage • The duties must not overlap with hospital staff • Probably not a typical management fee • Co-Management - Fixed Fee Overview

21. Quality outcomes drive payments - create payment tiers for incentives based on various outcomes • Improvement and superior outcomes may warrant incentive payment • Obtain industry-recognized benchmark data for the quality metrics, (average or median and top or 90th percentile) • Understand historical performance and who is responsible for developing and implementing the strategy • Cost savings metrics • Administrative oversight to protect quality is essential • Measurement must be tied to physician’s input • Co-Management - Variable Fee Overview

22. The following payment allocations may be included within a clinical integration model • Bundled payment splits – understand who is providing what service • Quality and Shared Savings splits among ACO entity and hospital and physicians • FMV process - balanced approach for overall model should be assessed • Third party funded or from hospital • Infrastructure cost recovery • Buy-in or participation Fee • Time spent/effort – hourly rate paid • Split of savings – existence of minimum savings threshold • Split of quality - benchmarks utilized • Upside and downside risk • Care coordinator payments – ie: Nurse care manager • PMPM fee for management – consider acuity and NCQA • Clinical Integration payments - ACO/IDN models

23. P4P Compliance and tips

24. Hospital is at risk for relying on unsupportable valuations • Valuation methodology is as important as total compensation • No opinion shopping, carefully choose your valuation firm • Logic Test: • Is it commercially reasonable? • Do not pay fulltime benefits/malpractice premiums for part-time services • Physicians paid above the 75th percentile of market data should demonstrate productivity consistent with other physicians in this percentile • Understand arrangements where the provider is not making money • Compensation for administrative duties should be based on significant duties • P4P – watch out for low hanging fruit and rebase annually • Case Law Growth and Take-Aways

25. Quality measures should be clearly and separately identified • Quality measures should utilize an objective methodology verifiable by credible medical evidence • Quality measures should be reasonably related to the hospital’s practice and consider patient population • Do not consider the value or volume of referrals. • Consider an incentive program offered to all applicable providers • Incentive payments should consider the hospital’s historical baseline data and target levels developed by national benchmarks • Thresholds should exist where no payment will accrue and should be updated annually based on new baseline data. • Hospitals should monitor the incentive program to protect against the increase in patient fees and the reduction in patient care • Incentive payments should be set at FMV • Regulatory Guidance - Quality

26. Gainsharing Guidance – Favorable OIG Opinions • Each member of the physician group should have medical staff privileges • The arrangement should be administered by a program administrator, whose compensation was not tied in any way to the incentive compensation. • A program administrator should identify cost-savings metrics after reviewing historical practices and understanding its medical appropriateness. • The savings targets should be “re-based” at the end of each year in multi-year arrangements. • The hospital should calculate the cost savings separately for each group and for each cost savings recommendation. • The arrangement should include objective measures to monitor quality (i.e., CMS Specification Manual for National Hospital Quality Measures). • Incentive payments should be set at FMV ------------------------------------------------------------------------------------------------------- • More complex factors should be considered for allocating savings associated with patient population and bundled payments • Responsibility for outcomes and savings • Risk adjustment for patient population • Responsibility for infrastructure costs (if applicable) • Caps are prudent and seen in demonstration projects • Regulatory Guidance – Shared Savings

27. Evolutionary Process, “Seen one, seen one” • Reported Data for making P4P decisions – provider and payor concerns • Inaccurate • Inconsistent, outlier treatment • Expensive/timely to aggregate and report • IT Infrastructure – other issues • Sharing and access • New software options • Connectivity of information among integrated parties • Common Challenges with P4P

28. Allocation of payment methodologies • Primary care versus specialists • Primary care – ACO model, PMPM and allocation of shared savings • Specialists – ACO model, service line co-management and bundled payments • Year 1 versus Year 2+ • Care coordinators – needed and who pays for them? • Risk taking • Choosing Metrics - inconsistent among P4P programs • Common Topics in the Boardroom with P4P

29. Start small • Have a written agreement • Modest set of metrics – perhaps consistent with those found in both commercial ACOs and Medicare ACOs • Update and rebase metrics annually • Understand who is driving cost savings and quality • Have safeguards which prevent cherry picking and lemon dropping • Identify flow of funds allocation early on in process Compliant P4P payment formula = Good Data + Logic + FMV guidance • P4P Program Starting Guidelines

30. Questions and Contacts Jen Johnson, CFA Partner jenj@vmghealth.com 214.545.5882