The Evolution of Managed Care?

2. The Evolution of Managed Care? An overview of health care trends and national policy issues that are changing health care now and 7 years into the future. December, 2002

3. Total Managed Care Penetration 1994: National Average = 52.6% Source: Interstudy, Medstatsuccess, July 2002.

4. Total Managed Care Penetration 2001: National Average = 67.6% I I I I I I Source: Interstudy, Medstatsuccess, July 2002.

5. 2000 Premium Rate Trends Sources: Milliman & Robertson, Inc. 1990 HMO Intercompany Rate Survey, Press Release; Federal Employees Health Benefit Program (FEHBP) 2000 Premium Increase, Press Release; 2000 Towers Perrin Health Care Cost Survey, Press Release; William M. Mercer, Inc., 1999 Survey of Employer-Sponsored Health Plans, Press Release.

6. Insurance Costs Rise Source: HealthLeaders, July 2002.

7. Health Insurance Premiums 12% 10% 8% 6% 4% 2% 0% Overall Inflation Workers’ Earnings NOTES: Estimates for health insurance premiums are statistically different from the previous year for years 1998, 1999 and 2000 (alpha =.05). No tests were done on years prior to 1998 or for workers’ earnings or overall inflation. Sample for 1997 included firms with 200 or more workers only. Premium Increases Compared With Other Indicators Source: Kaiser/Health Research & Educational Trust Survey of Employer-Sponsored Health Benefits, 1999 & 2000; and KPMG Survey of Employer-Sponsored Health Benefits, 1988, 1993, 1996 & 1998; and Bureau of Labor Statistics, 2000.

8. 12% 8% 4% 0% -4% -8% NOTES: Unadjusted. The total costs per adjusted admission and elderly length-of-stay data (from the American Hospital Association) are based on community hospitals (which include some facilities excluded from prospective payment) and federal fiscal years. The Medicare inpatient costs per discharge and Medicare length-of-stay data (from HCFA) are based only on hospitals paid under prospective payment and on prospective payment system (PPS) years. Total costs per adjusted admission Medicare inpatient costs per discharge Percent Change Elderly average length of stay Medicare average length of stay Annual Change In Costs PerDischarge & Average Length Of Stay Source: Medicare Cost Report Data from the Health Care Financing Administration.

9. United States - Overachiever Healthcare expenditures, as a portion of the domestic product, rise faster in the United States than in other developed nations. Source: OCED, July 2002.

10. Total U.S. Health Care Spending JANUARY 1, 2001 TO DECEMBER 31, 2001 95 999, 999, 999. $1, 275, JANUARY 1, 2011 TO DECEMBER 31, 2011 95 999, 999, 999. $1, 275, Total U.S. Prescription Drug Spending Estimated Total U.S. Health Care Spending in 2011: $3.43 TRILLION! Source: CMMS

11. New Health Care Strategy Tight Labor Market Managed Care Backlash Health Care Cost Increases Health Care Strategy Eighty five percent of all employers who responded to this survey will review and evaluate their health care strategy by the end of 2001. Corporate America will rethink its approach to health care benefits in the face of dramatic cost increases, talent shortages, and a backlash that is dismantling managed care as we have known it. Source:Hewitt Associates LLC, Health Care Expectations: Future Strategy and Direction 2001.

12. Health Care Strategy The widespread need to rethink health care strategies, evaluate employee and consumer involvement in health care decisions, develop valid goals and measures of success, and to find new solutions and delivery systems is evidenced by these results: • Only 36% of employers have a written health care strategic plan to guide their decisions on one of their biggest, single-purchasing decisions. • 82% of those organizations that already have a written health care strategy will conduct a major review to rethink their strategy by the end of 2001. • Not surprisingly, two-thirds of surveyed employers believe their employees don’t understand their organization’s strategy and goals in this emotionally charged area. Source:Hewitt Associates LLC, Health Care Expectations: Future Strategy and Direction 2001.

13. Steering Plan Enrollment With health care cost increases, employers are questioning which delivery systems are most effective. HMOs used to be the solution for managing care and controlling costs, but a 1999 survey show a migration to PPOs. Now , a new survey indicates a move back to HMOs with less restrictions.Also, almost 40% of all respondents indicated that recent cost, employee feedback, etc. have caused them to discourage enrollment in indemnity plans. Source:Hewitt Associates LLC, Health Care Expectations: Future Strategy and Direction 2001.

14. 5% 4% 5% 11% 11% 30% 34% Other Government Net cost of private health insurance/administration Rx drugs/medical supplies Nursing homes/home healthcare Physician services Hospital care Physician behavior: $120 billion Patient compliance: $80 billion Transaction costs: $50 billion Unit price: $30 billion Healthcare System Complex And Inefficient U.S. Healthcare spending in 1998: $1.1 trillion Estimated healthcare improvement opportunities could save a significant amount of money Source: PPRC 2002.

15. Wasted Hospital DaysAverage 54% Source: Milliman & Robertson, Inc.,

16. Public Opinion ofManaged Care Shifting Consumer attitudes towards managed care are becoming more polarized as fewer people have no opinion on whether managed care is dong a ‘good job’ or a ‘bad job,’ according to the new KFF survey. The percentage of Americans who think managed care is doing a bad job appears to have peaked, while the percentage reporting a ‘good job’ is almost back to 1997 levels. Sep 97 Oct 98 Apr 00 Aug 01 Bad Job 21% 36% 39% 39% Good Job 34% 30% 24% 32% Neither 13% 18% 16% 11%

17. Why • Managing claims and discounts has run its course • Physicians see HMOs and sometimes employers as the problem because there is emphasis on cost only • Employers starting to realize the real agenda is medical management • Many complex components that employers would rather leave to the medical profession • Renewed interest in staff models

18. Right now managed care is... • Capitating primary care.. • sharing risk • creating new reimbursement tiers for hospitals and doctors • creating innovation to predict populations medical expenses • headed for more class action suits • trying to muddle through by pretending it’s a FFS insurer • Doing a really bad job of explaining to the public that the system is so complicated that managed care cannot solve all the ills…especially with one hand tied behind their back

19. Health Plan Management Health and Productivity Strategies Health plan costs continue to increase rapidly at a time when a much-used weapon against costs - managed care - is experiencing great change. So, employers are looking more closely at various other mechanisms that have the potential to affect the health and productivity of their work force and, thus, business results. Source:Hewitt Associates LLC, Health Care Expectations: Future Strategy and Direction 2001.

20. Trends In Hospital Utilization Inpatient Days and Outpatient Visits: 1965-1997 Inpatient hospital days (an aggregate measure influenced by the number of admissions and the length of hospital stays) declined during the 1980s and has continued to decline. Between 1990 and 1997, inpatient days declined by 15%. In contrast, the number of outpatient visits has increased over this time period, rising by 49%. Source: Table prepared by CRS; Medicare & Health Care Chartbook, Committee on Ways & Means, May 17, 1999.

21. More Providers FaceOperating Deficits Percentage of Physician Organizations with Operating Deficits Source: Mode’s Investors Service.

22. Winning on Terms Winning on Appeals • Hospitals aggressively confront payers to secure more favorable contract terms • Current ‘zero sum’ payment environment creates strong incentive to win at any cost • Necessary for short-term survival; mutually harmful over long term • Hospitals aggressively control payers for greater success on denial recovery • Majority of denials are recoverable • Necessary but not sufficient for improved revenue capture IDEA ASSUMPTION ASSESSMENT Choosing Among Competing Relationship Models Source: The Advisory Board Company. Grade:B+ Grade:D

23. UnderstandingProfit Cycle Management Hospitals continue to face financial pressures, but many are discovering that across-the-board cost cutting is no longer a viable strategy for improving profitability and overall financial health. Managing the hospital profit cycle has emerged as the best, most balanced way to enhance revenue. Profit cycle management involves pinpointing operating processes and costs, clinical and financial outcomes, revenue recovery gaps, and market conditions that impact profitability. Source: healthcare advisory group, July 2002.

24. Quantify market demand • Attract profitable patients • Model contracts based on market demand • Identify profitable product lines • Appeal and win denied claims • Enhance percentage of reimbursed claims Targeted Growth Patient Access Management Revenue Enhancement • Profile physician practice pattern cost • Analyze complications of care impact • Measure clinical outcomes • Optimize registration processes • Provide real-time case management • Work denials concurrently Clinical & Operational Improve- ment UnderstandingProfit Cycle Management Source: healthcare advisory group 2002.

25. A Commitment to Reform Reconciling Our Agenda • Hospitals refocus their efforts to improving contract compliance and overall revenue cycle performance • Denial and underpayment problems not exclusively the fault of payers • Essential under almost every circumstance • Payers and providers cooperate to reduce or eliminate costs associated with denial model of medical management • Current payment system not inherently ‘zero sum’, ample room for cooperation on both technical and clinical issues • An alluring and likely future IDEA ASSUMPTION ASSESSMENT Choosing Among Competing Relationship Models Source: The Advisory Board Company. Grade:A Grade:A

26. Demographics of aging Cost of an over 85 is 12 times that of under 85 and there are 12% more today than in 1990 Everywhere will look like Pinnellas County Florida. High illiteracy level Lack of personal responsibility to take care of oneself Explosion in new diets, new drugs and new advertising If you hear voices call this number Much more occasion for diagnosis that is wrong Hospital safety in question Increase in demand

27. Increase in capacity • Cranes everywhere • All new emergency rooms( bulletproof of course) • Helicopters crash more likely than a hospital closing • Growing physician community that requires more RNs and LPNs • Babyboomers are going to be sick hurrah hurrah!! • More is better, maybe not!!

28. New information opportunity • HIPAA • Basic uniformity of billing and coding • Every employer gets an ID • Every insurer gets an ID • Every transaction uses same code • End result is that all systems and records must be updated for accuracy and privacy • Unit pricing of episodic care on a severity adjusted basis is a very real possibility. • Having it published an even greater possibility

29. Physicians and Hospitals • New business model has been tried but the hospitals and doctors do not trust or respect one another so we saw more disintegration than integration. • The attempts to buy practices has been a disaster loosing 150, 000 per year per practice • To buy clinics has been a disaster with most hospitals trying to rid themselves of the debt and embarrassment. • Physicians starting up practices to compete with existing clinics hospitals attempts to replace doctors seen as more conflict

30. Governments role • Finance or regulate or do both • .Market driven or cost controls strategies • Government payer drives DRGs, RBRVS,APCs • Government continues to pay late and less but has now set in motion a basis for a national fee schedule • Medicaid is at crisis proportion in Illinois because we have no means to monitor necessary care or actual care delivered. • Reforming a regulated industry that is already broken will take time, and money.

31. e-Business Improving business performance through connectivity • Deploying new technologies in the value chain • Connecting business-to-business • Leveraging customer insights • e-Commerce • Marketing • Selling • Buying of products & services on the Internet • e-Environment • Consumer empowerment • Information management • Technology • Science • e-Health • Physician list publishing • Information awareness • e-Call center Today Tomorrow e-Environment: More than e-Commerce, e-Business & e-Health Source: Pharma 2003

32. Managed Competition • Consolidate or Cooperate • Physicians compete with hospitals for outpatient surgical • Independent contractors compete with hospitals for imaging services • Doctors compete with one another • Hospitals compete with doctors for out-patient AND inpatient dollars • Business model of filling beds is not a sustainable strategy • Risk is not going away

33. Ethical Issues • Funding overspecialization • Higher and higher income per patient bed filled does not work as patients and their insurers go elsewhere • As all hospitals attempt to build this model they bypass real opportunities to build a seamless integrated care system instead of a network of services • In this environment basic testing procedures, outpatient surgeries and fundamental primary care services missed in favor of big dollar items • Overbuilding bypasses the general populations needs using expensive resources and provides NO IMMEDATE PATIENT VALUE

34. Tales From The Crypt Sell It Give It . . . Give it with $$ Cancel It

35. Moral issues • It is estimated that lower income people have less access to preventive services and therefore a higher disease rate and more expensive chronic condition than do higher income level people. • Breaking this down by color and race there are disparities • Breaking it down by age children with insurance live longer • Breaking this down by high risk behavior African Americans have the highest rate of asthma and diabetes both related to weight. • African Americans have one third more abortions than other female populations and many of these abortions drive patients to additional services that could have been prevented.

36. Solutions being discussed • Single Payer • Defined Contribution • Medicare competitive bidding • Socialized medicine • Mandatory employer coverage • Basic benefits , catastrophic reinsurance

37. So where is the future ? • Medical management being redefined..and not by us • Quality indicators going through a revision, not JACHO • PHO and IPA under scrutiny again, do we provide a community benefit? • Hospitals shedding their HMOs leaving lots of people unhappy and a bad taste in the employers mouth • Hospitals and their HMOs so powerful the FTC wants to know more • Direct contracting is in again( was it ever out but what is it) • How about a diagnosis driven severity adjusted global cap rate per person being paid to every doc • How about a single payor system starting with the largest public and employer.

38. The Mission IsMedical Management • Not fee schedule discounts • Not insurance claims management • Not fragmenting the delivery system • Not over the shoulder precertifications • Not creating a transitional state, that once managed care goes away, permits us to go back to the way we always have done things

39. The Mission Requires • Permanent change • Ability to manage risk of fixed price reimbursement • Create and follow a plan - your plan! • Capacity to see patients and guarantee access for other services • Competence to know what you want in the contract, and when to say NO! • A strategy to anticipate payors needs

40. Successful Extending of Life More Drug Therapy Innovation Computerized Applications The Evolution OfMedical Management Demographics Moving to 65+ Technology Simple Diagnosis Complex Patient Care Inpatient Facility Outpatient Ambulatory Care Based Treatment Home Treatment Options

41. Production Based to Performance Driven Healthcare Consolidations and Complexity of Care Generated More Accountability Demanded by Patients The Evolution OfMedical Management Reimbursement Risk More Complex Government Compliance Charge Per Visit Global Accounting of Patient Population PIPDCG Basic Frequency of Detailed Compliance with Units of Care and Charges Cost and Quality and Access New Rules on Fraud and Medical Errors

42. 2000 Surviving Healthcare Organization’s Health Management Approach 1960 Academic Research Initiatives 1980 Managed Care Interventional Process • Best practices • Benchmarks • Standards of care • Prospective determination of patient risk category by severity level • Continuous quality improvement • Clinical product redesign for delivery system improvement • Utilization review • Quality assurance • Utilization management • Quality improvement • Case management • Authorization and denial of claims Forty Years OfMedical Management

43. 12 10 8 6 4 2 0 tbrate cabgrat rcrate mcrate Rate per 1,000 Medicare Enrollees Chicago Aurora Peoria Joliet Evanston Elgin Urbana Blue Island Springfield Hinsdale Rockford Melrose Park Bloomington Hospital Referral Region Medical Management Rates of Common Surgical Procedures Among Non-HMO Medicare Enrollees by Hospital Referral Regions (1994-1995) Source: The Dartmouth Atlas of Health Care 1998.

44. High Quality Low Money Won’t Solve Everything Finessing cost and quality of care can be a difficult balancing act. Simply throwing money at the problem isn’t always the answer. In fact, there is a point at which spending more does not necessarily improve quality. Adequate Quality Marginal Benefits Increasing Cost Adequate Quality Increasing Cost Decreasing Quality Increasing Cost Low Cost Source: Medical Practice Institute 2002.

45. Your Performance 14 12 Hospital ALOS HCFA ALOS 10 Average Length of Stay 8 6 4 2 0 Physician Physician Physician Physician Physician Physician Physician Physician A A B C D B C D Premium Split Also Related To Physician Performance DRG 107: CABG Without Cath Average Length of Stay in Days by Physician

46. Risk is not going away • Capitation became so complex for some the lack of understanding and unwillingness to capture costs versus charges versus utilization put them away. • Many sold off their capitation calculators because hospitals decided not to take risk • Medicare Medicaid and FEHBP are gearing up for the biggest risk program you will ever see • More than financial sanctions and limits payors want to relate your direct efforts to a predictable savings • Employers want not just discounts they want productivity

47. The Right CareThe Right Time A recent study of 15,732 short-term disability claims suggests that cost-containment measures by insurance carriers - such as denying or postponing needed surgery - can cost employers more money than it saves them. The study compared musculoskeletal claimants who received surgical intervention with those who did not. Some of the most notable comparisons: • Surgical patients with a rotator-cuff tear lost 5.3 weeks of work versus 12.2 weeks for nonsurgical patients • Patients with lower-back stenosis who underwent surgery averaged 10.3 weeks of recovery versus 15.9 weeks for nonsurgical patients • Patients with a meniscus tear of the knee who had arthroscopic repair lost 5.2 work weeks versus 9.7 weeks for nonsurgical patients Source: Employers on Health 2002.

48. Medicare is Imploding

49. Conflict between generations for dollars that are NOT there

50. MEDICAID IS IMPLODING • Crashing U.S. Economy is straining State Budgets • During the mid-to-late 90’s being a state governor was the easiest job in the country, treasuries were flush with cash; balancing the budget was easy; tax cuts were politically popular… But it is not so easy now! • The ranks of Medicaid eligibles are growing exponentially; but with fewer dollars available. • State after state is struggling to control Medicaid spending and governors are pleading for federal help • States are cutting provider reimbursement • 45 states have cut their Medicaid programs so far this year, three of them dramatically • Increasing calls for some sort of national health insurance, e.g. Maine, Massachusetts, Oregon, Illinois, Texas (Texas???)