D I S P U T E S & I N V E S T I G A T I O N S • E C O N O M I C S • F I N A N C I A L A D V I S O R Y • M A N A G E M E N T C O N S U L T I N G

Navigating the Waves of

Healthcare Reform

Chicago Healthcare

Executive Forum

July 2011

Table of Contents

Section 1 » Navigant Overview

Section 2 » Market Context: How we got here

Section 3 » Reform Overview: What is it and what does it mean

Section 4 » Developing an Approach: Where we go from here

Section 5 » Market Perspectives: Views from the field

Section 1

Navigant Overview

Navigant

Business Description

Navigant is a specialized, independent

advisory firm that supports companies,

lenders, institutional investors, legal

counsel, and government agencies.

Headquartered in Chicago, IL, the

company focuses on entities and

industries facing the challenges of

uncertainty, risk, distress and

significant change, and on the issues

driving these transformations.

Navigant’s 1,800 professionals are

located in 40 cities throughout

North America, Europe and Asia

Ticker NCI (NYSE)

2009 Revenue $700+ M

Professionals 1,800

Headquarters Chicago, IL

Navigant’s Healthcare Practice

Navigant is one of the preeminent healthcare consulting firms in the country.

2009

Partnership

Our Strategy:» Comprehensive team of professionals

representing all disciplines» Acquisition of best of breed consulting firms» Integrated capabilities providing a

true end-to-end solution

2008

Physician Strategy

2006

Coding &

Documentation

The Result:» 500+ resources including healthcare

executives, clinicians, and physicians» Broad set of capabilities including

Enterprise Strategy, Physician Strategy, Operations Improvement,

and Financial Turnaround» Unique approach that incorporates

strategy and physician engagement to ensure sustainable results

2005

Strategy

2010

Physician Operations

Section 2

Market ContextHow we got here

Unsustainable Healthcare Costs

U.S. Healthcare Expenditures

1998 - 2008

Hea

lth

care

sp

end

as

a p

erce

nta

ge

of

U.S

. GD

PTo

tal ann

ual p

remiu

m

Rising from 13.5% to 16.3% of U.S. GDP, health care expenditures are reaching

an unsustainable level

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

% of GDP

Total premiums for family, in employer-sponsored plans

Personal health care expenditures per capita

Medicare spending per enrollee

CAGR: 8.4%CAGR: 6.8%

CAGR: 5.3%

Core Systemic Issues Exist

The current U.S. healthcare system has major access and affordability gaps due to a fundamentally flawed foundation – rewarding volume and inefficiencies, with limited consequences for variation or quality related issues

Fee for Service payments

Push for New

Technologies

Administrative Complexities

Excess Capacity

Waste & Inefficiency

Silo Oriented

Lack of transparency

Transactional Service

Models

Low Consumer

Trust/Engagement

Providers Health Insurers Life SciencesMedical Device

Manufacturers

Section 3

Reform OverviewWhat is it and what does it mean

Welcome to Healthcare

Reform

Lots of Questions

» What’s required for each market

constituent?

» How will the industry structure change?

» How will the basis of competition shift?

» How will value be created?

» How will the roles and players across the

value chain change?

» Who are the winners and losers?

» How will the political and legislative

environment and activities influence further

changes?

Confused? Overwhelmed? You’re Not Alone

» Patient Protection and Accountable Care Act represents

more than 2,400 pages of legislation

» More than 400 separate rules….most of which remain

undefined with vague timetables

» 183 new agencies and departments formed and funded

Goals & Key Elements of Reform

Decrease Costs Increase Access Improve Quality

» Delivery system reform

» Investments in public

health, prevention and

wellness

» Payment constraint

provisions

› Hospital market basket

reductions

› Hospital productivity

adjustments

› DSH payment

reductions

» Coverage and benefit

requirements

› Elimination of

restrictions

› Mandates

› Essential benefits

› Dependent coverage

» Premium subsidies

» Expansion of Medicaid

» Increased choice and

competition through

exchanges

» Care delivery provisions

› Medical Home

› ACO

› Bundled payment pilots

› Incentives for quality

» Evidence based

guidelines

» Expanding use of IT

» Transparency provisions

» Quality provisions

› Readmission payment

reductions

› Hospital-acquired

condition penalties

“PPACA” Creates a New Starting Point

B. Establishes Direction and Accelerates Evolution of Payment Agenda

1. ACO (Shared Savings Model)

2. Bundling

3. Value-Based Reimbursement

4. Medical Home

5. Geographic Variation

“What got you here, won’t get you there!”

C. Potential Mitigators

1. Political response

2. State energy (or lack thereof)

3. Rapid economic improvement

4. Patient revolt

5. Not enough budget for CMS to implement / administer

Ahead of the curve, Massachusetts’ emerging

reform agenda includes:

» Reduce ED utilization

» Reduce high-end imaging utilization

» Promote generic prescribing/substitution

» Promote treatment in the lowest cost

setting/facility appropriate for care

A. Health Insurance Reform

1. Enroll 32M entrants into system

2. Eliminate “injustices” (e.g., preexisting conditions)

3. Reduced ability to pass on increases and cross

subsidize public payers

New Challenges for Leadership

» Volatility vs. Stability

» Limiting, skeptical capital market

» Consumers represent a wildcard (compliance, market response, etc)

» Expense not price is last step in budget

» Two curve problem

» Developing internal excitement regarding change

» Implementing a new economic model to support implementation

» Creating a new culture to sustain it

Section 4

Developing an ApproachWhere do we go from here

A Classic “Two Curve” Problem is Underway

Many organizations are facing a decision between a classic “two curve” planning scenario.

Curve 1: Most are very comfortable continuing to follow a path along Curve #1;” optimizing the current

environment and maintaining the strategic direction and tactics that have been successful in the past

Curve 2: While many organizations have begun piloting efforts on the second curve, few have the vision or

fortitude to trust a Curve #2 path right now; that is, proactively exploring growth alternatives today with

associated upfront costs that may negatively impact Curve #1 performance

Continue generating incremental

margins despite evolving negative

national, regional and local

dynamics

Recognizing the medium and long term implications

of the changing market dynamics, “jump” to the

emerging curve, positioning the organization for the

anticipated challenges of the future.

Making the jump requires:

1) a forward thinking leadership

2) a high degree of organizational disruption

How do we get there…..

Section 5

Market PerspectivesViews from the field

Reform Changes Everything;

BUT Competition Preempts Reform!

Although health reform is in the

spotlight, a significant amount of

the jockeying for strategic position

in U.S. healthcare – among payers,

providers, governments – was

happening before PPACA. While

PPACA has served to accelerate

certain competitive trends, such as

the move toward value-based

healthcare, it continues to be

competition and not reform that

drives many markets.

Paper vs. Reality

“Policy Land”:

Reform is the rage…

Reform is on the horizon,

what’s movement is happening in the market?

1. Reducing “waste” by addressing cost and utilization

differences…”avoidable care”

2. Demonstration projects

3. Achieving scale & driving value

4. Physicians organizing

5. Targeted/Specialty Population Focus

6. Payer-Provider Collaboration

7. Delivering Innovative Market Solutions

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