Provider Sponsored Risk: Lessons Learned, What’s Next

AHA Leadership SummitJuly 28, 2017

San Diego

Paul H. Keckley, Ph.D.

The Keckley Report

Provider-Sponsored Risk: The Big PictureRealities:• Insurers are in the drivers seat in DC• Hospital margins have improved, esp. in

large systems & consolidation has not resulted in cost savings

• The public is alarmed by health costs and looking for relief

• Congress is dysfunctional: hawks control $$$• Costs are going up faster than GDP, wage, CPI

and medical inflation• Employers are shifting costs or exiting

altogether• The ACA is here to stay

Complicating Factors:• Physicians aren’t happy and 33% are our

employees

• Household discretionary spending is tight• Value is not systematically defined in U.S.

health policy• The ACA repair effort is in suspense

• Campaign 2018, 2020 underway• Debt is mounting & the debt ceiling is near

3

Per Capita Spending: Government Spending less than Private

Enrollment growth in Medicare,Medicaid not as profitableas private market

Providers see declining marginsas utilization by Medicaid,Medicare increase

Notes: GDP refers to gross domestic product.Source: E. H. Bradley and L. A. Taylor, The American Health Care Paradox: Why Spending More Is Getting Us Less, Public Affairs, 2013.

Total spending: 25% of US GDP health + social services

12 12 11 11 12

16

9 8 9 10 9

21 2120 18 15

9

1615 11 10

11

0

10

20

30

40

FR SWE SWIZ GER NETH US NOR UK NZ CAN AUS

Health care Social care

5

Public View: Concern about costs

Public Trust: Consumers Trust Physicians, Not-for-Profit Entities

Prepared for: Strategic Health PerspectivesBase: All US Adults (2016 n=10000 split sampled)Source: Q565 In your opinion, how trustworthy is each of the following industries?

Trustworthiness of Industries – Total(Top 2 Box: Very/Somewhat Trustworthy)

45%

53%

61%

70%

73%

82%

82%

91%

Pharmaceutical companies

Health insurance companies

For-profit hospital systems

US Food and Drug Administration (FDA)

Centers for Medicare & Medicaid Services (CMS)

Non-profit hospital systems

Nonprofit voluntary health organization

Physicians But trust in hospitals &health systems does nottranslate to advantage for PSP Plans: the insurance market Is price driven for Individuals and employers, and employers blame hospitals along with drug companies for avoidable costs

Employer View: Concern about Costs, esp. Hospitals, Drugs & Cancer Care

• Base: All Employer Health Benefit Decision Makers (bases vary) • Q1707: Please indicate your level of concern for the following drivers of health care costs.

Level of Concern for Healthcare Cost Drivers(Top 2 Box: Extremely/Very Concerned)

2013 2014 2016Hospital inpatient prices - - 60%Specialty pharmaceuticals 47% 54% 55%Cancer care 54% 56% 54%Hospital outpatient prices 47% 49% 50%General pharmaceuticals 46% 50% 50%Physician prices 54% 53% 48%Obese patients generally 45% 53% 48%Health plan fees for care management 45% 44% 44%Diagnostic imaging 43% 47% 41%Hospital outpatient utilization 40% 50% 40%Innovative, breakthrough treatments/cures for disease - 46% 40%Orthopaedic surgery (hips/knees/etc) 41% 44% 39%Diabetes patients - - 39%Physician utilization 45% 45% 37%NICU/early childhood disease costs 0% -- 36%Low-back pain treatment 43% 40% 34%Maternity care 41% 40% 32%Routine preventative testing 40% 43% 31%

Health Spending continues grow

Source: US Centers for Medicare and Medicaid Services, "National Health Expenditures and Selected Economic Indicators, Levels and Annual Percent Change: Calendar Years 2007-2023” - April 2015

$295$512

$833$453

$…

$1,465

$0

$1,000

$2,000

Commercial(Marketplace)

Commercial (Off-marketplace)

Government (Medicare and

Medicaid)

Industry Premium Revenues (2015 versus 2023)

2015 2023Source: US Centers for Medicare and Medicaid Services, "National Health Expenditures, Amounts and Average Annual Growth from Previous Year Shown, by Type of Sponsor, Selected Calendar Years 2007-2023” - April 2015

37,702 36,586 38,023 39,776 41,949 41,752 43,035 45,214 44,088 44,78048,985 49,951 48,613 47,951

41,953

0

10,000

20,000

30,000

40,000

50,000

60,000

58%

60%

62%

64%

66%

68%

70%

72%

Num

ber U

nins

ured

Axis Title

% o

f Wor

kers

with

Em

ploy

er P

lans

Number Uninsured in US vs. Percentage of Workers with Employer Sponsored Plans, 1999-2013

Number Uninsured in US % Worker Employer-sponsored Plans

Insurer View: Customer Base Shifting from Employer to Government

Premiums in Private Market: Above Wages, Increased Cost Sharing Plan Premium revenue will grow due to increasing numbers of insured

Source: US Centers for Medicare and Medicaid Services, "National Health Expenditures and Selected Economic Indicators, Levels and Annual Percent Change: Calendar Years 2007-2023” - April 2015

$948 $1,082 $1,191 $1,330 $1,489 $1,6533.4%

6.9%

4.7%

6.1%5.6% 5.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

2013 2015 2017 2019 2021 2023

Rate

of G

row

th

Tota

l Priv

ate

Heal

th In

sura

nce

Prem

ium

Spe

ndin

g (In

Bi

llion

s)

Projected Spending and Growth Rate for Private Health Insurance Premiums (2012-2023)

Private Health Insurance Premium Spending in the UnitedStates

Investor-owned Plans: Since passage of the ACA, the Big Five have maintained predictable earnings, improved market value

EBITDA Performance 2010-2016 for Big Five: United has outperformed its peers; Cigna, Humana have under-performed

$-

$2,000,000,000

$4,000,000,000

$6,000,000,000

$8,000,000,000

$10,000,000,000

$12,000,000,000

$14,000,000,000

$16,000,000,000

2010 EBITDA 2011 EBITDA 2012 EBITDA 2013 EBITDA 2014 EBITDA 2015 EBITDA 2016 EBITDA

EBITDA 2010 - 20165 Payors

Aetna Anthem Cigna Humana United Health Group

Provider-Sponsored Plans (PSPs): recent studies show increased activity among major systems via JVs; Medicare, Medicaid focusedSponsor Robert Wood Johnson Foundation: Analysis of Integrated

Delivery Systems and New Provider-Sponsored Health Plans (June 2017) Author: Baumgarten A.

Original research-Assessing the Financial Condition of Provider-Sponsored Health Plans: Michael J. McCue, DBA. published in Managed Magazine (June 2015 Update).

Atlantic Information Services (AIS) Health Plan Survey

New PSHP performance : quality, profit, competitive Performance: strong v. weak cash flow Growth/Scale: enrollment Mcare,Mcaid,Comm

Objectives & Questions

Examined the goals of new or acquired plans since 2010:(1) Are the new health plans growing and moving toward profitability? (2) Are they having impact on competition, cost, and quality in their respective markets?

Assessed the performance of health plans sponsored by provider organizations, with respect to plans generating strong positive cash flow relative to plans generating weaker cash flow. A secondary aim was to assess their capital adequacy.

Examined the growth among provider-sponsored plans based on enrollment numbers to determine the largest areas of growth b/t LOB-Mcaid, Mcare, Commercial and public exchange market.

Key Findings —Few new plans have gained enough enrollees to effectively manage risk, achieve economies of scale in plan administration, or have an impact on competition and price in their local markets.—Since 2010, of the 37 new health insurance companies and five acquired health plans, only four were profitable in 2015, five have gone out of business, and two are in the process of being sold.

—Overall medical loss ratios have increased from 83.5% in 2011 to 86.4% in 2013.—The profit margin ratio of provider-sponsored health plans with strong cash flows declined from 2.5% in 2011 to 0.4% in 2013.

—The number of health insurance policies sold directly to consumers for 2016 increased by 9.3 million people, or 10% over last year.—Individual (non-group) commercial risk-based enrollment increased 3.5% overall, but the number of those people who enrolled via public exchanges increased 48%, to a total of 9.7 million people.

Methodology —More than 25 Interviews conducted with: leaders in provider systems and their sponsored health plans, academics and consultants.—Analyzed a data set containing information on ~145 PSHPs operating in 2015 and 2016. NAIC data - plan financial and enrollment data.

—Identified 24 PSHPs with an average positive cash flow margin from 2011 through 2013 at or above the top 75th percentile, compared with 72 PSHPs below the 75th percentile.—The study conducted a t test mean comparison between strong and weak cash flow PSHPs across an array of financial performance and capital adequacy measures.

—Compared membership b/t PSHPs and Non-PSHPs based on enrollment growth; —Identified where plans were seeing the most growth-Commercial-Medicare-Medicaid using data from 2016 AIS Directory of Health Plans on 270 PSHPs and survey results from half of all U.S. health plans; data from exchange enrollment was included.

Conclusion —The current health plan environment is not conducive to profitability for new provider-sponsored plans. —The key to success for PSHPs is the ability to enunciate and then deliver on a value proposition. —Some of the new plans are among the lowest priced plans for individuals and small groups, and their presence is adding competition and benefits. The plans reviewed are only able to price competitively by paying their own providers below market rates - not a sustainable strategy.

—Strong cash-flow margin PSHPs are managing their medical costs. Although their medical loss ratio increased by almost 300 basis points from 2011 to 2013, it was still statistically significantly lower than the weaker cash flow PSHP group (P<.001). —In terms of capital adequacy, both strong and weak cash-flow margin PSHP groups possessed sufficient capital to ensure the viability of these plans.

—A combination of trends contributed to a significant shift away from employer-sponsored health insurance in the last year:

—Provider-sponsored plans are on the rise. The total number of these plans increased from 256 in 2015 to 268 in 2016. Membership in these plans jumped from 32.8 million to 36.3 million.

—There is a shift from group coverage to individual plan membership, which grew almost 4 percent from 16.1 to 16.7 million. "

Recent Performance for 5 biggest PSPs: enrollments up, margins thin

13

Health Plan Name Total Revenue 2015 Total Revenue 2014Total Enroll

2015Total Enroll 2014

Indiv Enroll 2015

Group Enroll 2015

Mcare Enroll 2015

Mcaid Enroll 2015

Enroll Change 2015/ 2014 Margin

Kaiser Permanente Health Plan 61,048,359,000 57,533,106,000 8,064,511 7,531,102 607,775 5,520,984 1,041,726 125,108 7.1% 3.1%

HealthFirst 4,807,584,443 1,053,467 852,997 36,409 889,574 23.5% 0.7%

UCare 3,513,929,868 3,053,290,107 492,355 451,586 9,890 85,357 397,055 9.0% 0.8%

Superior Health Plan 2,882,056,810 1,856,762,237 497,747 445,601 63,151 - 10,758 423,838 11.7% 0.5%

MetroPlus Health Plan 2,596,876,244 415,623 21,493 765 7,867 385,498 2.2%

Shared Risk Demonstrations, Pilots in ACA Outlook

Medicaid Demonstration Pilots (4) 2704-2707

Hospital Value-based Purchasing 3001

SNF, Home Care Value-based Purchasing (3006)

Value-based Modifier for Physician Fee Schedule 3007

Hospital Acquired Conditions 3008

CMMI 3021

Medicare Shared Savings Program 3022

Bundled Payments 3023

Independence at home 3024

Hospital readmissions 3025

Looking in ahead,shared Risk in the ACA:Most will continue

In the ACA, demonstrations &pilots target savings in Medicare/Medicaid programs

Most are 5 year programs that are Reviewed, modified annually

Most will continue, but on a voluntarybasis

Patient Centered Medical Home areEmbedded in various Medicaid, MedicareShared risk arrangements

Base: All Hospital-Based Execs (2016: n=205; 2015: n=200; 2014: n=202)Q980: Which of the following best describes your hospital’s/hospital system’s “risk bearing” strategy?

Hospital activity in shared risk: Hospital shared risk activity varies considerably by market, caution is evident

41%

29%

19%

10%

1%

31%

25% 26%

12%

8%

30%28% 27%

9%6%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

No plans to take risk beyondmodest shared savings and

pay-for-performancearrangements

Experimenting w/riskarrangements, but small part

of revenue

Committed to clinicalintegration organizationstrategy for contracting

w/payers

Building an ACO model thatis capable of taking risk suchas Medicare Advantage or

employer direct contracting

Committed to moving themajority of revenues to fully

at risk within 5 years

2014 2015 2016

Professional Services

Key Question for Hospitals & Health Systems: Will accountability for affordability mean hospitals must assume insurance risk?

Page 16

Destination?Regional

Systems of Health

Financing &Delivery

Inpatient& Post Acute

Services

Insurance

Retail &

Community

Health

Key Business Units

Medical Management

MSO Network Services

Member Services

Finance

Analytics & Decision Support

Planning & Strategy

Risk & Compliance

Leadership & Governance

Key Operational Functions

Real Estate

Marketing & Communications

Advocacy

From Community Hospital Management Focus to Systems of Health

Unit CostsInpatient, Outpatient Services, Physician Services

Medical Staff, Employed, ACOSafety, Outcomes, Patient Experience, Allopathic

Campus OrientationFacility Locations

AffiliationsTechnology, Facilities for Inpatient, Outpatient Core

Screenings, Social ServicesAnnual Negotiation

Reputation, IP-OP Locations

Costs Business Units

Physician OrganizationClinical Orientation

Network DesignAccess

Provider NetworkCapital Deployment

Community Benefit FocusInsurer OrientationValue Proposition

Total cost of careAcute, Primary, Post Acute, Retail + Insurance

Exclusive Network + Alternative Providers Effectiveness, Efficiency, User Experience

Regional Sites of CareFacilities + Digital Connectivity

Narrow, FormalRegional Hubs

Social DeterminantsPartnerships

Scale, Scope, Outcomes, Affordability, Locations,

Payments: from fee for service to value Scope of services: care delivery to delivery + financing

Scale of operations: from local to regionalCustomers: from patients to consumers

Market dynamics

Operational Focus

Copyright: The Keckley Group

Provider-Sponsored Risk: Lessons Learned, What’s NextLessons Learned:• Scale is an advantage: clinicians, IP & OP

services, telemedicine, retail et al

• Market conditions—competition, payer expectation, cost and demand characteristics—define share risk strategy

• Managing consumer adherence, creating high performing post acute networks & implementing digital health key competencies necessary to shared risk

• Start slow

• Focus on costs & execution, inside and outside risk agreements

What’s Next:• Expanded opportunities in managed

Medicaid & Veterans Health

• Simplification of reporting requirements• State action for drug cost containment• Insurer consolidation

• Integration of delivery & financing (insurance) among providers

Contact Paul H. Keckley, Ph.D. Managing Editor, The Keckley Report

Subscribe to report FOR FREE:www.paulkeckley.comEmail:pkeckley@paulkeckley.comFollow:https://twitter.com/paulkeckley