strategies for h leaders · and different in the senior market. numerous forces are converging to...

POPULATION HEALTH MANAGEMENT AND

IMPLICATIONS FOR THE SENIOR CARE

INDUSTRY Population Health Management (PHM) implementation will be unique and different in the senior market. Numerous forces are converging to compel post-acute care (PAC) providers to transform the delivery of care to seniors. PAC providers will need to address how and where senior care is being delivered, who makes decisions on a care plan and how they are made, who bears risk in a care coordination network and the role of technology and “big data” in assessing outcomes. While these shifts offer an opportunity to significantly improve care quality and reduce costs, there are nuances, challenges and dynamics distinctly unique to the senior population that will require special levels of care management and oversight. PHM adoption will create new possibilities for PAC providers. The lack of existing infrastructure within any single entity to support PHM in the PAC market will foster the creation of a variety of new partnerships, alliances, joint ventures and M&A activity. In this paper, Cain Brothers recommends three specific PAC combinations, and outlines PHM’s potential impact on Continuing Care Retirement Communities (CCRCs), Program of All-Inclusive Care for the Elderly (PACE), Telehealth, Healthcare IT and Home Health. New technologies and easing of legal restrictions could foster even more possibilities in the future.

STRATEGIES FOR HEALTHCARE LEADERS V o l u m e 7 7

S p r i n g 2 0 1 5

Primary Contacts:

Amy A. Hayman Managing Director 312‐604‐0578 [email protected] Katherine A. Kirchhoff Managing Director 562‐264‐0300 [email protected] Joseph P. Mulligan Managing Director 314‐800‐0441 [email protected] Bill Pomeranz Managing Director 415‐962‐2954 [email protected] Editor:

Leo Carpio Senior Vice President 212‐981‐6907 [email protected]

STRATEGIES FOR HEALTHCARE LEADERS, VOLUME 77

POPULATION HEALTH MANAGEMENT AND IMPLICATIONS FOR THE SENIOR CARE INDUSTRY

T A B L E O F C O N T E N T S EXECUTIVE SUMMARY ................................................................................................................................................. 1

PHM IMPLEMENTATION WILL BE DIFFERENT IN THE SENIOR MARKET ............................................................... 3

PHM’s Critical Skills and the Seniors Population ............................................................................................ 3 PHM Adoption in Senior Population Faces Hurdles ...................................................................................... 4 New Investments Will Be Required ................................................................................................................... 4

SOCIOECONOMIC FORCES AND GOVERNMENT/PAYERS ARE GENERATING NEW INTEREST IN PHM ......... 6

Fast-growing Retiree Population Is Frail and Ill .............................................................................................. 6 Economic Insecurity Has Affected Senior Decisions on Living Options ...................................................... 7 Staffing Crisis Is Compelling Exploration of Alternative Care Models ........................................................ 8 Medicare Push to Value-based Reimbursement in PAC Setting ................................................................... 8

THE MARKET OPPORTUNITY FOR PHM ..................................................................................................................... 9

Seniors Offer Significant Healthcare Cost Savings Potential ......................................................................... 9 Dual-Eligibles ..................................................................................................................................................... 10

PAC MARKET PIONEERED PHM ................................................................................................................................. 11

CCRCs Developed “Aging in Place” ............................................................................................................... 11 PACE Pioneered the “Home Care” Model ..................................................................................................... 11

BUNDLED PAYMENTS – PHM LEARNING TOOL ...................................................................................................... 12

Bundled Payments Show PHM Has Potential ............................................................................................... 13 Bundled Payments - Hone PHM Skills ........................................................................................................... 13 Prepare for Prospective Payments ................................................................................................................... 14 PHM Adoption Fuels PAC Integration ........................................................................................................... 14 Types of PAC Models ........................................................................................................................................ 15 PHM Opens the Door to Unique Combinations ............................................................................................ 17

CAIN BROTHERS RECOMMENDATIONS ................................................................................................................... 18

Recommendation #1: Create a Narrow SNF Network .................................................................................. 18 Recommendation #2: Enter into a Home Health Partnership ...................................................................... 19 Recommendation #3: Outsource SNF Operations into a Joint Venture ...................................................... 19 Real World Examples of New PAC Combinations ........................................................................................ 19 Real World Example #1 - Ascension Creates Post-Acute Care Joint Venture ............................................ 20 Real World Example #2 - Evangelical Homes Michigan/Trinity Project: Redeis Center ........................ 20 Real World Example #3 - Genesis and Skilled Healthcare Group Merger ................................................. 21 Case Study: Genesis Campus Bifurcation ....................................................................................................... 21

PHM WILL OPEN NEW POSSIBILITIES ....................................................................................................................... 22

CCRC Model Needs To Be Refined ................................................................................................................. 22 PACE Will See Increased Interest .................................................................................................................... 24 Telehealth – The Great Revolution .................................................................................................................. 26 Healthcare IT: Facing Challenges..................................................................................................................... 27 Home Health Ready To Shine .......................................................................................................................... 28

T A B L E O F C O N T E N T S , c o n t i n u e d

FIGURES 1 PHM Adoption’s Potential Impact in PAC Market ......................................................................................... 2 2 Critical PHM Capabilities Must Be Adapted to the Senior Market ............................................................... 3 3 New Investment Needed for Senior-focused PHM ......................................................................................... 5 4 Focus of Key CMS Initiatives .............................................................................................................................. 9 5 Top 15% of Medicare Account for 75% of Costs ............................................................................................ 10 6 Bundling Is the Midpoint on the Path Toward PHM .................................................................................... 12 7 CMS BCPI Models Summary ............................................................................................................................ 13 8 Paradigm Shift Is Underway ............................................................................................................................ 14 9 PHM Will Support Creation of Integrated PAC Networks ......................................................................... 15 10 Episode of Care PACs – Limited PHM ........................................................................................................... 15 11 System PACs – Popular Model ........................................................................................................................ 16 12 Integrated PAC Providers – Fully Utilizing PHM’s Potential ...................................................................... 16 13 Evolving Long Term Care/PAC Industry Consolidation ............................................................................ 17 14 Create a Narrow SNF Network (Advocate Model) ....................................................................................... 18

POPULATION HEALTH MANAGEMENT AND IMPLICATIONS FOR THE SENIOR CARE INDUSTRY Page 1

EXECUTIVE SUMMARY Population health management (PHM) will transform how healthcare is delivered to seniors. Socioeconomic shifts in the senior population and government/payer transitions to value-based reimbursement are compelling a re-examination of how healthcare for seniors is coordinated and delivered. PHM will require a fundamental philosophical adjustment to how care is provided to seniors, where it is best provided, how care is coordinated as seniors migrate through various settings, and who is responsible for navigating this care coordination. Some senior care providers will see their models upended, while others will experience resurgence in demand. New delivery models will be created, new vendors will emerge on the scene and new partnerships will be formed. PHM implementation in the senior market will be different than in the general population. PAC providers will need to make new investments in technology, personnel and facilities, as well as shift their product/service pricing and marketing practices. Although the senior population represents the greatest healthcare cost savings opportunity, it also requires special levels of care management and oversight. PAC providers will also need to address a multitude of senior specific issues, which will necessitate customization of IT and work flow as well as unique skills. The lack of physical and intellectual infrastructure, facility scale and capital in the PAC market will encourage the formation of a variety of new partnerships, strategic alliances, joint ventures, and narrow networks of preferred PAC providers.

PAC providers must move forward with PHM adoption. The shift to value-based reimbursement will lead to a realignment and stratification of healthcare providers in the senior market. The current retrospective payment model for bundled payments minimizes financial risk while providing a teaching environment. Providers that embrace and experiment with bundled payments and learn PHM skills now will be prepared for when bundled payments shift to full-risk reimbursement. Healthcare providers will increasingly be ranked by metrics such as the ability to bear underwriting risk, organizational/coordination skills, and quality of service provided.

PHM adoption will open the door to the formation of new unique PAC combinations. In a PHM environment, providers will focus on core competencies to drive better care and operating efficiencies in an optimal setting. Cain Brothers recommends that PAC providers consider the following combinations:

Create a Narrow SNF Network (Advocate Model) Enter Into a Home Health Partnership Outsource SNF Operations into a Joint Venture

Cain Brothers believes PHM will transform PAC providers, to varying degrees. PACE and home health organizations will be embraced as low cost optimal senior healthcare choices. CCRCs will leverage their “aging in place” expertise into new revenues while strengthening their risk management capabilities. SNFs will consolidate and compete for position in narrow networks. Telehealth will be introduced en masse to support care management, patient engagement, data collection and analytics. All PAC providers will make substantial investments in healthcare IT infrastructure and personnel to facilitate care coordination, data collection and analysis which are essential to support the new care delivery models.


Figure 1. PHM Adoption’s Potential Impact in PAC Market

PHM ADOPTION'S POTENTIAL IMPACT IN PAC MARKET SECTOR IMPACT

CCRCs The Great Recession impacted senior citizens’ personal finances, resulting in a delay in their transition to a CCRC until a later age when the move becomes more need‐based and individuals are in a frailer state.

PHM adoption will help CCRCs to strengthen their business models and reposition themselves by updating their SNF units, shifting care to lower cost levels of Assisted Living (AL) and expanding home and community‐based services (HCBS).

CCRCs can generate new revenue streams as a preferred partner for Clinical Integrated Networks (CINs). CCRCs can forge linkages with health systems and other referral sources by offering rehab and other services that are cost effective. This should generate referral volumes and revenues for this underutilized service and create potential to evaluate expanded clinical service lines.

Marketing for CCRCs is fundamentally changed. Independent Living (IL) status is no longer considered the portal of entry to the CCRC campus; residents often come initially for rehab, stay connected via HCBS, then come back via AL or SNF.

Because most life care communities have a significant “life care discount” expense, providers are evaluating new resident wellness admission metrics, adjusting population flow actuarial models and creating new risk management and pricing models.

CCRCs will need to form service collaborations in order to provide sufficient SNF bed capacity to absorb the daily placement needs demanded by their hospital system referral sources.

PACE PACE will need to enhance their IT capabilities and care management infrastructure to be cost effective managers of large populations.

Potential partnerships organized through PACE’s elaborate case‐management structure can align with CCRCs. Acute care hospitals and other PAC vendors are possibilities.

Working with State Medicaid Agencies and Dual Capitated Payers, PACE providers will need to advocate for broader eligibility standards so that their service model can move from boutique status to being a more mainstream service provider.

Home Health Aging senior population that desires to stay at home and need care delivered in a more cost effective manner will provide new demand for home health.

Home health will see resurgence in demand. PAC facilities will increasingly compete on quality of care provided, facility features and other amenities such as Wellness Centers. In this cost conscious environment, home health will be an attractive option.

Dual‐eligible pilot programs and higher Medicare Advantage population should drive new demand.

Potential stratification among home health providers with the best ones joining elite narrow networks or joint ventures with their local hospital systems or MA payer referral sources, while weaker performers will be relegated to Medicaid reimbursement.

Telehealth Despite current uncertainties around reimbursement and state licensing issues, we believe telehealth will be widely utilized in the senior care arena in the next three to five years.

Telehealth holds the promise of being a cost effective method to support seniors in independent living situations, whether at their own home or in a retirement community. New mobile tech, economies of scale and pricing dynamics should evolve to provide an appealing ROI.

Telehealth will be adopted by all PAC providers for follow‐up care – ranging from SNFs to CCRCs, home health and PACE, to the extent permitted by state regulation.

Early stage telehealth implementers are also including a geriatric physician strategy on site to augment the technology. This beta testing allows them to identify gaps in patient care and follow up on telemetry.

Healthcare IT PHM creates strong demand for data analytics, care management, patient engagement and data integration capabilities. Since no single company offers all of the necessary PHM capabilities, health care providers, payers and others will build PHM capabilities via multiple contractual arrangements.

In the senior care market, healthcare IT will be tailored to drive both patient/resident safety and maximum patient engagement. While providers will use mobile tech and wearable devices, seniors may well rely on iPad and other user‐friendly technologies.

Data collection and analysis for predictive analytics is clearly driving PAC and managed care PAC strategies; Acute care hospitals need to start collecting data on seniors before and after they leave the hospital.

Source: Cain Brothers


PHM IMPLEMENTATION WILL BE DIFFERENT IN THE SENIOR MARKET

PHM’S CRITICAL SKILLS AND THE SENIOR POPULATION

Servicing seniors requires unique PHM expertise and capabilities. Unlike the general populace, seniors are generally less tech-oriented and have multiple chronic ailments that together necessitate the need for significant help in navigating the healthcare system. Thus, seniors require a care coordinator as their point person to monitor their health status, facilitate access to the right provider and ensure compliance with the care treatment plan. Montefiore Hospital showed that a successful senior-focused PHM program is possible. Located in the Bronx, New York, Montefiore Medical Center services a predominantly poor and disadvantaged population that has the highest overall morbidity in New York State. Montefiore’s PHM program’s success can be attributed to its strong data analytics capabilities (active patient monitoring), tailored regional provider network (good mix of primary care and specialists), repurposed mobile tech and excellent 24/7 available call center (to help seniors with their needs). Montefiore’s experience highlights the unique capabilities and customization needed in the senior market for PHM implementation. At its core, PHM is about identifying and engaging consumers/patients to be concerned about their own health and then navigating them through the system to help them change their behaviors and achieve their health goals. PHM core capabilities will need to be customized and be more customer service/team support oriented than in the general population.

Figure 2. Critical PHM Capabilities Must Be Adapted to the Senior Market

CRITICAL PHM CAPABILITIES MUST BE ADAPTED TO THE SENIOR MARKET

PHM CORE SKILL GOALS ISSUES

Care Management Need to engage providers and care coordinators as a team so gaps in care can be readily identified, and evidence‐based practices can be quickly applied to improve health status

Address long standing friction between providers in acute care and PAC settings

Care coordinators need to be center of seniors’ care management not the providers (“No cowboys, we need pit crews!”)

High level of customer touch and interaction

Centralized patient records

Data Analysis Identify existing high cost patients, but also predict patients that are at risk (to target interventions)

Lack of interconnected data systems, low use of mobile apps for patient monitoring, and limited clean real time data

Consumer Engagement

Ensure patients follow prescribed health and wellness treatment programs

Engage the consumer and employ a wide variety of human and technology approaches

Seniors need a single touch point for care management to be engaged; call center infrastructure needed

Home and wearable monitoring technology must be cognizant of seniors’ needs



PHM ADOPTION IN SENIOR POPULATION FACES HURDLES Historically, PAC providers have deferred infrastructure spending due to relatively low acuity patient mix. As a result, PAC providers’ infrastructure capabilities are far below their acute care counterparts. This has affected and defined their relationships with acute care providers. As PAC providers start taking on higher acuity patients, they need to embrace PHM techniques and make infrastructure investments. As they implement PHM, PAC providers face the following issues:

1. Healthcare IT adoption rate among PAC providers is very low, which impedes data analytics and care coordination

2. Historical tension between acute care and PAC providers may hinder future cooperation

3. Care coordination expertise and staff capacity is lacking 4. Providers are resistant to a care coordination team model 5. Medicare fee-for-service reimbursement historically has pushed providers

to maximize volumes, not quality

NEW INVESTMENTS WILL BE REQUIRED

PAC providers will need to make significant investments in IT infrastructure, redesign workflow, retrain staff and forge new networks. We believe PAC providers need to make the following changes to fully realize PHM’s potential:

1. Align into Networks. PAC providers must align themselves into networks that can bear financial risk and provide good care/service, while at least breaking-even at Medicare rates and possibly even Medicaid rates.

2. Create Care Teams. PAC providers must redirect their staff physicians to function as a team focused on care coordination, efficiency and patient satisfaction.

3. Modernize Care Delivery Model. PAC providers must redesign care to make it accessible, coordinated and evidence-based, especially for the frail elderly and chronically ill – population cohorts that offer high potential cost savings.

4. Upgrade IT Capabilities. PAC providers must revamp their IT to provide deep analytic capabilities. They must identify, gather and analyze data that can impact senior care and have an ongoing commitment to maintaining a staff trained in state of the art data management. Electronic medical records can serve as a foundation, but true IT connectivity and interoperability with other types of providers is required.

5. Develop Physician Engagement Strategy. PAC providers must affiliate with an electronically connected network of physicians that holds providers accountable for care provided. One issue is that most PAC providers do not have a physician strategy, which impairs their marketing capabilities and ability to manage financial risk for new admissions in a bundled payment network.


6. Create Preferred Narrow Networks. PAC providers must collaborate with payers to offer affordable, high quality care through preferred narrow networks.

Figure 3. New Investment Needed For Senior‐focused PHM

NEW INVESTMENT NEEDED FOR SENIOR‐FOCUSED PHM

INVESTMENT NEEDED DETAILS

Integrated Technology Platform

An integrated technology platform that supports continuity of care and enables all stakeholders access to medical history and critical patient data.

Since seniors tend to have multiple chronic ailments, this is important for coordinating care and ensuring best outcomes. It aids providers with tracking patient data, even when patients are not coming to see them.

Electronic medical records can serve as core, but interoperability is critical.

Communication Collaborative communication with both patients and their primary caregivers among primary care physicians, specialty physicians, and hospitalists regarding where care is delivered (emergency department, urgent care facility, hospital, physician’s office, patient’s home, or another setting), specialist assessments and treatments, and care planning.

Communication needed to provide reminders for patients and providers regarding care rendered.

Care Managers Medical management coordination, including management of complex cases, coordination with disease‐management programs, and outreach to chronic, high‐cost “frequent fliers”.

They serve as primary touch point/navigators for seniors.

Data & Analysis Capabilities

Data on populations, utilization, program participation, clinical outcomes, and costs.

Data analysis capabilities critical for identifying and analyzing populations. It assists in stratifying patient’s risk and assigning the right care network.

In the senior market, good clean, real time data is scarce. For example, the Medicare nursing home five star quality rating system is based on flawed, outdated, biased data. For effective providers, good clean updated data is needed to tier providers.

Narrow Networks Build or partner to create an optimal network of providers who can provide high quality, standardized medical care to patients. Narrow networks ensure that medical care plan will be executed correctly with the best possible outcome.

Hospitals may be looking to build their own PAC network. With so much existing capacity in the market, a better option is to build narrow networks from existing PAC providers. Select the best PAC providers to build the network.



SOCIOECONOMIC FORCES AND GOVERNMENT/PAYERS ARE GENERATING NEW INTEREST IN PHM

FAST‐GROWING RETIREE POPULATION IS FRAIL AND ILL The retiring baby boomers will increase stress on, and create new opportunities for, all aging services providers across the continuum. As baby boomers age, seniors’ percent of the U.S. population will grow from 12% today to 19% by 20301. In 2030, there are expected to be more people aged 65 and older than people aged 15 and under. The age 70+ population is expected to grow faster than any other age group—from 28 million in 2010 to 53 million by 20302. The number of people in the oldest age bracket (85+) will increase by 50%, from 5.8 million in 2010 to 8.7 million by 20303. Though healthcare providers talk about how the retiring baby boomers will change their businesses, it is unclear how many are prepared to meet the demands. Hyper aging societies such as Japan have seen profound sociological changes as they confront the challenges of caring for a sizeable and growing retiree population. Equally significant, there are sociological shifts taking place in the U.S. as a result of the changing ethnic composition of the country’s population and cultural attitudes towards the role of seniors in society. This shift is likely to shape public policy trends and funding for senior care for decades to come. While most seniors are living longer, they are often frail and economically poor. Life expectancy is 79 years in the United States and is expected to continue to increase4. Per an Institute of Medicine study, increases in life span in the United States are not matched by increases in "health span" - time spent living in good health. At least 90% of those aged 65+ have one or more chronic conditions5. Most (70%) individuals aged 65+ will need long-term care services at some point in their lives6. However, nearly half of seniors (65 and older) are considered poor and low income7. Healthcare providers that service the low income senior segment are already reporting a surge in demand that is exceeding their expectations. Though medicine is making great strides in prolonging life, Alzheimer’s and dementia incidence is on the rise, and providers will need to respond to this rise in co-morbidity. One in nine people aged 65+, and about one-third of people age 85+, have Alzheimer’s disease8. The number of people in the U.S. with Alzheimer’s will increase by 60% in 2030, straining the U.S. healthcare system9. Senior care providers will need to service these patients. Memory care units are a distinct offering among senior care communities and typically licensed as assisted living in most states. Due to lower license requirements (no certificate of need required, for example) in most states, we expect a significant increase in the development of residential dementia facilities. Many of these will evolve as a continuum of care initiated at the acute and SNF levels for patients with acute episodes. Once the patient is discharged, they will receive treatment from their residential and day health programs. Considerable

1 “The Next Four Decades: The Older Population in the United States: 2010 to 2050”, U.S. Census Bureau, issued May 2010, p. 3 2 Ibid, p. 10 3 Ibid, p. 6 4 http://www.cdc.gov/nchs/fastats/life‐expectancy.htm 5 Gerard Anderson, PhD, "The Growing Burden of Chronic Disease in America," Public Health Reports, May‐June 2004 / Volume 119 6 LeadingAge Market Landscape report, August 2013 7 Ibid 8 Ibid 9 “Changing the Trajectory of Alzheimer’s Disease: How a Treatment by 2025 Saves Lives and Dollars”, Alzheimer’s Association, p. 4, http://www.alz.org/documents_custom/trajectory.pdf


research is emerging suggesting that more residential settings are generating better PHM results with demented patients because they can offer more home-like, relaxed settings that have less intense regulations mandated for other health care settings.

ECONOMIC INSECURITY HAS AFFECTED SENIOR DECISIONS ON LIVING OPTIONS

The Great Recession changed the way seniors look at their living options. The recession diminished the value of real estate, investments and personal incomes. For many seniors, home equity could no longer help fund retirement as expected in previous years. Low interest rates affected the growth of investments, and savings were significantly lowered due to equity market declines. The Great Recession also impacted pensions, which is a key source of income for many seniors, particularly in the lower income cohort. Fearing economic insecurity, 80% of baby boomers are now expected to work past traditional retirement age (historically age 65)10. Because of diminished home values and cost consciousness, many seniors are postponing elective senior living decisions, like moving into a senior care facility. While the stock market and real estate values have since recovered, the Great Recession’s impact on senior sentiment about retirement security will likely persist even as the economy continues to improve. Seniors are staying at home longer now, even as their health declines. Nearly 90%of seniors want to stay in their own residences as long as possible, and 80% believe their current home is where they will always live11. New technologies (telehealth, mobile and wearable devices, motion monitoring), home retrofitting and home care services are making staying at home more feasible for seniors that can have such care supplemented by family or friends. Now, many moderate to middle income seniors view moving to a CCRC as a needs-based decision, not a lifestyle decision. As a result, the average age of a new entrant to an assisted living facility for example is 87, up from 80 years of age a decade ago12. Seniors are also entering senior living communities in a frailer state. Thus, the degree of care and assistance that the residents require has changed. Whereas earlier they could have lived fairly independently for the first few years after they moved in, today’s service enriched senior housing resident often requires considerable support and care upon entrance. This affects the way senior living facilities are staffed and designed, as well as the service packages they offer. For the next several years, we foresee a continuation of the current industry trend that senior living facilities will need more assisted living, memory and skilled nursing services to deal with an older retiree population that increasingly has cognitive impairments. In the long run, we believe PAC providers that offer a high level of frailty-related services, and can do so on one campus, will stand apart from their peers and increase their relevance to the local market. Ultimately, this will enhance marketability, attract more provider partnerships and result in capturing higher market share.

10 LeadingAge Market Landscape report, August 2013

11 ibid

12 http://www.carltonseniorliving.com/the‐impact‐of‐recession‐on‐senior‐living/


STAFFING CRISIS IS COMPELLING EXPLORATION OF ALTERNATIVE CARE MODELS

Fueled by the growth in the senior population, increased longevity and the desire of older adults to remain in their homes as they age, the need for home health aides is expected to increase by 50% over the next decade13. However, the available pool of workers is expected rise only by 2%14. The projected staffing shortage is a contributing factor in driving providers to explore alternative care models that can maximize staff usage, while improving quality of care and keeping costs under control. Difficulty in recruiting new staff and retirement of existing medical care staff will create a labor shortage problem that will compel PAC providers to innovate and utilize their staffs more efficiently. The cohort of nurses that entered the profession in the ‘70s has aged, is approaching 60 years old and retirement15. Between now and 2022, there will be an expected half-million nursing jobs from growing demand, as well as another half-million nurses that will retire and need to be replaced16. Nursing homes and operators of agencies providing home-care services already are straining to find enough direct-care workers who help the elderly or disabled with daily tasks such as eating and bathing. They also face looming retirements in the current workforce, in which one-fifth of workers are 55 years old or older17. Because of low pay and high rates of injury, it is often difficult to replace these workers.

MEDICARE PUSH TO VALUE‐BASED REIMBURSEMENT IN PAC SETTING

Payment policies implemented under the Affordable Care Act are driving the U.S. healthcare system to institute PHM. New Medicare payment mechanisms incentivize providers across the continuum of care to partner up and coordinate services, with the goal of both improving beneficiaries’ health outcomes and lowering costs of care. Bundled payments, and shared savings programs have compelled providers to work together to better manage care across the continuum. Mandatory programs, like quality reporting and value-based purchasing, have forced providers to ensure the coordination of care well beyond the walls of the hospitals. HHS’s announced timeline for implementing value-based reimbursement will accelerate PHM adoption18. HHS aims for 30% of Medicare provider payments to be in alternative payment models – such as ACOs, medical homes, and bundled payments – by 2016 (up from 20% today) and 50% by 2018. HHS also expects to tie 85% of Medicare fee-for-service (FFS) payments to quality standards by 2016, then rising to 90% by 2018. HHS will encourage data connectivity and data sharing, which are critical to PHM. HHS aims to expand the usage of electronic health records (EHRs) to new settings of care to facilitate data sharing. Looking beyond Medicare, HHS will work with payers and employers to push value-based reimbursement adoption. Policymakers believe that PHM adoption will help the healthcare industry to best serve the retiring baby boomer population. CMS has cited better management of


14 ibid

15 Vignesh Ramachandran, “The new nursing shortage”, USA Today, May 7, 2014

16 ibid

17 James R. Hagerty, “As America Ages, Shortage of Help Hits Nursing Homes”, Wall Street Journal, April 14, 2013

18 “Progress Towards Achieving Better Care, Smarter Spending, Healthier People”, Centers for Medicare and Medicaid Services (CMS) blog, January 26, 2015


PAC services as the key to the success of any effort to improve and reform Medicare. Far-reaching policy initiatives aim to raise quality, achieve consistent placement and utilization standards, and establish shared risk and accountability among acute and PAC providers for full episodes of care. Because of CMS efforts, hospitals and other providers will be pressed to further expand usage of PHM in the PAC market (see Figure 4).

Figure 4. Focus of Key CMS Initiatives

FOCUS OF KEY CMS INITIATIVES:

Broadening and strengthening readmission penalties for acute providers and extending penalties to PAC sites

Instituting site‐neutral payments for comparable services rendered to similar patients in different PAC settings

Eliminating financial incentives to provide excess services

Piloting payment programs to encourage care in the most efficient, highest quality, clinically appropriate site

Moving toward use of a common assessment instrument to more clearly identify the optimal PAC setting for each discharged patient and to provide a consistent basis for comparing quality, costs and outcomes across settings

Overseeing the progress of current model 2 and model 3 bundled payment experiments in the post‐acute care market

Source: CMS Website

THE MARKET OPPORTUNITY FOR PHM

SENIORS OFFER SIGNIFICANT HEALTHCARE COST SAVINGS POTENTIAL While the Medicare population provides the greatest health care cost savings opportunity, it requires a high level of care management. Per a 2010 RAND Study, 133 million Americans (45% of the population) have one chronic ailment or more and account for 75% of national health spending19. In stark contrast, just 7 million senior citizens (top 15% of Medicare enrollees) have three or more chronic ailments and account for 75% of total Medicare spending (see Figure 5). Because they are less tech oriented and require high customer touch, seniors are sometimes overlooked for PHM initiatives. Aided by government incentives, we expect the Medicare market will see strong investment activity related to PHM initiatives - especially targeting the senior populations. This phenomenon has already gained considerable momentum in the dual-eligible market, which represents some of the greatest opportunities for cost savings and has been targeted with pilot programs and venture capital investment in several states.

19 Thomas Bodenheimer, Ellen Chen and Heather D. Bennett, “Confronting The Growing Burden Of Chronic Disease: Can The U.S. Health Care Workforce Do

The Job?”, Health Affairs, 28, no.1 (2009):64‐74


Figure 5. Top 15% of Medicare Account for 75% of Costs

Source: CareMore – HFMA National Institute 2013 presentation

DUAL‐ELIGIBLES

The ACA authorized the CMS to pursue demonstration projects to improve healthcare utilization of dual-eligible beneficiaries. Nationally, about 9 million dual-eligible patients — those enrolled in both Medicare and Medicaid — account for 13% of the total population in the Medicare and Medicaid programs20. However, they account for 40% of all Medicaid spending and 27% of all Medicare spending, for a total of $350 billion annually21. Through financial alignment demonstrations (outlined below), Medicaid intends to apply PHM principles to significantly reduce the dual-eligible populations’ healthcare costs. If successful, the pilot’s principles will be rolled out to the entire Medicaid dual-eligible population. CMS launched a financial alignment demonstration that is intended to reduce costs and improve the quality of care for dual-eligible beneficiaries. These three-year demonstrations, implemented beginning in July 2013, are introducing changes in the care delivery systems through which beneficiaries receive medical and long-term care services. In the fully capitated model, CMS, the state Medicaid program, and participating managed care plans enter into a three-way contract that will pay the plans a blended Medicare/Medicaid rate for each enrolled dual-eligible out of which the plans will provide seamless, integrated coverage of all Medicare and Medicaid benefits and services. CMS expects that the capitated model will result in savings to Medicare by reducing hospital admissions, emergency room visits, and skilled nursing care, and to Medicaid by avoiding costly long-term nursing home care. Simultaneously, CMS expects that there may be increased use of primary care services, outpatient services, behavioral health services, and community-based Long Term Services and Supports (LTSS), due to a greater emphasis on care coordination and maintaining beneficiaries in the community.

20 Virgil Dickson, “Reform Update: Many dual‐eligibles opt out of care coordination,” Modern Healthcare Magazine, July 22, 2014

21 ibid


PAC MARKET PIONEERED PHM

CCRCS DEVELOPED “AGING IN PLACE”

Continuing Care Retirement Communities (CCRCs) originated in Europe to provide communal shelter and care to the aged and arguably represent the first PHM business model. In the U.S., during the Great Depression the needs of the elderly were heightened and “old age homes” sponsored by faith-based, not-for-profit and fraternal organizations emerged as a response. Many contracts in those days required that a prospective resident, as a condition of moving in, turn over their assets in return for the promise of care for life, hence the term “life care.” CCRC development took off in the `70s and early `80s, as people wanted to address their future long-term care concerns while also addressing their desire for social interaction. The CCRC model is billed as a “lifestyle” offering. It offers the appeal of social activities, when one is active and healthy, while providing security and healthcare services when one’s health needs change without disruptive relocation. While it is not uncommon to see entrance fees above $500,000 at upscale life care CCRCs, aside from the more expensive densely populated cities, most markets have one or more CCRC providers appealing to the “middle income” seniors with entrance fees of $175,000 - $300,000. CCRCs provide a continuum of care that may include independent and assisted living, dementia care, secured Alzheimer’s care and skilled nursing care to allow a resident to ”age in place.” Through proactive care management at the CCRC campus, the health needs of residents are consistently monitored and actively serviced, particularly as those needs become more intensive. While CCRCs have helped to improve senior longevity, their high upfront entry fees and monthly payments have generally limited them to more affluent seniors. Currently, CCRCs service only 2% of the senior population, but the number of communities continues to grow22. The Great Recession has prompted many changes to the entrance fee CCRC model, including assistance with home sales, the type of contract offered, refund provisions, creative marketing incentives and cancellation provisions.

PACE PIONEERED THE “HOME CARE” MODEL

The PACE model of senior care was created in the early 1980s at the On Lok senior day health center in San Francisco’s Chinatown. On Lok’s main objectives were to allow frail elderly to age in place and to ensure safety, health and well-being by providing a coordinated network of support. On Lok is responsible for delivering the full range of healthcare services, including hospital and nursing home care, while bearing full financial risk. This is accomplished through intensive primary care, interdisciplinary team care management services provided in the PACE Center, as well as via home care and necessary transportation. In its Medicare funded pilot, On Lok demonstrated that its community based home care model achieved cost of care that was 15% less than traditional fee for service care23. While successful from a cost perspective, the PACE program has seen limited adoption, but policymakers are seeking to change that. Florida, New Jersey and

22 Daniel H. Gray, Continuum Development Services, “The Synergies of a Program for All‐Inclusive Care for the Elderly and the Continuing Care Retirement

Community” 23 http://www.onlok.org/About/History


California State legislatures have authorized PACE program expansions, while other states are contemplating similar moves. Currently, PACE serves individuals who are age 55 or older, certified by their state to need nursing home care, able to live safely in the community at the time of enrollment, and live in a PACE service area. As of January 2015, PACE had grown to 107 programs in 32 states. Several states have been resistant to implementing PACE, even though policymakers feel that the PACE model could provide a low cost, high quality home care setting for the dual-eligible population as well as healthy low income retired seniors. In an interesting twist, some believe the PACE program could provide new patient volumes for the CCRCs. However, there is growing tension between the dual-eligible capitated plans and PACE providers as many of the dual payers feel that they have the case management expertise to manage the PACE level of frailty. Naturally, the PACE providers dispute this assertion. In a compromise move, the frailest of the duals are carved out from the capitated plan, which is occurring in a number of states.

BUNDLED PAYMENTS – PHM LEARNING TOOL

Bundled payments are a gateway to payment reform as they provide a low-risk environment to learn PHM’s critical skills. Building a successful bundled payment program entails focusing on the entire episode of care, which requires improved care coordination and better risk management. PAC providers will identify their core competencies, select the right strategic partners, and build tight networks. Since bundled payments are currently on a retrospective basis, PAC providers can gain valuable PHM experience (for example, learn risk contracting process, develop performance metrics and fine tune patient engagement strategies) at minimal financial risk. PAC providers can use this experience to decide on how to best position themselves for a full risk-based reimbursement environment. Thus, PAC providers have the opportunity to avoid the financial pitfall as payments transition from fee-for-service to risk based reimbursement. In the future, top PAC providers, who distinguished themselves in the bundled payment program, will be targeted for inclusion in high performance, narrow PAC networks.

Figure 6. Bundling Is the Midpoint on the Path Toward PHM

GOAL FEE FOR SERVICE BUNDLED PAYMENTS

(READMISSION PENALTY) PHM (VALUE‐BASED REIMBURSEMENT)

Access vs. Efficiency Access trumping efficiency Broad access coupled with low readmissions

Efficiency gains equal footing with access

Quality Site specific Only matters when it affects readmissions

Impacts finances, efficiency, and market share

Integration Silo sites Sites partnering with aim to reduce readmission

Sites are interdependent

Care Coordination Discharge focused Condition focused Identify, target and engage all high risk or chronically ill patients

Finances Manage acute length of stay Manage acute length of stay while reducing readmissions

Manage to common bottom line with shared cost responsibility



BUNDLED PAYMENTS SHOW PHM HAS POTENTIAL

Two years ago, Medicare launched the Bundled Payments for Care Improvement (BPCI) Initiative, which offered four voluntary bundled payment models to providers (see Figure 7). Bundled payment is a single payment to providers or healthcare facilities for all services to treat a given condition or provide a given treatment. Unlike some of the other payment reform models, such as pay for performance, bundled payment asks providers to assume financial risk for the cost of services for a particular treatment or condition, as well as costs associated with preventable complications. Early evidence shows that BPCI has helped participating providers to improve the quality of care while better managing healthcare costs.

Figure 7. CMS BCPI Models Summary

MODEL 1 MODEL 2 MODEL 3 MODEL 4

Bundled Services Acute Inpatient (IP) Stay

IP stay and 30, 60 or 90 days of PAC

30, 60, or 90 days of PAC beginning with an IP stay

IP stay, all related physician services and readmissions within 30 days

Clinical Conditions Most Medicare FFS discharges

Participants select from 48 clinical condition episodes

Payment Mechanism

Retrospective: discounted amount based on IPPS payment rate

Retrospective; reconciliation to discounted target price based on participant’s historical FFS payments

Prospective discounted payment to hospital

Source: CMS.gov

BUNDLED PAYMENTS ‐ HONE PHM SKILLS

We believe healthcare providers should enter the BPCI program to gain experience with risk-based payments. Under a bundled payment system, every service provider becomes a cost center with the buyer of services being the organization that controls the dollars (bundled payment). Economic motivation will be to minimize the cost for an episode of care, irrespective of venue, for the same/optimal health outcome. Most importantly, a bundled or capitated payment system is free to creatively use existing discrete PAC services or to more creatively bundle existing Medicare reimbursed services with more social support level care, such as personal care, assisted living, day care, and similar services, to treat patient conditions while preserving quality and lowering costs. The methodologies and approaches used to support bundled payment are a forerunner to those employed to manage a population. The best care transition will follow a patient through the entire acute and PAC provider continuum in a closed loop fashion to ensure each care setting is providing the highest quality at the lowest cost with measurable outcomes. Ideally, clinical and financial information technology will assist and enhance care transition by tracking the patient’s clinical progress and related provider costs. Although BCPI efforts are focused on surgical treatments, which tend to be predictable episodes of care, the care coordination and delivery expertise learned can be applicable to episodes of care for those with chronic conditions.


PREPARE FOR PROSPECTIVE PAYMENTS

BCPI participants are currently operating in retrospective bundling methods in which all providers continue to receive their individual fee-for-service payments at standard reimbursement rates directly from Medicare. After an episode concludes, Medicare completes a reconciliation process, calculating the total reimbursement paid out to providers for the episode and compares that aggregate amount to the pre-established bundled price. If the aggregate reimbursement amount is less than the bundled rate, Medicare pays the providers the difference and vice versa. The transition to prospective payments could lead to stratification of health providers. In a prospective bundling method, the hospital would receive a single, lump sum payment from Medicare and then distribute that payment among all of the providers involved in the episode of care. In this model, hospitals would select providers based primarily on their upfront price quotes. Providers would then be tiered based on their price, quality of care provided and outcome history. The most cost effective providers would join large networks and receive Medicare or commercial reimbursement rates, while the worst providers would be relegated to networks that receive Medicaid reimbursement.

PHM ADOPTION FUELS PAC INTEGRATION

Medicare readmission policy started the first clinical integration efforts, but PHM adoption will facilitate full PAC clinical integration. PAC providers that rely heavily on Medicare and Medicaid reimbursements, such as skilled nursing facilities, have been on the leading edge of the trend toward partnering with acute care providers. As a result, a fair amount of consolidation between acute care and PAC providers has occurred in the past three years. While the new clinical integrated networks have materially reduced readmissions, they represent the first generation PHM adoption in the senior health market. Figure 8. Paradigm Shift Is Underway

Source: RTI International, 2009, “Examining Post Acute Care…” and Avalere Health, LLC, “Change in the SNF Marketplace,” March 2012

Old Paradigm

• Silo’d payment systems with different rates by site of care

• Payments based on service type, intensity and volume

• Limited coordination of shared risk among providers

New Paradigm

• Bundled payments across settings for most providers in Medicare

• Site‐neutral payment

• Payment influenced by patient outcome

• Encourage care coordination and primary care

• Regional Systems moving toward much tighter PAC networks


TYPES OF PAC MODELS

Figure 9. PHM Will Support Creation of Integrated PAC Networks


Episode of care/readmission-focused PAC providers - employ rudimentary PHM capabilities. While effective at reducing readmissions and length of stay, they lack a long-term strategy. These providers focus on specific episodes of care; ideally, volume driven ones. Their efforts to optimize PAC are directed at reducing readmissions starting with CMS-targeted conditions and broadening gradually to more episodes and longer time frames. They maintain relationships with a wide range of PAC providers. The primary responsibility often resides in discharge planning. Figure 10. Episode of Care PACs – Limited PHM

STRENGTHS WEAKNESS

Reduce inpatient length of stay Managing loosely structured relationships with many PAC sites

Reduce readmission rates without capital investment

Ensuring sharing of information at discharge may prove challenging

Avoid exposure to decreasing PAC reimbursement

Low visibility into PAC providers’ business and clinical practices or culture

Leverage PAC management skills of other partners

Ceding partial control of care delivery decisions

to other partners


System PAC providers - utilize moderate level of PHM capabilities to optimize care for patients. These PAC providers have established more structured relationships with a close knit network of preferred PAC providers. They offer continuum-spanning care for targeted conditions across a seamless network of settings. Primary responsibility for PAC optimization will vary based on the organizational framework for service line leadership. An example of this model is Advocate Health Care. To improve the quality of PAC services, reduce total care costs, and bolster the number of patients remaining in the network, Advocate partnered with SNFs to optimize care for its commercial and Medicaid insured patients. Most PAC integrated systems operate under this model and are likely to retain it.

Level of PHM Usage

Minimal Maximum

Episodeof Care PAC

SystemPAC

IntegratedPAC


Figure 11. System PACs – Popular Model

STRENGTHS WEAKNESS

Share system‐wide quality and efficiency metrics

Requires due diligence in obtaining both publicly available and internally collected performance data to guide selection of preferred providers

Place patients in optimal care level; support faster, clinically appropriate step‐down to less‐acute settings

Necessitates willingness to take action if performance of specific providers declines

Maximize margins and minimize leakage Needs clear management expectations and delineation of governance roles and responsibilities

Position system to bundle PAC and assume future risk; leverage network in payer contracting

Requires proactive risk identification and risk

management practices


Integrated PAC providers - fully embrace PHM to create true clinically integrated networks. In this model, an organization assumes full oversight and risk associated with PAC across sites and providers via ownership, strong partnerships or consolidation of back-office functions. Organizations most likely to employ this model are aggressively pursuing population health or fully capitated payments. Some are seeking unique payer contracts as full-service PAC providers. PAC responsibility will likely reside at the system or corporate level. Examples of integrated PAC providers are Partners Health (nonprofit), Kindred-Cleveland Clinic (for-profit) and Ascension Health, the second largest not-for-profit, long term care operator in the nation.

Figure 12. Integrated PAC Providers – Fully Utilizing PHM’s Potential

STRENGTHS WEAKNESS

Provide strong long‐term growth potential due to aging population and increasing PAC use

Long‐term financial success dependent on external factors and decisions (i.e., growth may be mitigated by payment and policy changes)

Enable near‐term positive operating margins

Volumes highly dependent on referrals and market relationships with all providers

Enhance opportunity for clinical integration and quality improvement by aligning incentives

Requires integrated acute and PAC management skills

Position organizations most strongly for risk‐based payment models

Heavy investment in a common IT platform required for optimal performance

Offers strongest opportunity for “neutral” selection of most efficient, clinically appropriate site

May require purchase of multiple entities to build economies of scale


Although ownership offers maximum potential for control, it’s not the only path to achieve the integrated PAC’s potential. Many organizations will choose to own one or more PAC settings, but for a variety of reasons, few will own the entire continuum. In recent acquisition deals, we have generally seen a preference for acute care-home health combinations, which have the ability to impact the greatest number of covered lives with the lowest upfront investment. Access to SNF assets,


on the other hand, is often-times obtained through joint venture partnerships with PAC providers.

PHM OPENS THE DOOR TO UNIQUE COMBINATIONS

PHM adoption will open the door to formation of new unique PAC combinations. In the first round of PAC integration, acute care hospitals focused on formation of narrow networks. Hospitals were narrowing their list of SNFs to two or three, as opposed to including all eight to 10 in the immediate area, as they previously did, according to a MEDPAC report. In the second round, we are witnessing new combinations taking hold that are aided by PHM adoption. Hospitals are starting to leave out LTACHs and IRFs from narrow network lists and are relying more heavily on SNFs and home health to provide this level of service while controlling costs. Figure 13. Evolving Long Term Care/PAC Industry Consolidation

TREND RATIONALE

Inpatient Rehabilitation Facility (IRF)/Long‐Term Acute Care Hospital (LTACH) usage under pressure to lower cost “super skilled nursing facilities”

Super SNFs are virtually acute rehab hospitals housed in SNFs

The trend is toward making SNFs a more common site of care for ventilator dependent individuals and others needing post‐acute complex care;

The goal is to reduce the number of readmissions to the acute care hospital

Hospital‐home health joint venturing for both scale and vertical Integration purposes

Hospitals interested in capturing the largest number of lives in a setting that has the most data for patient care and can provide care in the lowest PAC setting cost

Steady growth of hospice and delivery of in‐home infusion therapies

Patients preference shifts to receiving end of life care in non‐acute settings, which are lower cost

Emergency Room to SNF Diversion The goal is to reduce the number of patients with lower acuity care needs that are admitted to the hospital;

If patient requires additional care, they can be admitted to acute care setting as needed

No initial admission means no readmission

Experimental use of senior housing – home health partnerships is an emerging PHM strategy

Keeping the senior at home – a cost effective care setting



CAIN BROTHERS RECOMMENDATIONS Hospitals and health systems will have to determine whether integration with PAC services will be accomplished by owning, outsourcing or joint venturing these services. Based on BCPI experiences and comfort with prospective payment models, hospitals and health systems will opt for the alignment model that best meets their interests. Cain Brothers believes PAC providers must select a combination that best exploits their competitive edge in this new environment. PHM adoption is allowing providers to focus on core competencies to drive better care and operating efficiency in an optimal setting. In a PHM environment, PAC combinations that build scale are not the only viable option. Cain Brothers recommends that PAC providers consider the following combinations:

1. Create a Narrow SNF Network (Advocate Model) 2. Enter Into a Home Health Partnership 3. Outsource SNF Operations into a Joint Venture

RECOMMENDATION #1: CREATE A NARROW SNF NETWORK

Figure 14. Create a Narrow SNF Network (Advocate Model)


► Elements of Narrow SNF Network Strategy

Move from “any willing bed provider” to health system controlled relationships – distributed by geography

Shared IT and EMR for better patient care and tracking 24/7 admissions for hospital system partners (acute discharges, ER diversion) Demand facility up-grading Imaginative use of bundled payments/ACO/MA shared savings to pay for non-

traditional services Select two or three sites for psych continuums Consider selective SNF/senior housing investment for co-branding opportunities


RECOMMENDATION #2: ENTER INTO A HOME HEALTH PARTNERSHIP

Most health systems refer seniors to dozens of Medicare/MA reimbursed home health providers Health systems should create a joint venture with one or more home health agencies:

Tight clinical control Capture a percent of the profitability provided by targeted referrals Medical home/home health platform for PHM Leverage a clinical presence at various senior housing complexes to enhance visit

productivity Achieve secondary home health referral gains through capturing SNF discharges

that initiated with health system’s narrow SNF network

RECOMMENDATION #3: OUTSOURCE SNF OPERATIONS INTO A JOINT VENTURE

Typically, hospital based SNF units are financial burdens with:

Higher acute care personnel costs Referral destination of last resort Over-staffed/over-resourced Lack of PAC reimbursement expertise

Consider a third-party SNF/ALF/MC joint venture for existing SNF assets:

Transfer SNF beds to third-party developer/operator Potential profit from land use Enhances health system’s tertiary care reach Assume minority ownership position

Cain Brothers recommends that PAC providers also consider these unique combinations:

Narrow SNF and home health networks clinically staffed by the dominant local hospital system clinicians

Become a payer or have your own system joint venture with an HMO or Medicare Advantage (MA) plan

Identify low income and market rate housing partners where primary care clinics and skilled home health services can be located for economies of scale in service and for resident supervision

REAL WORLD EXAMPLES OF NEW PAC COMBINATIONS

Cain Brothers highlights the following real world examples of PAC combinations. They illustrate the variety of PAC combinations made possible by PHM adoption. Each PAC combination leverages the providers’ core skills to drive new growth and/or market share gains.


REAL WORLD EXAMPLE #1 – ASCENSION CREATES POST‐ACUTE CARE JOINT VENTURE

Ascension subsidiaries provide services that include healthcare delivery, medical equipment management, treasury management, resource and supply management, venture capital investing, physician practice management, and risk management. Envision Healthcare, based in Greenwood Village, CO, offers an array of healthcare related services to consumers, hospitals, healthcare systems, health plans and local, state and national government entities via its subsidiaries:

American Medical Response (AMR) is a provider and manager of community-based medical transportation services

EmCare is a provider of integrated facility-based physician services, including emergency, anesthesiology, hospitalist/inpatient care, radiology and surgery

Evolution Health unit provides comprehensive care to patients across various settings, many of whom suffer from advanced illnesses and chronic diseases

On September 15, 2014, Ascension Health and Evolution Health announced a joint venture to provide an array of post-acute services including home care, hospice care and infusion therapy to individuals in communities served by Ascension’s Health Ministries

Under the arrangement, Evolution Health will serve as Ascension’s exclusive partner in the provision of these services to patients in their homes and other facilities

The new joint venture will initially include five of Ascension Health’s 23 communities, with the first phase of the agreement having begun at the end of 2014

Revenues in the first year of operation are estimated to be $75 - $100 million, and expansion into additional communities is planned in a phased implementation over the next three years

REAL WORLD EXAMPLE #2 – EVANGELICAL HOMES MICHIGAN/TRINITY PROJECT: REDEIS CENTER

Evangelical Homes of Michigan (EHM) is a health and human services provider and a Michigan not-for-profit corporation, affiliated with the United Church of Christ. EHM serves more than 2,300 older adults of all faith affiliations and their extended families annually and is one of the largest not-for-profit organizations of its kind in the metropolitan Detroit area. EHM provides healthcare, housing, and community services to seniors and their families in five primary southeast Michigan cities and their surrounding communities.

In 2012, EHM entered into partnership with Trinity Health System to create the Redies Center for Rehabilitation. The facility was previously a vacated 60 bed acute care hospital acquired by Trinity as part of a multi-facility hospital system transaction. It is located adjacent to a 145-bed SNF owned by EHM in Saline, Michigan. EHM entered into a triple net lease arrangement with Trinity to create a 22,000 square foot, 54-bed facility that includes sub-acute short-stay medical and rehabilitation beds, a new fitness area, outdoor space for rehab and a dementia program known as Bridgeway within its complement of available beds.

The partnership created several accretive benefits to EHM:


Solidified relationship with major regional acute care referral source Expanded relationships with other local acute care providers through admissions

of new hospital discharges Provided EHM with a substantial net profit Increased profitability to EHM’s adjacent SNF through active management of

Medicare RUGs Expanded the service line offerings of EHM Created new prospects for home health, housing and LifeChoice division via

Redies Center discharges

REAL WORLD EXAMPLE #3 – GENESIS AND SKILLED HEALTHCARE GROUP MERGER

Genesis HealthCare, LLC, is one of the nation's largest post-acute care providers with more than 500 skilled nursing centers and assisted/senior living communities in 34 states nationwide. Skilled Healthcare Group, Inc., based in Foothill Ranch, California, operates long-term care facilities and provides a wide range of post-acute care services, with a strategic emphasis on sub-acute specialty health care. On August 18, 2014, Genesis Healthcare announced that it would merger with Skilled Healthcare Group to form one of the largest providers of post-acute care inpatient services nationally. Post-merger, Genesis Healthcare will leverage its combined footprint to drive new growth Growth Strategy:

Pursue development activities in specialized short-term PAC services and long-term care services

Focus on relationships with acute care providers and managed care payers − Readmission agreements with tiered savings − ACO, bundled payment strategies

Grow rehab therapy segment

Growth through selective acquisition and integration

Focus on high acuity patients − Clinical specialization, offer sub-specialties including post-acute cardiac and

pulmonary management

Genesis Physician Service (GPS) strategy − Employs 75 physicians and 136 nurse practitioners − 75% of new admissions seen by GPS provider; 500,000 annually − Extensive use of telemedicine

Build new facilities to increase market density and accelerate growth in SNF mix − State of the art facilities specializing in short-term care − Clustering to enable shared services, marketing and branding

CASE STUDY: GENESIS CAMPUS BIFURCATION

PHM adoption can lead to new combinations that were unheard of years ago. In this example, Genesis wanted to reposition this facility to take advantage of favorable state Medicaid reimbursement for long term care. Consequently, Genesis is repositioning facilities to pursue activities in specialized short-term PAC services


and LTC services. Two distinct business lines under one roof designed to realign the facility’s operations to best match the market’s patient flow. This led to the bifurcation of this skilled nursing facility.

Case Study: Genesis’ Campus Bifurcation Model

TWO DISTINCT BUSINESSES UNDER ONE ROOF

Short‐Stay/Post‐Acute Long‐term Care

20% of Patients

(15% Medicare / 5% Insurance/Managed Care)

80% of Patients

(63% Medicaid/17% Private/Other)

36% of Revenue / 50% of Profits 64% of Revenue / 50% of Profits

ALOS‐ 28 Days (31 Medicare/19 Insurance/Managed Care) − 20% are younger than 65 years old − 69% will return home

Average length of stay – 18 months

High intensity rehabilitation/restorative care Average age 85 years old

Sub‐acute clinical specializations − Transitional care − Progression units − Ventilator care

Long‐term care clinical focus − Dementia care − Dialysis − Palliative / Hospice


PHM ADOPTION WILL OPEN NEW POSSIBILITIES

PHM adoption will impact the different sectors of senior care in a variety of ways. Some sectors will see resurgence in demand, while others will need to realign their models for the new PHM environment. In the following section, we forecast the potential impact of the adoption of PHM on the following sectors: CCRCs, PACE, Telehealth, HCIT and Home Health.

CCRC MODEL NEEDS TO BE REFINED

While economic conditions have improved in recent years, the traditional CCRC business model faces new challenges from the introduction and implementation of healthcare reform. The healthcare industry is evolving toward a business model that is centered on population health management and value-based healthcare, which has led to consolidations across and within verticals in the healthcare industry. As a result, healthcare buying behaviors for the CCRCs’ target market population have changed. Many CCRC operators are facing a conundrum over how they fit into the new healthcare delivery ecosystem given their historically closed or capitated platform where they reserve the majority of their skilled nursing beds for existing residents. Furthermore, a significant portion of the CCRCs SNF beds are semi-private rooms, which are challenging to market to persons in need of only skilled nursing services, but not interested in life care. The CCRC business model has been adversely impacted by the senior preference to stay at home longer. Previously, seniors entered CCRCs in a relatively healthy state and did not require significant healthcare services for extended periods, often-times for eight to ten years. During this period, CCRCs recognized high margins due to light healthcare services utilization. As the seniors aged, they would begin to use more healthcare services. Thus, the CCRCs would see margins compress over time.


Now, seniors defer entry into the CCRC and enter at a later age and in a frail state. Consequently, the CCRCs are losing the early, high margin period and must manage pricing upfront and “acuity shifting” on an ongoing basis to preserve their modest margins. PHM adoption will help CCRCs to strengthen their business models and reposition themselves in the PAC market. With 90% of seniors wanting to stay at home as long as possible24, CCRCs can leverage their “aging in place” expertise to carve a niche in the emerging “aging in place” industry, which provides a range of services and products aimed at helping the elderly stay at home. PHM technology will allow CCRCs to share their expertise with different PAC providers and HCIT companies. By applying PHM tools, CCRCs can strengthen their risk management and marketing skills. CCRCs expertise in “aging in place” has been refined over decades. However, CCRCs’ unique care model has only been utilized for 2% of the senior population25. By sharing their expertise with PAC providers and other vendors, CCRCs can find new business opportunities to generate revenues. The newly announced Cerner and North Kansas City Hospital pilot is an example of a HCIT company (Cerner) seeking to develop “aging in place ” expertise by partnering with a local hospital for post-acute care services aimed to keep seniors at home26. The program, called Aging in Place, is based on the vision that a full continuum of care, including wellness and prevention, is essential for a healthy population. Through this partnership, Cerner acquires valuable knowledge and expertise about “aging in place” that will enhance its Millennium software platform. Then, Cerner will sell this Millennium software capability to existing and new health system and PAC provider customers who seek to interface with CCRCs and other senior living facilities. North Kansas City Hospital would receive a royalty stream from selling its expertise, which is monetized over a greater base. How PHM strategies can improve CCRC operations:

Targeted Market Analysis for New Customers. Traditional market analyses for CCRCs centered on admissions to their housing wings, which includes demographic analyses of the number of age and income eligible persons and related competitive penetration rates. PHM techniques such as risk stratification (identify and analyze sub-populations) should be employed to derive a clear picture of eligible persons’ health and wellness condition. PHM data analysis helps to provides a clear picture of a CCRCs’ potential target market

Comprehensive IT Strategy as Differentiator. By improving their IT capabilities, CCRCs can better coordinate care, track patients in real time and stand apart to gain new business. Most CCRC organizations have implemented an electronic medical record (EMR) system. While EMRs are helpful, CCRC organizations need to fully deploy technology to support PHM initiatives such as patient management, evidence based medicine, and risk stratification. As Clinically Integrated Networks are formed, CCRCs can differentiate themselves by building an “interoperable” IT system that can interface with hospital PAC providers. This system needs to include capabilities for patient tracking and


25 Daniel H. Gray, Continuum Development Services, “The Synergies of a Program for All‐Inclusive Care for the Elderly and the Continuing Care Retirement

Community” 26 http://www.cerner.com/Cerner_North_Kansas_City_Hospital_Aging_In_Place/


ability for the adult caregiver to be able to access/share health records via mobile platforms

Enhance Population Risk Analysis For Existing Patients. Facing tighter margins upfront, CCRCs need better risk profile assessment tools. CCRCs can utilize PHM risk analysis techniques to supplement and enhance their actuarial analyses. CCRCs are accustomed to managing a homogenous community of high-net-worth, generally healthy seniors. PHM can be used in the planning for healthcare delivery in life care/underwriting risk in communities by providing the population data diversity that is missing. Through prudent use of data analysis, risk management tools, acuity shifting and innovative new pricing strategies, CCRCs can avoid the pitfall of adding older, frailer residents to increase IL occupancy that typically end up being transferred to SNF care within a few years and exacerbate the negative financial impact of the “life care discount”.

Ancillary Services Can Provide New Business Opportunities. Most CCRCs reserve the majority of their health care beds for existing residents, which typically limits opportunities to collaborate with referral sources. PHM invites a wide variety of strategic partnerships and affiliations. Clinically integrated networks are looking for low cost PAC venues to transfer patients to. Most prefer home health or rehabilitation settings over SNFs. CCRCs could positon themselves as low cost rehabilitation partners or SNF alternatives. Once part of the preferred network, CCRCs can receive referrals and patient discharge flow from hospitals. A key to this strategy, however, is the ability of the CCRC – both from a financial and development standpoint -- to convert their semi-private rooms into marketable private rooms.

PACE WILL SEE INCREASED INTEREST

PACE is an excellent example of PHM applied in the senior care market. The core principal of PACE is modeled around the belief that it is better for the well-being of seniors with chronic care needs, and their families, to be served in the wider community (outside of a skilled nursing facility) whenever possible. The key to PACE’s success is not the health condition of participants at enrollment, but rather the infrastructure, program, and people in place to provide services. Despite the demonstrated success of On Lok, as discussed above, the growth of community-based care has been slow until now. With half of the retiring baby boomers classified as poor and desiring to stay home as long as possible, policymakers are turning to the innovative PACE program as a potential solution. By applying PHM principles, PACE has been able to reduce frail seniors’ use of hospitals and nursing homes and keep them in their communities. The typical profile of a PACE participant is 80 years old, female, and a person with approximately eight existing conditions. While PACE participants tend to be frail, only 7% live in nursing homes27. PACE will need to enhance their IT capabilities and care management infrastructure to be cost effective managers of large populations. Potential partnerships with CCRCs and other PAC vendors are possibilities. CMS is working creatively with the National PACE Association (NPA) to allow greater flexibility and innovation to increase the growth of PACE, including serving other

27 http://www.npaonline.org/website/article.asp?id=12&title=Who,_What_and_Where_Is_PACE?


populations such as persons under age 55 with disabilities. Currently, all PACE providers must be not-for-profit organizations and, except for New York City, programs are awarded an exclusive service area usually by ZIP Code and/or county. This restriction somewhat limits growth options for the PACE program. Two Potential PACE Model Expansions ► #1 - Enriched Housing at PACE Sites Mature PACE providers have worked with Cain Brothers to finance supportive independent housing as part of a mixed-use development strategy that includes housing, a PACE site, and other complimentary property uses. Instead of separating couples, supportive, service enriched housing can provide spouses with a home/location where the couple can remain together. Their spouses would get daily respite support and even help at night and weekends with the provision of informal care. “Spousal Impoverishment Allowance,” a Medicaid provision, is commonly used by spouses of skilled nursing patients, and it allows the non-PACE participant to retain a livable income, while their spouse receives Medicaid coverage for the PACE program. To fulfill its PHM potential, PACE would need to be expanded to include working class seniors, not just limited low-income seniors that most government subsidies favor. Cain Brothers has worked on a number of PACE-linked housing efforts that have allowed for a mix of incomes up to 50%, and to even 80%, of local median income, which allows a much broader income mix of isolated or chronically complex individuals to consider PACE in lieu of a skilled nursing placement. In the future, policymakers will be compelled to increase the income limit to possibly 100% of local median income. The combination of moderate to near-market rate priced shelter rent along with a PACE Center can serve to attract a higher income senior, one whose family is willing to consider private payment for the Medicaid covered long-term care services provided within a PACE program. These family members would see how the PACE private pay fee, even when combined with near-market rate shelter rent, still costs the family less than a typical private-pay assisted living facility, where monthly rates of $6,000 to even $8,000 a month have become commonplace. ► #2 - PACE-CCRC Combinations As CCRCs strive to find alternative revenue sources, they are increasingly looking within their local community for ways to generate income. It may appear counterintuitive that CCRCs, which are dependent on welcoming new residents in to their facilities, would embrace the PACE model that strives to keep older adults living in the wider community. However, home health agencies and PACE programs are two business lines that allow CCRCs to further their mission by providing services to a broader market while also improving their bottom line. While there are modest eligibility requirements to participate in PACE, most seniors utilizing the program are Medicaid eligible. This, combined with the fundamental principle of PACE, which is to keep participants out of a nursing home, would allow CCRCs to serve a population they would likely never be able to touch otherwise. Another attractive attribute of PACE is that PACE participation would allow a CCRC to leverage its existing infrastructure. Since the majority of


PACE programs nationwide are financially successful, it is an appealing option. PACE is an effective way for a CCRC to expand its mission by serving a senior population in need with manageable upfront capital needs and significant income potential. TELEHEALTH – THE GREAT REVOLUTION

Telehealth is emerging as a cost-effective solution for delivering healthcare to seniors, despite the skepticism that they are incapable users. Although they may not be tech savvy, seniors are willing to try new technologies if they are helpful to their daily activities. The challenge is to carefully select technology that recognizes seniors’ physical limitations and personal preferences. According to an Anthem market study, 74% of U.S. consumers indicated that they would use telehealth services. This number is expected to increase as boomers continue to retire. Telehealth can put a patient-centered medical home within reach regardless of where patients live or their financial status. The combination of technology, care level, and care location can reduce costs and shift the emphasis to managing wellness instead of illness. Telehealth enables PHM to be applied to the senior market in a cost effective manner. Technology will be a critical infrastructure component for aging service providers to understand and to invest in. A broad range of emerging technologies will enable both older adults and their caregivers to address a comprehensive range of medical, health, social, and functional needs. The use of Internet-connected technologies can support the whole person in multiple ways, including:

Health, wellness (including both physical and cognitive health), and prevention Functional limitations and chronic disease management Social connectedness to friends, family, and community organizations Mercy Health System has been a pioneer in the use of telehealth technology. Nearly a decade ago, Mercy launched its first telehealth program, a virtual intensive care unit. Three U.S. Agricultural Department grants totaling $1.4 million dating back to 2011, have helped to nurture Mercy’s rural telehealth monitoring program and bring connectivity to rural emergency rooms, clinics and schools. Mercy is currently constructing a new $50 million telehealth center that will deliver around-the-clock care through audio, video and data connections to the system’s remote patients in four states28. The new building is expected to open in Summer 2015 and be home to 300 physicians, nurses, researchers and support staff. Patients of health care providers outside its system and employers who partner with Mercy also can receive care through the telemedicine program. Mercy estimates that the virtual care center will manage more than three million telehealth visits in the five years after it opens. The new facility will allow Mercy to expand the patient monitoring aspect of its telemedicine program, which already comprises some 75 services. Several services are focused primarily on seniors, including:

28 http://www.mercy.net/newsroom/2014‐05‐12/mercy‐starts‐construction‐on‐nations‐first‐virtual‐care‐center


Telesepsis

Using an early warning system that combs through the EHR of every patient that enters the hospital, Mercy can accurately identify patients who are most susceptible to sepsis. The system categorizes inpatients by risk and monitors them continuously throughout their stay

In less than a year using Telesepsis, deaths from severe sepsis at Mercy Hospital St. Louis dropped by 50%, deaths from septic shock dropped by 60% and the average length of stay in the ICU decreased by more than four days

Telestroke

Telestroke uses secure two-way video to connect stroke patients with board-certified neurologists. These neurologists work with local emergency physicians to determine whether tPA (tissue plasminogen activator) should be administered. Timely intervention with clot busting medications is critical for stroke victims, reducing the risk of death and stroke-related complications or disabilities.

eSNF (Skilled Nursing Facilities)

eSNF uses a branded SafeWatch technology and a portable telehealth unit to enable clinicians to monitor their patients, preventing unnecessary trips to the emergency department. Virtual follow-up visits are easy, helping clinicians prevent dangerous secondary infections and readmissions

While Medicare experiments with the idea of expanded telehealth reimbursement, private industry and many state governments are moving forward on their own. Most insurers cover at least some telehealth services. Twenty two states and the District of Columbia already require telehealth coverage from private insurers and forty six states offer some type of Medicaid reimbursement for telehealth services. Use of telehealth technology is still a developing concept in senior care, but it is gaining momentum. Nearly 17% of senior living providers pointed to teleheath/remote patient monitoring as a future area of investment in a September 2012 Ziegler-CAST Technology Spending Survey. A majority (70%) indicated plans to invest or increase investment in EMRs and another 29% are looking into video conferencing for residents and clients. Data collected from a 2014 Mayo Clinic study suggests that e-visits could lower healthcare spending. Using Medicare reimbursement data and prior studies, the researchers estimated costs of urinary tract infection (UTI) visits in a virtual or office setting. While antibiotic prescription rates were higher among e-visits, particularly for UTIs, the researchers found that the lower rate of testing for the infection among e-visits outweighs the higher rate of prescriptions. In total, the estimated cost of a virtual doctors visit for a suspected UTI was $74, versus $93 for office visits. HEALTHCARE IT: FACING CHALLENGES

Healthcare IT will play a critical role in adoption of PHM in the senior market. Various remote health management offerings (e.g., personal emergency response systems, medication dispensers, and telemonitoring solutions) empower the patient and allow for self-management. Data collected from these devices coupled with electronic data sources (EMRs and patient registries) can be leveraged to support PHM. Once built, healthcare IT infrastructure will enable the collection of real-time


data to track the patient status and to improve post-discharge compliance. Healthcare IT will help fulfill the vision of identifying potential medical problems before they become expensive emergency room visits and hospital stays.

Healthcare IT will allow providers and patients to realize the full power of PHM in a number of ways: Enhance the discharge process and care transition by enabling a more efficient

way of communicating with patients and helping and empowering patients to manage their condition

Improve self-care, treatment, and medication compliance by educating, motivating, and monitoring patients on a more frequent basis.

Improve the organization’s productivity by enabling providers to manage more patients without additional resources

Facilitate care coordination between providers across the continuum to attain desired health outcomes

Analyze data to drive PHM strategies

Designing HCIT for seniors requires changes to be impactful on healthcare status. Aging makes using technology difficult and different. Although mobile technology may be difficult to use, seniors will try new devices if they see a clear benefit. When designing technology for seniors, adjustments need to be made. We suggest keeping the following in mind: Vision and hearing: Color vision declines with age. In particular, shades of blue

appear to be faded or desaturated. Thus, displays must be black and white with large scale fonts. A large proportion of people over 65 have some form of hearing loss

Dexterity: Motor skills decline with age, which makes it harder to use computers in various ways. Touch interfaces should be used over mouse technology

Seniors value long-term relationships with healthcare providers. Digital technology should enable connection to a small, important group of people. PAC providers should also be cognizant that paper is still very important for seniors. Older people almost exclusively use calendars and diaries to supplement their memories. However, well-designed technology has the potential to provide cues for these important actions. HOME HEALTH READY TO SHINE

Home health is a quiet industry that is poised for growth. Currently, 12 million people receive community-based care from home health services and hospice providers to help with post-acute and chronic conditions, disabilities, or terminal illnesses29. As more and more older people prefer to age in place and elect to live independent, non-institutionalized lives, they are choosing to receive home care services as their physical capabilities diminish. Since chronically ill individuals account for about 75% of all hospitalizations, medical and technological advances

29 http://www.ltpachealthit.org/content/about‐long‐term‐and‐post‐acute‐care


will create growth opportunities for home health providers. Coupled with its relative low cost compared to other PAC options, home health will see an influx of new patients in the coming years. Home health has been undergoing consolidation as providers reposition themselves to be profitable. There are an estimated 310,000 different home health care agencies in the U.S., with about 12,000 participating in Medicare in 201230. Over the past five years, the industry has seen consolidation and the large providers are increasingly focused on delivering specialized services such as orthopedics, cardiopulmonary and chronic disease management programs. PHM implementation will accelerate industry consolidation. A four-year 3.5% per year reduction to the Medicare base payment for home health services was implemented in January 2014. Since Medicare payments comprise approximately 50% of home health industry revenue, small providers may not be able to sustain the base payment reductions. The National Association for Home Care and Hospice estimates that as many as three-quarters of current operators will be unable to sustain profitable operations by 2017. To be appealing to the newly formed clinically integrated networks, home health providers are consolidating to gain scale, financial resources, and patient volumes to assure inclusion in narrow networks. In the past eighteen months, several large consolidations of home health vendors in major markets (Boston, Chicago, and Los Angeles) were designed with this strategy in mind. Many hospitals and health systems own or are in partnerships with home health care agencies, and should seek to optimize the performance of their home health care assets— analyzing volumes, internal capture rates, readmissions and outcomes. As the lowest cost PAC setting, payers will increasingly seek quality home health care providers. Owning the asset is not necessary, but partnering with a quality, stable provider is key to achieving consistent outcomes and ultimately, cost savings.

30 “Post Acute Care Integration: Today and In the Future”, DHG Healthcare – Center For Industry Transformation, June 25, 2014

ABOUT CAIN BROTHERS

Cain Brothers is an investment banking firm that focuses exclusively on the healthcare industry. Our clients include investor-owned and tax-exempt providers, insurers and payers, healthcare information technology and medical technology companies, and private equity and venture capital financial sponsors. The firm has one of the largest teams of experienced healthcare bankers and capital markets professionals on Wall Street.

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