Healthcare Pulse Quarterly Magazine, Issue II 2013

NAVIGANT PULSE 2013, ISSUE II | 1

IN THIS ISSUEProvider-Sponsored Health Plans: Past, Present & Future • Risk Management Roadmap for Provider-Sponsored Health Plans and Population Health Initiatives • First-Hand Voices from the Field • New Medicaid Models, Health Insurance Marketplaces Open Opportunities • Valuation Trends Offer Guide to Payer Strategy

© 2013 Navigant Consulting, Inc.

2013, Issue II

Will Providers Demand More Risk? Will Payers Do More Providing?

2013 PRSA BRONZE ANVIL AWARD WINNER

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in this issueWill Providers Demand More Risk? Will Payers Do More Providing?

A LETTER FROM DAVID BURIK

PROVIDER-SPONSORED HEALTH PLANS: PAST, PRESENT & FUTURE Navigant Healthcare's Chris Myers, Kara Fleming and Brian Newell discuss the history of provider-sponsored managed care — and how today's chang-ing market forces are triggering renewed interest among health systems.

RISK MANAGEMENT ROADMAP FOR PROVIDER-SPONSORED HEALTH PLANS AND POPULATION HEALTH INITIATIVES Navigant Healthcare’s Michael Nugent and Chris Kalkhof define reform-related risks and suggest steps payers, providers and provider-sponsored health plans can take to manage risk efficiently and effectively.

FIRST-HAND VOICES FROM THE FIELD Kevin Conlin of Horizon Blue Cross Blue Shield of New Jersey and Continuum Health Alliance’s Chris Olivia offer their experience leading both health systems and health plans.

NEW MEDICAID MODELS, HEALTH INSURANCE MARKETPLACES OPEN OPPORTUNITIES Navigant Healthcare’s Catherine Sreckovich outlines emerging Medicaid models and the role of provider-sponsored health plans in Health Insurance Marketplaces.

PROVIDER-SPONSORED HEALTH PLANS HAVE A NICHE WITH CONSUMERS Navigant Healthcare’s Stephen Morales says PSPs can compete effectively with larger plans in Health Insurance Marketplaces.

VALUATION TRENDS OFFER GUIDE TO PAYER STRATEGY Navigant Healthcare’s Jerry Chang and John Leary describe how mergers and acquisitions of managed care companies have gained momentum as companies and health systems seek to strengthen — or maintain — their market position.

NAVIGANT HEALTHCARE NEWS

NAVIGANT HEALTHCARE ADVISORS OFFER THEIR EXPERTISE

UPCOMING EVENTS

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Here at Navigant Healthcare, we have been struck by how many of our provider, payer and governmental clients are actively investigating expanding into the traditional areas of responsibility of others. Simply stated:

» Providers are considering taking on more payer functions;

» Payers are considering taking on more provider functions, and;

» The government is creating incentives for the lines to blur.

Yet, it is absolutely startling how little has actually been written about the history and realities of these role expansions.

We have therefore set out to come up with a relatively definitive, but concise, guide for every organization considering an expanded role. There are, in fact, historic waves of providers and payers testing their roles.

Navigant Healthcare’s Chris Myers, Kara Fleming and Brian Newell examine the past, present and future of provider-sponsored health plans. Where will the action be centered? What are the pros and cons of buying, developing or partnering with a health plan? Navigant Healthcare’s Michael Nugent and Chris Kalkhof suggest steps to manage the operational, competitive and financial risks faced by payers, providers and provider-sponsored health plans.

David Burik

Clients, Colleagues and Friends:

A Letter from David Burik

We also offer some first-hand voices from the field – two leaders who have been at the forefront of the movement. As CEO of Via Christi Health, Kevin Conlin sold a health plan, in part because it didn’t fit with the Kansas-based system’s mission. Now, as a senior executive of Horizon Blue Cross Blue Shield of New Jersey, he is overseeing the insurer’s increased collaboration with that state’s providers. Continuum Health Alliance President Chris Olivia also offers his observations as a former leader of both health systems and health plans, including why, as CEO of West Penn Allegheny, he initiated the merger with Highmark, the largest payer-provider combination to date.

Navigant Healthcare’s Catherine Sreckovich assesses whether and how provider-sponsored health plans should participate in new Medicaid models, and how Health Insurance Marketplaces open opportunities for closer partnerships between health systems and health plans. Navigant Healthcare’s Stephen Morales explains why the narrower networks and more tailored care of provider-sponsored plans may have an advantage when consumers click on to the online healthcare markets starting October 1.

Finally, Navigant Healthcare’s Jerry Chang and John Leary look at how managed care stocks have fared, and how valuation trends can help health systems decide on the best health plan strategy.

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Best regards,

David Burik, Managing Director, Co-Leader, Strategic Consulting Division, Navigant Healthcare [email protected] 312.583.4148

In conclusion, I believe that provider-sponsored managed care and payer-owned providers often have served as a “hedge” strategy that was intended to keep markets honest and to be available to expand “just in case.” Today, some organizations may decide that changes are so profound that marrying these roles together will not simply be a “hedge,” but instead will be the principal driver of their success. We have been particularly ambitious in our goals for this issue of Pulse; we hope you find it both timely and useful.

As co-leader of Navigant Healthcare’s Strategic Consulting Division with Andy Epstein, I am always happy to discuss your organization’s payer strategy, or any other challenges and opportunities, as you develop a vision and strategic options for the future. Please visit our website, navigant.com/healthcare, or contact me directly by phone or email.

Weigh in on the topic of provider-sponsored health plans. Go to navigant.com/pulse to take our brief survey. Then on October 3, join us for the Pulse Exchange, a Navigant-hosted webinar where we will share the findings of this survey, and give you the opportunity to hear from our authors who will discuss the data, research and insights behind this issue of Pulse.

We Want to Hear from You

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Provider-Sponsored Health Plans: Past, Present and FutureBy Chris Myers Contributors: Kara Fleming and Brian Newell

KEY POINTS

» Renewed interest spurred by market consolidation, healthcare reform, evolving payment models and individuals selecting their own health insurance

» Majority of provider-sponsored plans have not expanded beyond their hospital sponsor’s geographic service area

» Analysis of pros and cons and strategic options help determine if a health plan makes sense

After several cycles of development and divestiture of health plans by health systems since the ’70s, health systems are showing renewed interest in developing health plans in the post-reform era, in response to opportunities emanating from the Affordable Care Act (ACA) and Medicare Accountable Care Organization (ACO) and related initiatives. Those health systems see ownership of a health plan as a strategic tool to benefit from transformation of their delivery system and as a distribution channel for retail markets, where individuals, rather than their employers, select their own




health insurance. However, as evidenced by many divestitures and closures, mixing the payment and provision of care is not for everyone.

There are compelling arguments both for and against provider-sponsored health plans, just as there are multiple strategic options to enter the health plan business. To date, little has been written about this segment of the health insurance industry. Given the gap between the growing interest and lack of information on the topic, Navigant Healthcare offers its perspective on the past, present and future of provider-sponsored health plans in this article.

The term “health plan” typically refers to a subscription-based medical care arrangement offered through a Health Maintenance Organization (HMO), Preferred Provider Organization (PPO) or Point of Service (POS) plan and is often used as shorthand for managed care or HMO. “Provider-Sponsored Health Plan” (PSP) is a term used to describe a health plan that is owned and operated by providers (hospitals and/or physicians) rather than by shareholders (publicly traded companies), policyholders (mutual organizations) or the government.

Historically, health systems have expanded vertically by developing health plans for a number of reasons, including:

» To develop population health and wellness capabilities in order to better meet the organization’s mission

» To expand the geographic market served and draw patients to its tertiary hub

» To fully leverage the organization’s brand and access more of the premium dollar

» To develop more “glue” with voluntary physicians

At the same time, many health systems have divested or closed their health plans, with recurring reasons being the inability to resolve the inherent payer-provider conflict and the inability to achieve sufficient scale for success.

THE PAST:

Over the past 100 years, there have been at least four waves of provider health plan development. Given the most recent round of health plan “birth announcements,” largely around ACOs, many believe the industry is entering a fifth wave of provider-sponsored development. A brief history of each wave appears in Table A. (see next page)

During the same time period, there was tremendous consolidation in the health insurance industry and most of the big national carriers increased in size at the same time that many provider-sponsored health plans were sold. As of 2012, the top five health insurance companies — UnitedHealth, WellPoint, Aetna, Health Care Service Corporation and Cigna — account for 112 million lives in the U.S.

THE PRESENT:

As of 2011, 13% of U.S. community hospitals (640 of 4,973) reported having an equity position (or being part of a health system with an equity position) in an HMO — the same percentage as in 2007. There is, however, significant variation in provider ownership of HMOs by state and region. The states with the highest percentage of provider-sponsored health plans are in the North, whereas the South has the lowest percentage, perhaps due to the prevalence of taxable hospitals in that region.

PERCENTAGE OF COMMUNITY HOSPITALS WITH AN EQUITY POSITION IN AN HMO BY STATE (2011 DATA)

<10% 10%–24% 25%+Source: Navigant analysis of AHA Hospital Statistics: 2013 Edition

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WAVE WAVE I: PIONEERS WAVE II: HMO ACT PASSED

WAVE III: DRGS TO CLINTON

WAVE IV: MEDI- MANAGED CARE

WAVE V: POST REFORM?

ERA 1910s–1960s 1970s 1980s–1990s 2000s 2010s

EXAMPLES » Kaiser

» Group Health Cooperative of Puget Sound

» Health Alliance Plan of Michigan

» Harvard Community Health Plan

» Rush-Presbyterian’s Anchor HMO

» Michael Reese Health Plan

» Predecessor organizations of both Geisinger Health Plan and Security Health Plan

» MedCenters Health Plan (Park Nicollet)

» Presbyterian (New Mexico)

» Spectrum (Priority Health)

» Intermountain (SelectHealth)

» Ochsner Health Plan

» Dean Health Plan

» UPMC Health Plan

» M-CARE (University of Michigan Health System)

» Providence Health Plan and Legacy Health Plan (both in Portland)

» Very few new entrants, rather expansion of existing plans to Medicaid and/or Medicare

» Catholic Health Initiatives

» Sutter Health

HIGHLIGHTS » 1970: Paul Elwood coins the term health maintenance organization (HMO)

» 1973: Federal HMO Act, encouraging development of HMOs

» 1981: Omnibus Budget Reconciliation Act (OBRA) allows states to implement Medicaid managed care

» 1982: Tax Equity and Fiscal Responsibility Act (TEFRA) creates incentives for HMOs to increase participation in Medicare on an at-risk basis

» 1987–1991: Managed care shakeout as price wars lead to 70 HMO closures

» 1993: Humana divests its hospitals, due to inherent Integrated Delivery System (IDS) conflict

» 1997: Balanced Budget Act (BBA) creates Medicare Choice, a private health plan for Medicare beneficiaries

» Mid to late 1990s: Economic boom and other factors lead to managed care backlash. Many health systems divest their health plans given struggles — Incurred But Not Reported (IBNR), small scale, losses — and high valuations

» 2010: Affordable Care Act (ACA) becomes law

» 2013: ~430 ACOs (of which ~250 are Medicare ACOs)

TABLE A


Beyond that national landscape, we offer five observations about the current state of provider-sponsored health plans.

1. Only one provider-sponsored health plan, Kaiser, is among the largest health insurers in the U.S. and only two are among the top 50.

Furthermore, only six of these plans account for greater than a half a million lives. (see Table B on next page)

Provider-sponsored health plans have a modest national footprint, as the overwhelming majority has not expanded beyond the geographic service area of their sponsoring organizations. The most notable exception is Kaiser, which primarily contracts with, rather than operates, hospitals in its non-West Coast markets. In addition, all of the top 10 largest provider-sponsored health plans were founded 25 or more years ago. Interestingly, the most recently formed of these plans — by University of Pittsburgh Medical Center — is the second largest.

In addition, several “Clinic Club” organizations have operated longstanding HMOs to overcome geographic distances to reach their tertiary hubs. Successful examples include Geisinger Health System’s Geisinger Health Plan (290,000 lives), Carle Clinic’s Health Alliance Medical Plans (245,000 lives) and the Scott and White Health Plan (168,000 lives).

2. Not surprisingly, given the data above, only a handful of provider-sponsored health plans have a leading statewide position, defined as being No. 1 or No. 2.

In fact, beyond Kaiser, only three provider-sponsored health plans are No. 1 or No. 2 within a state, in terms of 2012 total medical enrollment: Health Alliance Plan in Michigan, Presbyterian in New Mexico and SelectHealth in Utah. (see Table C on next page)

3. The vast majority of provider-sponsored health plans are operated by tax-exempt rather than taxable health systems.

As of 2011, 21% (1,025 of 4,973) of U.S. community hospitals were investor owned, according to the 2013 AHA Hospital Statistics Guide. Despite their significant presence in hospital ownership, however, to our knowledge, none of the five largest taxable health system chains (by staffed beds) — HCA, Community Health Systems, Universal Health Service, TENET and Health Management Associates - operates a large health plan. Furthermore, most other investor-owned hospital systems have avoided expanding into the health insurance business to date. Notable exceptions include:

» Ardent Health Services, which operates Lovelace Health Plan in New Mexico (with 222,000 total medical enrollment in 2012).

» IASIS Healthcare, which operates Health Choice Arizona (with 200,000 total medical enrollment in 2012).

» Vanguard Health Systems, which operates Phoenix Health Plan / Abrazo Advantage (with 187,000 total medical enrollment in 2012). In addition, Vanguard’s Detroit Medical Center acquired ProHealth Plan, a small HMO in Detroit, in late 2012. Interestingly, TENET announced plans to acquire Vanguard in June 2013.

Reasons why taxable health systems generally do not run health plans may include:

» Many taxable health systems focus on smaller markets, which may have insufficient scale to support a health plan.

» Insufficient presence in metro markets to support a health plan.

» Focus on commercial business and managed care relationships, rather than managed Medicaid and Medicare Advantage.

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HEALTH PLAN YEAR FOUNDED

TOTAL U.S. MEDICAL ENROLLMENT (000s)

U.S. MARKET RANK

1. KAISER FOUNDATION HEALTH PLAN 1937 8,851 7

2. UPMC HEALTH PLAN 1998 737 49

3. HEALTHFIRST (CONSORTIUM OF HOSPITALS IN NEW YORK CITY) 1993 693 52

4. HEALTH ALLIANCE PLAN (HENRY FORD) 1960 646 57

5. PRIORITY HEALTH (SPECTRUM) 1992 577 64

6. SELECTHEALTH (INTERMOUNTAIN) 1984 528 69

7. SENTARA HEALTH PLANS 1984 445 77

8. METROPLUS HEALTH PLAN (NYC HEALTH AND HOSPITALS) 1985 438 79

9. PRESBYTERIAN HEALTH PLAN 1985 420 84

STATE NO. 1 ORGANIZATION (BY 2012 TOTAL MEDICAL ENROLLMENT)

NO. 2 ORGANIZATION (BY 2012 TOTAL MEDICAL ENROLLMENT)

CALIFORNIA Kaiser WellPoint

COLORADO Cigna Kaiser

HAWAII Hawaii Medical Service Association (BCBS Hawaii) Kaiser

MICHIGAN BCBS Michigan Health Alliance Plan (Henry Ford)

NEW MEXICO Presbyterian BCBS New Mexico

OREGON Regence BCBS Oregon Kaiser

UTAH SelectHealth (Intermountain) Regence BCBS Utah

TABLE B: LARGEST PROVIDER-SPONSORED HEALTH PLANS BY TOTAL 2012 U.S. MEDICAL ENROLLMENT

Source: AIS’s Directory of Health Plans: 2013. Plans with 400,000+ medical enrollment. Total medical enrollment is based on 2012 data and includes fully funded and self-funded enrollment, both commercial and government sectors.

Source: AIS’s Directory of Health Plans: 2013 Priority Health (Spectrum) is No. 3 in Michigan and Lovelace (Ardent) is No. 3 in New Mexico.

TABLE C: STATES WHERE PROVIDER-SPONSORED HEALTH PLANS RANK NO. 1 OR 2


4. A small minority of academic medical centers (AMCs) operate large health plans.

With the obvious exception of University of Pittsburgh Medical Center (UPMC), shown in Table D, few AMCs operate a material

commercial health plan. Generally speaking, high-cost hospitals with relatively low proportions of primary care physicians and a focus on high-intensity inpatient services would seem to be a poor match for a successful managed care organization.

AMC PARENT HEALTH PLAN COMM. RISK LIVES

COMM. NON RISK LIVES

MEDICARE ADV. LIVES

MEDICAID AND OTHER LIVES

TOTAL MEDICAL ENROLLMENT

1. UPMC UPMC Health Plan 199 163 112 263 737

2. IU HEALTH (INDIANA)

MDWise 337 337

3. PARTNERS HEALTHCARE

Neighborhood Health Plan

95 158 253

4. BOSTON MEDICAL CENTER

BMC HealthNet Plan

61 192 253

5. FAIRVIEW (UNIV. OF MINN.) AND OTHERS

PreferredOne 70 157 227

6. JOHNS HOPKINS (AND OTHERS)

Priority Partners 215 215

7. PARKLAND HEALTH Parkland Community Health Plan

202 202

8. UNIV. OF LOUISVILLE (AND OTHERS)

Passport Health Plan

178 178

9. VCU HEALTH SYSTEM Virginia Premier Health Plan

169 169

10. TEMPLE UNIV. HEALTH SYSTEM (AND OTHERS)

HealthPartners of Philadelphia

163 163

TABLE D: TOP 10 AMC-SPONSORED HEALTH PLANS BY TOTAL 2012 U.S. MEDICAL ENROLLMENT (000s)

Source: AIS’s Directory of Health Plans: 2013


5. Three market conditions appear to be favorable to sustainable provider-sponsored health plans.

» A more concentrated and integrated provider sector (both hospitals and physicians): This makes it easier for one provider system to offer a comprehensive (and perhaps exclusive) provider panel across a wide geography.

» More employees of local and regional, rather than national, employers: Given the wide dispersion of their employees, national employers are more likely to contract with national, rather than regional, provider-sponsored health plans.

» Taxable, rather than tax-exempt, regional health insurance leaders: Given quarterly earnings pressures, taxable insurers may be less likely to engage in costly price wars with provider-sponsored health plans for small group and / or locally based business, thus enabling provider-sponsored plans to occupy this segment.

States with these favorable conditions that have large, successful provider-sponsored health plans include Colorado (Kaiser), New Mexico (Presbyterian), Utah (Intermountain) and most interestingly Wisconsin. In Wisconsin, the nine largest provider-sponsored health plans account for nearly one in six lives, despite limited presence in Milwaukee, the state’s largest city.

Furthermore, a provider-sponsored health plan is the market leader in all Metropolitan Statistical Areas (MSAs) in central and western Wisconsin, including Madison.

THE FUTURE:

Recent activity suggests a new wave of provider-sponsored health plan development. Recent examples of each appear below.

RECENT ENTRANCES

» Partners HealthCare System acquired Neighborhood Health Plan (2011)

» Vanguard’s Detroit Medical Center acquired ProCare Health Plan (2012)

» Sutter Health applied for an HMO license (2012)

» Catholic Health Initiatives bought a majority stake in Soundpath Health (AvMed) (2012)

» Piedmont Healthcare and WellStar Health System announced a partnership to start a health plan (2012)

» North Shore-LIJ Health System announced its plan to develop a health plan (2012)

» MemorialCare Health System (Los Angeles) purchased certain assets of Universal Care and formed Seaside Health Plan (2012)

» Cooper University Health Care announced plans to take a 20% stake in AmeriHealth New Jersey, which is part of IBC (2013)

» Catholic Health Partners announced initial agreement to purchase Kaiser’s Ohio operations — both health plan and physicians (2013)

RECENT LARGE DIVESTITURES

» Sisters of Mercy sold Mercy Health Plans (~180,000 lives across Missouri and Arkansas) to Coventry (2010)

» Via Christi sold Preferred Health System to Coventry (2010)

» Children’s Mercy sold Family Health Partners to Coventry (2011)

» Lutheran Medical Center sold HealthPlus to Amerigroup (2011)

» Catholic Health East sold its stake in Keystone Mercy/AmeriHealth (~420,000 lives in Pennsylvania and South Carolina) to Independence Blue Cross and BCBS of Michigan (2011)

» Dean Health System, including Dean Clinic and the ~265,000 lives in Dean Health Plan in Wisconsin, announced its plan to sell to its longtime partner SSM Health Care (2013)



Unfortunately, there is no “answer key” for providers to determine whether development of a health plan makes sense for an organization and for its market. However, stepping back from the recent round of announcements and

transactions listed on the previous page, compelling arguments exist both for and against provider-sponsored health plans, as summarized in the following:

ARGUMENTS IN FAVOR OF PROVIDER-SPONSORED HEALTH PLANS (PROS)

» Provides a distribution channel to increase and get closer to the customer base, as more business becomes individual or retail, as opposed to wholesale (e.g., development of Health Insurance Marketplace and growth of managed Medicaid and Medicare Advantage

» Enables more control of the premium dollar, the ability to convert some administrative dollars into provider payments and the ability to reap the benefits of transforming the delivery system

» Provides more control of claims data

» Facilitates greater focus on population management and wellness

» Enables greater opportunity to “bend the cost curve,” including on own employees

» Enables further alignment of incentives between hospitals and physicians (as well as development of own proprietary fee schedule)

» Enables local governance and reinvestment of profits in local community

ARGUMENTS AGAINST PROVIDER-SPONSORED HEALTH PLANS (CONS)

» Creates competing incentives (e.g., more vs. less care), given prevailing reimbursement model

» Can create “internal” conflicts between physicians, the hospital and the health plan

» Providers and payers require distinct core competencies (i.e., different businesses)

» Increases capital requirements and regulatory oversight (and the source of capital is unclear — unlikely to be from revenue bonds)

» Future of health insurance sector is uncertain

» Most newer, provider-sponsored health plans have a limited (regional, not national) scale

» History — many failures, although there are a few notable successes (and some “failures” have resulted in a health plan sale)

While many of these arguments for vertical integration are identical to those during the ’80s to mid ’90s, today’s economic, employer, provider and payer environment is different in a number of material ways.

» Growth of health systems: Health systems are generally larger and more integrated with physicians than before.

» Evolving payment models: Society is focused on lowering healthcare costs and payment is increasingly tied to value.

» Business moving from wholesale (group) to retail (individual): Evidence of this includes the development of Health Insurance Marketplaces, the growth of managed Medicaid, the growth of Medicare, including Medicare Advantage and more individual financial responsibility for healthcare.

» More concentration of payer sector: The government (Medicare and Medicaid) insures a greater percentage of total lives and large national insurers continue to grow and consolidate.


» Selective acquisition of providers by payers: Recent examples include Highmark’s acquisition of West Penn Allegheny, WellPoint’s acquisition of CareMore and Humana’s acquisition of Concentra.

» Growth of health system employee base: Health systems account for a growing percentage of the employee workforce in many markets.

Of course, as healthcare is predominantly still local, careful consideration of regional market realities and organizational capabilities is required prior to starting a health plan. In so doing, significant factors to be considered are the likely competitive response of area health plans and competitors.

That said, there are four strategic options for health systems wanting to develop health plans. Each approach (outlined in Table E below) has

distinct advantages and disadvantages and health systems have pursued all such models.

Only time will tell if health plans developed now by providers will be sustainable and material or just a fad. However, Navigant Healthcare expects to see growing interest in, and development of, provider-sponsored health plans by organizations pursuing population management strategies in markets with favorable market conditions, as well as growth and expansion of select mid- to large-sized existing provider-sponsored health plans. The typical path for new entrants is to focus first on health system employees, then on other local employers and then on adding Medicare and/or Medicaid initiatives. What remains to be seen is whether these can develop the capabilities to effectively occupy market segments and compete effectively with well-capitalized national insurers in an evolving marketplace.

OPTION PROS CONS EXAMPLES

1. ACQUIRE AN HMO LICENSE (NEW OR DORMANT)

» Control » Time

» Expense/capital

» Risk (new business)

» Sutter Health

2. BUY AND REBRAND AN EXISTING PLAN

» Control

» Time

» Expense/capital

» Risk (new business)

» MemorialCare

» Partners

» Vanguard/DMC

3. PARTNER WITH ANOTHER PROVIDER (TO START, BUY IN OR PRIVATE LABEL)

» Speed

» Access to experience/skill

» Reduces risk

» Control

» Complexity

» CHI and AvMed

» Piedmont and WellStar

» MedStar

» HealthPartners of Philadelphia

» CommunityCare (Tulsa)

» Mercy Health Plan (Arizona)

4. PARTNER WITH AN INSURER

» Speed

» Impact

» Access to experience/skill

» Control

» Impact on relationship with other insurers

» Aetna (with Banner, Carilion and others)

» Cigna (with BayCare, Ochsner and other large physician groups)

» Highmark and Mercy (co-own Gateway Health Plan)

» AmeriHealth New Jersey and Cooper

TABLE E


About Chris MyersChris Myers is a Director in Navigant Healthcare’s Provider Strategy team. He has more than 20 years of healthcare strategy consulting experience, with a focus on enterprise strategy and mergers and acquisitions. Chris received his Bachelor of Arts at Williams College and his MBA in finance at Northwestern University’s Kellogg School of Management. Contact him at [email protected] or 312.583.4161.

About Kara FlemingKara Fleming is a Director within Navigant Healthcare’s Payment Transformation team who has served as a consultant and executive to health plans and health systems over the past twenty years. Kara received her Bachelor of Arts at Indiana University and her MBA at Harvard University. Contact her at [email protected] or 312.583.2178.

About Brian NewellBrian Newell is a Senior Consultant within Navigant Healthcare’s Payment Transformation team and advises Navigant’s payer clients. Brian received his Bachelor of Science degree in health policy and management from Providence College and his Masters in Health Services Administration from the University of Michigan School of Public Health. Contact him at [email protected] or 312.583.4176.

http://www.navigant.com/professionals/m/myers-chris/

http://www.navigant.com/professionals/f/fleming%20kara/


KEY POINTS

» Health reform makes operational, competitive, financial risks higher than ever for payers and providers

» An empty bed is better than an inappropriately filled bed in most provider-sponsored health plans

» Now is the time to develop your action plan to manage risk and put controls in place

With the advent of reform, Health Insurance Marketplaces, Accountable Care Organizations and new payment models, the magnitude of operational, competitive and financial risks have increased substantially for payers and providers.

» Clinical and Administrative Operational Risks relate to how your organization delivers care and performs administrative functions from staffing to scheduling to coding for the populations you serve. Several of the risks tie to the disease burden of the population, as well as the incentives those populations face. Typically, the chief clinical officer and chief operations officer manage operational risks.

» Competitive Market Risks relate to competitors’ attempts to steer patients, members and volumes from your enterprise to their enterprises. These risks originate from competitors’ decisions related to facility placement, physician recruitment, affiliations and product/service offerings. These risks are typically managed in part by strategy, business development and sales staff.

» Financial Risks relate to how your organization budgets, prices, invests, distributes and reserves funds to cover random events, operational risks and market competition (none of which can ever be fully controlled). The chief financial officer is typically responsible for managing the financial risks, which are rooted in operational and competitive risks.

The entire executive team is typically responsible for managing these risks in unison.

Risk Management Roadmap for Provider-Sponsored Health Plans and Population Health InitiativesBy Michael Nugent and Chris Kalkhof




1. Risk Landscape: What’s Changing?

Large payers historically have leveraged their large balance sheets over diverse products, networks and fully/self insured populations to withstand random events, operational mishaps and competitive actions. Consequently, payers have not had to intensively manage care, per se, to be successful.

Providers, on the other hand, have historically leveraged their balance sheets to capitalize facilities, clinical infrastructure and physician practices. Providers have not maintained large reserves to the same extent that payers have. Providers also have generally maintained a risk-averse profile and purchased stop-loss, malpractice and errors-and-omissions insurance to cover a variety of operational risks within their facilities.

But for those systems that are ready to take a strategic leap toward population health management and provider sponsored health plans, it is critical to understand the operational, financial and competitive risks associated with a business model where an empty bed is better than an inappropriately filled one. The remainder of the article provides a framework and roadmap for managing such risks.

2. A Framework for Managing Operational, Financial and Competitive Risks for Provider-Sponsored Health Plans and Population Health Initiatives

A comprehensive risk management roadmap must accomplish the following:

» Define operational, financial and competitive risks

» Define the day-to-day functions that are associated with those risks

» Specify “success metrics” for each risk

» Assign who is responsible for managing which risks

» Prioritize investments in skills and tools to manage the risks

Table A on the next page captures three primary categories of risks associated with provider-sponsored health plans and population health initiatives.

This framework is particularly relevant to provider-sponsored health plans that choose to take on all three risks in a post-reform environment. This framework is also very useful to payers and providers who are negotiating shared savings, shared risk and performance-based, population health-based contracts with payers.

CONTINUED ON PAGE 17


CLINICAL AND ADMINISTRATIVE OPERATIONAL RISK

COMPETITIVE/ MARKET RISK

FINANCIAL RISK

Day-to-Day Functions

» Care delivery, staffing, scheduling, coding, documentation

» Facility and clinic placement, partnerships and affiliations, products and service portfolio

» Pricing, budgeting, investing, reserving, and distribution of funds

Potential Blind Spots that Need Transparency and Management

» Unexplained clinical practice variation

» Cost/price of new expensive technology

» Disease prevalence and comorbidities in a given population

» Expensive out-of-network utilization

» Clarity around Physician Hospital Organization (PHO) vs. Independent Practice Association (IPA) vs. medical group functions rather than unnecessary duplication

» Unexpected patient behavior under various incentives such as high deductible health plans

» Cherry picking “good risk” and dumping “bad risk”

» Product, network and channel disruption based on competitors’ actions or our inaction

» How various competitive, market, clinical and administrative risks factor into key pricing, budgeting, investing, etc. decisions — given that competitive and operational risks can never be fully controlled

Success Metrics to Track

» Process and structure metrics for systems to eliminate systemic patient safety risks

» Lives under management

» Market proof points re: quality, access, affordability that distinguish your offerings from competitors

» % Revenue with performance contracts

» % Per Member Per Month (PMPM) the system directly owns, controls or outsources

» Commercial price points vs. market

Who Manages it » CCO COO » Sales and strategy » CFO

Emerging Skills and Tools to Manage the Risks

» Retool primary care practices

» Clinically integrate delivery functions across the continuum

» Adopt regional and local governance

» Tools to communicate patient clinical data to patients and caregivers at point of care in an accurate and timely manner

» Comprehensive action plan re: product, network and channel tactics for growth (e.g., direct to employer strategy)

» Includes appropriate ambulatory and primary care footprint, etc.

» Tools to stratify and quantify patient populations

» Ability to influence patient benefit design/ incentives

» Manage a retail pricing strategy

» Underwriting and actuarial skills

» Single source of truth data warehouse for analytics and reporting

TABLE A


Key Success Factor No. 1: Define / manage underlying clinical and administrative operating risks

Clinical and administrative operating risks originate in two areas:

» The underlying disease prevalence, comorbidities, severity of illness, information and incentives associated with the populations/customers you serve.

» Weak links in the care delivery, staffing, scheduling, coding and documentation infrastructure and functions your system performs each day.

To manage operational risks at their origin, it is important to understand the origins of clinical and administrative operating risks:

» Disease prevalence: Certain diseases (e.g., cancer, cystic fibrosis, etc.) are more unpredictable and costly than others. So before agreeing to underwrite a particular population, clinical leaders and finance should seek to understand the disease prevalence of the population by acquiring historical utilization and cost data for that population.

» Comorbidities: Comorbidities such as asthma, diabetes and heart disease make treatment more complex and costly, and should therefore be factored into patient care plans, staffing, scheduling and delivery accordingly.

» Severity of illness/disease stage (e.g., stage 1 vs. stage 4 cancer) also impacts overall resource needs and costs, and requires operators’ attention, too.

» Patient incentives: As patient out-of-pocket payments (e.g., copays, deductibles) increase, patients may postpone services. The evolution of high-deductible health plans and value-based health plans, particularly in challenging economic times, change patient behaviors at point-of-care and point-of-insurance enrollment. (Health Serv Res. 2011 February; 46(1 Pt 1): 155–172) Clinicians need to be more aware of patients’ increasing cost burdens and the impact on when and how they seek care.

» Clinical practice variation: Literature by John Wennberg on small area practice variation analysis underscores the relevance of overuse, misuse and underuse of health services on overall healthcare utilization, quality and cost. Until providers have accurate and timely data to risk, stratify and treat patients, and distinguish explained from unexplained variations in utilization and cost, providers need to be extremely cautious on taking delegated risk or pursuing a direct-to-employer strategy.

CONTINUED ON PAGE 19

Case Study: A Provider's Quest to Reduce Unexplained Variation in CareThe nation’s top provider-sponsored health plans zealously measure and reduce unexplained variation from evidence-based care.

Take the example below. The authors profiled hypertension treatment variations among different physician cohorts. The first quintile of providers utilized certain drugs very differently than other quintiles. (Green, Red, et al. “Beyond the Efficiency Index” Health Affairs May 2008).

Upon further research and discussion, the authors concluded that, by promoting the first quintile's practice pattern across the entire medical group, quality, as well as cost, could be maintained or improved.


Next, imagine having the systems to track these unwarranted variations across an entire population, not just a particular service or product (such as ACE inhibitors). Consider the case of General Electric, one of the largest groups of insured lives in the country. Years ago, General Electric began profiling its improvement opportunities using a classic 6-sigma approach. It’s providers’ turn to take the lead at quantifying and managing these operational risks in partnership with like-minded employers, brokers and payers. (DPM is defects per million parts; CABG is coronary artery bypass graft).

PRESCRIBING PATTERNS IN TREATMENT OF UNCOMPLICATED HYPERTENSION BY ROCHESTER INDIVIDUAL PRACTICE ASSOCIATION (RIPA) INTERNISTS, 2003–2004

30

15

0

-15

-30

DaysThiazidesACE InhibitorsBeta-blockersCCBsARBsCCB-ACE Inhibitor combos

Quintille 1 Quintille 2 Quintille 3 Quintille 4 Quintille 5Source: RIPA commercial health maintenance organization (HMO) data, 2003–2004. Notes: Relative utilization per episode, in days' supply of medication, ACE is angiotensin-converting enzyme. CCB is calcium channel blocker. ARB is angiotensin receptor blocker.

Providers that can make the unpredictable risk more predictable and reduce unwarranted variation (through retooling their primary care model and reducing avoidable post acute care costs), invest in information infrastructure, and balance the need for centralization and decentralization, stand to benefit greatly from managing the total premium dollar.

Source: EHCCA based on GE's approach to health benefits procurement.

1

10

100

1,000

10,000

100,000

1,000,000

1 2 3 4 5 6 SIGMA

93%

99.4%

99.98%

Diabetes Care — $6MM OpportunityAdmits to Hospitals

CABG at "5 star" facility (Geisinger money-back guarantee) — $3MM Opportunity

Radiology Overuse — $60MM OpportunityCardiac Admits to Quality Centers — $7MM Opportunity

Outpatient Cardiac Care — $15MM Opportunity

Rx Overuse — $20MM Script DaysRx Misuse — $16MM Script Days

Eligibility Accuracy

Timely pay of workers' comp

Web & IVR Availability

DPM


Key Success Factor No. 2: Define / manage underlying competitive risks

Simply reducing operational risk is insufficient to operate a successful population health-based initiative or your own health plan. Another, and sometimes most important, risk relates to the competitive risks providers and payers face when they get into each other’s business.

Consider the following actions/reactions that occur in our industry every day:

» Dozens of health systems have sought to create clinically integrated networks to bolster their competitive position, quality and financial stability. Although many payers have been wary of providers’ attempts to clinically integrate, several payers have found clinically integrated networks to be excellent partners to reduce medical cost trends, allocate revenue based on performance, transparently allocate and manage risks, and even mutually grow top-line revenue from weaker competitors. Likewise, several Independent Physician Associations (IPAs) have succeeded under similar arrangements, where payers have steered Medicare Advantage patients/members to IPAs that deliver lower costs, accurate documentation and high patient satisfaction scores.

» Payer/provider relations also have become strained, however, when health systems have entered insurance markets to directly compete for insured lives. Incumbent payers have been particularly hostile to providers they perceive as competitive risks who cherry pick the least risky lives, even if the provider’s intentions were to simply get more control over their future referrals. In some West Coast and East Coast markets, some health plans have reacted with contract terminations. In others, payers have temporarily discounted insurance premiums to prevent providers from entering particular product markets, most notably Medicare Advantage. Several providers have overlooked these competitive risks, and as a result have significantly over-invested in their own provider-sponsored health plans.

» Payer/provider relations have become strained when payers have aggressively pursued exclusive network contracting and product strategies that reduce patients’ ability to access providers. A number of front-page negotiation standoffs have been related to which lives providers have access to serve at what price point(s) in the market. Relations have also been strained when providers perceive that the plan is allocating excessive downside risk to providers, particularly if providers lack the systems to manage, budget or price that risk. Finally, relations have become strained when providers have perceived plans’ attempts to create and reward new physician contracting entities (e.g., IPAs) with lucrative bonus payments in return for reduced hospital utilization, which hurts hospitals’ bottom lines.

Mindful of these market dynamics and competitive risks, there are numerous ways to manage competitive risk, some more potent than others. Consider the following risk mitigation strategies, depending on your situation:

» Contract Language: Where possible, some providers have been able to negotiate language that prevents commercial payers from tiering or narrow-networking the provider without the providers’ permission. If the payer does so, it must pay the provider (not reimburse the patient) a percentage of charges by default. This competitive risk management approach is not very sustainable, though, particularly if the provider is not a “must have” system.

» Disciplined Pricing Structure: Many providers have also created a tiered pricing structure to compete most effectively in the market.

› Consider giving your “best prices” to like-minded payers, brokers, etc., capable of expanding your market share and margins through either a new product or service-specific steerage (e.g., steering patients to your ambulatory surgery center).


› Consider giving your other set of price points to unaligned payers, brokers.

If your system has no policy to determine when to trade discounts for market share, your system may make a rash competitive decision to cut its prices with no guarantee of market share growth, only to have its competitors cut their prices, too. This is what happened in many markets in the 1980s and 1990s, and is likely to happen again to those without pricing policies and procedures in place.

» Payer Relationship Management: Providers should seek to improve, if not establish, strong working relationships with the largest payers, brokers and employers in order to manage competitive risks. Too often, providers’ relationships with payers are either undeveloped or strained. Proactively managing relationships, setting expectations, and sharing data are key to managing the competitive risks that will emerge as payers, providers and other actors compete for patients.

» Market Essentiality & Value Creation: Ultimately, the best/unassailable strategy is to be a “must have” provider based on critical mass and the ability to create differentiated value through personalized service, access, quality and price. The other key is to have a tactical plan for each product (e.g., Medicare Advantage, Health Insurance Marketplace, traditional PPO), network (e.g., owned or affiliated) and channel (e.g., direct-to-employer, insurance broker, business coalition). The plan should specify which customers, what prices and budgets to optimize profitable growth and market share.

Finally, ensure that your leadership team is clear on roles and responsibilities to execute on the product, network and channel strategy. For example:

» Clarify the role of your PHO, IPAs and medical group re: population health. There may be significant duplication of care management and paper-based systems across these types of entities within a given health system.

» Create a monthly operating progress plan to senior executives in order to track progress on how your system is managing particular patient populations/products (e.g., Medicare Advantage lives) relative to budgeted financials, quality, satisfaction and access scores.

Key Success Factor No. 3: Define / manage underlying financial risks

Finance plays a critical role in managing risk. Most finance departments are familiar with buying malpractice, errors-and-omissions and stop-loss insurance and managed balance sheet risk.

But when health systems move into managing population health and/or provider-sponsored health plans, the stakes increase. In these instances, finance needs to play the primary role in making operating, competitive and financial risks as transparent as possible.

This often starts with basic education on the magnitude of financial risk inherent to particular patient populations based on underlying age, gender, disease prevalence, patient comorbidities, stages of diseases, clinical practice, patient incentives and catastrophic events in the population.

Recently, as illustrated in Table B on the next page, a client, a client profiled the magnitude of risk on a variety of different patient populations served. Although the total medical cost (expense) trend in total was 5%, underlying cohorts (of 50,000 patients each) experienced significant differences in annual medical cost trend (from -10% to +20%). Providers interested in starting their own health plan or population health management program need to recognize the magnitude of the inherent risk and variability that needs to be budgeted, priced, allocated and managed.


So consider some of the following tactics CFOs can use to manage risk, beyond buying malpractice and stop-loss insurance:

» Factor in the impact on new clinical programs and technologies on utilization, your pricing and your budget: Finance directors who overlook the impact of a large group of newly employed specialists that attract a large subset of chronically ill patients will likely under-price and under-budget that population.

» Do not allow others to set your total medical expense budgets and prices: One of the most common problems that arose in the 1990s was when health systems allowed health plans to set premiums without input or review from the provider. Some health plans set the premiums low, in order to sell products in the market. Providers agreed to manage medical costs to a percentage of the artificially low premium. So providers were left holding the bag when health plan expenditures exceeded premium revenue.

» Do not overpay for services you do not control: Patients may need expensive care when they are out of town, and do not have access to your services. How you choose to price, contract and/or carve out those services with the health plan or employer is critical to define at the onset.

» Recognize the evolving regulatory restrictions on health plans’ administrative and profit margins: Providers should not be misled into believing that owning the entire premium dollar is an easy way to bolster margins, given emerging regulations on carriers’ margins and administrative costs.

» Simulate, simulate, simulate: To incorporate these issues in your pricing and P&L budgets, the finance team needs to create financial scenario models that account for regulatory changes, as well as the age, gender, clinical practice, comorbidities, incentives and severity of illness in populations providers care for. Ideally, purchasers, payers and providers should meet to jointly quantify and discuss how various event risks will be managed, budgeted and priced. For any commercial ACO product or program, consider the following:

› What financial risk/responsibility should the patient (member) have to assume?

› What financial risk/responsibility should the provide have to assume?

› How will the provider allocate risks/rewards internally?

› What’s left for the employer and health plan to assume?

TABLE B: ANNUALIZED COST CHANGE (TREND)25

Perc

enta

ge

Incr

ease

-15Across 12 Months

Average Medical Cost


About Michael NugentMichael Nugent is a Managing Director and leader of Navigant Healthcare’s Payment Transformation team. With nearly 20 years in the healthcare payer and provider industry, he is an expert and nationally recognized writer, speaker and advisor in the area of pricing, managed care contracting strategy, negotiations and front-end revenue cycle innovations in an era of increased patient cost sharing and price transparency. Michael is co-author of the book, Accountable Care Organizations, Your Guide to Strategy, Design, and Implementation. He received his Bachelor of Arts from Lawrence University and his MBA from Northwestern University. Contact him at [email protected] or 312.583.4153.

About Chris KalkhofChris Kalkhof is a Director in Navigant Healthcare’s Payment Transformation team. He is a senior healthcare executive with more than 27 years of experience assisting providers and payers in organizational effectiveness, market opportunities and revenue growth. Chris received his Bachelor of Science from Allegheny College and his Master of Healthcare Administration from Tulane University. Contact him at [email protected] or 312.583.2143.

3. Summary and Conclusions

In summary, health systems have a long way to go to think like payers, and vice versa. After all, health systems are operating companies that invest in assets, while insurance companies carry very large reserves and more robust investment income. Furthermore, insurance is a scale business from a risk mitigation perspective and administrative infrastructure perspective.

If you are a provider who is considering entering the insurance and population health space, now’s the time to consider the financial, operational and competitive risks that you will need to manage, as well as the controls you will need to put in place.

http://www.navigant.com/professionals/n/nugent_michael/

First-Hand Voices from the Field

Q&A with

Kevin ConlinExecutive Vice President, Horizon Blue Cross Blue Shield


Kevin T. Conlin has more than 25 years of healthcare experience, with a concentration in hospital systems, provider management and managed care business. As president and CEO of Via Christi Health, a Kansas-based integrated health system, he oversaw the sale of Via Christi’s insurance company, Preferred Health Systems, to Coventry Health Care in 2010. In 2012, he joined Horizon Blue Cross Blue Shield of New Jersey, the state’s largest health insurance company, as executive vice president of healthcare management, responsible for the contracting results and relationships with hospitals, physicians and all providers in Horizon networks. Earlier in his career, he was president and CEO of Baptist Health System of East Tennessee and CEO of two teaching hospitals, Hotel Dieu in New Orleans and DePaul Medical Center in Norfolk, Va. Contact him at [email protected] or 973.466.4000.



Q: What forces are prompting health systems’ renewed interest in developing health plans?

Kevin Conlin: Health system leaders are making very significant commitments to transform the way they are organized to deliver value in care, rather than simply volume of care. They want to ensure they have the capacity and opportunity to participate in the value they have created and don’t want that value to benefit only other entities, such as insurance companies. Further, their business model is under such stress now that if they can't find a different way to generate margins — such as with a health plan — they’re going to face very difficult pressures to continue to operate their business.

Q: What drove your decision to sell Via Christi’s health plan to Coventry?

Kevin Conlin: We looked at what was going on in the health insurance field in the market where we operated, and determined we had a strong Blues competitor plus a couple of strong publicly owned companies. Even though we had a strong insurance subsidiary with the No. 2 insurance market share in Kansas, our concern was that if one of our competitors decided to take an aggressive premium pricing position, we would find ourselves incapable of meeting them from a capital structure standpoint and competing effectively in the long run. If we did find ourselves in a price war, our concern was that we may have to access the assets of the delivery side of our health system to remain competitive. That reality forced us to ask the question, ‘Is that something that we were willing to risk, if we wanted to preserve the reserves we had built to support the delivery side of our health system?’ Once we got to that point, we determined that we would be better served to sell the insurance unit, get the value that we created and enter a long-term contractual relationship with the ultimate buyer.

Q: Would you make the same decision now with today’s market forces?

Kevin Conlin: Absolutely. While owning a health plan gives you the opportunity to participate in the value that you create as a health system, what gets lost are the facts that owning and

operating a health plan carries very significant capital risk and requires a skill set that most health systems don’t have. Health systems have expertise in managing clinical risk. But most health systems aren’t familiar with the separate risk of running essentially a risk-financing mechanism, and developing that skill set is not inexpensive or something that’s easy to do, particularly for people with a background in delivery of healthcare.

Moreover, Via Christi is a faith-based organization with a core mission of delivering care, particularly for those who are vulnerable. We just didn’t find that being in the risk financing of healthcare was core to that mission. I believe other thoughtful health systems are asking that question themselves around their boardrooms: Is risk financing of healthcare core to their mission?

Q: What other questions should health systems ask before buying or developing health plans?

Kevin Conlin: One of the main strategic questions would be, ‘Does my organization have adequate capital to develop a meaningfully sized health plan?’ Corollary to that question is ‘Does my health system have adequate capital to invest in a meaningfully sized health plan and still meet the capital requirements that we have for ongoing investment in the care delivery side of our organization?’ The next would be, ‘Are we prepared, as a health system, to begin the process of managing waste out of the system?’

Q: Are we likely to see more health systems partnering with health plans, rather than starting their own or buying one?

Kevin Conlin: Yes, the concept of partnering will clearly dominate over the next 10 years. There are other health insurers that view the world similarly to the way we do at Horizon, which is that the future requires collaboration between providers and insurers. At the same time, I think most health system leadership teams are going to evaluate getting into the health insurance business and learn that there are immense capital requirements and significant challenges in taking on an entirely new line of business that they're not familiar with. In addition, they may be faced with competitive responses to entering


the Health Insurance Marketplace that may not be in their best interests, and they'll likely conclude that for all of those reasons, and probably more, that it's not the best strategic play for them.

Q: What should a health system look for when considering a partnership with a health plan?

Kevin Conlin: I would want to ensure my organization is getting appropriate financial recognition of the increased value that we are creating by improving quality and member experience while lowering the total cost of care. I would be looking for an insurer who wants to collaborate with provider systems and find a way to provide some alignment of incentives and some sharing of the gains.

Q: How is Horizon partnering with health systems and other providers?

Kevin Conlin: Horizon has taken a very decided approach of collaborating with providers to create value for our members and other paying customers, and also share the value with providers because we know that’s required for them to maintain a healthy infrastructure. We’ve set up kind of a ‘skunk works’ known as Horizon Healthcare Innovations, which developed the core processes, infrastructure, tools and technology to align with providers. We have focused on three types of collaboration: Patient-Centered Medical Homes, Episodes-of-Care Bundling and private Accountable Care Organizations (ACOs).

We have about 1,000 practitioners in New Jersey who are in the Patient-Centered Medical Home, and continue to grow that aggressively. We have 11 physician practices that are collaborating on Episodes-of-Care Bundling, and we have another three private ACOs with several more active discussions that we expect we'll get under contract in 2013. The total number of attributed members that we have in one of these three forms of collaboration is in the neighborhood of 250,000 individuals — a very significant number for one state — and we've been encouraged by the early results, in terms of improving the members' experience with the delivery system, improving the quality for the individual members and lowering the total cost of care.

Q: Which of the three collaborations is growing faster?

Kevin Conlin: We put most of our effort first into the development of the Patient-Centered Medical Home with primary-care physicians across the state because it plays such a key role in directing the care that all of our members receive. It’s the point of entry, the point of triage and the part of the health system that is responsible for the management of the largest amount of cost in the members’ experience. Consequently, that is the most advanced of our three types of innovative payment arrangements. The least developed is the Accountable Care Organization. It is more complex and usually more difficult to finalize because it involves a full continuum of a health system, including hospitals, related healthcare facilities and both hospital-employed and independent physician groups. We are continuing to push our development in all three areas, though most of our energy this year has been shifted to the ACO side because we think it's important to get the active participation by more hospitals and facilities in our range of payment arrangements.

Q: How do you attend to cultural differences between health systems and health plans?

Kevin Conlin: One of the things I’ve learned since I've been on both sides of the fence is that there's more of a commonality of mission and motivation than I think either side appreciates in the other. Having been on the health system side for many years, I know that the people come to work every day with the intent of doing their very best to serve the needs of the patients who they are responsible for. Sometimes I think that can get lost on those on the insurance side. And now that I’m on the other side of the table, I can tell you that there are a lot of people who come to work every day trying to figure out what's the best thing to do to manage the health of the members who we are responsible for. One key cultural difference is a health plan determines in a methodical, defensible and appropriate way the health needs of members and puts in place mechanisms to ensure that’s what is delivered, without unnecessary cost. At most providers, the entire management focus has more to do with insuring that appropriate levels of care are provided to the member. Therein lies the difference in the perspective of the two parties.

NAVIGANT PULSE 2013, ISSUE II | 26NAVIGANT PULSE 2013, ISSUE II | 26

First-Hand Voices from the Field

Q&A with

Chris Olivia, M.D.Former CEO of West Penn Allegheny Health

Christopher T. Olivia, M.D., has had leadership roles at both health systems and health plans. As President and CEO of West Penn Allegheny Health System, he initiated the recent merger with Pittsburgh-based insurer Highmark. It is the largest payer-provider combination to date, valued at $1.1 billion, and with $17 billion in revenue is the country’s third-largest integrated payer-provider system after the Veteran’s Administration and Kaiser. He then served as Senior Vice President for Strategic Planning and New Venture Development for Highmark. At West Penn, a hospital-based, academic health system with $1.7 billion in revenue, he led a $250 million turnaround by consolidating six hospitals and 750 physicians into a system of care. During his tenure, the flagship hospital was named a Top 50 hospital by US News & World Report. He also was the CEO credited for turning around Cooper Health System in Camden, N.J., which acquired 20% of AmeriHealth New Jersey this year. An ophthalmologist by trade, he is now president of Continuum Health Alliance, a leading healthcare management company based in New Jersey with nearly 1,000 physicians. Contact him at [email protected] or 609.781.8108.



Q: What market dynamics are prompting more mergers between health systems and health plans?

Chris Olivia, M.D.: Providers didn’t suddenly wake up and say, ‘I want to own a health plan.’ But more hospital executives are looking at insurance companies that control the premium dollars and saying, ‘I want more of those dollars.’ So they’re beginning to stick their toes back in the population-based care market, even though some are no better prepared than they were in the ’90s. We have another generation of hospital leaders since then who did not live through the failures of Medicare risk contracting. Health systems are still supporting medical practice driven by the same two dynamics — rate and volume — that have been dominant since the days of Hippocrates. They provide a service and get paid for it. If they provide more service, they get paid more. If they provide enough service, they can control the market. Many health systems are trying to perpetuate the fee-for-service model, and there may be systems with enough market muscle to be price makers and preserve that environment, for a while anyway. But the environment is changing. That model has driven up the cost of care to the point where governments and businesses are finding it difficult to manage.

Q: What should health system executives consider before getting into the health plan business?

Chris Olivia, M.D.: We should start by asking the question, ‘What’s changing in my marketplace and how do I need to adapt to survive and prosper?’ The Affordable Care Act (ACA) has had a greater impact on the healthcare industry than we thought it would, well before being fully ramped up. The invisible hand of the marketplace is acting in anticipation of ACA provisions being implemented with future payment reductions. We also have to consider the lingering effects of the recession, and what our competitors are doing. Once we recognize what’s changing, there are several options for providers interested in the financing of care: buy

a health plan, buy a component of a health plan, start your own health plan or undertake a limited-risk project like an Accountable Care Organization. A fifth option, as we did at West Penn Allegheny Health System, is to sell to a health plan.

Q: What prompted the acquisition of West Penn Allegheny Health System by Highmark?

Chris Olivia, M.D.: We started with the premise that we had to change the market dynamics because we would lose in the intense, rate-volume market. We had a regionally dominant provider, the University of Pittsburgh Medical Center (UPMC), with 70% market share and 10 times our capital. We couldn’t compete in rate and volume because we didn’t have the market share to dictate price. We also observed that the rate-volume market in western Pennsylvania was not sustainable and the market was beginning to demand value, quality and cost accountability. We cut our cost structure 30% below our competitor, and improved our existing high-quality product. Survey after survey showed that Allegheny General is the top hospital in the region in quality. We wanted market dynamics to be based on cost and quality. We consolidated six hospitals into four and moved the care into ambulatory centers. But we needed cash to carry out the ambulatory strategy and we needed an insurance partner to offer a lower-cost insurance product. We looked around and the best partner was Highmark. We were making plans quietly and had not announced we were looking for a capital partner or insurance partner. Then Highmark approached us and preempted the whole process by proposing to buy West Penn Allegheny. Highmark wanted access to a low-cost, high-quality provider group as a mechanism to prevent UPMC from controlling the entire provider industry. So we had a marriage.


Q: What prompted Cooper University Healthcare's acquisition of part of AmeriHealth New Jersey?

Chris Olivia, M.D.: I’m on the outside looking in because I left Cooper University Hospital (Cooper) in 2008, but I think it’s very innovative and forward-looking for that marketplace. Cooper is in a more fragmented market with less consolidation among hospitals and physicians than western Pennsylvania, allowing it to put together a physician network using Cooper as the anchor facility. I believe Cooper will create a narrow hospital-physician-provider network within the umbrella of AmeriHealth, delivering higher-quality care using their physicians and facilities and therefore limiting the need for patients to seek more expensive care in Philadelphia. Cooper likely opted to acquire a 20% interest in AmeriHealth in part because they realized that the cost of developing a health plan, plus the necessary expertise to run it, is just prohibitive.

Q: What is often overlooked as health system executives contemplate combinations with health plans?

Chris Olivia, M.D.: The cost and complexity — and infrastructure needed — to deliver population-based care are among the biggest challenges for health systems contemplating getting into the health-plan business. Some health systems, particularly smaller and medium-sized ones, have shied away from getting into the business because they don’t have the necessary resources. Others also believe the cost to create the infrastructure, and the additional risk, are contrary to their missions of serving their communities. One hospital CEO who is a former health-plan executive told me, ‘It’s going to cost us $100 million to $150 million to invest in information-technology and other infrastructure to do large-scale, risk-based contracting on our own, and our board is unwilling to make that commitment.’ Capitalizing and starting up a full, risk-bearing entity can be a fairly onerous undertaking.

Q: What are the culture differences between health systems and health plans and how can they be bridged?

Chris Olivia, M.D.: They have vastly different cultures. Health plans are focused on network contracting. Their expertise is in provider contracting and marketing to employers. Health systems’ expertise is in providing care. They don’t market in the traditional sense, and oftentimes neither health systems nor health plans are strong on strategy, and they rarely talk. Leaders of both health systems and plans have to be willing to start communicating and understanding each other’s needs, or combinations like West Penn and Highmark are not going to be successful.

New Medicaid Models, Health Insurance Marketplaces Open OpportunitiesBy Catherine Sreckovich

KEY POINTS

» Provider-Sponsored Health Plans’ (PSPs) participation in the Medicaid market will grow quickly

» Emerging PSPs will look and act differently than in the ‘90s

» Health Insurance Marketplaces also open new possibilities

With the massive expansion of Medicaid eligibility under the Affordable Care Act (ACA), PSPs need to consider whether and how they might participate in new Medicaid models of care. The emergence of state Health Insurance Marketplaces (formerly known as Exchanges) also opens new possibilities for PSPs as the marketplaces accelerate the need for closer partnerships between providers and payers.


NO TO EXCHANGES; ‘SI’ TO MARKETPLACEHealth Insurance Exchanges are now called Health Insurance Marketplaces.

The name change of the Affordable Care Act’s (ACA) key mechanism for expanding coverage for individuals and small businesses was made without fanfare earlier this year by the U.S. Health and Human Services Department (HHS).

While some ACA critics cited the name change as a bid to bolster support for the law, ACA supporters said the word “exchange” — used in the law — simply was not a very good description of its purpose to provide more competition and choices for people not insured through their employer, Medicaid or the Children’s Health Insurance Program.

HHS’ director of external affairs, Anton Gunn, later told a conference that the name change reflects the agency’s efforts to better reach Spanish-speaking consumers, many of whom are expected to shop for health coverage through the online marketplaces. While the word “exchange” doesn’t translate into anything meaningful in Spanish, the HHS official said “marketplace” does translate and is a better word to communicate with a growing Hispanic population. About 12 million people eligible to use marketplaces speak Spanish, Mr. Gunn added.



While the number of PSPs has declined from the early 2000s, provider organizations contracting directly with Medicaid agencies on an at-risk basis will start to grow quickly as states test and implement contracting directly with integrated care networks and other models designed to improve access to care and outcomes while reducing costs. Providers will be faced with a myriad of opportunities in many states to participate in such organizations, particularly in those states undergoing Medicaid expansion — assuming providers want to maintain their Medicaid volume and protect revenues associated with Medicaid patients as much as possible. The emerging PSPs will look somewhat different than the PSPs of the past, but the role of the provider in the organization will continue and strengthen.

The development of PSPs to serve primarily Medicaid enrollees occurred under somewhat different circumstances than in the private sector: market considerations and academic medical center involvement, for example, do not play the same role in provider considerations about advantages and disadvantages of involvement in the PSP model.

Providers making a determination about future involvement as a PSP also are making different considerations for the Medicaid market segment than they are for Health Insurance Marketplaces, as those online marketplaces for individuals and small group employers to purchase health insurance take effect January 1, 2014, as part of the ACA. Starting October 1 this year, about nine million consumers will be able to click into online healthcare markets in 26 states.

THE CHANGING MEDICAID MARKET

Looking back to the mid-to-late ’90s, there was considerable interest in PSPs for Medicaid just as in the private sector. The federal government first allowed PSP participation in Florida, Michigan and New York, with the understanding that providers were uniquely positioned to understand the care needs of their members. Restructuring the flow of payments directly from

the paying organization to the provider was viewed as a means to eliminate costs of the "middle man" — i.e., the health plan — thus saving money without reducing needed care.

The primary concern of the Centers for Medicare & Medicaid Services (CMS) and the states was the degree to which provider-based organizations could or should be expected to assume risk for the downstream healthcare needs of an enrollee population. When Michigan, for example, accelerated its move to managed care, hospitals and others lobbied the state legislature to allow hospitals to form clinics that would contract with the state but would not be required to secure state Health Maintenance Organization (HMO) licenses. Many hospitals did just that, and formed "qualified health plans" for Medicaid business. Within a few years, however, the state decided that it would require those plans to obtain an HMO license and meet all of the requirements for minimum capital and information systems. In subsequent years, in Michigan and in other states, some of these PSPs disappeared from the Medicaid landscape, although some continue to be viable and serve other populations. Examples include Providence Health Plan and Health Alliance Plan (HAP). In other states, PSPs continued to grow and expand the number of lives they cover.

Following these three states, many Medicaid-only PSPs became operational and others began serving not only Medicaid but Medicare Advantage and commercially insured populations. The Medicaid-only PSPs were organized primarily to preserve their patient base and operate without an HMO license (or the financial reserves required of other health plans and insurers) and under their own direction (i.e., no HMO or health plan to interfere with their business). Often, these PSPs were developed by safety-net providers and could make a strong argument to their legislatures that such entities would provide a solution to the state for managing its Medicaid population.


Currently, there are more than 60 PSPs serving the Medicaid population, or roughly one-quarter of all Medicaid health plans nationally. This number includes plans that are owned, affiliated or governed by healthcare systems, community health centers and clinics or physician practices. Some of these are owned by large public hospitals or academic health centers that serve as safety-net providers or comprehensive private healthcare systems, but others are successful serving smaller communities with networks of current Medicaid providers, such as federally qualified health centers.

THE EMERGING MEDICAID MODELS

Among the proposed new Medicaid models is the "Comprehensive Care Entities” (CCEs) proposed by North Carolina Governor Pat McCrory. His proposal would create four Comprehensive Care Entities, or "medical provider networks" that would be paid on a per-member, per-month basis. The North Carolina Community Care Network, now acting as the single network of Primary Care Medical Homes that operate throughout the state, could presumably become a CCE by partnering with other health systems. Although the Medicaid agency supports the implementation of HMOs to serve the Medicaid population, the provider-sponsored option is more favorably viewed by the provider community in North Carolina, since commercial HMO business is not extensive and providers have consistently rebuffed HMO involvement in both Medicaid and commercial business. Hospitals want to retain their levels of Medicaid payments, which include disproportionate share and supplemental payments.

In Alabama, Senate Bill 340 requires that Medicaid implement Regional Care Organizations (RCOs), a new regional managed care model, which will be provider-dominated and paid under a capitated payment model. Alabama Medicaid can contract with a commercial HMO only if the RCO in any of the eight regions has been terminated or failed to deliver adequate care.

Florida Medicaid reform serves as yet another example of growing PSP involvement. Provider-Sponsored Networks (PSNs) first contracted directly with Florida Medicaid in 2000 on a test basis. When Medicaid reform was first implemented in five counties in 2004, numerous advocacy groups, some legislators and other participants in the process expressed concern about a reform model that would make Florida an "HMO only" state. The state permitted PSNs to participate in the five reformed counties. Currently, there are nine PSNs serving Medicaid, on either a fee-for-service or capitated basis. Both forms of payment create risk for the PSN: in the fee-for-service form, PSNs must demonstrate cost-effectiveness for their members. If savings do not occur, the PSN may be required to repay the state the administrative allocations the PSN receives for its enrollees on a per-member, per-month basis. Broward Health and Memorial Health Systems (South Florida Community Care Network), Shands Jacksonville Medical Center (First Coast Advantage) and Health Network of Southwest Florida (Integral Quality Care) are current examples of PSNs in Florida. As Medicaid reform expands to the remaining Florida counties, the percentage of Medicaid enrollees in PSNs is likely to grow from the current roughly 10% number.

States have found overall that performance of the PSPs has been positive. Reports funded by the Commonwealth Fund showed that PSPs had slightly lower administrative cost ratios overall when compared to non-PSPs, and PSPs reported higher quality than non-PSPs.

The CMS Innovation projects are testing various models of delivery that depend on integrated care models. Pilots in states such as Colorado, Illinois and Ohio create new, value-based integrated care models that will be of interest to providers who want to maintain or grow Medicaid market share. This move for provider organizations to contract directly with Medicaid agencies is in contrast to state decisions in the recent past to reduce the number of contracting entities and to consolidate market areas to reduce state administrative burdens. It


will be interesting to see how the push for innovation and value-based models affects states' decision making around program administration.

ROLE FOR PSPs IN THE HEALTH INSURANCE MARKETPLACE

It is likely that some of the top 10 PSPs and several others will serve as qualified health plans in a Health Insurance Marketplace, although it is not likely that many new PSPs develop specifically to compete in the marketplace, at least in the near term. However, several of the emerging Consumer Operated and Oriented health insurance plans (CO-OPs) are based on the PSP model. Tufts Medical Center, Vanguard Health Systems and New England Quality Care Alliance are sponsors of an initiative aimed at bringing an innovative and affordable new model of CO-OP health insurance to Massachusetts residents and small businesses. The initiative, formally supported by 17 other Massachusetts hospitals, is a nonprofit, member-governed insurance company. CO-OPs in Connecticut, Maine, Louisiana and Ohio are also provider-sponsored. These CO-OPs had a distinct advantage in that they received federal loans for start-up to create more coverage options for Americans required to begin buying health insurance in 2014.

Only a handful of states have announced their Health Insurance Marketplace qualified health plans. In California, only one of the 12 plans is provider-sponsored — Kaiser. In Washington State, Kaiser and Group Health are PSPs offering qualified health plans in the marketplace. In Colorado, Denver Health and Kaiser are PSPs. In the already-established Massachusetts marketplace, Tufts, Neighborhood Health Plan and Boston Medical Center all participate in Commonwealth Care, the marketplace product in Massachusetts.

As providers determine if and how to compete for market share in the post-ACA era, they should consider how they can be more attractive to purchasers in the Health Insurance Marketplace. One of the goals of the

marketplace is to increase competition with the goal of reducing costs and improving outcomes. PSPs might have greater opportunities to offer competitive prices, with lower administrative costs. PSPs have overhead that can be covered by other lines of business and they can thereby shift some costs to their sponsors while creating new volume for themselves. In addition, PSPs have their presumably narrower networks that should increase their competitiveness. Although the Massachusetts Commonwealth Care scenario has demonstrated that the most important factor in plan selection is price, consumers today are beginning to understand and are looking not just at price, but also value. PSPs should be well-positioned to take advantage of their sponsoring organizations' innovations in care delivery and experience with consumerism — use of data, transparency and outcomes information — to provide this value to the individuals they currently serve, and hope to serve.

NAVIGANT ASSISTS CMS IN LAUNCH OF CO-OPS Navigant Healthcare has been engaged by the Centers for Medicare & Medicaid Services (CMS) to help Consumer Operated and Oriented Plans (CO-OPs) develop and operate as successful health insurance programs.

The Affordable Care Act (ACA), recognizing that in some states only a few insurance companies offer coverage for individuals and small businesses, established the CO-OP program to expand consumer choices and increase competition between plans. The federal government has awarded nearly $2 billion in loans to create 24 non-profit CO-OPs in 24 states. CO-OP sponsors, including consumer-run groups, membership associations and other non-profit organizations, are moving forward to offer health insurance in competition with established insurance companies.

Navigant is providing “real-time” technical assistance to support the CO-OPs as they prepare to offer coverage through Health Insurance Marketplaces, a central component of the ACA to expand affordable coverage for people who do not have health insurance through an employer, Medicaid or the Children’s Health Insurance Program.

Specifically, Navigant is helping the 24 CO-OPs complete readiness requirements, prepare for state licensure, satisfy each of their state’s Qualified Health Plan requirements and plan for the required business and service functional infrastructure. Navigant has developed and implemented a tool to assess each CO-OP’s progress toward completing nearly 100 activities required to be fully functioning health plans operating in Health Insurance Marketplaces. Navigant’s technical assistance strategy will identify and diminish barriers to entry, reinforce lessons-learned from the marketplaces’ initial roll-out and be adaptable and flexible over time as marketplace policy decisions are made by the federal government.


About Catherine SreckovichCatherine Sreckovich is a Navigant Healthcare Managing Director with more than 25 years of experience in the healthcare industry. She has extensive experience working with healthcare payers, providers and managed care organizations in the development and review of healthcare delivery and reimbursement systems, compliance programs, reform options and data analysis and litigation support. She

has worked with more than 30 Medicaid programs throughout the country on issues related to program financing and reform, Medicaid benefit design, quality management and cost containment. Catherine received her Bachelor of Arts and Master of Science in Business Administration from Indiana University. Contact her at [email protected] or 312.583.5747.

http://www.navigant.com/professionals/s/sreckovich_catherine/

If executed appropriately, provider-sponsored health plans (PSPs) can compete effectively with large health plans and establish a substantial niche through Health Insurance Marketplaces.

On October 1, 2013, consumers in 26 states are expected to select their health plans online through the state marketplaces. In a 2012 survey of 6,000 online purchasers across a variety of industries, consumers indicated that they will seek convenience and quality before lower premiums in their healthcare choices. Consumerism in health marketplaces will drive a need for personalization of health plan choice in a way that will efficiently deliver care to communities of enrollees. PSPs may be able to deliver more personalized, quality care to the healthcare consumer versus larger players on the marketplaces. Life Science companies can be ideal partners for provider-sponsored plans as they seek to carve out ways to improve the experience for their patients.

Consumerism in healthcare marketplaces means that plans will be chosen not by the standard tiers defined by the Affordable Care Act, but instead by how plans can appeal to individual patients. A recent study in Health Affairs led by Anna Sinaiko showed that 40% of users on Massachusetts’ Commonwealth Care found it difficult to understand the information on plans presented during enrollment, and about one-third of people opted for help selecting plans from friends or family members with opinions about providers. Similarly, Robert Krughoff and colleagues at Center for the Study of Services found that state marketplaces needed to provide greater understanding of value to consumers. Value in his experiments translated into the ways in which the proposed health plans could adapt to the individual

Provider-Sponsored Health Plans Have a Niche with ConsumersBy Stephen Morales

needs of the consumer. Pharmaceutical companies have unique insights to provider and patient needs for their drugs, which can provide insights to customer perceptions in value.

PSPs may be in a unique position to provide consumers the value they are looking for in healthcare marketplaces. Further, consumers’ health plan selection will be based on typical online purchase biases that may favor PSPs. Consumerism in online purchases has been shown to be dominated by present bias, a consumer’s tendency to undervalue their future needs in lieu of present knowledge about a purchase. Consumers on marketplaces, many of whom will be previously uninsured, will not be able to (1) identify and predict their future healthcare needs, nor (2) appropriately value the long-term stability of healthcare — specifically, access to affordable healthcare treatment. As a result, consumers are more likely to under-insure themselves on state marketplaces and lean toward plans that are the least expensive option unless they can derive another measure of value. PSPs may reverse this present bias by leveraging value from local credibility and quality of service commonly associated with their providers

Noticing this potential advantage, life science companies seeking to retain value should consider ways to partner with PSPs as they enter into the consumer-directed marketplace. A survey conducted by PricewaterhouseCoopers Health Research Institute showed that knowledge of providers in the network and available service lines had a greater influence on consumer choice than cost of the premium. Thus, PSPs that are developed from well-positioned provider networks in the communities they serve may have a distinct advantage.


Lastly, PSPs also may be more effective at cost transparency and establishing quality care in geographically narrow healthcare markets. Assuming they have the financial structure and their ability to directly monitor delivery of quality care to enrollees, they will be able to create value that is better indexed to the population in the surrounding market. However, a PSP’s ability to monitor and adapt care delivery to consumers requires careful planning to understand which quality metrics will give the PSP the greatest advantage in the defined geographic area.

To be sure, developing a PSP poses commercial and financial risks to most hospitals and health systems. But a properly planned PSP, with overhead that is appropriately covered through a set of diverse service lines, can effectively compete with large, established, well-funded commercial health plans. And partnerships with life science companies can offer PSPs a leg up in understanding how to communicate their value to consumers. Consumers are ready to offer PSPs a niche in the state marketplaces, if the PSP can demonstrate value through its providers, service offerings and quality of care that is indexed to the needs of the consumer.

About Stephen MoralesStephen Morales is a Director with the Life Sciences Practice at Navigant Healthcare with more than 16 years of experience in the medical device and pharmaceutical industries. Previously at Merck and Schering-Plough, he successfully launched several cardiovascular, women’s health and over-the-counter products across three continents for a range of organizations. Earlier, he was based in emerging markets for pharmaceutical companies to expand drug and device programs across Asia, including China and India. He brings his analytical approach and global expertise in strategic marketing, product development, new market penetration and thought leadership to Navigant clients. He received his Bachelor of Science in mechanical engineering at MIT and his MBA at Duke University. Contact Stephen at [email protected] or 312.583.6840.


http://www.navigant.com/professionals/m/morales-stephen/

Valuation Trends Offer Guide to Payer StrategyBy Jerry Chang, CFA and John Leary, CFA

KEY POINTS

» Increased merger and acquisition activity creates analyst optimism

» Multiples of multi-line companies not materially higher

» Substantial resource commitment needed to support and build valuations

Mergers and acquisitions (M&A) involving health systems and health plans appear to be gaining steam in a recovering U.S. economy as companies seek to strengthen — or maintain — their market position in the face of uncertainty related to the passage of the Affordable Care Act (ACA).

A two-year upward trend that has returned the number of transactions to pre-recession levels, as seen in the following chart (see Table A on next page), reflects companies’ desire to strengthen perceived membership base gaps in their business strategies. For example, Aetna acquired Coventry in order to strengthen its position in the commercial, individual and Medicare Advantage market segments. WellPoint expanded its position in the Medicaid market by acquiring Amerigroup. Cigna acquired HealthSpring, a leading sponsor of Medicare Advantage plans. In each case, the transaction was motivated by the desire to gain market share and increase scale by acquiring the capability to adequately serve specific health populations.




With this momentum in transactions, how have publicly traded managed care stocks fared since passage of the ACA, and how has that impacted valuation?

The increased M&A activity in pursuit of market share has created a level of analyst optimism in the marketplace. During the month of May 2013, approximately 37% of the analysts covering the five largest multi-line managed care companies maintained a strong-buy rating, 26% maintained a buy rating and 34% maintained a hold rating.

During the same period, 31% of analysts covering publicly traded Medicaid/Medicare managed care companies maintained a strong-buy rating, 13% maintained a buy rating and 56% maintained a hold rating. Overall, analysts gave the five largest multi-line managed care companies an average rating of 2.06 on a scale of 1 to 5 with a rating of “1” representing a strong-buy, while giving the Medicaid/Medicare companies a 2.2 average rating. Table B below displays how managed healthcare companies have performed relative to healthcare facilities and the overall market.

TABLE A: NUMBERS OF MANAGED CARE TRANSACTIONS

25

20

15

10

5

# of Transactions2007

Source: Irving Levin & Associates

30

02008 2009 2010 20122008 2011

TABLE B: PERCENT CHANGE IN INDEX PRICE

80%

Notes: Source: Standard and Poor's Capital IQ. The S&P Managed Health Care Sub-Index includes Humana Inc., Aetna Inc., Cigna Corp., UnitedHealth Group Incorporated, WellPoint Inc, Magellan Health Services Inc., Health Net, Inc., Centene Corp., Wellcare Health Plans, Inc., and Molina Healthcare, Inc. The S&P Health Care Facilities Sub-Index includes AmSurg Corp., Community Health Systems, Inc., Hanger, Inc., Health Management Associates, Inc., Kindred Healthcare, Inc., Lifepoint Hospitals, Inc., Tenet Healthcare Corp., The Ensign Group, Inc., Universal Health Services, Inc., and VCA Antech Inc.

70%60%50%40%30%20%10%0%

-10%-20%

Affordable Care Act Becomes Law

Supreme Court Upholds the Affordable Care Act

3/31/10 6/30/10 9/30/10 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11 3/31/12 6/30/12 9/30/12 12/31/12 3/31/1312/31/09

S&P 500 Index (^SPX)S&P Managed Health Care Sub-Index (Composite 1500)S&P Health Care Facilities Sub-Index (Composite 1500)


ANALYSTS’ POSITIVE VIEWS NOT SEEN IN MULTIPLES

However, analyst optimism has not appeared to translate into materially higher valuation multiples for publicly traded, multi-line managed care companies since passage of the ACA in March 2010. The average total enterprise value (TEV)-to-revenue multiple (defined as market value of equity plus debt minus cash) and the TEV-to-earnings before interest, taxes, depreciation and amortization (EBITDA) multiples were slightly multiples when the ACA

was passed. The average equity price to earnings multiple is slightly lower.

The valuation multiples for the Medicaid/Medicare managed care companies have increased substantially on average since the ACA, especially after the Supreme Court upheld the constitutionality of key provisions in the summer of 2012. Table C below presents the TEV-to-EBITDA multiples for Medicare/Medicaid managed care companies from December 31, 2009 to March 31, 2013.

TABLE C: MEDICARE/MEDICAID MANAGED CARE COMPANIES' TEV/EBITDA MULTIPLE

Notes: Source: Standard and Poor's Capital IQ. The mult-line managed care companies included are Humana Inc., Aetna Inc., Cigna Corp., UnitedHealth Group Incorporated, WellPoint Inc, Magellan Health Services Inc., and Health Net, Inc.

8x7x6x5x4x3x2x1x0x

Affordable Care Act Becomes Law

Supreme Court Upholds the Affordable Care Act

3/31/10 6/30/10 9/30/10 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11 3/31/12 6/30/12 9/30/12 12/31/12 3/31/1312/31/09

Average of Multi-Line Managed Care Companies

However, reported operating losses and declines in operating income can account for some of the increase in the valuation multiples. Centene, which is currently experiencing challenges with its Kentucky Medicaid business, reported a $27 million operating loss for its latest fiscal year, Wellcare reported a 25% decline in operating income for its latest fiscal year, and Molina reported a 55% decline in operating earnings for its latest fiscal year.

Valuation multiples vary significantly based on the geographical coverage of the target and the health populations that they serve. The three largest public company acquisition targets, all of which have operations in multiple states, reflected higher revenue multiples as compared to a sample of smaller Medicaid health plan transactions announced or closed in 2012. The following table (see Table D on next page) displays a representative sample of transaction activity in the managed care industry.


TRANSACTION VALUE

BUYER TARGET ANNOUNCEMENT DATE

PLAN TYPE

REVENUE EBITDA MEMBERS

Coventry Preferred Health Systems 2/1/10 Multi-Line 0.71x n.a. 36,627

Amerigroup University Health Plan 3/1/10 Medicaid 0.10x n.a. 53,357

Carolina Crescent Health Plan Absolute Total Care 6/1/10 Medicaid 0.16x n.a. 40,000

Centene Corporation Citrus Health Care assets 8/10/10 Medicaid 0.23x n.a. 40,400

CIGNA Corp. *HealthSpring, Inc. 10/24/11 Medicare 0.55x 5.55x 340,000

Coventry Family Health Partners 1/1/12 Medicaid 0.11x 4.01x 212,699

Amerigroup Health Plus 5/1/12 Medicaid 0.09x 9.24x 322,735

WellPoint Inc. *Amerigroup Corporation 7/9/12 Medicaid 0.50x 11.20x 2,700,000

Aetna Inc. *Coventry Health Care, Inc. 8/20/12 Multi-Line 0.34x 4.62x 4,000,000

* Publicly traded targets Source: Irvin Levin Associates, Inc., SEC Filings, NAIC Annual Statements, S&Ps Capital IQ, and Press ReleasesLow 0.1x 4.0x

Average 0.3x 6.9x

Median 0.2x 5.6x

High 0.7x 11.2x

TABLE D: MANAGED CARE INDUSTRY TRANSACTION SUMMARY

In light of the valuation trends, how should health systems decide on the best health plan strategy in a transformational healthcare environment? What should be considered in a decision to sell, build or affiliate? Are managed care plans buying access to customers? Are they buying access to provider networks? Are they buying scale? Are they buying based on the plans’ brand and reputation?

Business value is a function of a company’s expected cash flow generating capabilities, expected growth rate, required rate of return and perceived risk. Health systems and managed care companies are embarking on new strategies for serving newly insured and specific health populations, which carry inherent risk and uncertainty under healthcare reform, including the role and positioning of a health plan in the delivery system’s overall strategy. Health systems can view their provider-sponsored health plan as either an asset upon which they can build an Accountable Care Organization (ACO) or as a source of cash that can be used to finance the development of clinically integrated delivery systems.

LARGE PORTION OF PRICE ATTRIBUTED TO GOODWILL

An examination of four transactions in the three years following passage of the ACA where the buyer was a public company shows that a substantial portion of the amounts paid in these transactions is attributed to goodwill, an unidentifiable, intangible asset that includes future business opportunity. This could be in the form of:

» Greater unexploited growth opportunities attributed to the promise of newly covered individuals under the ACA.

» Growth from a shift in beneficiaries from fee-for-service to managed care plans.

» Expected higher profits from the implementation of new, undeveloped systems for managing the healthcare needs for disease populations at lower cost.

With a significant portion of the purchase price allocated to goodwill, it appears that the value drivers will be highly dependent on the perceived synergies and gaps that would be filled by a buyer’s overall healthcare delivery


strategy in a value-based healthcare delivery system. These synergies include future value creation, additional economies of scale related to investments, or simply enabling the buyer to maintain value that would otherwise be reduced.

Table E below summarizes the allocations related to four transactions disclosed in Securities and Exchange Commission (SEC) filings. These transactions indicate goodwill ranging from 40% to 65% of the transaction price. Interestingly, the provider network allocations are fairly nominal amounts ranging from less than 1% to 6%. Amounts allocated to technology or internally developed protocols or systems are even less significant.

TABLE E: PURCHASE PRICE ALLOCATION100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%Coventry/ Multi-Line

GoodwillTechnologyTrademarks/Trade NameProvider NetworkCustomer RelationshipOther AreasNet Working Capital

Healthsprings/Medicare

Advantage

Amerigroup/ Medicaid

Health Plus/Medicaid

Source: SEC Filings

The allocations seem to indicate that when evaluating health plan strategies to build or maintain valuations, provider-sponsored health plans will have to commit substantial human and financial resources to capitalize goodwill by developing new systems and protocols to grow their membership. These health plans also will have to develop protocols and systems to manage the healthcare needs of these newly acquired health populations at a lower cost. According to Standard & Poor’s, managed care organizations increasingly will face certain restrictions as more provisions of the ACA come into effect that could adversely impact the profitability of managed care companies, potentially tempering upside valuation potential.

In summary, the transformation of the healthcare delivery system has affected all managed care companies from a valuation perspective due to the dynamic risk/return perceptions, following the ACA. Health systems and managed care companies both are seeking ways to position their organizations in the best possible position in light of the ACA. For health systems, the strategic decision whether to pursue a strategy based on a sale of an existing plan, de novo development or strategic alignment is likely to be driven by the availability of the capital resources necessary to develop a quality-driven, cost-efficient, clinically-integrated, care management system. Ultimately, the value of provider-sponsored health plans will be driven primarily by the expected future cash flow of the buyer or owner’s selected strategy and the perceived risks that accompany that strategy.


About Jerry ChangJerry Chang is a Director who leads Navigant Healthcare’s Valuation and Financial Advisory Services team for clients seeking transaction/partnership, financial reporting, strategic decision making, tax and regulatory compliance, and litigation/arbitration support. He has more than 19 years of valuation and corporate finance experience and specializes in valuing businesses, equity interests, intangible assets and professional services arrangements. Jerry also has served as a valuation expert witness in state and federal court cases. Prior to joining Navigant, he held managerial positions with the valuation services practices of Ernst & Young and KPMG. He received his Bachelor of Finance degree from Georgia State University and MBA from Goizueta Business School of Emory University. Contact him at [email protected] or 404.602.3462.

About John LearyJohn Leary is an Associate Director with Navigant Healthcare’s Valuation and Financial Advisory Services team. He has more than 24 years of experience performing valuations for managed care companies and health system clients. John received his Bachelor of Arts degree from Emory University and MBA from Georgia State University. Contact him at [email protected] or 678.845.7696.

http://www.navigant.com/professionals/c/chang_jerry_m/


VALUE AND ADVANTAGE IN THE HEALTH MARKET

Navigant Healthcare has developed a “Hot Zone” methodology that providers and health plans can use to learn the advantage of the Health Insurance Marketplace in the evolving healthcare environment. Navigant’s point of view from our team of experts draws on their work with the Centers for Medicare & Medicaid Services (CMS), state governments, managed care organizations and providers to capture the impact of marketplaces from multiple, pragmatic perspectives. For more information, visit navigant.com/hotzone.

DELIVERING THE REQUIRED RESPONSE IN THE “NEW NORMAL”

As changes in the health industry play out, there is an ample supply of conflicting signals. Health systems and physicians succeed when they align — at a fundamental level — to create a high-performing medical group. Learn more about Navigant Healthcare’s point of view on how to build such groups by responding to market forces. For more information, visit navigant.com/hcresponse.

A YEAR IN REVIEW: ALLEVIANT, A NAVIGANT LAUNCHED SUBSIDIARY

In June 2012, Navigant Healthcare launched Alleviant LLC, a broad-based revenue-cycle management services company based in South Dakota. Alleviant offers a wide range of billing and collections services to health systems that employ physicians and independent physician organizations. Alleviant’s processes and systems help to significantly shorten payment times and improve the accuracy of bill processing and cash collections for clients. Unique to Alleviant, the team leverages their clients’ existing resources, investments and platforms, allowing physician organizations to maintain control of their data. In less than a year, Alleviant has produced significant positive results for its clients, including reduction of accounts receivable days and an increase in collected revenues and revenues per unit of service. In addition, Alleviant assumed a billing and collections outsourcing role so its clients could focus on other growth opportunities and initiatives, enabling the organizations to boost their revenue. Alleviant was recently listed as one of the top 25 largest revenue-cycle management firms in Modern Healthcare. To learn more about Alleviant’s services and core capabilities, and to sign up for its quarterly newsletter, Alleviant Advantage, please visit www.alleviant.com.

Navigant Healthcare News

Source: http://www.navigant.com/hotzone/

®


http://www.navigant.com/hotzone



http://www.alleviant.com


HEALTHCARE SERVICES QUARTERLY DIALOGUE

Each quarter, Navigant Capital Advisors publishes the Healthcare Services Quarterly Dialogue, which provides a market overview, industry perspectives, notable news, M&A transactions and valuation metrics. The analysis of trends and news includes the following sectors: (i) Alternate Site; (ii) Diagnostic Services; (iii) Distribution; (iv) Equipment & Supplies; (v) Information Technology; (vi) Hospital Providers; (vii) Long-Term Care & Senior Living; and (viii) Managed Care Companies. Visit, http://www.navigantcapitaladvisors.com/industries/healthcare/ to download the most recent Q2 2013 Report.

NAVIGANT’S PULSE NEWSLETTER WINS TOP AWARD

Navigant Healthcare’s Pulse quarterly electronic newsletter has been named a 2013 Bronze Anvil winner by the Public Relations Society of America. Only 50 organizations from 759 entries were selected as winners of a Bronze Anvil. Luquire George Andrews, co-recipient of the award for Pulse, is a leading advertising, public relations, brand strategy, media planning and digital solutions agency based in Charlotte who assists Navigant in producing Pulse. We have been very pleased to see the number of Pulse recipients increase to an average of 21,000 in 2012, an increase of 14% from 2011.


Navigant Healthcare News

http://www.navigantcapitaladvisors.com/

http://www.navigantcapitaladvisors.com/pdf/Healthcare_Services_Quarterly_Dialogue_2Q13.pdf

http://www.navigantcapitaladvisors.com/pdf/Healthcare_Services_Quarterly_Dialogue_2Q13.pdf

http://www.prsa.org/Awards/BronzeAnvil/BronzeAnvilResults/PreviousResults/2013BronzeAnvilAwardResults.pdf

http://www.prsa.org/Awards/BronzeAnvil/BronzeAnvilResults/PreviousResults/2013BronzeAnvilAwardResults.pdf


Navigant advisors offer their expertiseNavigant is knowledgeable on a variety of healthcare topics that are important to physician practices, health systems, payers and life sciences companies. Below are some highlights and links to articles featuring our experts.

For links to these articles and more, visit our Insights & Events page at navigant.com/healthcareinsights.

LESSONS FROM THE ROCKFORD JOURNEY

Regulatory opposition and stakeholder neutrality can undermine economic arguments for hospital mergers. In their article in Trustee's digital edition, co-authors David Burik, Navigant Healthcare Managing Director, and Gary Kaatz, Rockford Health System CEO, follow the Rockford journey through a potential merger with OSF Health System.

ALTERNATIVE PATHS TO VALUE

Navigant Healthcare’s Christine Malcolm and Thomas Dixon co-author an article in Trustee highlighting how healthcare’s competitive landscape is changing from one that rewards volume aggregation to one that rewards value creation.

A NEW TOOL FOR SYSTEM BUILDING

In an article in Healthcare Financial Management, Navigant Healthcare’s Bryan Cali and Casey Quinn discuss how hybrid deals are enabling unlikely partners to come together in developing strategies for care delivery and population management.

DRIVERS OF PHYSICIAN CONSOLIDATION: HOW TO INTEGRATE SUCCESSFULLY

Navigant Healthcare’s Casey Nolan outlines in hfm the barriers and risks to successful physician-hospital consolidation, emphasizing that cultural issues are one of the biggest hurdles and that physicians should be partners in the process.

SIMPLE TRUTHS ABOUT VARIATION IN CARE AND COST REDUCTION

Navigant Healthcare’s Brad Smith authors an article for hfm highlighting how the pressure to drive financial performance has caused hospitals to actively seek new ways for decreasing cost through variation in acute care and volume-based price reduction.

RISING ABOVE THE COMPETITION BY REENGINEERING THE PATIENT EXPERIENCE

In an article in Becker’s Hospital Review, Navigant Healthcare’s Alleviant leader John Boland urges physician organizations to concentrate on the ability to administer patient services in a consistent manner across all aspects of the patient encounter to ensure peak efficiency and engagement.


http://www.navigant.com/insights/library/healthcare/2013/lessons-from-the-rockford-journey/

http://www.navigant.com/insights/library/healthcare/2013/alternative-paths-to-value/

http://www.navigant.com/insights/library/healthcare/2013/a-new-tool-for-system-building/

http://www.navigant.com/insights/library/healthcare/2013/drivers-of-physician-hospital-consolidation/

http://www.navigant.com/insights/library/healthcare/2013/truths-about-variation-in-care-and-cost-reduction/

http://www.navigant.com/insights/library/healthcare/2013/reengineering-the-patient-experience/

http://www.navigant.com/healthcareinsights

Upcoming EventsNavigant Healthcare’s experts speak on a variety of healthcare issues throughout the year. This calendar highlights upcoming events that our experts are participating in across the country.


SEPTEMBER 18–20 Healthcare Billing and Management Association (HBMA) Evolving Reimbursement Models & the Billing Company — Positioning for Future Success

Speaker John Boland

OCTOBER 3 Navigant Healthcare Pulse Exchange Join us for a webinar to discuss the research, data and insights behind this issue of Pulse. Click here to register. Connectivity information will be distributed to registrants.

Webcast David Burik

OCTOBER 20-22 Medicaid Health Plans of America (MHPA) Annual Meeting Health Reform from East to West: Preparing Medicaid Health Plans for 2014

Sponsor & Exhibitor

OCTOBER 21–23 PharmAsia Summit: New Growth Models for China Conference Bridging the Affordability Gap: Improving Market Access to High-Priced Therapeutics

Speaker & Moderator Paul Zhang

OCTOBER 26–30 American Health Information Management Association (AHIMA) Annual Conference Health Information Management’s Global Transformation

Exhibitor

NOVEMBER 4–6 U.S. News & World Report Hospital of Tomorrow Summit

Speaker and Sponsor

NOVEMBER 11–13 National Association of Medicaid Directors (NAMD) Fall Conference Best Practices and Technical Assistance for Medicaid Directors and Senior Staff

Exhibitor

For links to these events and more, visit our Insights & Events page at navigant.com/events.

http://www.navigant.com/insights/events/2013/09/18/healthcare-billing-and-management-associationevent/

http://Navigant-PulseExchange.surveyanalytics.com

http://www.navigant.com/insights/events/2013/10/20/2013-medicaid-health-plans-of-america/

http://www.navigant.com/insights/events/2013/10/21/pharmasia-summit/

http://www.navigant.com/insights/events/2013/10/26/2013-american-health-information-management-associate/

http://www.navigant.com/insights/events/2013/11/4/2013-hospital-of-tomorrow/

http://www.navigant.com/insights/events/2013/11/11/2013-national-association-of-medicaid-directors/

http://www.navigant.com/insights/events


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Dave Zito Managing Director Navigant Healthcare Practice Area Leader [email protected] 312.583.5871

David Burik Managing Director Co-Leader, Strategic Consulting Division [email protected] 312.583.4148

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Healthcare Pulse Quarterly Magazine, Issue II 2013

Business

Transcript of Healthcare Pulse Quarterly Magazine, Issue II 2013