Shared Savings Program Regulation Operationalizing the Shared Savings Program Regulation Physician Alignment Achieving Strategic and Operational Value Accountable Care Organization Task Force Mid-Year Luncheon at the Institute on Medicare and Medicaid Payment Issues March 31, 2011

Session Overview: Physician alignment Many organizations are contemplating Accountable Care Organization (ACO) opportunities, Medical Homes, and various forms of clinical integration in response to Healthcare Reform and other industry trends driving an increased focus on quality patient satisfaction, and cost accountability. Because of delays in publishing the ACO regulations, there are many unknowns around implementing a compliant ACO model. Regardless of the care model and/or reimbursement mechanism your organization implements, it will require hospitals and physicians to re-examine their historical relationships and align around shared financial and patient care goals. Hospital and physician alignment can be achieved in many ways. This session explores alignment strategies to consider that can balance: the objectives of the hospital and its affiliated physicians; the incentives of new care models and reimbursement mechanisms; the local market landscape (payors, competitors); and the regulatory environment.

Physician alignment: Why now? Healthcare reform initiatives and incentives provide the tipping point to accelerate the existing momentum for health system/physician alignment. Health Reform Volume Focused Value Focused Reimbursed per admission and/or units of work Physicians seeking employment models for income security and lifestyle reasons Limited incentives to prevent admissions or coordinate care Continuum lacks integration Declining reimbursement for hospitals and physicians Significant uninsured and underinsured “Pay-for-compliance” rather than true outcome- based reimbursement Limited access to capital for technology investments required to meet HI-TECH Regulatory issues that restrict integration e.g., Stark, Anti-Kickback, Private Inurement, etc Competing on quality, patient safety, cost effectiveness, and coordination of care Episodic/Bundled payments mechanisms Shift of large groups of uninsured to capitated Medicaid population HITECH dollars for technology use and integration Improved documentation of care and information sharing through HIEs ACOs/Medical Homes Demonstration projects factor more and more into reimbursement and government payments New focus on prevention and population health

Physician alignment: What is it? Alignment occurs when patient care and financial goals are shared between a health system and its affiliated physicians. The strategy to achieving those goals must be developed together and take into consideration the success of each. Low High Strength of Alignment Selected Characteristics Leadership Medical Directorships Department/Program Chairs Committee Participation Clinical Co-Management of Service Lines,  Centers, or Institutes Focus on Practice Management, Quality, and Safety Initiatives Physicians Active on Board and Executive Team Dyad Leadership Models Shared Strategic Values Finance Minimal Financial Linkages or Risk Sharing Group Practice Contracts On-Call Contracts Gain Sharing in Specific Programs Ambulatory and Ancillary Joint Ventures Bundled Reimbursement Common Payer Contracting/Participation Strategy Capitation Operations Common HIT Limited but Growing MSOs/PHOs Provide Support Services to Affiliated Physicians Integrating/Interfaced EHR Shared Services Agreement for Certain Business Functions Integrated Information Management Singular Business Units Managing All Operations Joint PI/Efficiency Approach Clinical Services Volume-Focused Quality and Safety Management Programs in Place Delivery Systems Which Provide Continuity of Care Organizational Commitment to Quality and Safety Value Based/ACO Delivery Model Clinical Effectiveness is Core Competency Population Based Care Low High

Physician alignment: What are potential structures? There are multiple structures through which physician alignment can be achieved, each with its own set of clinical care, financial, and regulatory considerations. Clinical Co-Management / Clinical Integration Joint Venture Single Entity Formed through Merger or Acquisition Scope of Services Influenced Medical Directorships, Call, & Professional Service Arrangements Gain Sharing Physicians linked as independent contractors – relationship may not be exclusive Likely ACO Models Physicians share % of cost savings for targeted services / supplies Aligned around care delivery model in specific service lines Co-investors and aligned around clinical and financial performance Shared accountability for health care utilization and improvement in health status Strength of Alignment

Physician alignment: How do we get there? A fully aligned organization requires a degree of trust in which physicians and administrators see each other as “co-owners” of a health system, working together to deliver the most effective care and experience to their patients. Achieving strategic and operational value will require physicians and hospitals to navigate across these five stages of trust regardless of the alignment structure. Competition Cooperation Collaboration Co-Management Co-“Ownership”

Determining the right model for you

Physician alignment: What’s the right strategy for you? An appropriate physician alignment strategy will balance healthcare reform impacts, competitive market, and organizational objectives. Assess and design strategy Strategy development Scenario planning framework Complete a full review of external factors related to physician alignment Through interviews and data analysis assess the organization’s degree of alignment with physicians Identify the desired position within the competitive and geographic market Determine the desired degree of alignment and/or position across each alignment factor Utilize a Scenario Planning Framework to identify strategic flexibility scenarios that consider all alignment factors, in addition to the impacts of reform and the desired competitive position Select the scenario(s) and develop a strategic roadmap with executable action items Current state Future options Alignment factors Optional strategies Scenario A Scenario B Scenario C Scenario D Outputs Physician alignment factor assessment Strategic flexibility scenarios Strategic roadmap Executable action plans Execute strategy

Physician alignment framework: Internal dimensions To inform decision making around strategic direction, organizations will need to assess current and desired future state positioning around internal and external dimensions. Competitive Environment Physician Availability Regulatory and Reimbursement Issues Local Payor Landscape Situational Analysis Internal Alignment Dimensions External Alignment Dimensions Leadership Culture Change management Decision making model Organizational structure Operations Technology optimization Revenue cycle Cost management Supply chain Shared services Patient experience Finance Physician compensation Physician recruitment Reimbursement / contracting Financial strength, capital access Clinical Services Clinical organization Coordination of care Quality/safety Medical staff model Clinical care team model

Physician alignment: Internal dimension 1 — Clinical services Competency Focus areas Key questions/indicators Elements Clinical organization Coordination across care continuum Remarkable patient experience Quality/safety Clinical care team model Staff collaboration Patient-centered care How are clinical department and service offerings organized at the hospital? How active are your physicians with managing the overall health of the community? Are coordinated efforts made by the hospital and physicians to enhance care based on patient satisfaction scores? Who develops quality plans in the hospital, and how effectively are they followed? What kind and how much interaction exists between physicians and hospital staff to coordinate care for the patient? How well is information passed between physicians, patients, and the hospital? Performance tracking and monitoring Performance tracking Performance monitoring Are community health indicators and quality of care metrics used to prioritize improvements in the continuum of care in the community? Technology enablers Information technology What level of EMR interoperability exists been the hospital and physicians? Key analytics Contribution Margin and ALOS by DRG Listing of actively utilized care maps (hospital and into community if available) Core Measures — Readmissions Total cost per adjusted patient day by specialty or DRG Quality Results Disease state specific results Process of care measures Community health indicators Results of payor PFP indicators HEDIS indicators Degree of alignment Low High Clinical Services Volume Focused Quality and Safety Management Programs in Place Delivery Systems Which Provide Continuity of Care Organizational Commitment to Quality and Safety Value Based/ACO Delivery Model Clinical Effectiveness is Core Competency Population Based Care

Physician alignment: Internal dimension 2 — Operations Competency Focus areas Key questions/indicators Elements Cost management and performance management Technology management Revenue cycle Shared Services Patient Experience Patient satisfaction Employee satisfaction Physician satisfaction How are physicians engaged in initiatives to reduce costs? To what degree does the hospital and physicians have and meaningfully use integrated Electronic Health Records? Does your organization have a process to allocate bundled payments? Do physicians take ownership of ensuring appropriate clinical coverage's? Does senior hospital leadership champion staff training? How involved are physicians with improving the overall patient experience? Performance tracking and monitoring Performance tracking Performance monitoring What clinical and procedural information is shared with physicians? How often do physicians review their quality and operational core metrics? Technology enablers Information technology When patients are discharged from the hospital how is follow up care coordinated? What systems are in place? Key analytics Total operating expense per CMI adjusted patient day or patient visit Total labor expense per CMI adjusted patient day or patient visit Total supply cost per CMI adjusted patient day or patient visit Total drug cost per CMI adjusted patient day ALOS Trends Patient throughput Physician Admissions Inventory of IT Systems Any Hospital/Physician Joint Ventures Medical Staff Make-up Residents Mid Levels Employed/Hospitalists Contracted Voluntary Locums Degree of alignment Low High Operations Common HIT Limited but Growing MSO’s/PHO’s Provide Support Services to Affiliated Physicians Integrating/Interfaced EHR Shared Services Agreement for Certain Business Functions Integrated Information Management Singular Business Units Managing All Operations Joint PI/Efficiency Approach

Physician alignment: Internal dimension 3 — Finance Competency Focus areas Key questions/indicators Elements Physician compensation Physician recruitment and practice growth Reimbursement Financial strength Access to capital Patient Experience Patient satisfaction Employee satisfaction Physician satisfaction Are employed physicians compensated based on quality of care, productivity and utilization? How frequently does your organization complete a physician needs assessment? How are physicians involved in the recruitment process? What percentage of your physicians participate in group contracts with your payors? Is your organization financially prepared to enter into alignment models with physicians? What is your process for processing capital requests from physicians? Performance tracking and monitoring Performance tracking Performance monitoring How often does your organization monitor physicians in the following areas: productivity, quality, referrals, outcomes and cost containment? Technology enablers Information technology Has the hospital entered into financial arrangements with physicians to bring electronic medical records into physician offices? Key analytics Income statement for operating margin Physician Comp Models Balance sheet Days in A-R Days Cash on Hand ALOS RVU comparisons Occupancy % Bad Debt as a % of Net Patient Service Revenue Degree of alignment Low High Finance Minimal Financial Linkages or Risk Sharing Group Practice Contracts On-Call Contracts Gain Sharing in Specific Programs Ambulatory and Ancillary Joint Ventures Bundled Reimbursement Common Payer Contracting/Participation Strategy Capitation

Physician alignment: Internal dimension 4 — Leadership Competency Focus areas Key questions/indicators Elements Decision making and management model Change management Culture Organization structure To what degree are physicians engaged in hospital decision making? Are there physician leaders from the exam room to the board room? Are decision rights and responsibilities clearly understood? Are all stakeholder needs taken into consideration before decisions are made? When in the decision making process is physician input sought? Do hospital administrators work with physicians as champions of change management? Is there a formal change management methodology? Do physicians have defined responsibility and accountability? Do physicians and executives speak each other’s language and collaborate in decision making? Performance tracking and monitoring Performance tracking Performance monitoring Are performance measures proactively used by management and physicians to make system wide business decisions? Key analytics Listing of physicians in key leadership roles Listing of physicians leading/playing significant roles in high-value teams/initiatives Degree of alignment Low High Leadership Medical Directorships Department/Program Chairs Committee Participation Clinical Co-Management of Service Lines, Centers, or Institutes Focus on Practice Management, Quality, and Safety Initiatives Physicians Active on Board and Executive Team Dyad Leadership Models Shared Strategic Values

Physician alignment: Internal dimensions assessment A qualitative and quantitative assessment of the four internal dimensions will illustrate the current state of alignment along with the desired future state for both the physicians and the hospital / health system. Current State Desired Future State — Physicians Desired Future State — Executives Clinical services Finance Overall Leadership Operations No alignment Minimally aligned Somewhat Moderately Fully aligned

Physician alignment framework: External dimensions Conducting a review of specific external factors assists with understanding the market forces that are impacting the current environment and could potentially impact the future environment. These factors are market specific. Multi-entity systems will need to assess each market independently. External Alignment Dimensions Situational Analysis Internal Alignment Dimensions Leadership Operations Finance Clinical Services Local Payor Landscape Payor market characteristics Payor mix vs. competitors Hospital or provider-owned insurance companies Competitive Environment Market share/shifts Your and Competitors’strengths/weaknesses Innovation efforts Public perception Physician relations Regulatory and Reimbursement Issues Value Based Payment Reimbursement trends Federal mandates State healthcare laws Physician Availability Physician shortages Physician/ Hospital models Physician market characteristics Admission patterns Referral patterns

Physician alignment: External dimension 1 — Competitive environnent Element Focus areas Key questions/indicators Market share/shifts Overall market share and by specialty Trends in market share over time Mergers/Alliances among core and secondary market facilities Population shifts/aging trends/demographics Recent purchase activity – specialists Are we gaining share, maintaining it or losing it? How is market characterized – one dominant player, fragmented? How “competitive” is the market on the continuum from collaborative to fiercely competitive? Any recent or planned mergers/alliances? Population moving in or out, what is population race mix? Any recent deals between hospitals and physicians? How have they been handled? Your and competitors’ strengths and weaknesses Financial strength Quality Satisfaction Efficiency Operating margin, cash, debt, expense and capital mgmt. Core indicators, HEDIS, Centers of Excellence Press Gainey, HCAPHS, Overall public perception Cost of care, labor cost per adjusted discharge, supply cost per adjusted discharge etc. Physician-owned facilities Any physician owned or J/V facilities, either hospital or ambulatory centers? Any in direct competition with hospital services or other groups? How successful are these? What level of duplication exists? Source of contention or pride? Innovation efforts Any planned modernization efforts planned by client/competitors (facilities, IT other)? Any announced/unannounced moves to focus on Centers of Excellence? Impact of these announcements on Physician allegiances? Impact of these on public perception? Expected impact of these on admissions/services and bottom-line? Any RHIOs or HIEs? Physician relations Level of trust/collaboration for client and competitors Any history of deals gone bad or successful collaborations? How to characterize the levels of trust among parties?

Key questions/indicators Physician alignment: External dimension 2 — Regulatory and reimbursement Element Focus areas Key questions/indicators Physician shortages Ability to attract and retain primary care and specialist physicians and mid-levels Is there a current and/or chronic physician shortage at your facility? In your market? By geography? What is your physician turnover rate? How does that compare? Physician/hospital models Degree of physician ownership IPA, PHO, MSO, Joint Ventures etc. What is your/competitors’ current physician/hospital models? What % of physicians in the market are owned by a hospital and How has that changed in the last few years? How well is each working? Assess level of physician satisfaction with those models? Physician market characteristics Size of groups Dominance of groups Aging of Physicians Market demographics What is the level of consolidation among groups? Are there a few dominant groups or is the market fragmented? What level of retirements are expected ? will they cause shortages? Are there any population-specific health conditions that will become more prevalent and impact physician demand? Who are the physician opinion/thought leaders and what level of influence do they exert? Are there physician leaders capable of leading a major change initiative? Admission patterns Loyalty factors — levels of allegiance Assess admissions by provider to determine levels of allegiance to your facility? Splitters versus primarily aligned? Referral patterns Loyalty factors — referrals to specialists and/or hospital ancillary services Where are PCPs referring patients for specialty services? What % is being referred to your hospital versus outside? Where are patients being referred to ancillary services…to hospital- based centers or non-hospital based?

Key questions/indicators Physician alignment: External dimension 3 — Regulatory and reimbursement Element Focus areas Key questions/indicators Pay for performance programs Hospital based, physician based and/or continuum based Measurement/reporting system requirements Does the hospital and/or physician groups participate in pay for performance programs? How to characterize hospital and physician experience with P4P to date? Are any programs administered across the continuum of care, including home health? What are the measurement requirements (claims data versus enterprise data)? How well positioned are the hospital and physician groups to meet the data reporting requirements? Reimbursement trends Reimbursement rates — government, private payors Prevention/wellness/chronic disease management versus episodic care What have been the trends for average reimbursement per adjusted discharge or adjusted patient day in the hospital or reimbursement per visit or work RVU on the physician side? What is happening on the ancillary level to such services as high dollar testing? Federal mandates Health Care Reform What is the impact at the national level? Has any financial modeling been completed to assess impact on hospital and /or groups? How is coverage and reimbursement expected to change in the market related to Medicaid expansion and creation of exchanges?” State healthcare laws Changes mandated at the state level What if any is the impact?

Physician alignment: External dimension 4 — Payor landscape Element Focus areas Key questions/indicators Payor market characteristics Payor market share Payor consolidation activities Reimbursement levels Pay for Performance Initiatives Group Contracting What are the financial indicators of significance of your main payors? How is the market characterized (few dominant payors, fragmented, etc.) Has there been significant movement in terms of payor market share? Based on market characteristics, what leverage points does the hospital have with payors? Physicians with payors? To what extent have payors incentivized pay for performance? How many groups are participating in these? What level of maturity? How are contracts negotiated for hospital and groups? Are there limits to collaboration/alignment based on these contracts (exclusivity etc)? Payor mix versus competitors Payor mix Payor mix of competitors What is current payor mix? How has it trended over time? What is mix of “good “ to “bad” payors? How does that compare to competitors? Hospital or provider owned insurance companies Unique business relationships Are there any hospital or physician owned or controlled insurance companies? If so, what is their market share and has it been growing/declining?

Prioritization/Sequencing Executable Action Plans Outputs from the internal and external assessments informs alignment strategy development Desired level of alignment on internal dimensions Strategies And future options Prioritization/Sequencing Strategic Roadmap Guardrails set through external dimensions Executable Action Plans Implementation

Physician alignment advisory group

Outputs and key themes from our physician alignment advisory group Deloitte convened a group of industry executives and physician leaders in Washington, DC, at our Center for Health Solutions to discuss physician-hospital alignment in the context of reform. Through the discussion we identified the following themes as being key considerations in refining a physician-hospital alignment strategy: Employment is not necessarily a pre-requisite for alignment, and employment should not be the only option. Alignment does not always equal engagement; and integration does not always equal alignment. Physicians need to be at the decision making table as “owners” in the process of improving healthcare. The destination is unclear, but we know that cost, quality, and value are key tenants in the new value equation. It’s not which reimbursement or delivery model that will drive future success. To “win” in the reform era requires: The right physician leaders (need docs to educate docs before behaviors will change) The right executives (need business acumen paired with physician leadership) The right technology infrastructure (data required to model/manage under new reimbursement mechanisms) The biggest gap in terms of future state success is physician leadership and organizations will need to make investments to close the gap.

Outputs and key themes from our physician alignment advisory group (cont.) More burning platforms and disruptive innovations are needed to serve as catalysts for change. We live in two worlds: The immediate — with all of the day-to-day challenges around cost, access, and quality The future — which we know will look very different than today. “We can do all the right things but go broke doing it without making the right future investments” “Where we are heading here is unknown. We know we’re heading west. Money is our core organizing principle. We know we have to create a more purposeful solution, more value, less fragmented.” — Source: Mark Werner, MD, President of Carilion Clinic Physicians and Executive Vice President and Chief Medical Officer for Carilion Clinic, June 29, 2010 “We live in two different worlds. It’s not going to be around docs, hospitals…it will be around health coaches and what people do for themselves.” — Source: Ken Abrams, Senior Vice-President, Clinical Operations/Chief Quality Officer and Associate Chief Medical Officer, North Shore-LIJ Health System June 29, 2010 “The focus cannot be on hospitals. The focus must be on a new structure where physicians and hospitals can cooperate, collaborate and coordinate care for communities. Trust is still a major issue.” — Source: Robert B. Williams, MD, MIS, National Medical Leader, Deloitte LSHC Consulting, June 29, 2010

Speaker Introductions Hector is a Managing Director in Deloitte Corporate Finance LLC’s corporate finance practice. He is a member of the firm’s Health Sciences & Government industry group, co- leads the national Health Care Strategic Advisory and the Financial Advisory Services Accountable Care Organization integration efforts. Hector has advised hospital systems in matters involving physician practice acquisitions, joint ventures, fairness opinions, FMV opinions, physician alignment and ACO strategies, sell-side and buy-side transactions, affiliation agreements, physician compensation agreements (including direct employment, call arrangements, directorships, and co- management agreements), debt restructurings, and hospital syndications. Hector ‘s healthcare sector experience includes acute care, long term care, home health, hospice, ambulatory surgery centers, physician and dental practices, IPAs, imaging, dialysis, catheterization laboratories, disease management, group purchasing organizations, healthcare products distribution and healthcare information technology, managed care, PBM’s, specialty pharma distribution, and life sciences. Hector G. Calzada, Jr. Managing Director Deloitte Corporate Finance LLC 191 Peachtree St NW Suite 2000 Atlanta, GA 30303 mobile: +1 678 779 3006 hcalzada@deloitte.com