Using Game Theory to Gain The “Upper Hand” During Contract Negotiations The 11 th Annual HFMA Region 11 Healthcare Symposium Caesars Palace, Las Vegas, Nevada Edward M. “Mickey” Duke President of E.M. Duke & Associates, LLC C.E.O. of Oasis Health System, LLC 702/ January 27, 2009

The 1996 book Co-opetition (by Adam Brandenburger and Barry Nalebuff, published by Currency Doubleday) helped to clarify two basic business tenets that are often underestimated in their value to managed care contracting: You don’t have to destroy your competition to win in business -- know when to cooperate and when to compete Game theory helps you to see all of the players and relationships that affect the game that your business is playing -- it allows you to change the game to one that you can win, regardless of whether your actions cause your competitors to lose or to win as well

CO-OPETITION THEORY There are times when you need to work to “raise the tide” – making sure that you benefit, but not always worrying that a competitor may benefit as well –Gore Vidal: “It is not enough succeed. Others must fail.” vs. –Bernard Baruch: “You don’t have to blow out the other fellow’s light to let your own shine” There is plenty of room for battles with competitors over market share, fights with suppliers over costs, and conflicts with customers over price.

GAME THEORY A way of bringing competition and cooperation together – to your advantage n Game theory has only recently been applied to business n Dates back to early days of WW II n 1944: John von Neumann & Oskar Morgenstern published Theory of Games and Economic Behavior n 1994: John Nash, John Harsanyi, Reinhart Selton were awarded the Nobel Prize n NOT necessarily a “Business-as-War” way of thinking – Contemporary game theory applies just as well to positive-sum (or “win-win”) games

Basic Elements of Any (Every) Game… n P layers n A dded Values n R ules n T actics n S cope

Changing the Game… Business is different from other games in two important ways because – -- it allows more than one winner -- it doesn’t “stand still”, all the elements are constantly changing People are free to change the game of business to their benefit. And they do! To change the game, you have to change one or more of the five elements – you change the PARTS (the Players, Added values, Rules, Tactics and/or Scope)

It’s All in the Cards… an example n Red and Black cards – you each have a Red card, and I have as many black cards as there are Red cards n HFMA-Region 11 has agreed to pay $100 to anyone – either Mickey or an attendee – who turns in a pair of cards, one Black and one Red. n Attendees can’t get together and bargain as a group with Mickey n It’s a free-form negotiation between Mickey and the attendees n What will Mickey offer each attendee? $20? $50

Let’s discuss that example… n Are you ready to take the $20? n Why? – why not? What is your negotiating position? n Even if you can’t agree at first, the game’s not over n Assume everyone else except you agrees to $20 – I still have to come back to you, or $100 is lost n What is the probable outcome? 50/50 split is the most likely outcome – I need you just as much as you need me n Actually, in all these negotiations, we need each other equally

Now, Let’s change the situation a bit… n Now, I’m missing 3 black cards, but each of you still have a Red card n As before, each Red and Black card together is worth $100. Has your negotiating position changed? Are you worse off now than before? n If I offer $20, should you take it or ask for more? n What is the probable outcome? Three of you will end up with nothing – You need me much more than I need you n I was a bit Machiavellian – I didn’t “lose” the black cards, I got rid of them

What did I end up with in the second game? n I did make the overall pie smaller n I knew all too well that losing three Black cards would change the division of the pie n BUT… Getting a sufficiently large slice would more than compensate for the reduction in the size of the pie Just a card game? No, a valid strategy used by many companies, the NFL, anyone – including my Oasis Health System – who wants to shift the power advantage in their favor

“It’s never just one thing… “ Dennis Quaid, in “The Rookie”, responding to his son when asked if the reason that he quit the Major leagues was because of his arm injury … and in Managed Care contracting, we all know it’s also “never just one thing”… but Game Theory offers the opportunity to coordinate multiple “things” to methodically create workable strategies with generally predictable outcomes, and accomplish an overall business goal

The initial Oasis Health System situation (mid-1990’s) n Ten individual hospitals in Las Vegas (mid-1990’s) – mostly for-profit or multi-state non-profit system, one large county hospital n All the hospitals were contracted with all the health plans n Our UHS hospital had 16% market penetration n The region was under-bedded, and the population was growing strongly n There were no multi-hospital systems yet, although some were “on the drawing board” n Not all major / national health plans were in the market yet

Oasis Health System Strategy… attacking the “PARTS” of the game We began by aligning “groups” of hospital Players, and introducing new health plan Players to the market In the course of changing these Player parts, we were also adding value to the hospital side of the negotiations; we were changing the rules (and expectations) of the players and complimentary players (including our competitors); and we were introducing some new tactics into the marketplace Our intent (Goal) was to gain market share and increase net revenue per inpatient day

Applying Game Theory First, we re-arranged and added Players n Expanded UHS ‘presence’ by building 2 nd UHS hospital and affiliating with three others – genesis of Oasis Health System n Agreed to contract with United and Aetna at low rates to encourage their successful entry – but on the condition they could not contract with competitor hospitals of HCA and CHW n Obtained 70% bedday guarantee from PacifiCare n Successfully sued Sierra to get out of contract RESULTS: Not all the hospitals were now on all health plans, so brokers were now willing to sell a plan with less than all the hospitals (a change in the rules)

Applying Game Theory… (con’t) In the mid 1990’s, the Plans held the fewer Black cards, and could tell the hospitals to “pipe down, or we’ll give your beddays to another hospital” – The Hospitals Added value to their position: n By encouraging “banding together’ of hospitals, and acting as single players (UHS built a 2 nd hospital and created Oasis, and HCA-CHW countered by also building a 2 nd hospital and creating a competitor network), the bargaining position of the hospitals changed n By dividing the market – not all plans having all hospitals – the hospitals essentially reversed who was holding the fewer cards (the Red cards / Black cards game)

Applying Game Theory… (con’t) Changed the “Contracting” Rules n Brokers now would sell plans with less than all the hospitals as plan providers n Tiered all of my contracts: Top tier players (4 HMOs), Middle tier (Statewide / Regional PPOs), and Bottom tier (Smaller / national PPOs) n Strengthened the Middle tier contract language (see next slide) n Terminated the entire Bottom Tier (actually moved this tier up to subcontract with Middle tier contract plans, under the new preferred Middle tier contract terms n Created new contracting “rule” – increased discount for increased volume (result of “dividing the market”) n Created a 25-30% differential in rates between plans with all hospitals, and plans with only some hospitals

Applying Game Theory… (con’t) Strengthening the Middle tier “Contracting” Rules – n Strengthened the “considerations” n Limited access by Affiliates n Access to the “alternate rates” requires Financial Incentive, Direction, Timely Payment, and One “point of entry” into the service area n Participate in all products n No offset – must first ask for return of $, can use dispute resolution n PPO must provide the “chain of contracts” n Payer “updates” require advance notice – can stop onerous updates n Can get rid of a single payer within PPO if “problems” n All UR/UM/QI plans, policies, procedures are Exhibits to the contract n COB allows up to 100% recovery n Prompt pay or billed charges n Payor must pay undisputed portion of all claims

Applying Game Theory… (con’t) MAJOR BENEFIT of Changing the “Contracting” Rules – n TWELVE CONTRACTS ARE NOW ON OASIS CONTRACT PAPER – NOT THE PLAN’S PAPER. These include Cigna, Humana (has now acquired PacifiCare), Great West, Beech Street and other statewide and regional PPOs and HMOs.

Applying Game Theory… (con’t) Introduced new Tactics to accomplish our goals – n Built up my personal rapport with the health plans’ executives and contract negotiators – they rightly perceived that I wanted to do what was “fair” for all sides, and came to support my proposed changes n We created a mystique surrounding Oasis (strengthened the plans’ perception that Oasis was serious about its efforts to “change things”, and was becoming powerful enough to do so) n Used Oasis to enter into a multi-hospital / IPA –based full capitation agreement in 1999 with PacifiCare for 55,000 lives (that ended up being a mistake, but showed a position of strength to the health plans)

Applying Game Theory… (con’t) Another Tactic we used to accomplish our goals – n Began regular, monthly meetings of the MC Directors of the Oasis affiliates -- same time and place each month, furthering the perception of a strong provider community ready to “take on” the health plans -- Purchased multiple copies of the AudioTech ‘’books on tape’ version of Co-opetition to “get things going” -- Oasis study topics over the past 10 years have included various managed care books, contracting guides, reviews of actual model contract language, COB and ERISA guidebooks, article reviews, even formation of study groups for the HFMA certification exams in managed care

Applying Game Theory… (con’t) The Scope of the game was leveraged into other markets n We used the concept of Oasis to leverage our negotiations in northern Nevada, where we entered into an affiliation with one of the two larger competitor hospitals n We even imported the Oasis affiliation concept into our Washington state market – at Auburn Regional Medical Center, where we began discussions to link three intermediate-sized hospitals into a contracting affiliation, to change the power balance in favor of the hospitals

What We Accomplished by Aggressively Using Game Theory… n Increased net revenue per Inpatient bedday by 85% in7 years n Obtained very strong hospital contracting terms in all of our hospital contracts, including those of our 3 community hospital affiliates – dramatically benefiting claims administration for our business offices n Leveraged the negotiating power of the UHS hospitals to benefit the affiliate community hospitals (and strengthening referral patterns and “building allies”) n Leveraged the Oasis affiliation to benefit affiliated ancillary services that are contracting partners with our hospitals n Oasis now holds twelve contracts on its own contract paper, including Cigna, Humana, Great West, Beech Street, and other major payors

QUESTIONS ? THANK YOU