1. HFMA SOUTHERN CALIFORNIA EDUCATIONAL WEBINAR October 4, 2012 Presented by: Jamie Cleverley Cleverley + Associates REGIONAL & OPERATIONAL EFFECTS ON HOSPITAL PRICING & STRATEGIC RESPONSES FOR PRICE DEFENSE

2. | 2 | Why pricing? National Health Expenditures (top five areas – millions) 1 GROWTH IN HOSPITAL COSTS/CHARGES

3. | 3 | Source: CMS Why pricing? 1980-1990 % Change1990-2000 % Chg2000-2009 % Chg Drugs12.8%Drugs11.6%Drugs8.4% Physician12.8%Admin Priv Hlth Ins7.7%Admin Priv Hlth Ins8.1% Admin Priv Hlth Ins12.4%Other6.1%Hospital6.9% Nursing Home11.4%Dental7.0%Other6.5% Other11.3%Nursing Home6.6%Physician6.4% Hospital9.6%Physician6.2%Struct & Equip6.3% Struct & Equip9.4%Struct & Equip5.9%Dental5.7% Dental9.0%Hospital5.2%Nursing Home5.4% TOTAL ALL11.0%TOTAL ALL6.6%TOTAL ALL6.8% 1 GROWTH IN HOSPITAL COSTS/CHARGES Annualized Change in National Health Expenditures by Area

4. | 4 | Why pricing? Inflationary Changes by Metric & Year 1 GROWTH IN HOSPITAL COSTS/CHARGES

5. | 5 | 6.0% Why pricing? 1 GROWTH IN HOSPITAL COSTS/CHARGES Rate Increase Median Limit Value 5.0%

6. | 6 | 2 INCREASED GOVERNMENT/LEGAL ATTENTION Why pricing? Hospitals, SEIU-UHW Reach Visionary Agreement on Future of Health Care Policy, Relationships in California May 2, 2012 The California Hospital Association and SEIU-United Healthcare Workers West have reached a comprehensive, strategic agreement to jointly take on the many challenges facing the health care system, including rising costs, burgeoning levels of chronic disease, and the need to provide the highest quality of care for the people of California. Reached after two months of meetings and conversations to discuss issues of mutual interest, the agreement calls for SEIU-UHW and CHA to work in good faith, along with other key stakeholders, to find practical solutions that can replace or improve the current hospital pricing system and protect the neediest patients by addressing uncompensated care in hospitals in a manner that accounts for low Medicare and Medi-Cal payments. Issued jointly by CHA and SEIU-UHW

7. | 7 | What is driving the need for transparency? 2 INCREASED GOVERNMENT/LEGAL ATTENTION Why pricing?

8. | 8 | Growth in HSA/HDHP Plans by Year (thousands) Source: Center for Policy & Research, America’s Health Insurance Plans 3 GROWTH IN HSA/HDHP AND CONSUMER-DIRECTED HEALTHCARE Why pricing?

9. | 9 | Why pricing? 3 GROWTH IN HSA/HDHP AND CONSUMER-DIRECTED HEALTHCARE

10. | 10 | 1)Understand the relationships of operating environment factors on hospital price through a national data study WHAT INFLUENCES HOSPITAL PRICING? 2)Assess current price position with critical performance metrics for inpatient and outpatient areas HOW DO WE COMPARE PRICES? 3)Defend hospital pricing in light of unique operating environments by implementing appropriate policies and strategic models HOW DO WE DEFEND PRICES? Today’s Objectives

11. WHAT INFLUENCES HOSPITAL PRICE?

12. | 12 | What influences hospital pricing? Three spheres of influence on price PRICE

13. | 13 | Who is likely to have the highest charges among hospitals that are: -Urban vs Rural -For-Profit vs Non-Profit -Large vs Small -High Market Share vs Low Market Share -High Medicaid vs Low Medicaid -High Cost vs Low Cost Testing price variables What influences hospital pricing? $

14. | 14 | Urban/Rural Status by Hospital Charge Index® Quartiles What influences hospital pricing?

15. | 15 | What influences hospital pricing? Organization Type by Hospital Charge Index® Quartiles

16. | 16 | What influences hospital pricing? Median Net Patient Revenue (millions) by Hospital Charge Index® Quartiles

17. | 17 | What influences hospital pricing? Median Market Share Percentage by Hospital Charge Index® Quartiles

18. | 18 | What influences hospital pricing? Median Medicaid Days Percentage by Hospital Charge Index® Quartiles

19. | 19 | What influences hospital pricing? Median Collection Percentage From Self-Pay By Year

20. | 20 | What influences hospital pricing? Median Hospital Cost Index® by Hospital Charge Index® Quartiles

21. | 21 | What influences hospital pricing? Median Operating Margin by Hospital Charge Index® Quartiles

22. | 22 | What influences hospital pricing? Median Payer Environment by Hospital Charge Index® Quartiles Payer Environment: Markup Ratio/Deductions %

23. | 23 | What influences hospital pricing? Regional differences in hospital pricing Regional Divisions Used by the United States Census Bureau NORTHEAST Connecticut Maine Massachusetts New Hampshire New Jersey New York Pennsylvania Rhode Island Vermont MIDWEST IllinoisMissouri IndianaNebraska IowaNorth Dakota KansasOhio MichiganSouth Dakota MinnesotaWisconsin SOUTH AlabamaGeorgiaNorth CarolinaTexas ArkansasKentuckyOklahomaVirginia DelawareLouisianaSouth CarolinaWest Virginia Dist of ColumbiaMarylandTennessee FloridaMississippi WEST AlaskaNevada ArizonaNew Mexico CaliforniaOregon ColoradoUtah HawaiiWashington IdahoWyoming Montana

24. | 24 | What influences hospital pricing? Median Hospital Charge Index® by Regional Divisions 88.3 110.6 94.9 119.7

25. | 25 | Urban/Rural Status by Regional Divisions What influences hospital pricing?

26. | 26 | What influences hospital pricing? Organization Type by Regional Divisions

27. | 27 | What influences hospital pricing? Median Net Patient Revenue (millions) by Regional Divisions 151 78 110 121

28. | 28 | What influences hospital pricing? Median Market Share Percentage by Regional Divisions 18.6 50.7 41.5 13.6

29. | 29 | What influences hospital pricing? Median Medicaid Days Percentage by Regional Divisions 13.3 15.3 13.8 18.0

30. | 30 | What influences hospital pricing? Median Collection Percentage From Self-Pay by Regional Divisions IP: 6.0 OP: 7.6 IP: 2.7 OP: 3.0 IP: 2.7 OP: 2.9 IP: 5.0 OP: 5.0

31. | 31 | What influences hospital pricing? Median Hospital Cost Index® by Regional Divisions 96.8 100.5 102.8 101.8

32. | 32 | What influences hospital pricing? Median Operating Margin by Regional Divisions -0.58 1.13 1.41 2.74

33. | 33 | What influences hospital pricing? Median Payer Environment by Regional Divisions Payer Environment: Markup Ratio/Deductions % 4.20 4.48 4.26 4.84

34. PAYMENT IS KEY IN HOSPITAL PRICING

35. | 35 | Payer Number of Patients Net Payment per Patient Total Payment Total Cost Medicare50$92.50$4,625$5,000 Medicaid10$75.00$750$1,000 Uninsured5$5.00$25$500 Managed Care30$125.00$3,750$3,000 Other5???$500 Totals100$9,150$10,000 less Total Cost$10,000 less Required Profit$500 Balance Remaining($1,350) Average Cost per Patient = $100 Required Payment from Five Remaining Patients = $270 ($1,350/5) ??? Analysis of Payer Environment & Hospital Price Payment key in hospital pricing

36. | 36 |  Average costs  Losses on patients who pay less than cost  Discounts to charge patients Uninsured Commercial  Reasonable return on investment Sustainable growth Pricing Requirements Analysis of Payer Environment & Hospital Price Payment key in hospital pricing

37. | 37 | Price = (NI + fixed pay loss) (1 - charge discount) Pricing Model avg cost + charge volume Average cost increases Use this model for price-setting at facility level: Net income requirements increase Losses from fixed pay business increases The percentage of charge paying patients decreases Price must increase when: The discount from charges increases Analysis of Payer Environment & Hospital Price Payment key in hospital pricing

38. | 38 | Avg cost =$100 NI =$4 (4%) FP loss =$0 Charge payers =20% Charge discount =30% Required price =$171.43 Pricing Model – Payer Impact on Pricing Analysis of Payer Environment & Hospital Price Payment key in hospital pricing

39. | 39 | Analysis of Payer Environment & Hospital Price Payment key in hospital pricing MODEL # 1# 2# 3 Profit margin4% FP loss020 % charge50%20%100% Average discount %15%60%5% Mark-up required127325109 Pricing Model – Pricing Sensitivity Analysis

40. HOW DO WE COMPARE HOSPITAL PRICES?

41. | 41 | CPT® is a registered trademark of the American Medical Association. All rights reserved. How do we compare prices? Level of ComparisonMetric FACILITYHospital Charge Index® Medicare Charge per Discharge (CMI/WI adj) Medicare Charge per Visit (RW/WI adj) DEPARTMENTBETOS Analysis INPATIENT CASECharge by MS-DRG OUTPATIENT CASECharge by APC PROCEDUREPrice by CPT®/HCPCS Code Levels of hospital price comparison Bundling Level of Detail

42. | 42 | Facility-level charge measure: Hospital Charge Index ® Outpatient Charges Outpatient Charge Index Formula: Your Medicare Charge per Visit (RW/WI adj) US Median Medicare Charge per Visit (RW/WI adj) Inpatient Charges Inpatient Charge Index Formula: Your Medicare Charge per Discharge (CMI/WI adj) US Median Medicare Charge per Discharge (CMI/WI adj) Facility-level price comparison How do we compare prices? Inpatient Charge Index Outpatient Charge Index Hospital Charge Index® Sample Hospital136.1119.4128.9 Peer Average96.665.985.2

43. | 43 | Sample Hospital Peer Average % of Peer Average Evaluation & Management – selected detail Office Visits 126.58111.74113.28% Emergency Room 406.53323.20125.78% Evaluation & Management Total 298.09213.27139.77% Procedures – selected detail Major Procedures – Cardiovascular 193.56113.00171.30% Eye Procedures - Cataract/Lens 130.76196.9366.40% Procedures Total 287.50185.65154.86% Imaging – selected detail Standard Imaging - Nuclear Medicine 230.29281.8681.70% Advanced Imaging - CT/CTA Scan Brain/Head/Neck 569.35396.29143.67% Imaging Total 467.71343.16136.29% Tests – selected detail Lab tests - Pathology358.81368.3897.40% Lab tests - Routine venipuncture1,854.80705.90262.76% Tests Total 495.30297.09166.72% Department-level price comparison CPT®Description 87075Culture specimen, bacteria 87076Bacteria identification 87077Culture Aerobic Identify CPT® is a registered trademark of the American Medical Association. All rights reserved. Department/Family Analysis “Lab Tests – Microbiology” How do we compare prices?

44. | 44 | DRGDescription Sample Hospital Volume Sample Hospital Average Charge Peer Average Charge 470 Major joint replacement or reattachment of lower extremity w/o MCC 79552,24645,870 652Kidney transplant55183,983147,994 871Septicemia w/o MV 96+ hours w MCC16254,71431,379 460Spinal fusion except cervical w/o MCC54128,55992,961 468Revision of hip or knee replacement w/o CC/MCC7273,39155,107 Inpatient/Outpatient/Procedure-level price comparison APCDescription Sample Hospital Volume Sample Hospital Average Charge Peer Average Charge 0301Level II Radiation Therapy8,6801,4811,146 0412IMRT Treatment Delivery2,6354,6422,820 0310 Level III Therapeutic Radiation Treatment Preparation 36724,95511,648 0615Level 4 Emergency Visits2,6982,9882,102 0616Level 5 Emergency Visits1,2655,2104,272 CPT®Description Sample Hospital Volume Sample Hospital Average Charge Peer Average Charge 77418Intensity modulated treatment deliver2,6523,3542,213 77414Radiation treatment delivery4,981991851 77334Radiation treatment aid(s)2,9541,6501,026 99284Emergency dept visit2,9451,3311,027 77413Radiation treatment delivery3,896991808 CPT® is a registered trademark of the American Medical Association. All rights reserved. How do we compare prices?

45. HOW DO WE DEFEND HOSPITAL PRICES?

46. | 46 | How do we defend prices? Three approaches to hospital price defense 1 23 ROI Model Peer PositionCost Markup

47. | 47 | (volume x price) - (volume x cost) investment ROI Formula ROI = Relating pricing to ROI: the public-utility approach Public utilities have used a Return on Investment (ROI) model to justify price increases to rate regulatory boards. The approach isolates the price variable from the ROI formula (below) and “tests” the remaining elements. If it can be proved that ROI, Cost, and Investment are not excessive, then price must also not be excessive. In the following pages, we present these tests. Tests 1.Is ROI excessive? 2.Is cost excessive? 3.Is investment excessive? If “no” to all three, price is not excessive. Return on Investment Model How do we defend prices? 1

48. | 48 | Group MedianReturn on Equity Los Angeles-Long Beach-Santa Ana 13.6 Riverside-San Bernardino-Ontario 11.6 San Diego-Carlsbad-San Marcos 17.5 San Francisco-Oakland-Fremont 14.4 Sacramento-Arden-Arcade-Roseville 14.0 California 12.2 US 9.0 Tests Is ROI excessive? Is investment excessive? Is cost excessive? How do we defend prices? Return on Investment Model 1 ROE: Excess of Revenue over Expenses/Net Assets

49. | 49 | How do we defend prices? Return on Investment Model 1 Average Age of Plant: Accumulated Depreciation/Depreciation Expense Fixed Asset Turnover: Total Revenue/Net Fixed Assets Tests Is ROI excessive? Is investment excessive? Is cost excessive? Group MedianAAPFAT Los Angeles-Long Beach-Santa Ana 7.83.82 Riverside-San Bernardino-Ontario 8.84.42 San Diego-Carlsbad-San Marcos 9.93.94 San Francisco-Oakland-Fremont 13.03.37 Sacramento-Arden-Arcade-Roseville 12.13.17 California 9.53.39 US 9.62.55

50. | 50 | Facility-level cost measure: Hospital Cost Index ® Outpatient Costs Outpatient Cost Index Formula: Your Medicare Cost per Visit (RW/WI adj) US Median Medicare Cost per Visit (RW/WI adj) Inpatient Costs Inpatient Cost Index Formula: Your Medicare Cost per Discharge (CMI/WI adj) US Median Medicare Cost per Discharge (CMI/WI adj) How do we defend prices? Return on Investment Model 1

51. | 51 | Tests Is ROI excessive? Is investment excessive? Is cost excessive? How do we defend prices? Return on Investment Model 1 Group MedianHospital Cost Index® Los Angeles-Long Beach-Santa Ana 95.7 Riverside-San Bernardino-Ontario 91.3 San Diego-Carlsbad-San Marcos 98.1 San Francisco-Oakland-Fremont 103.5 Sacramento-Arden-Arcade-Roseville 93.0 California 95.9 US 101.3

52. | 52 | Comparing your pricing to pricing at peer facilities The second method used to assess the defensibility of your pricing is direct comparison with peers. Data at these levels is useful: 1) Facility level 2) Departmental level 3) Inpatient-case level 4) Outpatient-case level 5) CPT®/procedure level How do we defend prices? Peer Position Model 2

53. | 53 | Facility-level How do we defend prices? Peer Position Model 2 Group MedianHospital Charge Index® Los Angeles-Long Beach-Santa Ana 156.4 Riverside-San Bernardino-Ontario 126.0 San Diego-Carlsbad-San Marcos 141.7 San Francisco-Oakland-Fremont 148.9 Sacramento-Arden-Arcade-Roseville 150.3 California 143.7 US 103.7

54. | 54 | Facility-level How do we defend prices? Peer Position Model 2 Group MedianMedicare Charge per Discharge (CMI/WI adj) Los Angeles-Long Beach-Santa Ana 29,718 Riverside-San Bernardino-Ontario 24,912 San Diego-Carlsbad-San Marcos 27,859 San Francisco-Oakland-Fremont 27,954 Sacramento-Arden-Arcade-Roseville 28,722 California 28,177 US 19,858

55. | 55 | Facility-level How do we defend prices? Peer Position Model 2 Group MedianMedicare Charge per Visit (RW/WI adj) Los Angeles-Long Beach-Santa Ana 422 Riverside-San Bernardino-Ontario 417 San Diego-Carlsbad-San Marcos 357 San Francisco-Oakland-Fremont 377 Sacramento-Arden-Arcade-Roseville 373 California 391 US 331

56. | 56 | Facility-level How do we defend prices? Peer Position Model 2 Group MedianMedicaid Days % Los Angeles-Long Beach-Santa Ana 23.8 Riverside-San Bernardino-Ontario 25.3 San Diego-Carlsbad-San Marcos 16.7 San Francisco-Oakland-Fremont 13.9 Sacramento-Arden-Arcade-Roseville 17.9 California 21.0 US 16.4

57. | 57 | Relating pricing to cost: Sources of Cost Data  Hospital cost-accounting system Direct Cost Fully allocated cost  RCCs How do we defend prices? Cost/Markup Model 3

58. | 58 | 1.Reduced net patient revenue, e.g., $5.1 million vs. $9.6 million in ATB 2.Major pricing changes, e.g., -99% to 3,580% Relating pricing to cost: Two Usual Outcomes How do we defend prices? Cost/Markup Model 3

59. CREATING AN APPROPRIATE PRICING STRATEGY

60. | 60 | Secondary/Tertiary Hospital Market Understand your market position Creating appropriate prices Core Hospital Market Non- Hospital Market WHO?? SERVICES?? PRICE COMPARE??

61. | 61 | Critical Areas of Contract Negotiation  Contract language  Payment terms Understand and manage payment Contract Language Areas  Clean claims definition  Most favored nation clauses  Appeal-process fairness  Payment arrangements after termination  Silent PPO arrangements  Price-increase limits Creating appropriate prices

62. | 62 | * 80 comparison plans Payer Z Average Value* Sample Hospital All services % of Billed Charges81% DRG Base Rate$6,125$4,806 Per-Diem Rates Medical$1,659 Surgical$1,921 TCU/Telemtry$2,036 ICU/CCU$3,314 PTCA$4,091 Psych$711$485 Alcohol/ Chemical Dependency$637$485 Rehab$1,293 Payment terms – Inpatient (payer Z & hospital) Understand and manage payment Creating appropriate prices

63. | 63 | * 80 comparison plans Payer Z Average Value* Sample Hospital All services % of Billed Charges72% Radiology (% BC)75% 38.6% (except case rates for SPECT, MRI/MRA, & CT Scan) Laboratory (% BC)76%Fee Schedule Emergency Department (% BC)73%38.6% Level 1$93 Level 2$141 Level 3$339 Level 4$600 Level 5$1,212 Payment terms – Outpatient (payer Z & hospital) Understand and manage payment Creating appropriate prices

64. | 64 |  Set the desired profit target  Establish initial rate-increase limits and parameters  Use the right data to estimate rate-increase impact  Model your contract terms  Assess fee-schedule pricing  Incorporate cost data  Examine competitive pricing comparisons  Review pharmacy / medical-supply issues  Evaluate impact by case categories  Evaluate impact by payer  Adjust parameters as necessary and implement final CDM changes Critical steps in a hospital’s rate-setting strategy Developing a rate strategy Creating appropriate prices

65. | 65 | Meet net income requirements? Maintain or enhance competitive position? Maintain related pricing relationships? Establish equitable distribution to case categories? Establish equitable distribution to payers? Developing a rate strategy Creating appropriate prices Does the pricing strategy:

66. | 66 | Summary Hospital pricing is impacted by various demographic and operating factors Payment is critical in rate establishment Price comparison can change significantly based on the level of comparison Defensibility and required net revenue production can be attained through strategic pricing assessments

67. | 67 | Jamie Cleverley Principal Cleverley + Associates Email: jcleverley@cleverleyassociates.com Phone: (614) 543-7777 Thank you. Questions?