Financial Executives

Networking Group

Steven H. LipsteinJune 8, 2011

2

30.

6

12.1 12 12.2

10.3

9.6 11.2

10.4 11

9.8

16

8.9

8.2 10

.2

9.1

9.4

9.4

7.8 8.4 9.4

10.3

9.9

8.3

8.6

6.4 9.

5

7.1 7 7.3

6.2

5.8

25.5

22.9

21.4

23.1

23.7 21.6

21.8

21.1

20.8

13.3

20.1

20.4 17.4

17.9

16.9

16.6

17.1

16.5 15.5

13.9

14.3

15.4

15.1

16.7 11.6

13.5

12.3

11.0

5.9

4.5

0

5

10

15

20

25

30

35

40Sw

eede

n

Fran

ce

Neth

erla

nds

Belg

ium

Denm

ark

Switz

erla

nd

Aust

ria

Ger

man

y

Finl

and

Unite

d St

ates Ita

ly

Unite

d Ki

ngdo

m

Portu

gal*

Norw

ay

OEC

D Av

erag

e

Gre

ece

Luxe

nbou

rg

Hung

ary

Icel

and

Cana

da

Aust

ralia

Spai

n

Japa

n

Pola

nd

New

Zea

land

Czec

h Re

publ

ic

Slov

ak R

epub

lic

Irela

nd

Kore

a

Mex

ico

Total Social Service ExpendituresTotal Health Service Expenditures

32.

1

34.

933

.6 33

.4 33

.3

37.

6

32.

8 32.

2

29.

3 29.

0 28.

627

.6 27.

0 26.

326

.0 24

.9 24

.9 24

.9 24

.2 24

.2 23

.7 23

.7 23

.1

21.

1 20.

619

.3

18.

312

.1

10.

3

Expe

nditu

res

as %

of G

DP

Total Health and Social Service Expenditures for OECD Countries, 2005

*Expenditures for Portugal are from 2004 due to missing data for 2005.

Source: OECD Health Data 2009 (Accessed June 2009); OECD Social Expenditure Dataset (Accessed Dec 2009); Health and Social Service Spending; Associations with Health Outcomes Article by Elizabeth Bradley, Ph.D, Benjamin Elkins, MPH, Brian Elbel, Ph.D.

3

Federal Government P & L (2011) (in billions)

Revenues $2,100 (14% of GDP)

Expenses

• Defense / Homeland Security $ 786

• Medicare / Medicaid $ 773

• Social Security $ 727

• Other Mandatory $ 676

• Other Discretionary $ 640

$3,602 (24% of GDP)

Deficit ($1,502) (10% of GDP)

4

Increasing Debt and Deficit

Source: International Monetary Fund, World Economic Outlook Database, October 2010. Last observation: 2009.

5

Debt Reduction 101

Total Debt = $15T Total GDP = $15T Debt / GDP Ratio = 100%

Targets: Total Debt / GDP Ratio = 60%Annual Federal Budget Deficit % < Annual GDP Growth % (About 2 – 3 %)

If GDP Growth = 2.5% then 2021 GDP = $19Tthen… 2021 Debt at 60% of GDP = $11T

Debt Reduction Required = $15T (Current Level) Minus $11T (60% of 2021 GDP) = $4 Trillion

Democrats: $3T in Spending Cuts + $1T in New TaxesRepublicans: $5T in Spending Cuts + $1T in New Tax Cuts

$4 Trillion is the Consensus Target

6

Spreading the “Hurt” on the First $3 TrillionDefense = $1 TrillionMedicare/Medicaid = $1 TrillionAll Other = $1 Trillion

Of the $1 Trillion Attributable to Medicare/Medicaid,One-Third Allocated to Hospitals/Doctors

= $330 Billion

Of the $330 Billion Allocated to Hospitals, 0.1% Impact on BJC HealthCare= $330 Million

(This Amount Deducted From BJC 10-Year Forecast of Cash Flow)

ACOs plus HIZs plus Bundles plus all other CMMI Innovations = -$330 Million to BJC HealthCare

Manage Costs to Medicare Breakeven: Supply Chain, Revenue Cycle, Enterprise Resource Management, Ancillary and Pharmacy Utilization, Length-of-Stay, Labor Inflation = PCE

Inflation

Imagine: Then:NIH (Leading Bio-Medical Research) Washington University School of Medicine (WUSM)

Mayo Clinic (Leading Adult Specialty Care)

WUSM and BJC HealthCare

Children’s Hospital of Philadelphia (Leading Pediatric Specialty Care)

WUSM and St. Louis Children’s Hospital

Cook County Hospital (Anchor Hospitalof Regional Safety Net)

Barnes-Jewish Hospital and Christian

Intermountain Health (Leading Integrated Delivery Network of Community-Based Hospitals and

Doctors with Highly Regarded Patient Outcomes)

Missouri Baptist, Christian, Alton, BJWCH, BJSPH, Progress West, Sullivan, Parkland, Clay County, Boone, BJCMG, BJC Home Care, BJC

Corp. Health, BJC Behavioral Health, BJC Health Literacy and School Outreach

+ +

+ +

+ +

+ +

Large, Balanced, Diversified, Risk-Dispersed Portfolio(Not Highly Integrated – Yet)

7

BJC is Uniquely Bi-State (Missouri and Illinois)

8

Standard and Poors Credit Rating For BJC HealthCare “AA” Long-Term Rating Reflects BJC’s:

• Status as a well-established, multi-hospital regional system with stable system membership, a long track record of system integration, good leverage with third-party payers, and excellent financial-risk dispersion;

• Maintenance of a leading, though not dominant, share in the greater St. Louis, MO market, bolstered by broad regional and national draws at its largest facility, Barnes-Jewish Hospital, due to a reputation of clinical excellence and a long-time academic relationship with the highly respected Washington University School of Medicine (WUSM), which is one of the top recipients of federal research funding;

• Strong financial profile, characterized by low leverage of 18% debt to capitalization, solid unrestricted liquidity with 286 days’ cash on hand as of December 31, 2010 with cash to long-term debt of over 3x;

• Very capable management team☺that is responsible for the system’s strong financial performance in the past five years and a strong governance structure that makes system members highly unlikely to disaffiliate;

• Historically strong maximum annual debt service (MADS) coverage averaging over 8x for the past five years, with fiscal 2010 MADS coverage at 11.59x; and

• Continued good operating performance in fiscal 2010 with margins of 5.5%

9

Health Care Reform

Coverage Expansions: 16 Million Added to Medicaid16 Million Added Via Individual MandateMedicare RX Donut Hole

Coverage Improvements: Guaranteed Issue (w/o Health Status or Gender Rating)Premium Rate Bands (1x – 6x) (Age, Tobacco Use, Family Composition)

Individual Mandate: Constitutional or Not?

Payment / Delivery System Improvements:

• Medicare Rates ↓• Tax Cadillac Coverage• Simplified Electronic Billing• ACOs, HIZs / Bundles (CMMI)• PCORI (CER)

• State Insurance Exchanges• Meaningful Use of IT• IPAB• Drug Prices• Geographic Variations

Domains

KeyPlayers

KnowledgeDomain

CareDeliveryDomain

PayerDomain

INTERFACE

“A”

INTERFACE

“B”

• Medical Schools• Teaching Hospitals• NIH• Developers/Manufacturers of

Drugs, Devices, Implants, Equipment and Instrumentation

• Other Research Organizations

• Patients• Doctors• Hospitals• Post-Acute

• CMS• State Medicaid Plans• Private Insurance Plans• Employers

Health Reform Impact

Source: Mayo Clinic Health Policy Center, 2009, adapted.

Medicaid ExpansionPrivate Insurance Fixes

Individual MandateInsurance Exchange

“Starter Set” forDelivery and Payment

Reform

Incremental ChangeOver Time

Fees Leviedon Devices/Pharma

Medicare Medicaid UninsuredPrivate Insurance

Options

Population

• About 47 million• Over 65• Some Disabled

• About 58 million• Living Below A

Poverty Threshold• Some Disabled

• About 51 million• Many w/o Access to

Employer-Based Coverage

• About 164 million• Under 65• Above Poverty

Threshold

The Payer Domain

Payers

Will growto 70 million

as baby boomersreach age 65

Will growto 74 million

with Medicaid expansion

Will shrinkto 19 million

with individual mandate

Initial growthto 180 million+then decline as

Medicare grows

Reduce Variations and Waste of Resources

Increase Value: Outcomes per Dollar Expended

CareDeliveryDomain

PayerDomain

INTERFACE

“B”

Patient

BJC HealthCare Professionals / Hospitals

– Washington University Physicians

– BJC Medical Group

– BJC Affiliated MDs

– BJC Home Care

– Rehabilitation Institute of St. Louis

– BJC HealthCare Professionals

– BJC Hospitals

Payers

– Center for Medicare/ Medicaid Services (CMS)

– Essence

– Aetna

– Cigna

– Anthem

– Coventry

– HealthLink

– United

– Washington University

– BJC

Population Management (Non-Clinical)

– Enrollment– Claims Administration– I/T (Financial)– Member Services– Actuarial Expertise

Population Management (Clinical)

– MD Leaders and Clinical Team Captains

– Multi-Disciplinary Teams

– IT (Clinical)– Facilities– Outcome Measurement– Payment Models

(Team Rewards)

Populations by Payers

– Medicare Advantage

– Medicare ACOs

– BJC (Employer)

Populations by Medical Conditions

– Obesity/Diabetes

– Complex Patients

– COPD

– CHF

– Stroke

– Back Pain

Reduce Price

Reduce Consumption

What Health Systems and Payers are Doing (w/o Informed Consent)

13

• Pay a Medical Home more money (incentives) to manage patients away from Hospitals (reduce admissions / ER visits / ancillary utilization).

• Pay a Pharmacy Benefit Manager (PBM) to improve medication compliance and use of less expensive generic substitutes.

• Increase Employee Out-of-Pocket cost-sharing (“Skin in the Game”):> Co-Pays> Deductibles> Premiums> Reimbursement and Spending Accounts> Donut Holes

• Bjchelpforyourhealth.com And myHealthFolders.com

• The “Super Six” of Health Promotion and Disease Prevention

What Employers Are Doing

– Medical Home– No Tobacco Use– BMI <30 or Weight

Management Program

– BP <130/90 or Medicine– BS <140 or Medicine/Diet/Exercise– BC <230 or Medicine/Diet/Exercise