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TRANSCRIPT
Analyst and Investor Day September 11, 2014
Welcome and Opening Remarks Robert Musslewhite Chairman and Chief Executive Officer
©2014 The Advisory Board Company • advisory.com
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2
3
1
Road Map
Overview of Our Business
Compelling Growth Opportunities
Performance Snapshot
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The Advisory Board in Brief
The leading health care and
higher education software
and analytics provider, driving
transformation and ROI for our
members and in our markets.
Identify key
challenges
IDENTIFY DISTILL TRANSLATE HARDWIRE POWER
Distill best
practices
Translate to
unique products
Hardwire solutions
to drive change
Power high
value and ROI
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Incredible Breadth of Relationships
8,000+ CEO/COO
relationships
Established Health Care Member Base Growing Presence in Higher Ed
600+ members
88% of U.S. News &
World Report top
100 universities
1,300+ President/Provost
relationships
3,900+ global members
100% U.S. News & World
Report honor roll
hospitals
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Uniquely Deep Knowledge of Right Answer
300+ industry experts
2,600+ collective years of health care experience
POWERFUL
research engine
PROFOUND
institutional expertise
World-Class Insight and Intellectual Property Differentiate Our Solutions
Unique Ability to Discern Best Practice
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The Leading Vertical SaaS Platform in Health Care
Integrated Analytics Platform Driven by Best Practice Insight
Powerful, Flexible Software Platform
Member Provided Data 3rd Party Data Proprietary Data
Crimson
Population Risk
Management
Crimson
Surgery
Compass
Cost & Ops
Revenue
Cycle
Compass
Rev Cycle
Multiple Differentiated Applications
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The Leading Vertical SaaS Platform in Health Care
Integrated Analytics Platform Driven by Best Practice Insight
Powerful, Flexible Software Platform
Member Provided Data 3rd Party Data Proprietary Data
60% of hospital admissions
flowing through our platform
members
2,000+ memberships
3,700+ user sessions annually
1.6M+
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Platform Enables Comprehensive Offerings
Margin Maximization
Reducing avoidable costs and
increasing revenue capture
Value-Based Growth
Fueling sustained growth
through provider-, consumer-,
and payer-focused strategies
Population Health
Management
Transforming care delivery
and payment to assume
risk for defined populations
PROBLEM AREAS
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Margin Maximization Offerings
PROBLEM AREAS
• Financial Management
Program
• Revenue Cycle
Performance Programs
$1.5B+
Spend sourced through our
supplier-neutral platform
$205M+
ROI across our physician
cost platform since 2012
15:1
ROI on cost strategic
assessments last year
$2.9B+
Revenue enhancement
over 10+ years of service
REPRESENTATIVE ASSETS
• Surgery Performance
Program
• Crimson Continuum of Care
• Crimson Practice
Management
• Strategic Sourcing Program
OUR EXPERIENCE IN NUMBERS
Margin Maximization
Reducing avoidable costs and
increasing revenue capture
Value-Based Growth
Fueling sustained growth through
provider-, consumer-, and payer-
focused strategies
Population Health Management
Transforming care delivery and
payment to assume risk for
defined populations
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Value-Based Growth Offerings
PROBLEM AREAS
• Market Planning Research
• Service Line Strategic
Assessments
REPRESENTATIVE ASSETS
• Crimson Continuum of Care
• Crimson Market Advantage
• Patient Experience Program
• Crimson Medical Referrals
OUR EXPERIENCE IN NUMBERS
20+
Years of growth,
marketing and planning
research experience
1,000+
Custom growth and
planning projects
completed per year
1.2B+
Practitioner-level claims
enabling full market
visibility
$700M+
New net revenue realized
from 2012 targeted
outreach
Margin Maximization
Reducing avoidable costs and
increasing revenue capture
Value-Based Growth
Fueling sustained growth through
provider-, consumer-, and payer-
focused strategies
Population Health Management
Transforming care delivery and
payment to assume risk for
defined populations
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Population Health Management Offerings
PROBLEM AREAS
• Population Health
Advisor Program
• Medical Group Strategy
REPRESENTATIVE ASSETS
• Payer Integrity Forecaster
• Crimson Population
Risk Management
• Crimson Care Management
• Clinical Integration Initiative
OUR EXPERIENCE IN NUMBERS
350+
Accountable care projects
across 45 states
1,500+
Hospitals using our value-
based care technology
550K+
Physician profiles on cost
and quality performance
10M+
At-risk lives managed
using our technology
Margin Maximization
Reducing avoidable costs and
increasing revenue capture
Value-Based Growth
Fueling sustained growth through
provider-, consumer-, and payer-
focused strategies
Population Health Management
Transforming care delivery and
payment to assume risk for
defined populations
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Building Similarly in Higher Education
Growth of a Student-Centric Platform
OUR EXPERIENCE IN NUMBERS
Enrollment Growth Attracting the best-fit students
to the university
Next-Generation Learning Creating a personalizing learning
experience for students
Student Retention Ensuring on-time graduation
for all students
Student Employment Ensuring gainful employment
for all students
5,000+
Senior leader
relationships at members
500+
Research studies
published every year
120M +
Student course
records analyzed
1.5M +
Active students supported
on technology platforms
PROBLEM AREAS
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Delivering Measurable Results
MARGIN
MAXIMIZATION
Houston Methodist
Reduced potential for
denied payments
$7.2M
Carson Tahoe Health
Savings through
improved practice
performance
$4M
VALUE-BASED
GROWTH
Three-hospital
system
Increased investment in
physician relationship
development
$5.1M
480-bed hospital
Growing Cardiovascular
and EP volumes
$3.7M
$490K Southern Illinois Univ.
Additional tuition revenue
through targeted campaigns
$2.2M Georgia State University
Projected increased revenue
from student retention gains
$5.6M
Adena
Net savings from reduction
in clinical variation
$3.5M
Covenant
Health System
Increased use of
generics and lowered
avoidable utilization
POPULATION HEALTH
MANAGEMENT
HIGHER
EDUCATION
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Road Map
Overview of Our Business
Compelling Growth Opportunities
Performance Snapshot
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Robust Markets Served
1) World Bank Organization; Health care expenditures
in total, Public expenditures on education.
Percentage of
2010 US GDP1 18% 5%
Number of Potential
Purchase Points 15,000+ 5,000+
Degree of Change
and Complexity Very High High
Adoption of
Best-in-Class Analytics Low Low
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Continued Huge Cross-Sell Potential
New Customers
New Programs
$5B Cross Sell
Current
Opportunity
~15,000
Immediate Prospects
• US hospitals
• Other US health care
• International hospitals
• US education
• International education
~4,100
Current members
New Program
Launches
• New research
programs
• New software-
based programs
• New management/
advisory services
programs
• New data programs
50+
Current programs
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Cross Selling to Grow Relationships
Memorial Hermann Relationship History
Patient Experience Program 2014
Crimson Care Management 2013
Crimson Population Risk Management and Crimson Care Registry 2012
Crimson Market Advantage and Payer Integrity Performance Program 2010
Crimson 2008
Nursing Compass 2007
Cost & Ops and Workforce Consulting 2003
1992
Partnership originates through research membership;
Establish deep executive relationships
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Member-Driven Product Development
Leveraging Our
Research Engine
New products
launched yearly
30-40 25 4-5
New Product Launches
Strategic Acquisitions
9,000+
C-suite relationships
Visibility Into member strategy
and operating plans
Increasing
To member
performance data
Access
Conversations weekly
2,000+
New programs
under evaluation
Industry leaders as
charter members
Expand capabilities Augment tech platform
Enhance speed to market
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Demonstrated Ability to Scale Acquired Businesses over Time
Proven Track Record of Success
CrimsonMay 2008
SouthwindDec 2009
ConcuityMar 2010
Other 2011-2014
Total Blank CV fromAcquiredProducts
CV fromProducts Builton Acquired
Platforms
Total
Total Acquired Run Rate Revenue
Millions
~$165
~$88 ~$253
~$47
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Core Crimson Program Growth
Revenue Contribution
2008 2013
$2M
($1M)
$60M+
$33M+
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3
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Road Map
Overview of Our Business
Compelling Growth Opportunities
Performance Snapshot
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Snapshot of a High-Growth Company: 2010-2014
Consistent Focus on Growth Investment
‘ ‘ The Company’s initiatives in health care and education
are progressive and have potential to not only guide
institutions through changing paradigms, but to help
design those paradigms. THAT is exciting!”
John Sampson Rutland Regional Medical Center
New Program
Launches
18 New
Members
1,618 New
Memberships
10,700+
New Logo and
Brand Identity
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Predictability of Renewals Yields Strong Visibility
FY09 FY10 FY11 FY12 FY13
88% 89% 91% 92% 90%
Member Renewal Rate Composition of Annual Revenues
Deferred
Revenues
Renewals
New
Contracts
Annual
Revenues
85%+
of revenues visible at
beginning of calendar year
FY14
90%
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Results Demonstrate Consistent Growth
Revenue Adjusted EBITDA1
CY12 CY11 CY13
$345.5
$431.6
$502.3
$62.7
$81.4
$89.3
20.6% 19.3% 2011-2013
CAGR
(Millions) (Millions)
$570-$580
CY14(P)
$97-103
CY12 CY11 CY13 CY14(P)2
1) Adjusted EBITDA excludes share-based compensation expense, equity method investment loss,
earn-out and warrant fair value adjustments, transaction related costs, and discontinued operations.
2) CY 2014 Adjusted EBITDA includes dilution from Healthpost, Care Team Connect, and MRS acquisitions.
©2014 The Advisory Board Company • advisory.com
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Long Term Share Price Performance
0%
200%
400%
600%
800%
S& P 500 ABCO
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Managing with an Eye to Long Term Value
Drive greater
member value
Expand footprint
with members
Grow long term
revenue and earnings
Invest in
new products
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Today’s Agenda
Welcome and Overview Robert Musslewhite
Health Care Market Update Chas Roades
Higher Ed Market Update Scott Fassbach
Member Case Study Jim Cote, Senior Vice President and Clinical
Administrator, Virginia Mason Medical Center
Product Demonstrations Taylor Rohrberger, Matt Cinque,
Jim Lazarus, Zac Stillerman, and Ed Venit
Closing Remarks Robert Musslewhite
1
• Current challenges in health
care and higher education
• Demonstrating member value
• Product demonstrations
Our Focus for Today
What You Won’t See
• Heavy operational details
• Detailed financial review
• The same “faces”
3
4
5
6
2
Update on the Health Care
Marketplace Highlights from Recent Advisory Board Research
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Staying Afloat Through Cross-Subsidization
Source: American Hospital Association, “Trendwatch Chartbook
2014,” available at: www.aha.org; Health Care Advisory Board
interviews and analysis.
The Existing Business Model
Hospital Payment-to-Cost
Ratio, Private Payer, 2012
149% Hospital Payment-to-Cost
Ratio, Medicare, 2012
86%
• Above-cost pricing
• Robust fee-for-service
volume growth
• Steady price growth
• Only one component of
our total business
Commercial Insurance Public Payers
Below Cost Above Cost
Traditional Hospital Cross-Subsidy
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Traditional Strategy Dependent Upon Price, Network Assumptions
Source: Health Care Advisory Board interviews and analysis.
Shadow Pricing at Every Level
Established Provider
• Expect steady public-
payer, commercial
price growth
• In-network for most
plans
Entrenched Payer
• Maintain broad
provider networks
• Pass excess cost
growth on to
employers through
brokers
Price-Insulated Patient
• Open access to broad
provider network
• Seek care with little
concern for out-of-
pocket payment
Traditional Assumptions Underlying Provider Growth Strategy
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Three Trends Threatening the Traditional Provider Business Model
Source: Health Care Advisory Board interviews and analysis.
Cross-Subsidy Economics Under Stress
Medicare Payment
Innovation
• New risk-based
payment models
• Growth of Medicare
Advantage
Market-Based
Medicaid Reform
• Growth of Medicaid
Managed Care
• Commercialization
through “Private Option”
Increased Commercial
Market Competition
• New dynamic
individual market
• New channels for
competition in group
market
1 2 3
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Becoming a Bigger Part of Our Core Business
Trend #1: Medicare Payment Innovation
Source: CMS, “2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance
and Federal Supplementary Medical Insurance Trust Funds,” May 31, 2013, available at:
http://downloads.cms.gov/files/TR2013.pdf; Health Care Advisory Board interviews and analysis.
Growing Wave of Medicare Beneficiaries
Average Inpatient Case Mix
By Volume
n = 785 Hospitals
Projected Number of
Medicare Beneficiaries
Millions of Beneficiaries
54.0M
55.6M
57.3M
59.0M
60.7M
62.5M
64.3M
2014 2015 2016 2017 2018 2019 2020
42%
19%
33%
6%
58% 15%
25%
2%
2012 2022
Medicare
Medicaid
Commercial
Self-Pay
Medicare
Medicaid
Commercial
Self-Pay
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Medicare Payment Cuts Becoming the Norm
Source: CBO, “Letter to the Honorable John Boehner Providing an Estimate for H.R.6079, The Repeal of Obamacare Act,” July 24, 2012;
CBO, “Estimated Impact of Automatic Budget Enforcement Procedures Specified in the Budget Control Act,” September 12, 2011; CBO,
“Bipartisan Budget Act of 2013,” December 11, 2013, all available at: www.cbo.gov; Health Care Advisory Board interviews and analysis.
1) Includes hospital, skilled nursing facility, hospice, and
home health services; excludes physician services.
2) Disproportionate Share Hospital.
Public-Payer Reimbursement Already a Prime Target
($4B)
($14B) ($21B)
($25B) ($32B)
($42B)
($53B)
($64B)
($75B)
($86B)
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
ACA’s Medicare Fee-for-Service Payment Cuts
Reductions to Annual Payment Rate Increases1
$415B in total
fee-for-service
cuts, 2013-2022
$260B Hospital payment
rate cuts,
2013-2022
$56B Reduced Medicare
and Medicaid DSH2
payments, 2013-2022
$151B Reduced Medicare payments
due to sequestration and
2013 budget bill
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More Mandatory, Optional Risk Programs On the Horizon
Source: The Advisory Board Company, “Mortality Rates Are Only One of Many VBP Changes
to Come,” December 4, 2013, available at: www.advisory.com; CMS, “Request for Information
on Specialty Practitioner Payment Model Opportunities,” February 2014, available at:
www.innovation.coms.gov; Health Care Advisory Board interviews and analysis.
1) Value-Based Purchasing.
2) Includes Value-Based Purchasing Program, Hospital Readmissions
Reduction Program, and Hospital-Acquired Conditions Program.
3) Request for information.
Steady Shift Toward Risk-Based Payment
20% 25% 25%
30%
40%
30%
30%
30%
25%
70%
45%
20% 10%
FY 2013 FY 2014 FY 2015 FY 2016
Clinical Process
Patient Experience
Outcomes of Care
Efficiency
Medicare VBP1 Program Domain Weights
Medicare revenue at risk from mandatory
pay-for-performance programs2, FY 2017
6%
Two New Bundled Payment
Initiatives in CMS RFI3
Bundled Payment for
Outpatient Specialty
Procedures
May include radiology,
diagnostics, drugs, and
facility payments
Bundled Payment for
Complex, Chronic
Disease Management
Would incentivize
specialists to manage a
beneficiary's care over a
long-term period
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ACO Presence Steadily Extending Nationwide
Source: CMS, “More Partnerships Between Doctors and Hospitals Strengthen Coordinated Care for
Medicare Beneficiaries,” December 23, 2013; Muhlestein D, “Accountable Care Growth In 2014: A Look
Ahead,” Health Affairs Blog, January 29, 2014; Oliver Wyman, “Accountable Care Organizations Now
Serve 14% of Americans,” February 19, 2013; Health Care Advisory Board interviews and analysis.
1) Medicare Shared Savings Program.
ACOs Reaching a Tipping Point
Total Number of Operating ACOs
January 2014
Widening Reach of ACOs
52% Portion of US
population living in a
primary care service
area with an ACO
14% Portion of US
population treated
by an ACO
5.3M Medicare FFS
beneficiaries treated
by an ACO
23
606
114
106
123
240
2012
MSSP1
Cohorts
2013
MSSP
Cohort
Private
Sector
ACOs
Pioneer
ACO
Model
Total 2014
MSSP
Cohort
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Physician-Led ACOs More Likely to Generate Savings
Source: Muhlestein D, “Accountable Care Growth in 2014: A Look Ahead,” Health Affairs Blog, January 29, 2014,
available at: www.healthaffairs.com/blog; CMS, “More Partnerships Between Doctors and Hospitals Strengthen
Coordinated Care for Medicare Beneficiaries,” December 23, 2013; Oliver Wyman, “Accountable Care Organizations
Now Serve 14% of Americans,” February 19, 2013; Health Care Advisory Board interviews and analysis.
1) Medicare Shared Savings Program.
Starting To See Early Adopters Move the Dial
First-Year Spending Reduction
By MSSP1 ACOs
2012 Cohort
$147M Total cost savings by
Pioneer ACOs in first year
$126M Shared savings earned by 2012
MSSP ACOs in first year
Percent of MSSP ACOs that Earned
Shared Savings by Sponsorship
29%
20%
Physician-Led Hospital-Led
25%
22%
53%
Earned
Shared
Savings
Reduced
Spending But
Did Not Earn
Shared Savings
Did Not Reduce
Spending
2012 Cohort
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Precipitating an Individualization of the Medicare Market
Source: Jacobson G et al., “Projecting Medicare Advantage Enrollment: Expect the Unexpected?”
Kaiser Family Foundation, June 12, 2013, available at: www.kff.org; Hollander C, “CMS to
Increase Medicare Advantage Pay Rate By 0.4%,” ModernHealthcare, April 7, 2014, available at:
www.modernhealthcare.com; Health Care Advisory Board interviews and analysis.
1) Medicare Advantage.
Medicare Advantage Growth Unlikely to Abate
Initial proposed 2015
MA1 payment rate cut
(1.9%)
Final announced 2015
MA payment rate increase
0.4%
2013 Projections 2010 Projections
Projected Number of Medicare Advantage Enrollees
Millions of Enrollees
29.5% of Medicare
beneficiaries
10.4M
19.0M
8.2M
2009 2020
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“Red Carpet Effect” Driving Enrollment in Non-Expansion States
Trend #2: Market-Based Medicaid Reform
Source: The Advisory Board Company, “Where the States Stand on Medicaid Expansion,” March 28, 2014, available at:
www.advisory.com; HHS, “Health Insurance Marketplace: Summary Enrollment Report for the Initial Annual Open Enrollment Period,”
May 1, 2014; Millman J, “These States Rejected Obamacare’s Medicaid Expansion, But Medicaid Is Expanding There Anyway,”
Washington Post, May 13, 2014, available at: www.washingtonpost.com; Health Care Advisory Board interviews and analysis.
1) Children’s Health Insurance Program.
Medicaid Expansion Finds Its Footing
Increase in Medicaid and
CHIP1 enrollment, October
2013 to March 2014
4.8M
Average decline in
projected 10-year
hospital margin in states
not expanding Medicaid
(2.4%)
State Participation in Medicaid Expansion
Participating
Will Not Participate
Undecided
March 2014
Average Medicaid
enrollment increase across
non-expansion states
2.8%
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Pushing Risk to Providers and Payers
Source: Health Care Advisory Board interviews and analysis.
Budget Pressures Creating Impetus for Reform
Provider-Led Care
Management
E.g., Oregon’s “Coordinated
Care Organizations”
Exchange-Based
Privatization
E.g., Arkansas’ “Private
Option”
Full Medicaid
Managed Care
E.g., Florida’s Statewide Medicaid
Managed Care Program
Expansion of
Traditional Medicaid
Three Non-Traditional Models of Medicaid Reform
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Shifting Medicaid Beneficiaries to the Public Exchanges
Source: Ramsey D, “Enrollment in Arkansas Health Insurance Marketplace at 44,665,” Arkansas Times, April 22, 2014,
available at: www.arktimes.com; Jones DK and Singer PM, “Expanding Medicaid Without ‘Obamacare’,” Aljazeera
America, April 17, 2014, available at: www.america.aljazeera.com; Health Care Advisory Board interviews and analysis.
1) Federal poverty line.
Growing Interest in “Arkansas Model”
45K
150K
Non-"Private Option" "Private Option"Medicaid Expansion
Arkansas Public Exchange Enrollment
As of April 21, 2014
States Considering “Private Option”
April 2014
Medicaid expansion-
eligible individuals
(up to 138% FPL1)
Select among Silver
Qualified Health Plans
in public exchange
Enroll in private plan
with no premium
contribution
Arkansas “Private Option” Medicaid Expansion Process
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Historically Slow Growth Coming to a Close?
Trend #3: Increased Commercial Market Competition
Source: Bureau of Economic Analysis, National Income and Product Accounts Tables, April 30, 2014,
available at: www.bea.gov; Kliff S, “The $2.8 Trillion Question: Are Health Costs Growing Fast Again?”
Vox, May 2, 2014, available at: www.vox.com; Health Care Advisory Board interviews and analysis.
Seeing a Resurgence in Health Spending
0.3%
2.3% 2.3%
1.3%
3.6%
2.7%
5.6%
9.9%
2012Q2
2012Q3
2012Q4
2013Q1
2013Q2
2013Q3
2013Q4
2014Q1
Rate of Increase in Health Care
Personal Consumption Expenditures
Percent Change in Real Dollars
Fastest Growth in
Seven Years
"We're at the highest level of
growth since the slowdown
began. You have to go back
seven years to see growth
like this."
Paul Hughes-Cromwick
Senior Health Economist
Altarum Institute
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Cadillac Tax Forcing Pay or Play Decision
Source: Herring B and Lentz LK: “What Can We Expect from the ‘Cadillac Tax’ in 2018 and Beyond?” Inquiry, 2011,
48(4):322-37; Piotrowski J et al., “Health Policy Brief: Excise Tax on ‘Cadillac’ Plans,” Health Affairs, September 12, 2013,
available at: www.healthaffairs.org; Mandelbaum R, “Why Employers Will Stop Offering Health Insurance,” The New York
Times, March 26, 2014, available at: www.boss.blogs.nytimes.com; Health Care Advisory Board interviews and analysis.
How Long Can Employer-Sponsored Coverage Last?
Percent of Employer Plans That
Will Incur the Cadillac Tax
16%
75%
2018 2029
Reduction in average value
of private health benefits due
to the Cadillac Tax, 2029
(3.1%)
“Hands-On Management” “Hands-Off Delegation”
Convert to
Self-Funding
Hope for success in
controlling total cost growth
Drop Coverage
Trade Cadillac Tax for
employer mandate penalty
Shift to Private
Exchange
Cap growth of
employer contribution
Spectrum of Options for Controlling Health Benefits Expense
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Bumpy Rollout Did Not Hurt Future Projections
Path #1: Hands-Off Delegation
Source: HHS, “Health Insurance Marketplace: Summary Enrollment Report for the Initial Annual Open Enrollment Period,” May 1, 2014; Cheney K and
Haberkorn J, “Obama: 8 Million Enrolled Under ACA,” Politico, April 17, 2014, available at: www.politico.com; UnitedHealth to Expand Exchange
Presence as Profits Dip,” ModernHealthcare, April 17, 2014, available at: www.modernhealthcare.com; Cheney K and Norman B, “Insurers See
Brighter Obamacare Skies,” Politico, April 15, 2014, available at: www.politico.com; Health Care Advisory Board interviews and analysis.
1) Numbers do not add precisely due to rounding.
Public Exchange Enrollment Reaches Eight Million
2.2M
2.1M
3.8M 8.0M
October toDecember
January toFebruary
March Total
Public Exchange Enrollment in Qualified Health Plans1
2013-2014
7.0M
(Original CBO
Projection)
Renewed Interest for
2015
“We had a very modest
footprint in 2014. We do
have a bias to increase
that participation in 2015.
[…] The size of the overall
market is positive.”
Gail Boudreaux, EVP
UnitedHealth Group
States expecting to see
more insurers on their
public exchange in 2015
10+
Flawed rollout did not change CBO
enrollment projections beyond 2014
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Source: HHS, “Health Insurance Marketplace: Summary Enrollment Report for the Initial
Annual Open Enrollment Period,” May 1, 2014; HHS, “Health Insurance Marketplace
Premiums for 2014,” September 2013; Health Care Advisory Board interviews and analysis.
Individuals Gravitating Toward Leaner Plans
20%
65%
9% 5%
2%
Bronze
Metal Tiers of Plans Chosen on Public Exchanges
October 2013 to April 2014
Silver
Gold Platinum
Catastrophic
$129 $163
$203 $240
Catastrophic Bronze Silver Gold
33%
25%
21%
10% 12%
Bronze Silver
Gold
Platinum Catastrophic
Average Monthly Premiums By Metal Tier 27-Year-Old Before Financial Assistance
Enrollees Without Premium Subsidies All Enrollees
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Payers Responding to Anticipated Premium Sensitivity
Source: Gottleib S, “Hard Data On Trouble You’ll Have Finding Doctors in Obamacare,” Forbes, March 8, 2014,
available at: www.forbes.com; McKinsey & Company, “Hospital Networks: Configurations on the Exchange and
Their Impact on Premiums,” December 2013; Health Care Advisory Board interviews and analysis.
1) “Pathway X” bronze plans compared to leading PPO plan
offering across nine states.
2) Comparing products by the same carrier of the same tier,
across 7 carriers.
Networks Narrowing on the Public Exchanges
Median premium reduction directly
attributable to network narrowing2
26%
Degree of Hospital Exclusion Across
Public Exchange Plans
20 Urban Markets, December 2013
Excludes 30% of
20 largest hospitals
Average Percent of PPO Network Specialists
Included in Exchange Plan Networks1
Anthem BlueCross BlueShield, 2014
62% 59% 59% 48%
OB/GYNs Orthopedists Oncologists Cardiologists
38%
32%
30%
“Ultra-Narrow”
“Narrow”
Broad
Excludes 70% of
20 largest hospitals
100% PPO Network Breadth
©2014 The Advisory Board Company • advisory.com • 28601A
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Each Looking for Best Set of Network Offerings
Source: Xerox, “Buck Consultants’ Private Health Insurance Exchange Serves 400,000 Participants for 2014 Health Care Enrollment,” November 20, 2013;
Mercer, “Mercer Signs Up 52 Employers For Its Private Exchange Platforms, Including Petco and Kinder Morgan,” October 15, 2013; Aon Hewitt, “Year-
Two Enrollment Results Show Private Health Exchanges Can Mitigate Costs and Create Greater Individual Accountability,” March 6, 2014; Accenture, “Are
You Ready? Health Insurance Exchanges Are Looming, “ 2013, available at: www.accenture.com; Health Care Advisory Board interviews and analysis.
1) Includes 500K enrolled in Towers Watson’s
Retiree Exchange.
Growing List of Private Exchange Operators
400K
1.8M
600K
200K
640K
BuckConsultants
Aon Hewitt Mercer TowersWatson
ConfirmedPrivate
ExchangeEnrollment
February 2014
BSwift Inc.
February 2014
United Benefit
Advisors
September 2013
National Financial
Advisors
April 2014
First Niagara
Benefits Consulting
December 2013
AIA Benefits
Resource Group
October 2013
The Partners Group
Projected private exchange
enrollment, 2018
40M
Confirmed Private Exchange Enrollment
Number of Lives, 2014
Newest Benefit Consultants to
Launch Private Exchanges
1
Private exchange operators,
May 2014
140+
©2014 The Advisory Board Company • advisory.com • 28601A
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Ensuring Defined Contribution From Employment to Retirement
Source: Health Care Advisory Board interviews and analysis.
1) Acquired by Towers Watson in 2012.
2) Acquired by Mercer in 2014.
Spectrum of Private Exchange Services
Active Employee
Exchanges
Early Retiree
Exchanges Medicare Exchanges
Description
Allows Medicare-eligible
retirees to compare Medicare
Advantage, Medigap, and
Part D plans
Allows pre-65 retirees to
compare group coverage
options or on- and off-
exchange individual plans
Allows active employees to
compare vendor and
employer-selected network
options
Sample
Platforms
• Extend Health1
• Aon Hewitt Navigators
• Retiree Health Access
Exchange
• Transition Assist2
• Towers Watson Retiree
Medical Exit Solution
• Aon Active Health
Exchange
• Mercer Marketplace Active
Exchange
Employer
Adopters
• IBM
• Dupont
• Caterpillar
• AT&T
• Time Warner
• UPS
(none publicly named) • Sears Holdings
• Darden Restaurants
• Walgreens
• Petco
• Kinder Morgan
©2014 The Advisory Board Company • advisory.com • 28601A
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Long-Term Savings Must Rely on Network Management
Source: Mathews AW, “To Save, Workers Take On Health-Cost Risk,” Wall Street Journal, March 17th, 2013, available at:
www.wsj.com; Aon Hewitt, “Year-Two Enrollment Results Show Private Health Exchanges Can Mitigate Costs and Create
Greater Individual Accountability,” March 6, 2014; Buttorff C, Tunis SR, and Weiner JP, “Encouraging Value-Based Insurance
Designs in State Health Insurance Exchanges,” AJMC, July 22, 2013; Health Care Advisory Board interviews and analysis.
Short-Term Savings from Participant Buy-Down
Change in Actuarial Value Of Selected Plan
From Previous Year
Aon Active Health Exchange, 2013-2014
Sample Active Purchaser Exchange
Carrier Requirements
Generic utilization
programs
Value-based
benefit design
Centers of
excellence steerage
Clinical and care
management
programs
42%
12%
32% 81%
26%
7%
2013 (Year 1) 2014 (Year 2)
"Bought Down"
Same Value
"Bought Up"
©2014 The Advisory Board Company • advisory.com • 28601A
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Disrupting Traditional Channels of Coverage
Source: Congressional Budget Office, “May 2013 Estimate of the Effects of the Affordable Care Act on Health Insurance
Coverage,” available at: www.cbo.gov; Accenture, “Are You Ready? Health Insurance Exchanges Are Looming, “ 2013,
available at: www.accenture.com; Kaiser Family Foundation, “The Coverage Gap: Uninsured Poor Adults in States that
Do Not Expand Medicaid,” April 2, 2014, available at: www.kff.org; Health Care Advisory Board interviews and analysis.
1) Based on number of lives falling into the “Medicaid expansion
gap” in non-expansion states.
2) Based on the number of Medicare Advantage enrollees.
A Burgeoning Retail Market
25M
87M
5M
40M
17M
PublicExchange
"Private Option"Medicaid
Expansion
PrivateExchange
MedicareExchange
Total RetailMarket
Projected Size of the Potential Retail Market
2018
1
2
©2014 The Advisory Board Company • advisory.com • 28601A
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Individuals Selecting “Ultra”-High Deductible Plans
Source: Breakaway Policy Strategies, “Eight Million and Counting: A Deeper Look at Premiums, Cost Sharing and
Benefit Design in the New Health Insurance Marketplaces,” May 2014; eHealth, “Health Insurance Price Index
Report for Open Enrollment and Q1 2014,” May 2014; Health Care Advisory Board interviews and analysis.
1) Employer-Sponsored Insurance.
2) Silver plans, medical deductible only.
Facing an Ultra-High Deductible Consumer
Annual Deductibles of Individual Plans
Selected on eHealth
13%
3%
11%
5%
30%
39% $6,000+
$3,000-$5,999
$2,000-$2,999
$1,000-$1,999
$500-$999 < $500
October 2013 – March 2014
$1,135
$2,500
$6,250
ESI Public Exchanges
Annual Deductibles of Individual Plans
Offered For ESI1 and Public Exchanges
2014
Mean Median
Max
2
©2014 The Advisory Board Company • advisory.com • 28601A
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HDHP1 Enrollees Have Greater Motivation to Price Shop
Source: KFF, “2012 Employer Health Benefits Survey,” available at: www.kff.org; New Choice Health, “New Choice Health
Medical Cost Comparison,” available at: www.newchoicehealth.com; Healthcare Blue Book, “Healthcare Pricing,” available at:
www.healthcarebluebook.com; Kliff S, “How much does an MRI cost? In D.C., anywhere from $400 to $1,861,” Washington
Post, March 13, 2013, available at: www.washingtonpost.com; Health Care Advisory Board interviews and analysis.
1) High-deductible health plan.
2) $2,086; based on KFF report of average HDHP
deductible.
3) $733; based on KFF report of average PPO deductible.
Substantial Potential for Price Shopping
Consumers Paying More Out-of-Pocket
Fall within HDHP deductible2
$150 $275 $400 $900 $1K
$2K
$6K
$9K
$18K $730
$900
$1,269
$2,183
$411
• Price-sensitive shoppers
will be acutely aware
of price variation
• MRI prices range from
$400 to $2,183
MRI Price Variation Across
Washington, DC
Fall within PPO
deductible3
©2014 The Advisory Board Company • advisory.com • 28601A
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Spurred By Upcoming Regulatory Changes
Path #2: Hands-On Management
Source: Gabel JR et al., “Small Employer Perspectives On The Affordable
Care Act’s Premiums, SHOP Exchanges, And Self-Insurance,” Health Affairs,
32(11): 2032-39; Health Care Advisory Board interviews and analysis.
1) 3 to 50 FTEs.
Self-Funding Spreading to Smaller Employers
26% 74%
Percent of Firms Whose Brokers Had
Discussed the Possibility of Self-Insurance
No Yes
n = 604 Small Firms1
Definition of “Small Firm” Under the
Affordable Care Act Expands in 2016
28%
36%
Percent of Private Sector Employees
Pre-2016 Definition
(Up to 50 Employees)
Post-2016 Definition
(Up to 100 Employees)
ACA Requirements Avoided By Self-Funding
Modified
Community Rating
Essential Health
Benefits
Guaranteed Issue
and Renewability
Medical Loss Ratio
Requirements
©2014 The Advisory Board Company • advisory.com • 28601A
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Custom Network Builders Offering Local Solutions
Source: Innovative Healthware Services, Inc., Arnold, MD; Health Care
Advisory Board interviews and analysis.
1) Innovative Healthware Services.
Leading to Hands-On Network Management
Case in Brief: Innovative Healthware Services
• Private company based in Arnold, Maryland that
markets software solutions for PPOs, TPAs, providers,
and payers
• Provides “Custom Provider Network” solution for
self-funded employers to limit the network to selected
list of hospitals, physicians, and ancillary care
“Working with the TPA and
employer, we replace the ‘one
size fits all’ network with a
cost-effective customized
network created around the
needs of your business and
your employees.”
Innovative Healthware Services
Self-funded employer
submits list of physicians,
hospitals, and ancillary care
IHS negotiates cost-effective
provider agreements using
Medicare-based pricing
IHS continually evaluates
network providers to “ensure
competitive price contracts”
IHS1 “Custom Provider Network” Solution
©2014 The Advisory Board Company • advisory.com • 28601A
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Exporting Walmart’s Centers of Excellence Program
Source: Walmart, “Walmart, Lowe’s And Pacific Business Group On Health Announce A First Of Its Kind National
Employers Centers Of Excellence Network,” October 8, 2013; Health Design Plus, “Health Design Plus & Employers Health
Announce National Centers of Excellence Initiative,” June 11, 2013; Chen C, “Providers Using Bundled Payments, Quality
to Entice Employers,” Health Data Management, March 11, 2014,; Health Care Advisory Board interviews and analysis.
Custom Networks Becoming Widely Available
Case in Brief: Health Design Plus
• Third-party administrator based in
Hudson, Ohio that creates Centers of
Excellence (COE) programs for self-
funded employers
• In 2013, partnered with Employers Health
Coalition in Ohio and Pacific Business
Group on Health to make COE program
available to employer members
Two New Employer Coalition Partnerships
Forged in 2013
Pacific Business Group on Health
(San Francisco, California)
• 60 large employer members with
employees in all 50 states
• 10M covered lives
Employers Health Coalition
(Canton, Ohio)
• 300+ employer members with
employees in all 50 states
• 3M covered lives
“It would be prohibitive for a small
employer, with only one or two employees
needing surgery a year. When you spread
the administrative costs over a number of
employers, it becomes more attractive.”
Bruce Sherman
Medical Director, Employers Health Coalition
©2014 The Advisory Board Company • advisory.com • 28601A
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Source: Intel Corporation, “Employer-Led Innovation for Healthcare Delivery and Payment Reform: Intel Corporation
and Presbyterian Healthcare Services,” Santa Clara, California; Evans M, “Slimming Options,” Modern Healthcare,
July 13, 2013, available at: www.modernhealthcare.com; Health Care Advisory Board interviews and analysis.
1) Presbyterian Healthcare Services.
Entering Into Direct Provider Contracts
Case in Brief: Intel Corporation
• Large, multinational employer
headquartered in Santa Clara,
California
• Entered into narrow-network
contract with Presbyterian
Healthcare Services, an 8-hospital
system in New Mexico, for
employees at Rio Rancho plant
5,400 Covered lives in
contract
$8-10M Projected savings
through contract,
2013-2017
Key Components of Partnership
Customized Care Offerings
Addition of depression screening into
customary provider workflow
Infrastructure for Care Management
Conversion of Intel’s on-site clinic into full
service patient-centered medical home
Narrowing of Health Plan Options
Intel reducing number of health plan
options from 8 to 4; two remaining plans
are narrow networks of PHS1 providers
Shared Accountability
Upside and downside risk for health care
spending compared to projected target
©2014 The Advisory Board Company • advisory.com • 28601A
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Saving Money—For Its Associates and Customers
Source: Canales MW, “Wal-Mart Opening Clinic in Cove,” Killeen
Daily Herald, April 18, 2014, available at: www.kdhnews.com; Health
Care Advisory Board interviews and analyais.
Walmart Quietly Enters Full Primary Care
The Largest “Activated Employer” Yet
“As the largest private employer in the U.S., we are
committed to finding ways to drive down health care
costs for our 1.3 million U.S. associates and the 140
million customers who shop our stores each week.”
Labeed Diab
President of Health and Wellness, Wal-Mart
Visit fee for
Walmart
associates $4
Visit fee for
Walmart
customers $40
Walmart Care Clinic Model
Walmart associate or
customer visits Care Clinic
Care Clinic staffed by two NPs
from QuadMed, an employer
onsite clinic provider
NP provides primary care
services, refers to external
specialists and hospitals
©2014 The Advisory Board Company • advisory.com • 28601A
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Driven By Unsustainable Spending Growth
Source: Health Care Advisory Board interviews and analysis.
Seeing Shifts in Two Major Markets
Traditional
Public Payers
Traditional
Commercial Insurance
Activated
Group Market
Risk-Based Payment
Programs
Private Individual
Market
“Retail Private Market” “Forced Public-Payer Risk”
Shifts in Public, Commercial Insurance Markets
• Price cuts
• Risk shifting
• Narrower networks
©2014 The Advisory Board Company • advisory.com • 28601A
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Multiple Opportunities To Appeal to Decision-Makers
Source: Health Care Advisory Board interviews and analysis.
Winning Share at Two Points of Sale
Network Selection Care Decision Network Assembly
Decision Processes Involved in Provider Choice
Being chosen by payers, employers,
exchange operators, custom network
builders, and accountable physician
entities to be offered as a network option
Being chosen by
patients at the
point of care
Being chosen by
individuals during
enrollment
Secure Enrolled Lives Win Share of Volumes
1 2
©2014 The Advisory Board Company • advisory.com • 28601A
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Source: Health Care Advisory Board interviews and analysis.
Capturing New Channels of Growth
Established
Provider
Care Delivery
Network
Relationship-Based
Referring Physician
Cost-Conscious
Referring Physician
Price-Sensitive
Consumer
Entrenched
Payer
Vulnerable
Payer
Activated
Employer
Exchange
Operator
Custom Network
Builder
Secure Enrolled Lives Win Share of Volumes
Traditional
Growth
Channels
New
Growth
Channels
Key Decision-Makers in Traditional and New Growth Channels
Individual
Insurance Shopper
Accountable
Physician Entity
©2014 The Advisory Board Company • advisory.com • 28601A
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Catalyzing a Shift in Network Demands
Source: Health Care Advisory Board interviews and analysis.
No Longer Insulated From Market Forces
Traditional Market Retail Market
Growing number of buyers
1
Proliferation of product options
2
Increased transparency
3
Reduced switching costs
4
Greater consumer cost exposure
5
Passive employer,
price-insulated employee
Activist employer,
price-sensitive individual
Broad, open networks Narrow, custom networks
No platform for apples-to-
apples plan comparison
Clear plan comparison
on exchange platforms
Disruptive for employers
to change benefit options
Easy for individuals to
switch plans annually
Constant employee
premium contribution,
low deductibles
Variable individual
premium contribution,
high deductibles
Characteristics of a Traditional vs. Retail Market
©2014 The Advisory Board Company • advisory.com • 28601A
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Delivering Desirable Network Attributes at Low Cost
Source: Health Care Advisory Board interviews and analysis.
Redefining “Value” in Health Care
Four Imperatives for Health Systems
Low Unit Price
Radically restructure
to accept low
unit prices
Total Cost Control
Develop population
health model to control
cost trend
Geographic Reach
and Clinical Scope
Meet minimum network
adequacy demands
Clinical and Service
Quality
Differentiate to
consumers, network
assemblers
Low Cost Desirable Network Attributes
©2014 The Advisory Board Company • advisory.com • 28601A
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Source: Health Care Advisory Board interviews and analysis.
Meeting Cost Demands of a Retail Market
Degree of Cost Control
Two Provider Strategies to Win on Cost
Price Cut Trend Control
Provider
Strategy
• Improve internal efficiency • Reduce excess utilization
• Refer care to higher-performing
specialists
• Implement care management
Market
Reward
• Inclusion in network
• Share of volumes from
price-sensitive patients
• Inclusion in network
• Referral preference from payers,
accountable physicians
• Share of lives during network selection
Care Delivery Network
©2014 The Advisory Board Company • advisory.com • 28601A
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Source: Health Care Advisory Board interviews and analysis.
Network Scope and Reach Critical Levers
Individual Insurance
Shoppers
Employers
Payers
Private Exchange
Operators
Custom Network
Builders
Provider Strategy:
1.Ensure sufficient reach and density of physicians and access points
2.Cover all needed specialty services
3.Make compelling argument for guaranteeing access
Provider Strategies for Three Constituencies Considering Reach and Scope
Consistent Strategy Across All Three Groups
©2014 The Advisory Board Company • advisory.com • 28601A
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Network Assemblers Beginning to Take Note
Source: Health Care Advisory Board interviews and analysis.
Clinical and Service Quality at Two Levels
Network Assemblers Individuals
Facility-level clinical
process, outcome
measures
Actual ease of
access, care
experience
Network-level
quality, access,
service ratings
Network Selection Care Decision
Quality Demands of Network Assemblers and Individuals
Individual remembers care
experience during re-enrollment
Network assembler adjusts strategy
to respond to market demands
©2014 The Advisory Board Company • advisory.com • 28601A
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Source: Health Care Advisory Board interviews and analysis.
Preparing for the Coming Retail Marketplace
Clinical and
Service Quality
• Evidence-based processes
• Strong clinical outcomes
• High member satisfaction
• On-demand access
• Online services
Cost
• Low unit price
• Utilization management
• Effective trend control
Geographic Reach
and Clinical Scope
• Broad geographic footprint
• Density of access points
• Full spectrum of clinical
services
Three Core Attributes to Become the Network of Choice
©2014 The Advisory Board Company • advisory.com • 28601A
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Arena of Competition Expanding Beyond Care Decision
Source: Health Care Advisory Board interviews and analysis.
Winning Market Share in a Retail World
Network Assembly Network Selection Care Decision
All providers included in nearly all
networks; only compete on price
negotiations
Employees have little choice of
networks
Most decisions made by
referring physician
• Low total per-member cost
• Promise of total cost savings
• Low premium
• Low employee contribution
• Low out-of-pocket
cost
• Broad geographic footprint
• Comprehensive clinical scope
• Inclusion of preferred
physicians
• Proximity to access
points
• High clinical process, outcomes
performance
• Adherence to evidence-based care
• On-demand access options
• Centralized navigation services
• Prompt appointment times
• Extended hours
• High population health
quality ratings
• High member satisfaction
ratings
• Positive brand association
• On-demand access options
• Great care experience
• On-demand access
options
• Prompt appointment
times
• Extended hours
Cost
Reach and
Scope
Clinical and
Service
Quality
Network Assemblers Individual Consumer
Reta
il M
ark
et
Traditional Market
Th
resh
old
Fa
cto
rs
Diffe
ren
tiatin
g
Fa
cto
rs
Expanding Arena of Competition
eab.com
Higher Education Market Update
©2014 The Advisory Board Company • eab.com 2
Looking Like the Hospital Industry Circa 1992
Costs Rising Quickly with Relatively Little to Show for It
Starting with Industry Fundamentals
1,120%
601%
385%
280%
244%
1975 1980 1985 1990 1995 2000 2005 2010
College Tuition & Fees
Medical Care
Shelter
Consumer Price Index
Food
College Costs Rising Faster Than Health Care
Increase in College Tuition and Fees (1975-2010)
55.5% 57.4% 57.2%
41.9% 42.3% 43.4%
0%
50%
100%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Private Public
Five-Year Graduation Rates Largely Unchanged
©2014 The Advisory Board Company • eab.com 3
Starting with Industry Fundamentals
Why Focus on Efficiency and Cost When You Can Raise Price
Colleges and Universities Growing Administrator Ranks at Fast Pace
Number of FTE Faculty and
Instructional Staff per FTE Professional
2.5 2.6 2.5
3.3 3.4
2.7
1.8 2.0 1.9
2.5 2.5
2.2
PrivateBachelor's
PrivateMaster's
PrivateResearch
PublicBachelor's
PublicMaster's
PublicResearch
2000 2012
Most Growth in
Student Services
However, the report also shows that the majority of salary expense
growth is tied to Student Services, not Institutional Support.
“Wage and salary expenditures for student services have grown faster
than other spending categories.”
Delta Cost Project
February 2014 Issue Brief
60%
25%
Position ControlExists
Position ControlEffective
Universities with Position Control Process
n=107
©2014 The Advisory Board Company • eab.com 4
Starting with Industry Fundamentals
Largely Fixed Costs with Significant Excess Capacity
Starting with Industry Fundamentals
Most Costs are in Faculty and Largely Fixed
Total Academic Department Costs and Type (in Millions)
37.5 40.4
64.2
7.7 8.3
9.1
15.3 13.7
22.8
5.1 7.2
9.5
Regional PublicSoutheast
Regional PublicMidwest
Large Public Midwest
Tenure Track Salary Non-Instruction Salary Costs
Adjunct Salary Direct Non-Salary Expenditures
Surprisingly Large Number of Empty Seats
A: All Texas Public
Universities
B: All Virginia Public
Universities
C: All UK Universities
D: Northwestern
University
E: Stanford University
33%
36%
22% 23%
19%
A B C D E
Classroom Hours / Week
60%
61%
49%
32%
48%
A B C D E
% of Seats Filled / Class
Room Utilization Seat Utilization
Largely
Fixed
Largely
Variable
©2014 The Advisory Board Company • eab.com 5
Starting with Industry Fundamentals
Federal Government Staying on the Sidelines
Little Likelihood Washington Flexes Its Purchasing Power in Near Future
Federal Government Accounts for
44% of Higher Education Revenues
Little Likelihood It Will Wield It
Net Tuition Calculator
$200
$95
$84
$42
$22
$9
Federal Government
+44%
Consumer
State
Other
(Fundraising)
Local
Corporations
Loans
Pell Grants
Research
Total Revenue: $452 Billion
Financial Aid Shopping Sheet
National College Scorecard
Incentives for Improved Outcomes
(“Race to the Top” for Colleges)
Tying Federal Aid to Outcomes
or Tuition Price
Accreditation Reforms
©2014 The Advisory Board Company • eab.com 6
Public 58%
Private (Non-Profit) 30%
For-Profit 12%
$55B
Starting with Industry Fundamentals
Disproportionately Public and Increasingly Un(der)funded
State-Run Colleges Predominate but are Receiving Less State Support over Time
Public Colleges Are 57% of the Market
Total Revenue: $451 Billion
$259B
Tuition as Percentage of Educational Revenues
for Public Universities
State Funding Lags Behind Enrollment Growth
Distribution of Higher Education Revenue by Segment
26.1%
29.3%
35.5%
47.0%
20%
30%
40%
50%
1987 1992 1997 2002 2007 2012
$137B
Economic recessions have accelerated the “privatization” of public
education, with states making deep cuts in funding and public
colleges responding with steep increases in tuition price
©2014 The Advisory Board Company • eab.com 7
What’s Driving Change?
States Starting to Pay for Better Outcomes
Tying Public University Funding to Student Graduation Success
P4P Funding Spreading Across Nation
Before 2010:
Pennsylvania
Indiana
Tennessee
Ohio
After 2010:
24 states (and counting)
have now approved or are
currently planning new
funding models
Still Relatively Few Dollars at Risk
-3.8%
-2.9% -2.9% -2.8%
-1.7% -1.1%
0.1%
4.1%
8.4%
Me
mph
is
UT
Ma
rtin
Mid
dle
Ten
n. S
tate
Te
nn
essee
Tech
Te
nn
essee
Sta
te
UT
Ch
atta
noo
ga
Ea
ste
rn T
en
n.S
tate
UT
Kn
oxville
Au
stin
Pe
ay
Tennessee State Outcomes Funding Changes
Between 2011 and 2014
Rising Tide Not Lifting All Boats
Six schools together received less than
1% of the recent $14.6M increase in
overall Tennessee state funding
©2014 The Advisory Board Company • eab.com 8
Customers Starting to Question the Value of a Degree
Early Evidence That Students are “True Drivers” on Price
Betting on Market-Driven Reform
Starting to Vote with Their Feet
76%
57%
Are Graduates Getting Their Money’s Worth
Students admitted
to first-choice
institution
Students enrolled in
first-choice
institution
62%
Of students who did not
enroll at their first-choice
cited cost as primary factor
Admissions and Enrollment Responses, Higher Education
Research Institute at UCLA’s Freshman Survey
n = 165,743 Poor Job Prospects
44% Underemployment rate
for recent college
graduates
Skeptical Employers
11% Employers who strongly
agree that graduates
possess skills
businesses need
Low Public Confidence
32% Americans who say
that college is worth
the investment
©2014 The Advisory Board Company • eab.com 9
50%
55%
60%
65%
70%
75%
80%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1996 2006 2016 2026
Co
lle
ge
Pa
rtic
ipa
tio
n R
ate
(%
)
Hig
h S
ch
oo
l G
rad
ua
tes
(T
ho
us
an
ds
)
Participation Graduates
What Will Really Pressure Future Price and Value
U.S. Undergraduate Enrollment Growth Projected to Flatten in Next Decade
High School Graduate Numbers Flattening Undergraduate Enrollment Growth Will
Decline in Next Decade Number of High School Graduates and College
Participation Rate, Fall 1996 to Fall 2027
2.8%
1.2%
1996 to 2010 2011-12 to 2021-22(projected)
Actual and Projected Average Annual Growth in
Undergraduate Enrollment, Fall 1996 to Fall 2021
©2014 The Advisory Board Company • eab.com 10
Rise of Low Cost Alternatives to Brick and Mortar
Online Education Threatens Traditional Ground-Based Economics
1.6
3.2
5.6
7.1
9.6%
18.2%
27.3%
33.5%
2002 2004 2006 2008 2010 2012
Students Taking at Least One
Online Course (Millions)
New Competitors Enter the Ring Students Have Real Alternatives
“In fifteen years from now half of US
universities may be in bankruptcy.”
Clayton Christensen
Harvard Business School
Share of Students Taking at
Least One Online Course
©2014 The Advisory Board Company • eab.com 11
Revenue CAGR:
1.5-2.0%
The Problem for Higher Education Moving Forward
Increasing Conversation around the Sustainability of the University Business Model
Source: Inside Higher Ed, Survey of of College and University Business Officers, http://www.insidehighered.com/news/survey/cfo-
survey-reveals-doubts-about-financial-sustainability; Wall Street Journal, “Public University Costs Soar”, 3/16/2013; Education
Advisory Board interviews and analysis. Education Advisory Board analysis 1) Projected growth in costs and revenue accounts for inflation
Of business officers
disagreed with the
statement:
I am confident that my
institution’s business
model will be sustainable
over 10 years.
83% of non-elite private
college CBOs, and 74%
of non-flagship public
universities peers, had no
confidence in the
sustainability of their
business model over the
next 10 years.
59%
2000 2003 2006 2007 2009 2012 2013 2015 2018
Revenues
Salary
Freeze
Layoffs
Hiring
Freeze
Furloughs
Costs
Great Recession
Cost CAGR:
4.5%
©2014 The Advisory Board Company • eab.com 12
Maybe We Can Grow Our Way Out of This?
16%
27%
19%
Bachelor's Master's Doctorate
All Postsecondary Institutions
Projected Growth by Award Level, 2011-2021
Master’s as Share of Total Degree Completions, 2011
Upskilling the Professional Workforce The Degree Completion Opportunity
U.S. Population by Education Level
Master’s
720 K
28%
Bachelor’s
1.7M
66%
Doctoral
160K
6%
87.4M
34.2M
19.7M
40.6M
22.8M
High School orLess
Some College,No Degree
Associate'sDegree
Bachelor'sDegree
Graduate Degree
54 million adults
have some college
or an associate’s 50%
Say they want to go
back to school –
only 3% do so
©2014 The Advisory Board Company • eab.com 13
Bending the Cost Curve Has Been Difficult
Universities Saving Relatively Little and Avoiding Largest Cost Buckets
Planned Savings from Recent High Profile Engagements
Typical Savings: 2-3%
$97.5M $66.2M $82.5M
$3.5B
~$2.5B
~$3.5B
Projected Savings Operating Budget
CBOs Stating Budget Cuts Impaired Effectiveness
of Service Delivery at their Institutions
45.2%
25.1%
11.2%
BusinessServices
Student Services AcademicPrograms
©2014 The Advisory Board Company • eab.com 14
Professors Really Do Run Higher Education
Academic Decisions Drive Vast Majority of Revenues, as Well as Most Costs
Academic Units Generate
Nearly All University Revenue…
Tuition
Tech
Transfer Corporate
Funding
Public
Service
Federal
Grants
Econ
Development
State
Funding
Fundraising
… And Their Decisions
Drive Most Costs
Procurement
IT
Facilities
Staffing
Workload
Centers &
Institutes
Energy
Curriculum
How can we help faculty understand the cost
and revenue implications of their decisions?
!
The Fundamental Challenge
©2014 The Advisory Board Company • eab.com 15
Findings From Our Work with The Gates Foundation
Faculty Add Courses, Never Subtract
Course and Major Proliferation Reducing Class Size
1,500
2,000
2,500
3,000
3,500
Year 1 Year 2 Year 3
To
tal D
isti
nc
t C
ou
rse
s
Growth in Number of Distinct Course
Offerings at Six Universities
3% Annual increase in the number of hours of
faculty instructional time spent on small
courses (2-10 students)
Annual increase in faculty time spent on
large courses (11+ students) 1%
Mid-size Regional Public University
Distribution of Courses by Class Size
44%
≤10 Students
56%
11+ Students
1
2-5
6-10
11-30
30+
©2014 The Advisory Board Company • eab.com 16
Findings From Our Work with The Gates Foundation
Diseconomies of Scale
Larger Departments Are Not Always More Efficient
Number of Distinct Lower and Upper Division Courses by Undergraduate Department Size
n = 7 Public Universities
Agriculture Anthopology
Engineering
Art
Biology
Communication
English Geography
History
Mathematics
Marketing Music
Nursing
Psychology
Technology
0
50
100
150
200
250
300
350
0 500 1000 1500 2000 2500 3000 3500 4000 4500
Dis
tin
ct
Co
urs
es
Department Size (Total Faculty Credit Hours)
Distinct Lower Division Distinct Total Courses
Larger departments offer more courses,
particularly in the upper division, than
their smaller counterparts
©2014 The Advisory Board Company • eab.com 17
Findings From Our Work with The Gates Foundation
The Myth of the Lazy Professor
Faculty Teaching Less, Working More
Faculty Work Hours Comparable to
Higher-Pay Professions
Significant Release Time
Devoted to Administrative
Functions, Non-tenure Staff
~3K Total semester hours
released per year
~3/4 Share of releases awarded
for administration
Share of releases awarded
to non-tenured faculty4 ~1/3
500 Course equivalent of tenured
release time for administration
(15% of capacity)
Total theoretical spending
on faculty release time ~$10M
Yet Majority of Faculty Don’t Teach
Standard Load
Share of Faculty by Load Across Select
Departments3
62%
16% 23%
Underload Standard Load Overload
55.5 60 59.5
Associate,
Corporate Law Firm2 Cardiologist Full-Time Faculty1
©2014 The Advisory Board Company • eab.com 18
67%
48% 45%
38%
30%
20%
11% 7%
4% -2% -7% -10% -24%
-47%
So
cio
log
y
Ge
olo
gy
Psycho
log
y
Mili
tary
Scie
nce
Fo
reig
n L
ang
uag
es
Ph
iloso
phy
Econ
om
ics
Bio
log
y &
Physic
al S
cie
nce
s
Art
En
glis
h
Che
mis
try
Mu
sic
Ph
ysic
s
Th
ea
tre A
rts
Starting to Ask Faculty to Reform
University Beginning to Look at Academic Cost and Efficiency
* Regional public university participating in Gates Foundation project
Which Departments Make and Lose Money?
Contribution Margins for Select Academic Departments* Key Findings from Gates Research
Proliferation of courses
and majors
Decreasing class size
Increases in faculty
release time
High level of unfunded
research
Death by a thousand
committees
Large Opportunities for Improvement
©2014 The Advisory Board Company • eab.com 19
Is this the record industry circa 1988?
Faculty and Classrooms -- How Quaint
Digital Technology (Beginning) to Transform Where, What, and How Students Learn
It’s online… …it’s about competencies
and skills… …it’s personalized
to the student
MOOCs and Online
Learning
Competency-Based
Education
Adaptive Learning
Platforms
• Convenient access and
lower cost
• Lower university revenues
• Standardizes learning
(ICD-10 for higher ed)
• Lower university revenues
• Decreased importance of
brands and degrees
• Integration of education with
employment
• Improved outcomes and
lower costs
• Improved student completion
• Lower university revenues
Key
Players
Why
Disruptive?
Implications for
Sector
©2014 The Advisory Board Company • eab.com 20
Where is the industry five years out?
A Remarkably Resilient Business Model
Remain chronically underfunded,
dependent on state support
Consolidation right answer but
politically difficult
Remain primary providers of
postsecondary education in their
states
Continue to serve (and struggle
to graduate) less well prepared
students
Best brands, will attract best
(richest) students
Diversified revenue base—
education, research, philanthropy
Increasingly global student bodies
and ambitions
Flagship publics going private
(UVA, Michigan)
Tuition-Dependent Privates
Regional Publics and Two Years
Bleakest outlook—high prices
not supported by the brands
Lack large endowments or
state safety net
Future of price discounting,
declining enrollment, closures
$53 Billion
At Risk
$118 Billion
Muddling Through Brighter Future
Public & Private Research
$225 Billion
Majority of EAB CV and Market Focus
Analyst and Investor Day September 11, 2014