strategic health care trends - legislative...

Strategic Health Care Trends

November 14, 2006

2

Environmental Trends Over Next 3-5 Years

Payment Sources Under Pressure

Slowing and Shifting Demand

Quality and Patient Safety Initiatives

Increasing Competitive Forces

Resource Constraints—Capital and Labor

Escalating Headline Risks

3

Government Payors: Federal Payment Sources under Pressure

$767$706$649$600$562$529$497$468$438

$342$309

$0

$200

$400

$600

$800

$1,000

2004A 2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E

Est.

US

Gov

't Sp

endi

ng .

($ in

bill

ions

)

CAGR = 9.5%

Source: 2005 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds

Estimated Increase in US Government Medicare SpendingEstimated Increase in US Government Medicare Spending

Source: Medicare Board of Trustees 2006 Annual Report

0%

2%

4%

6%

8%

10%

12%

1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Premiums

Payroll Taxes

General Revenue

Total Expenditures

State Transfers

Tax on Benefits

HistoricalHistorical EstimatedEstimated

HI Deficit Total Non-Interest Incom

e

Medicare Expenditures and NonMedicare Expenditures and Non--Interest Income by Source as % of GDPInterest Income by Source as % of GDP

4

Medicaid Expenditures: A Growing Component of States’ Budgets

Medicaid22.5%

Elementary & Secondary Education

21.9%

All Other31.3%

Transportation8.1%

Corrections3.4%

Higher Education10.8%

Public Assistance2.0%

…States’ medicaid expenditures have nearly tripled over the past 20 years and are expected to reach 27% of total state expenditures by 2010, representing one of the largest components of State spending.

Source: NGA/NASBO Fiscal Survey, December 2005

Total State Expenditures by FunctionFY20051

8.0%

13.0%

20.0% 20.0%22.5%

27.0%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

1985 1990 1995 2000 2005 2010(Projected)

Source: Vernon Smith, Health Management Associates

Medicaid Expenditures as a Percent of Total State Spending

5

The Emerging Reality of Provider Payments

56% of payments for health care services are channeled through private payors. Growth in this segment will accelerate with increasing penetration of Medicare Advantage.

Approximately 300 million people Approximately $1.6 trillion in payments

$100 billion not paid$45 billion self-pay

$6 billion from Federal government

$325 billion CMS & States

$100 billion individuals

$400 billion CMS

$250 billion self funded

$400 billion insured plans

$ Paid by Sources: In Practice

Source: Citigroup reports and Citigroup Investment ResearchNote: Managed Care Orgs (in pie chart) include Commercial Insured, Self-Funded Employers, Medicare Advantage and Medicaid Advantage)

Population $ Paid by Sources: In Theory

Approximately $1.6 trillion in payments

Individuals47 million uninsured

TriCare: 3.7%Military & Veterans

Medicaid: 15.6%Indigent & children

Medicare: 13.7%Age 65+

or disabled

Commercial : 46.7%Covered by employers

Commercial Insurers: 40.0%

Medicare: 30.8%

Medicaid: 20.0%

Other: 6.2%

56%

22%

7%

0%9%

6%

Managed Care Orgs $906.8 billion

CMS (Medicare) $352.0 billionCMS & States $120.3 billion

Federal Government $2.0 billionIndividuals $145.0 billion

Not Paid $100.0 billion

6

Commercial Payors: Payment Sources are Increasingly Driven at National Levels

$45,136 $45,365

$6,470

$14,395

$31,120

$16,684

$22,492

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

Aetna Cigna Kaiser WellPoint United

2005

E R

even

ues

($ M

illion

s)

WellPoint (the Blue)

• Combined enrollment of 34 million members

• Operates as Blue Cross or Blue Shield license in 14 states; #1 ranked in 12 states

Pacificare

United (the non-Blue)

• Combined enrollment of 23 million members

• Operates nationally as the largest health benefit provider

Commercial Insurance is Increasingly Driven by Two Super Insurers

WellChoice

Total = $51,606

Total = $59,760

Source: Source: Wellchoice and Pacificare data based on Thomson First Call Consensus FY2005 estimates. Others based on FY2005 audited financials.

7

Quality and Patient Safety Initiatives

Clinical and information technology investment

Workforce development and training

Process flow redesign

Facilities design

Payor focus

Impact of transparency

8

High Investment in Technology

23.0%

25.0%

33.9%

34.6%

34.6%

34.8%

36.1%

37.2%

49.6%

50.7%

61.3%

64.1%

71.7%

0% 10% 20% 30% 40% 50% 60% 70% 80%

New hospitals

Renovate to accommodate computers in patientrooms

Expand outpatient facilities

New outpatient centers

Increase lab space

Increase bed capacity

Convert semi-private rooms to private

Add specialty unit

Increase OR Capacity

Increase ER capacity

Purchase major IT/information system

Purchase computerized physician order entrysystems

Purchase digital radiology systems

“Executive management must embrace IT as a cost of doing business and a way of transforming the organization to ensure its viability. While ‘return on investment’ remains a critical factor for deciding some IT investments, it cannot become the sole factor in determining the value of IT on service quality or outcomes.”

- HIMSS Analytics

The top 3 forecasted

categories of capital

purchases over the next 5

years are related to

information technology.

Source: HFMA, Financing the Future, Report 6

Planned Capital Purchases, Next Five Years

Technology-related

Capacity-related

Other

9

Increasing Competitive Forces: Pure Play Companies

Pure Play Companies peel away high margin businesses

10

The Lifting of the Specialty Hospital Moratorium

Economic incentives re-aligned via reimbursement changes to payments

Physician conflict of interest resolved via financial disclosure

Federal response was to change the economic incentives for specialty-hospitals, in effect “leveling the playing field” and enabling increased competition

November 2003

June 2005

August 2006

Congress instructs CMS to prohibit physician-investor referrals to specialty hospitals for a period of 18 months

The 18-month moratorium period ends. Investigation continues.

CMS issues its final report to Congress and allows the

moratorium to officially expire

STOP CAUTION GO

11

Resource Constraints: The “Capital Gap”

Capital access will

become tighter for all health care providers, particularly

so for marginal credits. Technology and Delivery Innovation

Reconfiguration of Physical Assets

Product/Service Portfolio Rebalancing

Physicians

Key Uses of Strategic CapitalKey Uses of Strategic Capital

Operations

Financing

Investments

Philanthropy

Sources of Strategic CapitalSources of Strategic Capital

The Capital Gap

Capital Partnerships & Asset Sales

Routine Capital Ambulatory Clinics

New Beds

Devices IT

Surgical Suites

Niche Facilities

Source: Citigroup / Tiber research

12

Resource Constraints: Growing Labor Gap

Number of Retiring Workers & New Entrants1

(in thousands)

-2,000

-1,600

-1,200

-800

-400

0

400

800

1,200

1,600

2,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Shortfall Newly Retired New Entrants

Source: Federal Reserve Bank of Atlanta, The Health Management CEO Forum, August 20051 New Entrants = Newly Employed Aged 16 to 24

13

Unsustainable Business Fundamentals

Rising Constraints: Capital & Labor

Payer

Consolidation

Growth of the Uninsured

A variety of pressures on health care providers are anticipated to “squeeze” underlying business fundamentals over the next 3-5 years

Provider

Slowing & Shifting

Demand

Constrained Payment Sources

Quality & Patient

Safety Imperative

Increasin

g

Competitive Force

s

Escalating Headline Risk

14

Evaluating Health Care Provider Performance: Data Base Includes Approximately One Quarter of All U.S. Hospitals

> $3 Billion8%

$1-3 Billion32%

< $1 Billion60%

Total Systems

Single-State Systems

Total = 46 systems828 hospitals

(24% of Database)

Total = 145 systems559 hospitals

(76% of Database)

Multi-State Systems

Total = 191 health care systems(1,387 hospitals)

> $3 Billion

2%$1-3

Billion28%

< $1 Billion70%

> $3 Billion26%

$1-3 Billion44%

< $1 Billion30%

15

2.86%

0.87%1.53%

1.96% 2.39%

3.70%

4.90%5.10%4.60%

0.0%

0.4%

0.8%

1.2%

1.6%

2.0%

2.4%

2.8%

3.2%

3.6%

4.0%

4.4%

4.8%

5.2%

2001 2002 2003 2004 2005

Aggregate Virginia Aggregate

Good News: Operating Margins Improving

Operating Margin

Virginia Aggregate Source: Virginia Health Information Industry Reports

16

Bad News: Margin Growth Across All Size Organizations Has Been at Slowing Rates

Year-over-Year Change in Operating Margin

19.7%

22.2%

76.1%

28.2%

4.08%

32.43%

-19.57%

-40.0%

-10.0%

20.0%

50.0%

80.0%

110.0%

2001-2002 2002-2003 2003-2004 2004-2005

Aggregate Virginia Aggregate


17

-1.0%

1.0%

3.0%

5.0%

FY01 FY02 FY03 FY04 FY05

>$3 B $1B - $3B <$1B Aggregate Virginia Aggregate

While Operating Margins are Improving Overall, Scale of Health Care Systems is Driving the Strongest Results

Operating MarginStratified by Size

228.7%

662.5%249.5%

180.8%


10.9%

18

Scale Drives Lower Supply Costs

Supply Costs: Expense RatioStratified by Size

16.0%

17.0%

18.0%

19.0%

20.0%

21.0%

22.0%


> $3B $1 - $3B < $1B Aggregate

-64.9%

-13.7%

-14.7%

3.3%

19

Scale Generates a Cost of Capital Advantage

Total Cost of Debt—Stratified by Size

3.5%

3.9%

4.3%

4.7%

5.1%


> $3B $1 - $3B < $1B Aggregate

12.0%

-16.7%

-19.9%

-21.1%

20

Scale may Create a Sustainable Advantage for Health Care Systems

Provider

Achieve Pricing Leverage and

Revenue Diversification

Manage Resource Constraints

Proven Trends:Proven Trends:

Faster Revenue GrowthFaster Revenue Growth

Lower Supply CostsLower Supply Costs

Ability to Pay Work Force MoreAbility to Pay Work Force More

Lower Cost of CapitalLower Cost of Capital

Leverage IT SpendingLeverage IT Spending

21

Another Data Point…Seven Years of Rating Action Show the Advantages of Scale

38.5%

18.4%14.5%

8.6%

33.3%

12.4%

28.3%

7.7%

40.8%

37.3%

46.7%

13.3%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

>$3 B $1-3B $400mm-$1B <$400mm Multi-State Single-State

Downgrades Upgrades

Moody’s Investors Service has divided 250 health systems into the following categories assessing the percentage of downgraded credits for the period of 1998 – 2005

Large health care systems experienced far fewer downgrades

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