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Healthcare Industry Update

The Seven Signs That Convergence Is Coming

Carolinas HealthCare System2013 HealthCare CPE Event – Reshaping Healthcare

November 1, 2013

2© 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 127142

FOR INTERNAL USE ONLY

Who Is KPMG?

K stands for Klynveld. Piet Klynveld founded the accounting firm Klynveld Kraayenhof & Co. in Amsterdam in 1917.

P is for Peat. William Barclay Peat founded the accounting firm William Barclay Peat & Co. in London in 1870.

M stands for Marwick. James Marwick founded the accounting firm Marwick, Mitchell & Co. with Roger Mitchell in New York City in 1897.

G is for Goerdeler. Dr. Reinhard Goerdeler was for many years chairman of Deutsche Treuhand-Gesellschaft and later chairman of KPMG. He is credited with laying much of the groundwork for the KMG merger.

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Current Perspectives on Healthcare Reform and Market Transformation

Our view is that there is an ongoing transformation of the healthcare industry – particularly on a local market basis in anticipation of new economic models for financing healthcare and despite the uncertainties at the Federal and State levels.

The Four Imperatives Remain The Same

The need to be agile around cost structures

The need for greater size and scale

The need for strong governance and greater transparency around quality and pricing

The need to continue to be vigilant around compliance

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Future sustainability of entitlement programs

Year Revenues ProfitProfit

MarginUncompensated

CarePercent of Expenses

2011 $755.30 $53.20 7.0% $41.1B 6.0%2010 $730.9B $52.9B 7.2% $39.3B 5.8%2009 $690.5B $34.4B 5.0% $39.1B 6.0%2008 $650.0B $17.0B 2.6% $36.4B 5.8%2007 $610.0B $27.8B 4.60% $34.0B 5.8%

Source: American Hospital Association, all U.S. Hospitals

Source: AHA Town Hall Webcast, January 15, 2013

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Distinguishing T from C

Today’s transformation is inward looking – assembling the component parts, experimenting with new payment models, monitoring employer and consumer trends and understanding the role of new entrants.

Health plan, physician, or health system-led integrated delivery models through mergers and acquisitions, joint ventures, management agreements, etc.

Alternative payment models coupled with increasing employer and consumer engagement

Emerging role of private equity, retail health, life sciences companies, etc.

Tomorrow’s transformation will be defined by collaborating with others, coordinating care across the continuum and developing extended operating models, which we call Convergence.

The next stage in the evolution of the healthcare industry reflects a convergence of interests among providers, payers, and life science companies

Utilizing advanced analytics, enabled by new technologies to change the practice of medicine and the business of healthcare

Convergence is currently expressing itself through data and analytics collaboratives, innovative public private partnerships, and previously siloed stakeholder groups working together in new ways.

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New Models Are Emerging Every Day

Convergence of roles, responsibilities and relationships drive new business models.

“[Our] promise will really come to fruition when other great groups, large academic medical practices, research universities, biotech, pharma and device companies, other insurers and health policy groups, all come together and help us use informatics to pull out the data here that will really define value… the potential is almost limitless and really should change the way we design healthcare systems in the future.” – Dr. John Noseworthy, CEO Mayo Clinic, April 2013

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The Seven Signs Convergence Is Coming

Volume declines and new metrics

Reimbursement reductions coming online

Health insurance exchanges coming online

Strong signals from private payers

Faint but increasing signals from public payers

Frequent questions by health systems on whether to build or buy a health plan

Governance questions on the linkage of strategy and risk

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The Key Elements Of An Effective Risk Management Program

Source: Expectations of Risk Management Outpacing Capabilities, KPMG International, 2013.

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Levels of Risk in an Organization

Enterprise Level

Department, Functional or Business Unit Level

Process Level

Enterprise Risks are key / top risks of the enterprise and risk information supports:

Strategic plan initiatives and objectives

Decisions regarding solvency, capital allocation and business initiatives

Management and Board Monitoring

Next level of risks is more detailed or specific risks but mapped and linked to top enterprise risks

Risk detail helps business focus on risks, gaps, mitigation and action plans to remediate

Internal Audit Plan is developed from risk information at this level

Process level risks are very granular and detailed and may be identified as part of the following:

SOX, Privacy, Compliance, etc

Understanding operational risks in the process, or application level.

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The Risks Around Convergence At The Enterprise Level

Acknowledging continuing margin compression in the cost shift

Evaluating the opportunity to disrupt or the risk of being disrupted given the velocity of local market changes, including physician and other provider alignment

Preparing for revenue transformation as new revenue streams emerge around public and private exchanges, narrow networks, and other value-based arrangements

Monitoring employer and consumer attitudes/acceptance

Evaluating “make or buy” decisions on the necessary tools, technology, and talent

Becoming agile around cost structures given declining volumes coupled with clinical transformation

Conducting scenario planning, predictive modeling, and war gaming around market transformation and the impact on financial performance

Assuring the integrity of clinical reporting and developing new metrics for the transition from volume to value

Converting unstructured data into information for decision making to enable clinical, operational and financial benchmarking across the continuum of care along with real-time predictive clinical surveillance systems

Managing increasingly complex compliance regimes and enhancing transparency in reporting

Discussion

Presenter informationEd GiniatNational Sector Leader – Healthcare & Life Sciences 312-665-2073eginiat@kpmg.com

For more information, visit the KPMG Healthcare & Pharma Institute @ http://www.kpmghealthcarepharmainstitute.com

The information contained herein is of general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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