Today’s Changing Healthcare Economics

WSHMMA Meeting

April 13, 2011Presented by Jeff Veilleux, EVP & CFO

Adapting to a New Reality…Adapting to a New Reality… Positioning for SuccessPositioning for Success

3

Long Term Pressure – Healthcare Reform

Cost Impact from Declining Payor Reimbursement(No Change in Volume Assumptions)

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10

Expense "Plan" Reduced Expenses

30% More Efficient in 10 Years

4

Organizational Expectations

• Slow Growth• Cost Pressure• Deteriorating Payer Mix• HCR Pressures

– 3rd party insurer pressure– Medicare and Medicaid rate decreases– Medicare and Medicaid volume increases– Move to outpatient– Bad debts may decrease

5

Expected Shift in Insurance Coverage

Dual coverage affects the total insurance coverage population calculation, thus total insurance coverage population does not equal to the true US population amount.Estimated Effects of the Patient Protection and Affordable Care Act, as Passed by the Senate, on Enrollment by Insurance Coverage, in millionsSource: Congressional Budget Office and the staff of the Joint Committee on Taxation. Centers for Medicare & Medicaid Services, Office of the Actuary. January 8, 2010 (http://www1.cms.gov/ActuarialStudies/Downloads/S_PPACA_2010-01-08.pdf)

Individual24mm

Individual23mm

Individual 24mm

Individual27mm

Medicaid & CHIP50mm

Medicaid & CHIP49mm

Medicaid & CHIP42mm

Medicaid & CHIP40mm

Medicare47mm

Medicare52mm

Medicare55mm

Medicare60mm

Uninsured - 18mmUninsured - 18mmUninsured - 23mm

Uninsured50mm

Employer Sponsored (Small & Large Group)

168mm

Employer Sponsored (Small & Large Group)

169mm

Employer Sponsored (Small & Large Group)

172mm

Employer Sponsored (Small & Large Group)

150mm

Exchanges - 22mmExchanges - 20mmExchanges - 14mm

0mm

50mm

100mm

150mm

200mm

250mm

300mm

350mm

400mm

2010E 2014E 2016E 2019E

314mm 327mm334mm

342mm

6

Translating Insurance Coverage into Bottom-Line Impact

2006 U.S. Hospital Cost Shift Estimate

Source: Milliman Inc. – Hospital and Physician Cost Shift, December 2008. Of the $89 billion in total cost shift, 57% or $51 billion is hospital related.

In 1999, the gap between Medicare and Commercial Payers was 11.3%. By 2006, the gap widened to 32.5%.

7

State Medicaid Spending is Expected to Increase because of Health Reform

0 - 25th Percentile

25th - 50th Percentile

50th - 75th Percentile

75th - 100th Percentile

Source: Center on Budget and Policy Priorities (FY2011 estimates) and National Association of State Budget Officers (FY2008 data); based on a composite score comprising equal weightings of the estimated percentage of state spending on Medicaid and most recently available state deficit/surplus as a share of general fund.

National Medians

State Budget Deficit: 14.2%

Medicaid Spending: 19.6%

Statistical Key:

B = Budget Deficit (Share of FY2011 state budget that is under-funded as of 7/15/2010)

M = Medicaid Spending (State Medicaid spending as a percentage of total state expenditures, FY2008)

B: 20.2%M: 23.2%

B: 34.7%M: 28.2%

B: 38.3%M: 19.5%

B: 13.9%M: 25.9%

B: 36.6%M: 22.8%

B: 21.6%M: 19.7%

B: 41.5%M: 29.5%

B: 9.4%M: 34.5%

B: 15.9%M: 26.7%

B: 30.3%M: 26.4%

B: 15.6%M: 30.3%

B: 9.8%M: 28.5%

B: NAM: 8.4%

B: NA%M: 20.3%

B: 21.6%M: 11.1%

B: 28.9%M: 17.4%

B: 11.5%M: 11.5%

B: 12.0%M: 11.2%

B: 18.9%M: 17.9%

B: 8.7%M: 18.7%

B: 8.8%M: 21.3%

B: 12.5%M: 19.3%

B: 14.4%M: 18.9%

B: 9.6%M: 17.7%

B: NAM: 15.1%

B: 14.8%M: 18.6%

B: NAM: 13.7%

B: 8.8%M: 22.3%

B: 14.6%M: 13.6%

B: 30.2%M: 18.9%

B: 8.8%M: 15.1%

B: 12.9%M: 16.3%

B: 23.9%M: 13.5%

B: 10.3%M: 10.2%

B: 26.2%M: 19.6%

B: 3.4%M: 21.9%

B: 9.6%M: 18.7%

B: 9.2%M: 22.2%

B: 26.0%M: 22.6%

B: 16.1%M: 22.4%

B: 54.0%M: 12.3%

B: 24.1%M: 26.0%

B: 11.3%M: 23.2%

B: 25.6%M: 21.1%

B: 9.4%M: 21.7%

B: NAM: 16.8%

B: 6.2%M: 20.8%

B: 10.2%M: 16.4%

B: 8.3%M: 11.0%

B: 3.6%M: 12.1%

8

States With Stronger Economies May Lower System Bad Debt Risk

N: 7.7%U: 6.3%

N: 9.4%U: 6.8%

N: 12.4%U: 6.5%

N: 5.4%U: 9.0%

N: 8.5%U: 6.8%

N: 12.6%U: 4.8%

N: 10.3%U: 5.9%

N: 10.9%U: 3.6%

N: 9.7%U: 9.2%

N: 11.3%U: 4.5%

N: 13.0%U: 7.2%

N: 10.2%U: 6.0%

N: 8.9%U: 7.9%

N: 9.7%U: 8.8%

N: 11.0%U: 8.5%

N: 9.6%U: 8.0%

N: 12.9%U: 7.1%

N: 12.6%U: 9.1%

N: 14.9%U: 9.6%

N: 13.6%U: 8.2%

N: 11.6%U: 10.5%

N: 11.3%U: 12.0%

N: 13.6%U: 7.0%

N: 11.8%U: 8.9%

N: 13.6%U: 6.8%

N: 9.8%U: 10.0%

N: 11.9%U: 10.1%

N: 14.6%U: 8.5%

N: 20.1%U: 11.4%

N: 19.3%U: 7.0%

N: 11.9%U: 10.3%

N: 19.0%U: 7.9%

N: 17.0%U: 7.5%

N: 16.1%U: 8.0%

N: 14.7%U: 8.8%

N: 13.1%U: 10.4%

N: 15.9%U: 7.3%

N: 15.9%U: 6.8%

N: 14.7%U: 10.1%

N: 18.9%U: 9.6%

N: 18.4%U: 12.3%

N: 17.7%U: 10.0%

N: 14.8%U: 10.0%

N: 11.7%U: 13.2%

N: 18.3%U: 11.0%

N: 18.0%U: 14.2%

N: 23.1%U: 8.2%

N: 15.9%U: 10.0%

N: 16.5%U: 10.5%

N: 16.1%U: 10.7%

N: 25.1%U: 8.2%

0 - 25th Percentile

25th - 50th Percentile

50th - 75th Percentile

75th - 100th Percentile

National Medians

Uninsured Population: 13.1%

Unemployment Rate: 8.7%

Statistical Key:

N = Uninsured Population (Percentage of Total Population Under 65, 2010)

U = Unemployment Rate (Seasonally adjusted percentage of civilian labor force, as of June 2010)

Sources: Bureau of Labor Statistics (June 2010 figures) and Robert Wood Johnson Foundation (2010 estimates); based on a composite score comprising equal weightings of the state unemployment rate and uninsured percentage of state population.

9

Market Expectations

• Local Competition– MD’s– Employees

• Battles for Market Share– Programs– Patients

• Consolidation– Local– Regional– National

10

$-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

-

100

200

300

400

500

600

700

800

Number of Transactions Transaction Value

Health System Consolidation: Poised to Re-Ignite

1985-1998: HMO Heyday - Payors control livesAct 1: Payor consolidation

Federal Policy/ Economic Factors

CommercialPayors

ProviderCatalysts

2003-2008: ACT II Payor Consolidation

Returns

2002-2007: Provider Recovery

2001-2002: Tech Bubble

Implodes

1997-2000: BBA After

Shocks

1998-2003: Specialty Companies Emerge

and outperform

1992-1994: Anticipation of Clinton Reform

1990-1997: Columbia – Take No

Prisoners Approach to Growth

October 1983:Inception of DRGs

2004-2008: NFPs embrace growth

2008-2010 Great Recession

2009-2010: Reform

Overhang Kills M&A

2008-2010: Preserve cash

Growth in response to external factors

Portfolio Rationalization driven by financial considerations

Strengthening Fundamentals drives Growth

Twin bullets: Recession and Reform

11

2.8%2.2%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09

> $5B NFP $3 - $5B NFP $1 - $3B NFP < $1B NFP

Operating Margin

Note: Historical Data based on approx 250 reporting systems; Preliminary 2009 data is based on 168 systems, which represents 64% of the systems used in the 2008 Citi Growth Study. Approximately 90% of systems above $5 billion and 60% of all systems with operating revenue below $5 billion have reported 2009 data.

Comparative data from Citi Growth Study. Health system data reflects average value of category. NMHS’ FY 2001-2009 data reflects data reflects operating margin calculated from audited financials.

2.2%

3.6%

Largest Systems Continue to Experience Highest Operating Margins

Preliminary 2009 results show the impact of improved operations. Average Operating Margin of 2.5% was an improvement of 90 bps from 2008 levels.

Scale continues to drive difference in performance

between “Haves” and “Have-Nots”

12

Leading IHN’s and Large Systems Have Clear Sustainable Competitive Advantages in Periods of Transformation

Advantages of

Scale

Advantages of

IntegrationHighest Revenue Growth

Lowest Bad Debt Expense Ratio

Lowest Supply Expense

Lowest Cost of Capital

Leveraging of IT & Routine Capital Spending

Highest Investment in Strategic Spending

Operating Margin

13

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

19.0%

20.0%

21.0%

22.0%

23.0%

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08*

>$5 B $3-5 B $1-3 B <$1 B SDI Group SDI Top Quartile

Supply Expense Ratio

18.1%

21.7%

15.2%

18.5%

Both Scale and Integration Favorably Impact Supply Costs

21.4%

21.8%

*Note: Historical Data based on approx. 250 reporting systems; Comparative data from Citi Growth Study. Health system data reflects average value of category. NMHS’ did not break out supply expense in its audited financials prior to 2008.

14

Wild Cards

• ACO Activity

• New Payment Structures– Bundling– Pay for performance

15

Long Term Pressure – Healthcare Reform

Cost Impact from Declining Payor Reimbursement(No Change in Volume Assumptions)

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10

Expense "Plan" Reduced Expenses

30% More Efficient in 10 Years