financial implications: we do not expect any meaningful...

I N D U S T R Y N O T E

A p r i l 1 , 2 0 1 5

Healthcare Services: Alternate Site ProvidersBPCI - The Next Big Thing; A Closer Look Into Medicare's Bundling Initiative

Kevin K. EllichSr Research Analyst, Piper Jaffray & Co.612 303-5666, [email protected]

Cairn K. ClarkResearch Analyst, Piper Jaffray & Co.612 303-6981, [email protected]

Related Companies: Share Price:AFAM 44.71AMED 26.78AMSG 61.52DVA 81.28EVHC 38.35FMS 41.45IPCM 46.64LHCG 33.03TMH 58.51

RISKSRisks include reimbursement andregulatory pressures, competition,integration risk, attrition, costinflation, government investigations,and lower utilization.

CONCLUSIONWe believe Medicare's bundling initiative, known as BPCI, could provide a meaningful,long-term opportunity for several of our healthcare services companies. The governmenthas made it clear that reimbursement will continue to gravitate toward valued-basedmodels, and the Bundled Payments for Care Improvement (BPCI) initiative is a wayto lower the cost of care without sacrificing quality. We think hospitalists, integratedphysician practices, and post-acute providers will play an important role in the BPCImodel and companies under our coverage with the greatest exposure include: FMS,IPCM, and EVHC, while AMED, LHCG, and DVA have some exposure, but to a muchlesser extent. AFAM is not involved in BPCI, but is participating in Medicare's SharedSavings Program (MSSP) and we think TMH and AMSG could eventually get involvedin Medicare's valued-based reimbursement programs.

• What is BPCI and how does it work? BPCI is Medicare's bundling initiative known asthe Bundled Payments for Care Improvement (BPCI) initiative. Essentially BPCI is away for Medicare to reduce the cost of care through episodic care in the acute and post-acute setting with bundled reimbursement. Healthcare providers and facilities act asepisode initiators and have a convening organization that acts as a general contractorfor Medicare. There are four BPCI models under which providers can bear risk ornot bear risk. Details about the BPCI models can be found in the body of this report,however most of our covered companies are participating in Model 2 (retrospective,hospital plus post-acute) and Model 3 (retrospective, post-acute only).

• Which companies are involved? The majority of our healthcare services coverage areinvolved with the BPCI initiative. Based on the number of Phase I BPCI episodes foundin Medicare's analytic files, FMS had the greatest exposure with 12,960 episodes or4.2% of the Phase I total of 310,677 episodes. IPCM had the second largest exposurewith 7,200 episodes or 2.3% of the total, while EVHC had 3,553 episodes accountingfor 1.1% of the total. AMED had 1,056 episodes, while LHCG had 201 and DVA onlyhad 50 episodes. It is important to note that BPCI exposure can vary as companieschange which bundles to participate in, e.g. the Phase II deadline is approaching onApril 13th and providers must select which bundles in each geography they want toparticipate in. Additionally, some companies like DVA, EVHC, FMS, and AMED arealso conveners, which provide a different type of exposure to BPCI.

• Financial implications: We do not expect any meaningful contribution from BPCIuntil at least 2016 as Phase II will commence later this fall. We also believe it is difficultto quantify the potential impact given the early nature of the initiative and companieshave not been able to provide specific financial guidance on BPCI's potential, eventhough we expect to receive greater disclosure over the next couple of quarters. Ifproviders are able to provide care at a lower cost than historical averages, they wouldbe able to keep the savings, which would be split between the physicians, facilities, andconveners. While we do not have specific estimates for the potential benefit, we thinkthe biggest BPCI beneficiaries, based on magnitude, are: IPCM, EVHC, FMS, andAMED. Regardless of the financial benefit, which remains relatively uncertain at thispoint, we view early participation in BPCI as a positive since it provides experiencewith Medicare's new reimbursement programs, which are clearly here to stay given theshift to value-based reimbursement away from fee-for-service.

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Piper Jaffray does and seeks to do business with companies covered in its research reports. As a result, investors should be awarethat the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report asonly a single factor in making their investment decisions. This report should be read in conjunction with important disclosureinformation, including an attestation under Regulation Analyst certification, found on pages 18 - 19 of this report or at thefollowing site: http://www.piperjaffray.com/researchdisclosures

mailto:[email protected]

mailto:[email protected]

http://www.piperjaffray.com/researchdisclosures

INDUSTRY NOTE

Apr i l 1 , 20 15

AN OVERVIEW OF THE BUNDLED PAYMENT S FOR CARE IMPROVEMENT ( BPCI) INITIATIVE

Given the growing involvement in Medicare’s Bundled Payments for Care Improvement

(BPCI) initiative, we thought it would be a good time to provide an overview and deep dive

into the program, while reviewing participation of our healthcare services coverage.

Meaningful contributions to financial results are probably at least a year away and it is still

too early to quantify with detail what the potential impact the program will ultimately

have, but we think quarterly commentary by company management teams will increase and

there are at least six of our covered companies already participating in the program in some

form, including EVHC, IPCM, FMS, DVA, AMED, and LHCG, and more could follow.

While the program has recently been gaining more momentum, BPCI has been around for a

while as it was originally announced in August of 2011. As of December 2014, the Centers

for Medicare and Medicaid Services (CMS) projected that the program would serve 130,000

Medicare beneficiaries. The BPCI program offers four different models for managing

various types of bundled payments and we believe the focus for most of the companies in

our services coverage will be model 2 and model 3 which are retrospective and cover

various acute and post-acute care episodes. Models 1 and 4 are much smaller in comparison

based on the number of participating providers. Thus, our brief overview will focus on

models 2 and 3.

Below is a list of key terms that are frequently used when discussing the BPCI program:

Episode Initiator – Program participants that begin the actual care of the patient.

An episode initiator can be a physician group practice or an acute care hospital.

Convener – Helps facilitate participation in the program by providing services such

as data analytics and CMS compliance.

Awardees – Medicare providers that bear risk for episodes they initiate

Awardee Conveners – participants that apply with partners and bear the risk for

all of the partnered episode initiators.

Facilitator Conveners – only facilitate risk taking by other organizations.

PAC – Post-Acute Care

Episode – The condition or reason for initiating treatment (e.g. congestive heart

failure)

Bundle – the services provided under the episode of care

DRG – Diagnosis Related Group

FFS – Fee For Service

Discount – Providers offer Medicare a discount, usually 2-3%, on the episode cost

which is essentially an entry fee for participating in the program

Target price – This is based on the discount and historical cost for the episode

Prospective payment bundling – pre-determined payment made for the bundle of

services to be provided

Retrospective payment bundling – payments are made at the usual fee-for-service

rates (actual cost) then aggregated and compared to the target price

BPPO – Bundled Payment Participating Organizations

Key BPCI

Terminology

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INDUSTRY NOTE

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The basic retrospective payment concept is Medicare takes an approximate 2-3% cut off of

the top of the care cost for managing the episode and providers are set with a target price

for each treatment group. If the provider beats the target price, then it is eligible for a

reconciliation payment, but if it falls short, a repayment to Medicare may be required.

Gains are split between the different groups involved in the episode of care, including the

episode initiator, the facility (e.g. hospital), and a convening organization.

CMS contracted the Lewin Group to evaluate and monitor models 2, 3, and 4 and in

February 2015 the Lewin Group released the first annual report which covered quantitative

analysis for Phase 2 participants during 4Q 2013 which was the first quarter of the

program. Qualitative analysis also covered the first two quarters of the program. The

Lewin Group was unable to make any significant determinations regarding the program’s

impact because of the small time frame and sample size, but we expect future reports to

deliver a much higher level of insight.

Financial implications for participants will depend on a wide range of factors:

The number and type of diagnosis related groups (DRGs) the company decides to

participate in

Whether the participant is a Convener or Episode Initiator

Participation in Model 2 or Model 3

Whether the company is focused on inpatient care or post-acute

Company involvement will likely change over the next few years as experience grows with

the various payment models. Without internal details on participation, it is difficult to

estimate what the potential revenue and EBITDA impacts will be on a company-by-

company basis, however now that the program is fully on the Street’s radar, our view is

that specific financial guidance is probably a few quarters away. While it is hard to quantify

the potential benefit for our covered companies, we compiled a qualitative list of individual

company participation, which is found in the exhibit below. Greater details about BPCI and

the models are found in following pages of this report. The following exhibits illustrate our

healthcare services coverage exposure to BPCI based on the number of Phase I episodes. We

analyzed the Medicare analytic files and our analysis may not have captured episodes for all

subsidiary operations, which could be meaningful.

Exhibit 1

P J C H E A L T H C A R E S E R V I C E S C O V E R A G E E X P O S U R E T O B P C I (Based on the number of Phase I Episodes)

Source: Piper Jaffray and the Centers for Medicare and Medicaid Services (CMS)

# of % of

Ticker Episodes Total

FMS 12,960 4.2%

IPCM 7,200 2.3%

EVHC 3,553 1.1%

AMED 1,056 0.3%

LHCG 201 0.1%

DVA 50 0.0%

Total Phase I Episodes 310,677

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INDUSTRY NOTE

Apr i l 1 , 20 15

Exhibit 2

P J C H E A L T H C A R E S E R V I C E S : B P C I P A R T I C I P A T I O N O V E R V I E W

*Locations and episode counts are based on our search of associated organizations and locations. There could be additional episodes not captured in our database checks.

Source: Piper Jaffray, company filings, transcripts, and CMS

Ticker Company BPCI Model / Convener

IPCM IPC The Hospitalist Company 2

Details from CMS BPCI files: Remedy BPCI Partners,

* 66 organizations registered with IPCM's address NaviHealth

* 7,200 episodes all in Phase I with end date of 9/30/15 Liberty

* 2-3% discount rate

Notes and other details:

* IPCM is an episode initiator & a partner to facilities that are initiators

* IPCM is managing $2.5 billion of care

* started to see cases in 3Q14

EVHC Envision Healthcare 2 & 3

Details from CMS BPCI files: Remedy BPCI Partners

* 73 organizations/locations with Evolution as the convener or listed under the address Evolution Health

for Emergency Medical Associates

* 3,553 episodes all in Phase I with end date of 9/30/15



* episode initiator and convener (Evolution Health) primarily for its own services, but may

offer services to interested parties

FMS Fresenius Medical Care 2 & 3

Details from CMS BPCI files: Liberty, NaviHealth

* 262 locations registered under Sound, Cogent or their addresses Remedy BPCI Partners

* 12,960 episodes all in Phase I with end date of 9/30/15 & Medsolutions, Inc.



* Sound Inpatient Physicians is preparing to participate in multiple markets

DVA DaVita HealthCare Partners 2 & 3

Details from CMS BPCI files: The Camden Group

* 3 locations

* ~50 episodes all in Phase 1 with end date of 9/30/15

* 2% discount rate


* HealthCare Partner's subsidiary, The Camden Group, is acting as a convener for:

-Summa Akron City and St. Thomas Hospitals (Ohio)

-Summa Berberton Hospital (Ohio)

-Glendale Memorial Hospital and Health Center

AMED Amedisys * Model 3 participant

* Model 2 convener

Details from CMS BPCI files: * Remedy BPCI Partners

* 83 locations registered with Amedisys name as a Model 3 participant for Model 3

* 1,056 episodes all in Phase I with an end date of 9/30/15 * AMED is a convener for 672

* 3% discount rate Model 2 episodes


* AMED was a model 3 convener in 2014 but terminated due to an unfavorable risk profile

LHCG LHC Group 2

Details from CMS BPCI files: NaviHealth

* two locations under Ochsner and one under West Tennessee Health

* ~201 episodes all in Phase I with end date of 9/30/15



* Two separate model 2 projects

* Hospital partners incclude Ochsner and West Tennessee Health System

AFAM Almost Family N/A


* not participating in BPCI

* participating in Medicare's Shares Savings Program (MSSP)

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INDUSTRY NOTE

Apr i l 1 , 20 15

Within our healthcare services coverage, five companies have discussed BPCI participation

on calls or in filings and we have uncovered participation from six companies in total. We

performed a number of searches in the available CMS databases in order to obtain some

rough estimates for the level of involvement by company. Many of organizations registered

for the initiative are listed under various subsidiary names and addresses, so there could be

a substantial number of episodes and locations not captured in the groupings below.

Additionally, the information in our summary table in Exhibit 1 and in the comments

below could be stale, as the data is based on the information from Medicare’s website and

databases and the companies may have changed which episodes and sites they plan to

participate in going forward, which might not yet be reflected in the available information

from Medicare that we analyzed.

Fresenius Medical Care companies Sound and Cogent comprise the largest number of

locations at over 250 organizations while AMED, IPCM, and EVHC each have between 50

to 75. As noted below, the DVA locations represented are related to its subsidiary, The

Camden Group, which is a convener for Models 2 and 3. The episode count paints a

somewhat similar picture with FMS taking the top spot in our coverage, but based on

episodes, IPCM has a much higher count than either EVHC or AMED. For volume

reference, the CMS database contains around ~6,660 locations and around 313,000 episodes

indicating that our covered companies only account for a fraction of total participants.

Company Commentary

Exhibit 3

N U M B E R O F O R G A N I Z A T I O N S / L O C A T I O N S B Y C O M P A N Y

*DVA locations are those related to its subsidiary The Camden Group acting as a convener


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INDUSTRY NOTE

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IPCM is an episode initiator and may be managing around $2.5 billion of care.

Management indicated the financial opportunity could be “extremely significant”. We

think the company did a good job of explaining its role in the program during its last

earnings call discussing that in its episode initiator role, the primary physician admits the

patient with a certain diagnosis (DRG) that has an assigned average cost from Medicare. If

IPCM beats the cost, gains can be shared with its partners which could include facilities,

specialists, or post-acute facilities. IPCM could also participate as a partner to facilities that

are acting as the primary episode initiators. While there is some substantial risk for

participating in the BPCI program, the company has pointed out some key aspects should

make it feasible:

1) IPCM will share the risk of increased costs with the convener,

2) IPCM gets to pick which DRGs and geographic areas it participates in, and

3) IPCM can opt out within 90 days of selected DRGs where the risk is too

extensive

We found a total of 66 organizations registered with IPCM’s address and based on the CMS

analytic file from late March 2015, IPCM’s affiliated organizations are using NaviHealth,

Remedy BPCI Partners, and Liberty Health Partners as conveners for 7,200 episodes. All

episodes are currently in Phase 1 with an end date of 9/30/2015 and discount rates of either

2 or 3%. At this point, we believe it is hard to say what type of impact the program will

ultimately have over the next few years and IPCM has not included any assumptions for

BPCI in its 2015 guidance. While cases should start to begin in 3Q15, the company has

pointed out that since it is operating with 90 day risk profiles, it will not be able to fully

evaluate data until 4Q15.

We performed a back-of-the-envelope, basic, high level analysis to estimate potential

revenue and EBITDA impacts for a wide range of Model 2 scenarios (in the exhibit below)

which we think is appropriate given that outcomes are largely unknown. The net payment /

repayment percentage is the net payment IPCM could receive after it has made repayments

to CMS for episodes where cost exceeds the target price. While there will be expenses

associated with program participation, we expect a much higher EBITDA flow-through for

BPCI payments than the company’s 2014 margin of ~10.5% because IPCM is already

providing the care regardless of BPCI involvement. We expect to gain more insight into the

company’s overall progress during its next update.

Exhibit 4

N U M B E R O F L I S T E D E P I S O D E S B Y C O M P A N Y

*DVA locations are those related to its subsidiary The Camden Group acting as a convener


IPC The Hospitalist

Company (IPCM)

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INDUSTRY NOTE

Apr i l 1 , 20 15

Management commentary from the fourth quarter 2014 earnings call:

"The financial opportunity for IPC could be extremely significant, since our workforce is uniquely positioned at the forefront of impacting costs, associated with both acute and post-acute care. While we have not included any assumptions for BPCI incentives in our 2015 guidance, we are actively evaluating initiative to determine the extent of our involvement."

"To put some bands around it, again, we do not have all the details yet of the program, but at IPC's size and given that we are primary admitters of patients, in most of the care that we deliver on the acute side, we look to be managing about $2.5 billion of care on to the Medicare program that would be applicable to this program."

- Adam D. Singer, CEO

EVHC is a convener and plans to be an episode initiator for Models 2 and 3. The company

is highly confident in its ability to choose appropriate episodes with its data analytics

capabilities and is acting as a convener for all of its own services and could eventually offer

services to other interested parties. CEO Bill Sanger discussed EVHC’s efforts in more

detail than perhaps any other company in our coverage during the 4Q14 conference call

noting that the opportunity for EVHC is significant. Mr. Sanger talked about some of the

history behind bundled payments in successful procedure areas such as hips and that there

will be some differences now that things are moving towards medical care. He also called

out some of the differences between the BPCI initiative and Accountable Care

Organizations (ACOs), specifically the requirement to engage physicians with bundled

payments, which led to the comment that BPCI could ultimately “challenge ACOs in terms

of what role they play in reducing costs and improving outcomes.” He also mentioned the

intensive care unit as one of the areas he sees as key to being successful in the program and

that EVHC could be taking a serious look at that specialty.

We found a total of 66 organizations/locations and 3,553 episodes associated with either

Evolution Health acting as a convener or Emergency Medical Associates’ (EMA) address.

Exhibit 5

I P C M : E S T I M A T E D B PC I F I N A N C I A L I M P A C T ($ in millions)

Source: Company transcripts, CMS, and Piper Jaffray estimates

Management

Commentary on

BCPI

Envision Healthcare

(EVHC)

IPCM

Dollars under careMedicare

discount

Factor 2% 20%

Dollar value $2,500 $50 $500 Base case sensitivity

Net payment/repayment %

Bull Base Bear EBITDA % 3% 5% 7% 10% 13% 15% 18%

Net Payment / Repayment % 15% 10% 5% 10% $2.5 $4.1 $5.8 $8.3 $10.7 $12.4 $14.9

Dollar value $375 $250 $125 15% $3.7 $6.2 $8.7 $12.4 $16.1 $18.6 $22.3

% received after split with other parties* 33% 33% 33% 20% $5.0 $8.3 $11.6 $16.5 $21.5 $24.8 $29.7

IPCM Revenue $123.75 $82.50 $41.25 25% $6.2 $10.3 $14.4 $20.6 $26.8 $30.9 $37.1

EBITDA Margin 25% 25% 25% 30% $7.4 $12.4 $17.3 $24.8 $32.2 $37.1 $44.6

IPCM EBITDA from BPCI care $30.94 $20.63 $10.31 35% $8.7 $14.4 $20.2 $28.9 $37.5 $43.3 $52.0

40% $9.9 $16.5 $23.1 $33.0 $42.9 $49.5 $59.4

*Assumes 3 way split between hospital, episode initiator (IPCM), and convener

High end of

overall payment

/ repayment

range

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INDUSTRY NOTE

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EVHC acquired EMA in January 2015 along with Scottsdale Emergency Associates and

EMA is using Remedy BPCI Partners as the convener for ~3,260 episodes. All episodes

associated with EVHC are currently in Phase 1 with an end date of September 30, 2015 and

discount rates of either 2 or 3%. The company sees 2015 as more of a preparatory year for

its role in the BPCI program as it evaluates each individual hospital and figures out the best

episodes of care to participate in moving into 2016 and 2017 when the impact will be more

significant. Mr. Sanger also discussed some of the many unknowns in the program since it

is still in the early stages and there could be some cherry picking by providers. He

mentioned that CMS could eventually mandate certain episodes and expects Medicare to

rebase after the first round of improvements which could introduce some risk into the

program if it is successful.


"I do believe that this whole initiative towards bundled payment may be one of the most transformational things that Medicare has done since, frankly, prospective payments."

"We're also cautious because it's a new program and we know it's going to morph over time. But I do believe that the numbers are substantial going into 2016 and 2017."

"I think this is completely different than ACOs. Number one, you have to engage the physicians. We have information by hospitals through CMS as to how our physicians treated different episodes of care. I think the bundled payment program would be the precursor, and frankly, I think, ultimately, may very well challenge ACOs in terms of what role they play in reducing costs and improving outcomes."

- William A. Sanger, CEO

We believe Fresenius Medical Care has been playing its cards closer to the vest than most

regarding the BPCI initiative and the company’s involvement, but it has disclosed that its

hospitalist business, Sound Inpatient Physicians and Cogent will be participating in the

program in 2015. While FMS has selected its convener and has a plan in place, for now

management did not disclose any further details and mentioned that the program is already

very competitive. The company did discuss that it was expecting the program to start

January 1, 2015 but that CMS delayed the start until the second quarter. We examined the

CMS database and found 262 locations registered under Sound Inpatient Physicians,

Cogent, or either of their corporate addresses. There were around 12,960 episodes all in

Phase 1 with either 2% or 3% discounts and FMS appears to be using a number of

conveners including Liberty, NaviHealth, Remedy BPCI Partners, and Medsolutions Inc.


"We know who the convener is going to be, we know what we're going to do. But I think I'm just going to let it stay at that. As you could imagine, this is pretty competitive."

- Rice Powell, CEO

"Our preparations began in 2014, expecting the program to begin January 1, 2015; CMS has delayed the start of the program until the second quarter."

- Mike Brosnan, CFO

AMED participated as a convener under Model 3 throughout 2014 mostly through two sites

and ended up terminating at the end of the year. After the company looked at its ongoing

risk responsibility under its 90 day episodes of care, it determined that the risk profile was

not favorable enough to continue involvement. Vice Chairman Ronnie LaBorde mentioned

Management

Commentary on

BCPI

Fresenius Medical

Care (FMS)

Management

Commentary on

BCPI

Amedisys (AMED)

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INDUSTRY NOTE

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on the fourth quarter 2014 earnings call that inside the bundled payments, around two-

thirds was accounted for by other providers while the remaining one-third was attributable

to home health. While the company was able to make some improvements in its focus area

by trying to reduce readmission costs, the bundle profile was ultimately too risky. Amedisys

recently indicated it is continuing participation in the BPCI program through Model 2

based on a single relationship where AMED is not the convener.

We examined Medicare’s BPCI database for instances where Amedisys was mentioned and

found 83 locations associated with the company’s name or listed as doing business as

Amedisys and there were a total of 1,152 episodes with Remedy BPCI Partners listed as the

convener for Amedisys. All episodes are currently listed as Model 3 in Phase 1 with a

discount rate of 3% and an end date of 9/30/2015. Separately, we found 672 episodes where

Amedisys is listed as a Model 2 convener for a number of organizations such as Clark

Memorial Hospital, Baton Rouge General, and the Georgetown Memorial Hospital. While

this finding is somewhat inconsistent with company comments, we assume the episodes in

the CMS file are either related to old programs or new under-takings.


"Obviously it's very early stage from a CMS perspective and certainly from a provider perspective of how do you dip your toe in the water and begin to take on risk and participate in different reimbursement alternatives.”

On the Model 3 work in 2014: "And while we made some progress, we just weren't moving that needle far enough. We had some positive clinical care redesign, we worked hard, but it was more of a financial risk profile that we decided not to go forward with."

- Ronnie LaBorde, Vice Chairman

LHCG is participating in two separate Model 2 projects, is using NaviHealth as its

convener, and management described the savings opportunity as a split between all three

parties (the third being the hospital) but could not disclose the percentage breakout for each

participant. The company talked about two hospital partners and we found two locations

associated with Ochsner Health and one under West Tennessee Health System for a total of

201 episodes all in Phase 1 with discount rates between 2-3%. Separately, LHCG is also

involved in 4 different ACOs and recently discussed that the main benefit for those

programs is currently volume enhancements coming from being the preferred provider and

that the same type of volume benefits are expected to exist with the BPCI arrangements.


"Right now, we're not taking a lot of – we're not taking any risk really in ACO models. It's just really a volume play. By becoming the preferred provider, we increased our volume at Medicare or higher rates."

"And the same applies to the two bundled payment arrangements. I mean those we have a defined stake in the upside and the same thing on the volume play. So all of the volume comes to us, because we're in the bundle. Our interim reimbursement is at Medicare levels. And the savings we generate are from the patients moving downstream to home care, out of more costly inpatient settings in those bundle arrangements. And then we are – we have the opportunity to share on the backside in those savings we generate."

- Keith G. Myers, CEO

Management

Commentary on

BCPI

LHC Group (LHCG)

Management

Commentary on

BCPI

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INDUSTRY NOTE

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We analyzed CMS’ list of BPCI conveners by organization/locations and found Remedy

BPCI Partners to be the largest convener by a wide margin (not shown in the bar chart

below due to size differential. Below we highlight a few of the key conveners for companies

in our coverage universe.

Key Convening Organizations

Exhibit 6

T O P 1 5 C O N V E N E R S H A R E B Y P A R T I C I P A T I N G L O C A T I O N S


Exhibit 7

T O P C O N V E N E R S B Y N U M B E R O F P A R T I C I P A T I N G O R G A N I Z A T I O N L O C A T I O N S

* Remedy BPCI Partners has 3,520 participating locations and was excluded from this chart due to the scale * Organizations may have same name but different location or BPCI Model

Source: Piper Jaffray and CMS

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INDUSTRY NOTE

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Remedy BPCI Partners is the largest awardee convener and has operations in all 50 states

partnering directly with both physicians and participating organizations such as episode

initiators. SEC filings show that in July 2014, Remedy filed for $35.9M in equity funding

from unspecified investors. In addition to data management and analytics, Remedy

provides a wide range of services that also include risk pooling and re-insurance, custom

contracting, and CMS compliance.

The company coordinates care data from the hospital, health plan, and other providers and

through its Episode Connect software. Remedy has a full time patient navigator (nurse) at

every one of its partner hospitals that provides a point of continuity throughout the

hospitalization and for 90 days after discharge for each patient. From start to finish, the

navigator helps to manage the care process which includes the patient receiving a tablet

after discharge that helps them track their medicines and care plan, receive alerts, and

contact the physician team. Additionally, all of the patients’ previous diagnostic test results

are available on the tablet in order to prevent any duplication during follow-up doctor

visits. Remedy has a full, 24/7 call center and also connects with all of the physicians and

additional providers to ensure that every party involved in the episode has current

information on the patient’s health status.

With approximately 228 organization locations, NaviHealth is the fourth largest convener

and a partner to many of the companies under our coverage. The company is owned by

private equity firm Welsh Carson Anderson & Stowe and initially announced that it would

be participating in Model 2 in early 2013 with five different organizations. Broadly,

NaviHealth focuses on post-acute care (PAC) and provides BPCI partners with services

ranging from initial analysis of potential opportunities to selection of the best DRGs and

CMS contract negotiation.

The Camden Group, a subsidiary of DaVita HealthCare Partners, is a national healthcare

consulting firm that offers a wide range of services such as business planning, financial

advisory and transactions, hospital operations, advisory services for physician groups, and

accountable care consulting. The company assists more than 2,000 healthcare organizations

nationwide and in the CMS BPCI database is listed as DNH Medical Management Inc.

doing business as (DBA) The Camden Group with 50 episodes all in Phase 1. The Camden

Group is acting as a subsidiary for a number of groups including multiple Summa hospitals

in Ohio and the Glendale Memorial Hospital and Health Center. The company has

bundled payment expertise with not only Medicare, but also with commercial payors and

markets a 100 percent approval rate for BPCI applications to the Center for Medicare and

Medicaid Innovation (CMMI).

Remedy BPCI

Partners

NaviHealth

The Camden Group

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INDUSTRY NOTE

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Payment bundling has been gaining momentum in recent years as more providers join

Medicaid trials and a number of commercial payors also implement various programs with

the goal of lowering overall costs while improving the quality of care.

At the heart of the payment bundling push is the Bundled Payments for Care Improvement

(BPCI) initiative which was developed by the Centers for Medicare and Medicaid

Innovation (CMMI) in 2012 through the Affordable Care Act. The initial participating

providers were announced in 2013 and since then the program has expanded significantly.

BPCI includes four different bundled payment models (exhibit below) with one of the key

differentiators between the models being whether the payments are prospective or

retrospective.

A prospective payment is essentially a single payment for a bundle of services to be

provided under an episode of care. The hospital will split the payment between the various

internal providers who submit “no-pay” claims, and if the services are provided at a cost

less than the payment, then there is a benefit for the provider. The retrospective option

allows providers to continue billing under the fee for service (FFS) model while the care is

provided to the patient. Afterwards, the payments are reconciled with the bundle price to

determine whether the provider owes Medicare a payment or vice-versa.

For models 2-4, participating providers move through the program in two phases. Phase 1 is

the period where participants get ready to take on risk, receiving monthly beneficiary-level

claims data, as well as baseline pricing information which helps to identify potential

opportunities. Before moving to Phase 2, CMS will conduct a comprehensive review and

extend an agreement to the awardee which allows them to take on risk and continue to

receive the monthly claims data. Awardees can also then use certain fraud and abuse and

payment policy waivers.

BPCI Overview

Exhibit 8

B P C I M O D E L S M A R C

Source: The Centers for Medicare and Medicaid Services (CMS)

Model 1 Model 2 Model 3 Model 4

Episode All acute patients, all DRGsSelected DRGs, hospital plus post-

acute period

Selected DRGs, post-acute period

only

Selected DRGs, hospital plus

readmissions

Services included in

the bundle

All Part A services paid as

part of the MS-DRG payment

All non-hospice Part A and B

services during the initial inpatient

stay, post-acute period and

readmissions. Up to 48 episodes.


services during the post-acute

period and readmissions. Up to 48

episodes.


services (including the hospital and

physician) during initial inpatient

stay and readmissions

Payment Retrospective Retrospective Retrospective Prospective

-364 participants -240 participants -7 participantsPhase 1 participants -47 conveners -33 conveners -1 convener

-2,038 providers -4,646 providers -8 providers

-60 awardees -20 awardees -8 awardees

Phase 2 participants -1 convener -18 conveners -8 conveners -1 convener

-12 providers -142 providers -81 providers -8 providers

Total providers 12 2,180 4,727 17

Episode length 30, 60, or 90 days

Services must begin within 30

days of discharge and end 30, 60,

or 90 days after the initiation of the

episode

Covers inpatient stay and related

readmissions for 30 days after the

hospital discharge

-acute care hospitals (ACH) -skilled nursing facilities (SNFs) -acute care hospitals (ACH) paid

-physician group practices (PGPs) -long-term care hospitals (LTCHs) under the Inpatient Prospective

Episode initiators -inpatient rehab facilities (IRFs) Payment System (IPPS)

-home health agencies (HHAs)

-physician group practices (PGPs)

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INDUSTRY NOTE

Apr i l 1 , 20 15

There are a few key players in the BPCI program that take on different roles and include

Episode Initiators (EIs), Conveners, and Awardees. CMS describes awardees as Medicare

providers that bear risk for only episodes they initiate. Awardee Conveners are those

participants that apply with partners and bear the risk for all of the partnered episode

initiators. On the non-risk bearing side, Facilitator Conveners do not assume any risk

themselves, but help to facilitate risk taking by other participants. Episode initiators are the

participants beginning the actual care of the patient and for Model 2 would include acute

care hospitals (ACH) and physician group practices (PGPs). For model 3, initiators would

include skilled nursing facilities (SNFs), long-term care hospitals (LTCHs), inpatient

rehabilitation facilities (IRFs), home health agencies (HHAs), & physician group practices.

Organizations have many decisions to make with respect to evaluation of participation in

the initiative. Not only do the costs for the various treatments vary widely from episode to

episode, but the variance of cost is much higher for some episodes vs. others which creates

both an opportunity and a risk. Additionally, the source of the variation is key depending

on the initiator and providers involved. For example, the majority of cost variation in some

episodes might be concentrated on the post-acute care provided whereas others could be

more weighted towards the physician or readmission. The projected benefits have to

balance attractively against the risks within chosen episodes for a given organization to

consider profitable involvement.

While Model 1 has a larger range of available episodes at 181, Models 2 through 4 are

limited to a total of 48 episodes that include multiple DRGs (Diagnosis Related Groups).

Orthopedics and cardiac are two key groupings in the episode list, but there is also a fairly

wide range of other conditions such as diabetes, renal failure, and bowel procedures.

Exhibit 9

B P C I P A R T I C I P A N T R O L E S

Source: Centers for Medicare and Medicaid Services, December 2014

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INDUSTRY NOTE

Apr i l 1 , 20 15

For example, congestive heart failure includes three different DRGs with varying degrees of

complications or comorbidity. In total, there are 179 DRGs.

Exhibit 10

4 8 E L I G I B L E C L I N I C A L E P I S O D E S F O R B P C I M O D E L S 2 - 4

Source: Centers for Medicare and Medicaid Services

Exhibit 11

C O N G E S T I V E H E A R T F A I L U R E D R G S


291 Heart failure and shock with major complications or comorbidities

Congestive heart failure 292 Heart failure and shock with cardiac catheterization

293 Heart failure and shock without complications or comorbidities and

major complications or comorbidities

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INDUSTRY NOTE

Apr i l 1 , 20 15

Below is the 2015 Phase 2 timeline. Throughout the year, there are key months where

participants can transition episodes from the Phase 1 risk preparation stage to Phase 2.

Phase 1 concludes in October.

Last July, Milliman released a briefing paper (here) examining the breakdown for overall

costs as well as specific post-acute care (PAC) benchmarks using 2012 Medicare data. The

179 DRGs included in the BPCI program are fairly expansive as they cover the majority of

Medicare expenses that come from all inpatient DRGs (40% of total Medicare costs vs.

57% of total costs, respectively). Based on Medicare Parts A and B costs for all 179 DRGs,

hospital inpatient admissions make up for 21% of Medicare spending while days 1-90 PAC

comprises 19% of spending for a total of 40%. The study found that on average, 48% of

the bundled claims cost is contributed by the 90-day PAC period vs. 52% from the inpatient

stay. While the percentage of total Medicare costs is fairly equal for both the inpatient and

the post-acute care DRGs, the post-acute care period represents a more significant part of the BPCI cost savings opportunity because of the potential to reduce big expense drivers such as readmissions. The inpatient period is somewhat more restricted on cost savings

because the admission is mandatory and a large proportion of the expenses are unavoidable

and comprised of components such as facility fees.

Exhibit 12

P H A S E 2 B P C I P A R T I C I P A T I O N T I M E L I N E

Source: Centers for Medicare and Medicaid Services December 2014

The Post-Acute Care

Opportunity

Exhibit 13

% C O N T R I B U T I O N T O T O T A L A N N U A L M E D I C A R E P A R T A & B C O S T S

PAC costs do not exclude BPCI “unrelated readmissions.” Source: Milliman analysis of the 2012 Medicare 5% Sample data

Source: Milliman, Inc., 2014, Fitch, Pyenson, Berrios, Engel

Hospital

Inpatient 1-30 day PAC 1-60 day PAC 1-90 day PAC

Total Inpatient

and 90-day PAC

BPCI 179 DRGs 21% 10% 16% 19% 40%

All Inpatient DRGs 32% 13% 20% 25% 57%

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http://www.milliman.com/uploadedFiles/insight/2014/evaluating-opportunity.pdf

INDUSTRY NOTE

Apr i l 1 , 20 15

As can be seen in exhibit 8, Models 2 and 3 have experienced a much higher level of interest

compared to Models 1 and 4. Part of this may be due to the retrospective nature of the

payment scheme. Because providers can continue billing under the FFS model, this is less of

a change from the traditional FFS systems and makes it easier to participate. This past year,

the Advisory Board also pointed out that Model 2 has the benefit of being more expansive

with respect to post-discharge care and readmissions which introduces a much broader

continuum of care component and offers the chance for more cost savings.

Model 2 includes 48 episodes and a number of episode lengths spanning 30, 60 or 90 days.

The defining feature of Model 2 is that it covers both the acute inpatient hospital stay and

the post-acute care period. With Model 2, physician group practices and acute care

hospitals act as episode initiators and all of the services and items covered by Medicare

that are provided during the hospital stay and post-discharge period are included in the

episode. In order to participate in the program, the awardees must give Medicare a discount

based on the episodes’ historical cost. This is used to come up with a predetermined target

price which is compared to the actual cost of care after the episode has finished. The

difference between the target price and actual expenses are either received by the awardee if

they beat the benchmark or paid to Medicare if the opposite occurs. One of the recent

changes to the Model 2 program limits for payments and repayments as follows:

“+/- 20% of the sum of the target price and Medicare discount, aggregated across

all episodes of care that initiate for the awardee in each performance quarter.”

Source: CMS Innovation Center Report to Congress

Potentially in a sign of the early nature of the program, Medicare also waived the

requirement to repay any negative amounts at the episode initiator level for 4Q 2013 and

every quarter in 2014. Below is an example timeline for a 30 day Model 2 episode that

begins with an initial hospitalization, includes a 2nd admittance after a complication, and

finishes with the retrospective claim reconciliation versus the target price.

Models 2 and 3 Overview

Model 2: Acute +

Post-Acute

Exhibit 14

B P C I M O D E L 2 T I M E L IN E E X A M P L E

Source: Centers for Medicare and Medicaid Services, March 2014

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INDUSTRY NOTE

Apr i l 1 , 20 15

As can be seen by the maps below, Model 2 facilities have expanded significantly over the

past year as there are now 2,038 Phase 1 providers and 142 Phase 2 providers.

Model 3 episodes are focused solely on the post-acute care phase and can begin within 30

days of a patient’s discharge following a period of inpatient hospitalization. Here, the

initiators do not include acute care hospitals, but rather facilities such as, long-term acute

care hospitals, skilled nursing facilities, inpatient rehab facilities, and home health agencies,

as well as physician group practices. Similar to Model 2, the payment method is

retrospective and all of the Medicare eligible FFS expenses are compared to the target price

after the episode is finished to determine the potential gain-sharing. Model 3 facilities have

also expanded significantly over the past year as there are now 4,646 Phase 1 providers and

81 Phase 2 providers.

Exhibit 15

M O D E L 2 M A R C H 2 0 1 4 F A C I L I T I E S M A R C H 2 0 1 5 F A C I L I T I E S M A R C


Model 3: Post-Acute

Exhibit 16

M O D E L 3 M A R C H 2 0 1 4 F A C I L I T I E S M A R C H 2 0 1 5 F A C I L I T I E S M A R C


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A p r i l 1 , 2 0 1 5

IMPORTANT RESEARCH DISCLOSURES

Distribution of Ratings/IB Services

Piper Jaffray

IB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY [OW] 372 60.10 104 27.96

HOLD [N] 232 37.48 17 7.33

SELL [UW] 15 2.42 0 0.00

Note: Distribution of Ratings/IB Services shows the number of companies currently in each rating category from which Piper Jaffray and its affiliatesreceived compensation for investment banking services within the past 12 months. FINRA rules require disclosure of which ratings most closelycorrespond with "buy," "hold," and "sell" recommendations. Piper Jaffray ratings are not the equivalent of buy, hold or sell, but instead representrecommended relative weightings. Nevertheless, Overweight corresponds most closely with buy, Neutral with hold and Underweight with sell. SeeStock Rating definitions below.

Analyst Certification — Kevin K. Ellich, Sr Research Analyst

Analyst Certification — Cairn K. Clark, Research AnalystThe views expressed in this report accurately reflect my personal views about the subject company and the subject security. In addition, no part ofmy compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report.

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A p r i l 1 , 2 0 1 5

Piper Jaffray research analysts receive compensation that is based, in part, on overall firm revenues, which include investment banking revenues.

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