HCE College Bowl 2013

Aaron MargulisJesse LeviAndrew Meehan

HOSPITALSTATUS TURNAROUND

FINANCIAL VIABILITY.STAND-ALONE HOSPITALNo Economies of ScaleNo Leverage with Payers & SuppliersNo Physician Alignment PlatformNo deployed EMR

LABOR SHORTAGEAlameda County is a designated RN Shortage Area (Source: OSHPD)Difficulty in recruiting physicians

OPERATIONAL INEFFICIENCIESHistorically High ALOSICU ALOS continues to be extremely high

CHALLENGES TO

LIQUIDITY & LONG-TERM DEBT LOADLiquidity: 1.8 Days Cash on Hand (FY2011)High Debt Burden (negative debt service ratio; FY2011)

INCREASING COSTSWages & Salaries up by 61% (2007-2011) MD Professional Fees up by 75% (2007-2011)Supplies up by 24% (2007-2011)

UNFAVORABLE PAYER MIX/ REIMBURSEMENT LEVELSHigh Med-Cal & Uninsured PopulationBelow Market Managed Care Reimbursement

UNCERTAINTIES & POOR OUTLOOK WITH RESPECT TO ACA Expansion of Avoidable Readmission Penalties through 2014Decreased CMS DSH Payments in 2014Does not Address 124,000 Undocumented Aliens Residing in Alameda County

THE

PLAN3 phases

FROM RED TO BLACK

PHASE 1

Restructure long-term debt

Unlock liquidity from fixed assets

Seek new capital partners

Reevaluate and realign capital expenditures

BALANCE SHEET REHAB

PHASE 2

Position Hospital for acquisition, affiliation or merger that would allow for infusion of capital for:

IT infrastructure

Physician Alignment Vehicle

PHASE 3

PARTNERSHIP

Operations Redesign

Strategic Cost Management

Clinical Transformation

Payer Contract Renegotiation

PHASE 1

FROM RED TO BLACK

Net Savings: $2,243,000 Net Savings: $300,000

Strategic Cost Management

WAGES & BENEFITS MD PROF FEES SUPPLY CHAIN

» Wages have increased by 61% in the last five years (2006-11)

» Benefits are at 22% (FY 2011)» Decreasing Wages by 1.25%

would save $993,000 annually» Bringing Benefits down to 20%

would save $1,250,000

» Constitute IM/OB Hospitalist and RAPE specialty subsidies, medical directorships and ED on-call pay

» Grown by 75% over five years to nearly $6 million dollars (2007-2011)

» Cut 5% from Management Groups in exchange for longer contract periods and place more dollars in a P4P bucket. Cut 2.5% from individual providers

» Supply costs have increased by 24% over last five years (2007-2011) to over $16 million per year

» Pursue a strategy of product and vendor standardization that can add more leverage to lower costs

» Implement caps for high-dollar items» Develop a formal process to justify

high-cost purchases especially in the presence of lower cost alternatives

Net Savings: $560,000

CLINICAL TRANSFORMATION

Managing Clinical UtilizationIntensivist Program» ICU LOS was 17.3 days in 2012» Our Goal: cut LOS to 4 days» Use of evidence-based guidelines

per SCCM standards» Multidisciplinary team approach» 12-hour in-house coverage» Net savings of $9.8 million

Managing Clinical VariationSuper Committee» Medical Staff Committee» Expedite approval process for

evidence-based protocols and order sets

» Monitoring adherence to evidence-based care for sepsis, AMI, CHF and PNA

» Refer fall-outs for peer review

MEDICARE MANAGED CARE REIMBURSEMENTSRH has generated comparable reimbursement rates from Medicare Managed Care plans relative to other hospitals in the same market.

2007 2008 2009 2010 2011 $-

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

EdenWashingtonAlta BatesSt Rose

Medicare35%

Medicare MC4%

Medi-Cal25%

Medi-Cal MC14%

Third Party1%

Third Party MC13%

Indigent6%

Other Payers2%

Source: OSHPD Annual Financial Disclosure ReportNet Inpatient Revenues per DischargeSource: OSHPD Annual Financial Disclosure Report

SRH Payer Mix | Inpatient Discharges, 2011

THIRD PARTY MANAGED CARE REIMBURSEMENTSRH has generated highly unfavorable reimbursement rates from Third Party Managed Care plans relative to other hospitals in the same market.

Medicare35%

Medicare MC4%

Medi-Cal25%

Medi-Cal MC14%

Third Party1%

Third Party MC13%

Indigent6%

Other Payers2%

Source: OSHPD Annual Financial Disclosure ReportNet Inpatient Revenues per DischargeSource: OSHPD Annual Financial Disclosure Report

SRH Payer Mix | Inpatient Discharges, 2011

2007 2008 2009 2010 2011 $-

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

EdenWashingtonAlta BatesSt Rose

PAYER CONTRACT RENEGOTIATION

Obtain higher reimbursement rates from third party managed care payers» Value Proposition: lower cost structure,

quality care, payer will have to pay higher costs if SRH closes

» Seeking 20% increase in rates, generating $2 million in additional revenue

Court health plans to obtain Medicare Advantage contracts to increase volume at favorable rates, once operational efficiencies have been realized and demonstrated

NET IMPACT TO SRH: $14,903,000

PHASE ONE FINANCIAL IMPACT

Strategic Intervention Financial Impact

Wages and Benefits $2,243,000

MD Professional Fees $ 300,000

Supply Chain $ 560,000

Intensivist Program $9,800,000

Payer Contract Renegotiation $2,000,000

BALANCE SHEET REHABILITATIONRestructure Long-term Debt

Unlock Liquidity in Existing Assets

Seek New Capital Partners

Reevaluate and Realign Capital Investments

STRATEGIC PARTNERSHIP

Consolidation in Regional Market» Partnership between UCSF and Children’s

Hospital Oakland» Potential acquisition of San Leandro Hospital

by Sutter Health Stand-alone hospitals cannot survive

under health reform Approach merger or acquisition

partners SRH offers a distinct value proposition

Source: California Public Policy Institute, 2011

IMPACT OF HEALTH REFORM

Most hospitals will benefit from the ACA» Expansion of Medi-Cal

Expectation that ACA will have negative effect on SRH» Revenues tied to clinical outcomes, quality of care

and cost efficiency» Expansion of CMS penalties for preventable

readmissions in 2014» Lack of physician alignment platform hinders

continuity of care» Expected decreases in DSH payments» Newly insured patients in our service area will likely

obtain plans with bronze rating or silver rating» Does not address 124,000 undocumented aliens

residing1 in Alameda County

CONCLUSION

LeadershipOperations

Balance Sheet Rehabilitation

Acquisition

THANK YOUHospital Turnaround