memorial hermann health system hermann health system ... • market share leader in houston ......

Memorial Hermann Health System 31st Annual J.P. Morgan Healthcare Conference

January 7, 2013

Daniel J. Wolterman President & CEO

Dennis L. Laraway Chief Financial Officer

System and Strategic Overview

Highlights

3

• Market Share Leader in Houston • Superior Regional Coverage • Operating Cash Flow Generation • Effective Cost Management – Best Practice • Improved Liquidity and Leverage Positions • Well Positioned for Accountable Care and Population

Management • Quality – Competitive Advantage for Memorial Hermann • National Recognition – Significant Accomplishments as a

Provider of Excellence

23%

19%

13% 9%

6%

6%

6%

4%

4% 3%

2% 2% 3%

The Market Leader

4

HCA

Inpatient Market Share 1st: Aggregate Market Share 1st: Burns 1st: Cardiology 1st: ENT 1st: General Medicine 1st: General Surgery 1st: Neurology 1st: Neurosurgery 1st: Ophthalmology 1st: Orthopedics 1st: Rehab 1st: Thoracic Surgery 1st: Urology 1st: Vascular 2nd: Gynecology 2nd: Obstetrics 2nd: Neonatology 2nd: Spine 3rd: Oncology

Market Share Ranking 171 Locations

$4.5B Total Assets $3.9B Net Operating Revenue

Over 20,000 Employees; 5,000 Medical Staff

Greater Houston MSA 6.14 million population, projected to 6.71 million (2016)

Memorial Hermann

Methodist St. Luke’s

Recent Accolades

5

15 Top Health Systems; Top 5 Large Health Systems

HealthGrades®

America’s 50 Best Hospitals (2010, 2011 & 2012)

Texas Health Care Quality Improvement Awards (9 Memorial Hermann Campuses)

Texas Hospital Association Bill Aston Quality Award

Healthcare’s “100 Most Wired” 7th consecutive year

Distinguished Hospital for Clinical Excellence

TIRR Memorial Hermann Ranked # 3 by U.S. News and World Report

Houston Business Journal (HBJ) No. 5 Best Places to Work

America’s #1 Quality Hospital in Overall Care 2 Consecutive Years

Industry Transformation

Current Model Fee-for-Service

Disparate Payments Illness & Cure

Volume Incentive Fragmentation

6

Fee For Service

Population Health

Fragmentation

Integration New Model Fixed Payment

Bundled Payment Population Health Value Incentive

Integration

New Vision Our Strategic Journey

7

Memorial Hermann will be the preeminent health system in the U.S. by advancing the health of those we serve through trusted partnerships with physicians, employees and others to deliver the best possible health solutions while relentlessly pursuing quality and value.

Advancing Health

8

Care Delivery: Indispensible market leader in health delivery

Texas Medical Center • Primary teaching hospital for The University of

Texas Medical School at Houston • Children’s Memorial Hermann Hospital • TIRR Memorial Hermann • Memorial Hermann Heart & Vascular Institute –

Texas Medical Center • Mischer Neuroscience Institute • MH Ironman Sports Medicine Institute • Memorial Hermann Clinical Innovation & Research

Center • Nation’s Busiest Level 1 Trauma Center with 7,000

cases/year and 3,500 Life Flight transports/year Ambulatory Portfolio

• Sports Medicine & Rehabilitation Centers: 30 • Ambulatory Surgery Centers: 18 • Diagnostic Laboratories: 21 • Imaging Centers: 24 • Breast Care Centers: 9 • 24 Hour Free Standing ER: 1 • Retirement/Nursing Center: 1 • Home Health Branches: 3 • Cancer Centers: 7

Community Hospital Portfolio • The Woodlands Hospital • Northwest Hospital • Southwest Hospital • Southeast Hospital

• Memorial City Medical Center • Sugar Land Hospital • Katy Hospital • Northeast Hospital

Advancing Health

9

Physicians: Pluralistic approach to physician alignment

Clinical Integration Principles • Create order sets, protocols, and

performance standards • Connect systems and share data • Report and manage quality outcomes

MHMD • 3,500 physicians members • 2,900 Clinically Integrated (C.I.) physicians • Unites private practice, academic faculty, and

employed physicians • Clinical Programs Committees linked to

System Quality Committee • Foundation for Memorial Hermann Accountable

Care Organization

Memorial Hermann Medical Group • 501(a) • 250 Employed Providers • Primary care and specialists

University of Texas Medical School, Houston • 1,066 Faculty Members • 24 Departments • 871 Residents and Fellows • 1,017 Medical Students • 1 Million Annual Clinical Encounters

http://www.utphysicians.org/

http://mhmedicalgroup.org/default.aspx

Advancing Health

10

Health Solutions: Value-added health plans & employer solutions

MHiE Facilitates access to and retrieval of clinical

data to provide safer, more timely, efficient, effective, patient-centered care by providing the capability to electronically share clinical information among disparate health care information systems in a useful manner.

MHealth • Self-insured / TPA Services • Fully-insured license • Employer-based contracting • Member Cost Share / Incentives to

encourage engagement in their health • Narrow Network of Highest Quality • Competitive Provider Contracts built

with Integral Pay for Performance structures

• Planning for Medicare Advantage. Notification of Intent submitted to CMS.

ACO • New subsidiary of MHHS • Formed to meet the intent

of both Commercial and Medicare ACO principles

• CMS Shared Savings Program – July 1, 2012

One Memorial Hermann

11

http://www.utphysicians.org/

http://mhmedicalgroup.org/default.aspx

One Memorial Hermann

12

Enterprise Data

Warehouse

Physician Office

Diagnostic

Hospital

Post Acute Home Health

Surgery Center

Imaging

Aligned Incentives & Benefit Structure

“Design & Optimize”

Population Analytics

“Measure & Score”

Individual Health Plan

“Personalize & Coordinate”

Operational & Clinical

Performance “Store & Report”

Information Technology Key To Advancing Health

CLAB

SI R

ate

per 1

K Li

ne D

ays

Board System Adult ICU CLABSIDo No Harm

Central Line Associated Blood Stream Infections

Source f ile date: 10/15/2012Generated: 10/15/2012 1:12:32 PM Reporting Months

produced by Sy stem Quality and Pat ient

UCL = 9.42

Mean = 5.53

LCL = 1.64

UCL = 5.79

Mean = 3.04

LCL = 0.29

UCL = 5.13

Mean = 2.52

UCL = 3.86

Mean = 2.12

LCL = 0.38

UCL = 2.55

Mean = 1.17

UCL = 2.97

Mean = 1.46

Qtr 2Qtr

3Qtr

4Qtr

1Qtr

2Qtr

3Qtr

4Qtr

1Qtr

2Qtr

3Qtr

4Qtr

1Qtr

2Qtr

3Qtr

4Qtr

1Qtr

2Qtr

3Qtr

4Qtr

1Qtr

2Qtr

3Qtr

4Qtr

1Qtr

2Qtr

3

2006 2007 2008 2009 2010 2011 2012

0

2

4

6

8

10

12

High Reliability Organization

13

Revenue & Quality

14

Information Technology and Quality Management programs on target to avoid CMS penalties, while maximizing reimbursement

1.0% 1.25% 1.5% 1.75% 2.0%1.0%

2.0%

3.0%3.0%

3.0%

1.0%1.0%

1.0%0.7%

1.4%

2.8%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2013 2014 2015 2016 2017VBP Readmissions Hosp. Acquired Conditions Meaningful Use of EHR

Hospital Objectives (Stage 1) MC TMC KY NE NW SE SW SL TWMeaningful Use Criteria Compliance

Legend: Meets criteria Requires attention

Stage I Readiness

Received $10.1M to date in Texas Medicaid funding

Received $12.9M in Medicare funding FY12

Meaningful Use Stage 2 requirements underway; targeting 2014 adoption

$54.6M expected over next 4 years from both Medicare and Medicaid

Meaningful Use Stage 1 & Stage 2 Attestation January 2012

Value Based Purchasing & Meaningful Use

Value Based Purchasing: Estimated $4.5M net gain over 5 years. HCAHPS greatest opportunity for improvement.

($3.3) ($4.1) ($5.0) ($5.8) ($6.6)

$3.7 $4.9

$5.9 $6.9

$7.9

$0.4 $0.8 $0.9 $1.1 $1.3 $2.3 $2.5 $3.1 $3.6 $4.1

($10)

($5)

$0

$5

$10

FY13 FY14 FY15 FY16 FY17

In M

illio

ns

Withheld Returned Net Gain Unearned

$6M $10M

$11.5M $17.5M

$27M

Accountable Care

• Clinically Integrated IPA • Pluralistic approach to physician / MHHS

alignment • Exclusive Contracting DOJ/FTC Protections

15

CMS Shared Savings • July 1, 2012 start • 22,000 attributed beneficiaries • Patient Centered Medical Home

(PCMH)

MHHS/MHMD Payor Contracting

Payor Comm. M/A Humana United Healthcare Blue Cross Aetna MHealth Notice

of Intent

PCMH 185

CI 2,900 ACO 2,700

MHMD 3,500 Gr Houston >11,000

Texas Medicaid

• Massive statewide restructuring of Medicaid through 1115 Waiver

• Year 2 of implementation • Memorial Hermann has reached agreement

with RHP3 anchor (Harris Health) • Supplemental Funding – expected to continue

at historical levels

16

Greater Houston Area and Market Position

Growth of Houston

18

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

1980 1990 2000 2010 *2012 *2017Source: Truven, formerly Thomson Reuters Medstat, 2011-2016 Note: Population number for 1980, 1990 and 2000 was based on Greater Houston MSA: Brazoria, Chambers, Fort Bend, Galveston, Harris, Liberty, Montgomery, Waller Expanded Greater Houston MSA includes: Austin, Brazoria, Chambers, Fort Bend, Galveston, Harris, Liberty, Montgomery, San Jacinto, Waller, Walker and Wharton

* The total population of the Expanded Greater Houston MSA is projected to reach 6.8 million by the year 2017. That represents growth of 568,846

people from 2012 (9.1% increase).

Population by Age

8.1%

2.5% 4.2%

25.7%

28.6%

3.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Children 0-17

Young Adults 18-34

Adults 35-54 Older Adults 55-64

Seniors 65-plus

Females 15-44

2012 2017 Growth Rate

Geographic Coverage

Approximately 82% of the Expanded Greater Houston MSA population lives within the primary service area of at least one Memorial Hermann campus.

19

Volume Forecast Summary

• Market Admissions projected to decrease 3% as a result of 9% population growth and 11% Use Rate decline

• MH Admissions projected to increase 3% through increasing market share, despite the Use Rate decline

20

Actual 2012 Projected 2017

% Change

Population 6,263,956 6,832,802 9%

Use Rates 87 77 -11%

Market Admissions 542,847 528,961 -3%

MH Market Share 22.9% 24.2% 6%

MH Admissions (Total) 129,469 133,511 3%

23.4%23.6%

22.9%

24.2%

22.0%

22.5%

23.0%

23.5%

24.0%

24.5%

2010 2011 2012 2017

Total Inpatient Market Share

Financial Performance

Memorial Hermann Health System

Memorial Hermann Foundation

Memorial Hermann Physician Network

(MHMD)

Health Professionals Insurance Company

(HePIC)

Memorial Hermann Medical Group MHealth, Inc.

Governance Transformation Financial Consolidation and Obligated Group

Corporate Members

MH Accountable Care Organization

Final Governance Structure (Effective January 1, 2013)

Part of the Obligated Group Legend:

MHealth Insurance Company

22

23

Patient Volumes

Growth/Volumes Managed Care Operating Income & Cash Flow Cost Control Balance Sheet Position Liquidity Leverage Q1 FY 2013

46,831 55,542

61,355 68,354

78,563

79,275

30,000

40,000

50,000

60,000

70,000

80,000

90,000

FY2007 FY2008 FY2009 FY2010 FY2011 FY2012

OP Surgery Cases

194,737 218,016

233,622

236,843

248,348

256,175

100,000

140,000

180,000

220,000

260,000

300,000

FY2007 FY2008 FY2009 FY2010 FY2011 FY2012

Adjusted Admissions

484,579 586,106

778,978 810,733

861,922 960,736

200,000

400,000

600,000

800,000

1,000,000

FY2007 FY2008 FY2009 FY2010 FY2011 FY2012

Diagnostic & Therapeutic Visits

133,846

140,919 138,351

135,099

135,347

134,064

108,348

112,793 109,077

107,403

108,712

108,436

80,000

90,000

100,000

110,000

120,000

130,000

140,000

150,000

FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Inpatient Admissions (excluding OB)

Inpatient Admissions

Outpatient Revenues

24

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2009 2010 2011 2012

64.6% 59.2% 57.0% 54.5% 52.3%

35.4% 40.8% 43.0% 45.5%

47.7%

OP Revenue % by Fiscal Year

IP % OP %


Ambulatory Care and Retail Operations Continue to Grow

25

Ambulatory Care / Retail Operations – Select Areas

OPID SM&R ASC Outpatient Imaging Sports Medicine & Ambulatory Surgery Division Rehabilitation Centers

OPID's ($000's) FY2010 FY2011 FY2012NOR 138,818$ 136,345$ 147,737$ Cash Flow Margin 32.1% 33.1% 38.6%D&T Visits 339,054 341,141 359,703 Sites 23 24 24

SM&R's ($000's) FY2010 FY2011 FY2012NOR 33,228$ 40,196$ 52,285$ Cash Flow Margin 26.7% 29.8% 34.8%D&T Visits 35,882 43,716 52,042 Sites 24 26 30

ASC's (JVIII & IV) ($000's) FY2010 FY2011 FY2012NOR 114,969$ 140,710$ 154,666$ Cash Flow Margin 29.5% 30.3% 32.0%OP Surgeries 32,397 41,444 44,493 Sites 11 15 18


Case Mix Index for all Hospitals

26

Tertiary/Quaternary Cases FY12 FY13 Ann'd

Transplants 70 125

Burn Center 412 500

Open Heart 1,050 1,150

Trauma - TMC 6,700 7,200


1.00

1.20

1.40

1.60

1.80

2008 2009 2010 2011 2012

Total CMI Medicare (only) CMI

1.66

1.971.951.94

1.95

1.851.79

1.871.87 1.851.82

1.86

1.95

1.63

1.631.631.601.62 1.63 1.64

1.68

1.63

1.60

1.62

1.20

1.40

1.60

1.80

2.00

2.20

Q409

Q110

Q210

Q310

Q410

Q111

Q211

Q311

Q411

Q112

Q212

Q312

TMC Median Teaching Hospital75th Percentile Teaching Hospital 25th Percentile Teaching Hospital

Benchmarked against Median Teaching Hospitals COTH Report – Memorial Hermann TMC

Payor Mix for all Hospitals


27

Payor Mix – 5 yr. Trend

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2008 2009 2010 2011 2012

Managed Care

Medicare

Medicaid

Self Pay

Other

19.9%

34.5% 13.2%

2.4%

19.1%

10.9%

Aetna

Blue Cross

Cigna

Humana

United

Other

21.0%

34.3% 10.4% 1.9%

20.2%

12.2% Aetna

Blue Cross

Cigna

Humana

United

Other

28

Managed Care Commercial Payor Mix


Managed Care Contracts % of Net Revenue FY 2011

FY 2011-$1.35B Net Revenue

Managed Care Contracts % of Net Revenue FY 2012

FY 2012-$1.47B Net Revenue

29

Strong Operating Performance Sustained Cash Flow Generation

• Fiscal Year 2012 operating income before extraordinary items of $171.3 million

• 12 consecutive years of solid operating performance with results at or above budget each year

29


0%

1%

2%

3%

4%

5%

6%

7%

0

20

40

60

80

100

120

140

160

180

2004 2005 2006 2007 2008 2009 2010 2011 2012

Operating Income

Operating Income Operating Margin

$ In Mil.

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

50

100

150

200

250

300

350

400

450

500

2004 2005 2006 2007 2008 2009 2010 2011 2012

Operating EBIDA

Operating EBIDA EBIDA Margin

$ In Mil.

Cost Control Labor and Supply Costs


30

Labor Costs as % NOR

Supply Costs as % NOR 20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

2008 2009 2010 2011 2012

42.0% 41.5% 41.0% 38.6%

36.5%

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

20.0%

2008 2009 2010 2011 2012

15.6% 15.2% 15.2% 14.5% 13.6%

VHA PharmaLYNX 2012 Review Rx Cost Index: Best in Class 10.5 Subscriber Avg. 16.4 Memorial Hermann 10.5

System-wide cost reduction initiative started in 2011,

targeting $161 million reduction over 24-months. Fully

implemented

$766.8

$866.2

$1,076.8

$1,323.0

$1,418.2

$0.0

$200.0

$400.0

$600.0

$800.0

$1,000.0

$1,200.0

$1,400.0

$1,600.0

2008 2009 2010 2011 2012

Cash and Investments

Balance Sheet Liquidity


$ in Mil.

31

105 109

129

151 148

0

20

40

60

80

100

120

140

160

2008 2009 2010 2011 2012

Days Cash

0%

20%

40%

60%

80%

100%

120%

140%

2008 2009 2010 2011 2012

45% 48% 61%

74% 80%

W/Cap Leases Excl Cap Leases

64%

74%

95%

120%

133%

Balance Sheet Leverage


32

Cash to Debt Debt to Capitalization

0%

10%

20%

30%

40%

50%

60%

2008 2009 2010 2011 2012

42% 44% 40%

36% 35%

Excl Cap Leases W/Cap Leases

51%

55%

52%

48% 47%

33

Volume Indicators FY2013 – 3 months ended September 30, 2012

Selected Statistics

Actual

P/Y

Percent Increase

(Decrease) Over P/Y

Inpatient Admissions 34,479 34,042 1.3%

Adjusted Admissions 66,853 64,455 3.7%

Deliveries 6,351 6,244 1.7%

ER Visits 117,136 107,800 8.7%

Outpatient Surgeries 20,230 19,507 3.7%

Diagnostic & Therapeutic Visits

253,980 230,768 10.1%

ALOS 5.38 5.36 0.4%

Case Mix Index 1.544 1.486 3.9%

Growth/Volumes Managed Care Operating Income & Cash Flow Cost Control Investment Income Balance Sheet Position Liquidity Leverage Q1 FY 2013

34

Operating Income and Cash Flow FY2013 – 3 months ended September 30, 2012

Growth/Volumes Managed Care Operating Income & Cash Flow Cost Control Investment Income Balance Sheet Position Liquidity Leverage Q1 FY 2013

$23.5

$44.6

$21.8

$98.4

$124.4

$98.7

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

$0.0

$20.0

$40.0

$60.0

$80.0

$100.0

$120.0

$140.0

Actual P/Y Bgt

Operating Income Operating Cash Flow

Operating Income Margin Operating Cash Flow Margin

Treasury Update

36

Underlying Debt Mix Net Interest Rate Exposure Credit Provider Rollover Exposure Mode Par Amount Percent Mode Par Amount Percent Mode Par Amount Renewal Fixed Rate $ 408,335,000 40.4% Fixed Rate $ 408,335,000 40.4% JP Morgan Chase LOC $ 103,200,000 7/8/15 Variable Variable Rate 2,900,000 0.3% Northern Trust LOC 30,000,000 5/25/15 Putable Variable Rate (VRDB's) 254,600,000 25.2% Synthetic Fixed 598,900,000 59.3% Wells Fargo Non-Putable Variable Rate (FRN's) 347,200,000 34.4% 2008A-2 FRN 77,000,000 9/1/16

Total $ 1,010,135,000 100.0% Total $ 1,010,135,000 100.0% LOC 121,400,000 11/4/14 RBC 2010B FRN 162,400,000 1/1/16 2008A-1 FRN 107,800,000 9/1/16 Total $ 601,800,000

Underlying Interest Rate Exposure Fixed/Variable Debt Mix (After Swaps) Credit Provider Exposure

Fixed Rate, 40.4%

Put Variable

Rate (FRN's), 34.4%

Fixed Rat 40.4%

JP Morgan

17.1%

44.9%

Current Debt Profile

Synthetic Fixed, 59.2%

Fixed Rate, 40.4%

Variable Rate, 0.3%

Fixed Rate, 40.4%

Non-Putable Variable

Rate (FRN's), 34.4%

Putable Variable

Rate (VRDB's)

25.2% RBC FRN, 44.9%

JPMorgan Chase LOC,

17.1% Northern

Trust LOC, 5.0%

Wells Fargo FRN, 12.8%

Wells Fargo LOC, 20.2%

*Does not include capital lease obligations

37

$0.0

$200.0

$400.0

$600.0

$800.0

$1,000.0

$1,200.0

$1,400.0

$1,600.0

FY 2010 FY 2011 FY 2012 YTD 9/30/12

International

US Equities

Money Mkts

Fixed

Short Term

4.9%* 3.0%* 2.4%*

Operating Account (in millions)

Investment Program Unrestricted Investments

5.5%*

* Percentages are Total Portfolio Returns

Asset-Liability Modeling (“Capital Deficit”)

Balance sheet decomposition and actions currently under consideration

Capital and operating assets

Net Assets “Equity”

Cash and investments

“Capital deficit”

Total assets

Investments

Debt and Capitalized Leases

-5.0 -2.5 0.0 2.5 5.0 7.5 10.0

Return (% of Investments)

“Expected” 3.2%

+1σ 6.6%

-1σ (0.1%)

-2σ (3.5%)

+2σ 9.9%

(%)

-5.0 -2.5 0.0 2.5 5.0 7.5 10.0

Cost (% of Debt)

(%)

“Expected” 5.4%

+1σ 5.6%

-1σ 5.3% -2σ

5.2% +2σ 5.7%

38

Investment Considerations • Current Investment Policy Statement in

process of review by management and Investment Consultant, Towers Watson

• Investment teams are beginning to run analyses to evaluate potential asset allocations that would target alternate expected returns

• Evaluate higher expected return allocations while keeping expected volatility as close to current levels as possible

Debt Considerations • Realize present value savings on the “in

the money” fixed rate refundings • Rebalance risk profile (bank, put, variable,

fixed rate, and swap exposure) • Reduce weighted average cost of capital • Increase floating interest rate exposure • Evaluate self liquidity VRDB structure to

further reduce bank exposure and support costs

Unhedged Floating

0%

Natural Fixed 24%

Synthetic Fixed 35%

Cap. Leases (Fixed)

41%

US Cash, 52%

Int'l Equity, 3%

US Large Cap, 9%

US Small-Mid Cap,

2%

US Aggregate

Bonds, 34%

Net capital deficit = $48.5MM; 95% worst deficit = $119.5MM

Conclusion

Take away points

40

• Market Share Leader in Houston • Superior Regional Coverage • Operating Cash Flow Generation • Effective Cost Management – Best Practice • Improved Liquidity and Leverage Position • Well Positioned for Accountable Care and Population

Management • Quality – Competitive Advantage for Memorial Hermann • National Recognition – Significant Accomplishments as a

Provider of Excellence

memorial hermann health system hermann health system ... • market share leader in houston ......

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