The shifting healthcare system realities after reform

Welcome ToThe Shifting Halthcare System –g y

Realities After Reform

Wednesday, June 2, 2010Webinar

Please consult the last page of this report for all disclosures.William Blair & Company, L.L.C. has received compensation for investment banking services from the company within the past 12 months, or expects to receive or intends to seek compensationfor investment banking services in the next 3 months.This information has been prepared solely for informational purposes and is not intended to provide or should not be relied upon for accounting, legal, tax or investment advice. Please consult with your tax and/or legal advisor with regard to your individual circumstances. The factual statements herein have been taken from sources believed to be reliable, but such statements are

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Featuring

Ryan DanielsPrincipal, CFAHealthcare Services Analyst

Ben AndrewPrincipalGroup Head – Healthcare Sector

William Blair & CompanyWilliam Blair & Company

Health Care Equity Research Group2

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Contents

Healthcare Reform: Timeline of Key Events & Next Steps


Implications for Healthcare as an Industry and an Investmentp y

Q&A Session


Healthcare Reform: Timeline of Key Events y& Next Steps



November 4, 2008

2008 20102009

,

Barack Obama elected 44th President of the

United States of America



June 5, 2009

2008 2009 2010

Senator Ted Kennedy Issues Bill

• Access to healthcare with no annual/lifetime limits

G t d C• Guaranteed Coverage

• Requires individual and employer contributions

• Public Insurance Option



2008 20102009

July 14, 2009y

House Presents “America’s Affordable Health Choices Act”

• Includes Public Plan Option

E ti t 96% C f U S id t• Estimates 96% Coverage of U.S. residents

• New surtaxes to pay for subsidies

• Requirement to accept all applicants



2008 20102009

July 22, 2009y

President Obama’s Primetime News Conference

• Sensing growing public skepticism over his healthcare reform plans; President Obama hosts a primetime address on the need for

h lth f t th Whit Hhealthcare reform at the White House



2008 20102009

August 2009 – Summer Recessg

Town-Hall Hostilities Arise

• Congressmen and Congresswomen from across the United States face skeptical crowds at local town-hall meetings on healthcare

• Public opinion of healthcare reform begins to drop markedly



2008 20102009

September 9, 2009p

President Obama’s Address to Congress

• In a widely-praised speech, President Obama works to regain momentum for the Democratic Healthcare Reform Agenda

• In discussing the need for reform, comments: “Put simply, our health care problem is our deficit problem. Nothing else even comes

close. Nothing else.”



2008 20102009

September 16, 2009p

Senate Finance Committee Releases Reform Proposal

• 223-page proposal outlining key Senate objectives for healthcare reform

• Soon thereafter, Senate Finance Committee rejects the Public Plan Option



2008 20102009

October 29, 2009

House Bill Released

• House leaders unveil a 1,990-page Healthcare Reform Bill

C t ti t d t $1 05 t illi 10• Cost estimated at $1.05 trillion over 10 years



2008 20102009

November 7, 2009

House Passes Healthcare Reform Bill



2008 20102009

November 18, 2009

Senate Releases +2,000-page Reform Bill

• Initial cost estimated at $848 billion over 10 years

E ti t d f 94% f th l ti• Estimated coverage for 94% of the population



2008 20102009

December 24, 2009

The Night Before Christmas…Senate Passes Reform Bill

• The Senate votes 60-39, along party lines, to pass its version of healthcare reform

• Recess begins



2008 20102009

January 19, 2010y

Scott Brown wins Massachusetts Senate Seat

• In a remarkable turn of events, Scott Brown wins the Special Election to Fill Senator Ted Kennedy’s

M h tt S t tMassachusetts Senate seat

• Importantly, Senators no longer have the 60 votes need to end filibuster debate

• Many pundits declare healthcare reform dead


• Many pundits declare healthcare reform dead


2008 20102009

February 13, 2010y

WellPoint Makes Headlines / Healthcare Reform Becomes “Health Insurance Reform”

• Anthem Blue Cross announces a 25% increase in i di id l i li iindividual insurance policies

• Obama administration uses Anthem news as a lightening rod for healthcare reform debate

• CEO Angela Braly soon thereafter called to testify in front


• CEO Angela Braly soon thereafter called to testify in front of Congress


2008 20102009

February 25, 2010y

Obama Hosts Healthcare Summit

• President Obama hosts a bipartisan summit at the Blair House

• By the end of the session, it is evident that bipartisan reform efforts are hopeless



2008 20102009

March 15, 2010

Obama Rolls up His Sleeves and Hits the Road

• In a final effort to push healthcare reform, President Obama travels to Ohio to rally support

• Later in the week, he cancels his trip to the Pacific to help push forward his key domestic agenda item



2008 20102009

March 21, 2010

History is Made

• After an executive order to eliminate abortion funding, healthcare reform is passed in the House (i.e., approval of

th S t Bill)the Senate Bill)



2008 20102009

March 23, 2010

The Patient Protection and Affordable Care Act is Signed into Law by President Obama



2010 Key Initiatives

Insurance companies barred from denying coverage to anyone with pre-existing conditions

Subsidies for small business to provide coverage begins (35% tax credit)

Children allowed to stay on parent’s insurance until age 26Children allowed to stay on parent s insurance until age 26

2010 2012 - 20182011




Plans must offer preventive services with no copayments

Long-term care premiums start being collected

Drug discounts beginDrug discounts begin

Medicare payroll tax increases from 1.45% to 2.35% for those making over $200,000 ($250,000 for joint filers)

2010 2012 - 20182011




Exchanges created


Citizens must have health insurance or pay fine ($95 in 2014)

Employers with 50 or more employees must provide coverage or pay a $3,000 per employee feey

N/A Medicaid expansion to 133% poverty level

Insurance industry pays annual fee of $8 Billion

2012 - 2018


Medicare pilots (bundled care) begin

Excise tax on devices (2 3%)


2015 -2017 Key Initiatives

Fines for lack of insurance coverage continue to increase each year

Excise tax on devices (2.3%)

Loss of tax deduction for subsidizing Part D

Hospital tax increase of 90 basis

40% excise tax on health plans valued at more than $10,200 (individual) or

$27,500 (family)


osp ta ta c ease o 90 bas spoints for those earning over

$200,000


The Patient Protection and Accountable Care Act (“PPACA”) will unquestionably expand insurance coverage; however, we believe it falls short in two other key areas:

1. Reducing Healthcare Costs. Healthcare costs are growing at rates approximately three times higher than GDP, making current trends completely unsustainable. In ourthree times higher than GDP, making current trends completely unsustainable. In our view, the Reform Bill does little to bend the long-term healthcare cost curve.

2. Improving Healthcare Quality. Despite spending more money on healthcare, per capita than any other industrialized nation our healthcare quality scores trail those ofcapita, than any other industrialized nation, our healthcare quality scores trail those of many developed nations on certain metrics. The U.S. also needs to reinvigorate the primary care physician (PCP) workforce to help drive more preventive care coordination. Again, the PPACA appears to fall short here.g pp

In our view, exorbitant cost increases remain the key issue facing the U.S. h l hhealthcare system.



Why Is the Cost of Healthcare the Biggest Remaining Issue?

Because, if nothing is done, healthcare will consume 50% of the U.S.’s GDP by 2082.

The Medicare Trust Fund will be bankrupt in less than 8 years (right as most of the Baby Boomers enter Medicare).

Publically held debt is $8 5 Trillion today (total debt is $13 0 T w/ $4 5 TPublically held debt is $8.5 Trillion today (total debt is $13.0 T w/ $4.5 T intragovernmental).

Present value of unfunded Medicare & Medicaid liabilities is about $50 Trillion.Percentage of U.S. GDP Consumed By Healthcare Expenditures

5 0

3 5

4 0

4 5

5 0

2 0

2 5

3 0

Al l Ot h er H eal t h Car e

0

5

1 0

1 5 M ed i c aid

M ed i c ar e


2 0 0 7 2 0 1 2 2 0 1 7 2 0 2 2 2 0 2 7 2 0 3 2 2 0 3 7 2 0 4 2 2 0 4 7 2 0 5 2 2 0 5 7 2 0 6 2 2 0 6 7 2 0 7 2 2 0 7 7 2 0 8 20

Source: Congressional Budget Office


Recall, even President Obama agrees that healthcare costs are the country’s largest fiscal issue:

“If we do nothing to slow these skyrocketing (healthcare) costs, we will eventually be spending more on Medicare and y p g

Medicaid than every other government program combined.

Put simply, our health care problem is our deficit problem. Nothing else even comes close.

Nothing else.”

- President Barack Obama, September 9, 2009



Positive quotes by press/politicians would lead one to believe that the healthcare Bill will help solve our healthcare cost problems:

“…The Congressional Budget Office reported that, if enacted, the latest health care reform legislation would, over the next 10 years, …lower federal deficits by $138 billi ” (NYT M h 21 2010)billion.” (NYT, March 21, 2010)

President Obama: “If you have health insurance, this reform just gave you more control… If you don't have insurance, this reform gives you a chance to be a part of a y , g y pbig purchasing pool … This reform is the right thing to do for our seniors…. It makes Medicare stronger and more solvent… It will reduce our deficit by more than $100 billion over the next decade…and more than $1 trillion in the decade after that ” (March 23 2010)after that.” (March 23, 2010)

House Speaker Nancy Pelosi (D-CA): “It makes it more accessible to many more people… It holds insurance companies more accountable…It [is] fairer to the middle class... Overall, we save over $1.3 trillion for the taxpayer… We protect Medicare and make it solvent for nearly a decade longer… “

And Vice President Joseph Biden: “This Is a Big F***ing Deal”(March 23 2010)


And…Vice President Joseph Biden: This Is a Big F***ing Deal (March 23, 2010)


We are not so sure. Rather we think creative accounting is at work…some key examples:

The “10/6 Differential” – 10 years of revenue, but only 6 years of expenses/ y , y y p Much of the tax revenue collected immediately, but the cost does not begin until 2014

Medicare Physician Fee Schedule Fix NOT included on the cost side: $280 Billion over 10 years; this is TWICE the $138 billion budget deficit reduction projected for the bill

State Medicaid Expenditure Support (Two Issues) Increased Enrollment (16m on a base of ~50m) paid for 100% by Feds at first, but scales down after 2017 Medicaid physician rates increased to Medicare levels, paid for by Federal funds, but stops after two years

CLASS – long-term care insurance CBO Score assumes revenue is collected for ten years, but cost only incurred for five Scored to contribute $70B in savings, but offsetting cost not considered

Using Social Security taxes to offset health care spending Using Social Security taxes to offset health care spending Expected to contribute $53 billion

Student Loan Provision expected to generate $19B in savings Answers the question “Why is there a student loan provision in a health care bill?”

$463 billion in Medicare savings assumed through reduced payment levels for Medicare Advantage and IMAC (“MedPAC on steroids”) Will Congress really allow such severe cuts to Medicare when the time comes?


Joseph Antos, a former director of the CBO said the bill could actually cost $1.6 Trillion in the first 10 years


The United States also has yet to deal with huge structural issues related to healthcare reform and the quality of care.

Perhaps the best example is with primary care doctors:

At present, there is such a shortage of primary care doctors (PCPs) in the United States, that an average patient visit lasts only 6 to 8 minutesaverage patient visit lasts only 6 to 8 minutes.

The main reason this is the case is that government payments for PCPs services are so low, they must have remarkably high throughput to be even modestly successful (e.g., to make $175 000 )$175,000 per year on average)

Last year, the government proposed raising PCP rates by 6% to 8%, but this was put on hold as including the fee increase in the healthcare bill would have made it seem more expensiveg p

So, when 47 million additional Americans (a roughly 15% increase in insured lives) start looking for doctors, where will they find them? Physician capacity cannot grow quick enough to meet potential demandpotential demand.

This will likely lead many currently uninsured to still seek care via hospital emergency rooms, which is no different than today…is this really healthcare reform? Does having insurance

t t hi h lit ?


guarantee access to high-quality care?

Implications for Healthcare as anImplications for Healthcare as an Industry and an Investment


Implications for Healthcare as an Industry and an Investment

So what can the U.S. do to solve the healthcare funding issue?

“Easier” Solution: Value-added tax (VAT): A VAT is one of the last “easy” deficit reduction tools that Congress has at its disposal Per WSJ: every percentage point in VAT tax would bring in roughly $100 billion per year.

• European-level rates of 20% would net the U.S. Treasury $2 trillion Look for this discussion to heat up around the time of the Deficit report in December 2010

Harder Approaches: Tort reform Viewed as a large mechanism to reduce costs Viewed as a large mechanism to reduce costs Estimates ranging from $50 billion in annual savings to as much as a 25% reduction in care delivered

Pilot Programs (such as those linking payment to improved outcomes) could be a way to bend the cost curve

More investment in preventive care and primary care physicians

Comparative effectiveness- better information and increased transparency (price and quality) for payers and consumersconsumers

Value-based reimbursement for providers- pay for outcomes & quality, not volume of services provided

Healthcare rationing (e tremel hard to “sell” this idea to the p blic)


Healthcare rationing (extremely hard to “sell this idea to the public)


One of the key points is that we believe the healthcare reform process has only just begun.j g

Not only will the current Bill not be fully implemented until 2018, but numerous hurdles remain

Public opinion of the law continues to worsen--a late-May Rasmussen Reports Poll showed that 63% of U.S. voters want to repeal the Bill (an all-time high)

Republicans hope to regain control of Congress and will attempt to stop funding for the reform legislation

In the interim, healthcare costs will continue to pressure consumers and drive an increasingly obvious need for additional changes



If we had to rate the healthcare services universe based solely on federal policy, we believe the various sub-segments would fall into different buckets:

Strongest Outlook Positive Outlook Neutral Outlook Negative Outlook Weakest Outlook

Healthcare IT Acute-care Hospitals Overall Physicians Durable Medical & Medicare AdvantageMedicaid HMOs Clinical Labs Hospice Home Oxygen Home HealthMedicaid HMOs Clinical Labs Hospice Home Oxygen Home Health

PCPs Dialysis Providers Surgery Centers SNFs Specialty HospitalsPreventive Care & Psychiatric Hospitals Managed Care

Disease Mgmt. Imaging

No Impact

DentalVeterinary

Healthcare OutsourcingMedical WasteMedical Waste

Private Pay Seniors Housing

Value-added devices Generic devices Low-tech devices Imaging equipment Me-too devicesDiagnostics

Aesthetics



Over the long-term, our healthcare team focuses on investment ideas we believe will drive superior relative returns.

Consumer-based healthcare providers with limited government reimbursement risk (veterinary healthcare, dental, aesthetics, and outsourcing providers)

Higher-quality lower-cost healthcare deliver sources (surgery centers PBMs andHigher quality, lower cost healthcare deliver sources (surgery centers, PBMs, and diagnostics providers)

Innovative products and services companies (medical technology, biotechnology, and specialty pharmaceuticals)and specialty pharmaceuticals)

Preventive healthcare companies and enablers (HCIT, laboratories, and disease management providers)


Q & A

Ryan DanielsPrincipal, CFAHealthcare Services Analyst

Ben AndrewPrincipalGroup Head – Healthcare Sector

William Blair & CompanyWilliam Blair & Company


Disclosures

Current Ratings Distribution (as of 4/30/10)

Coverage Universe Percent Inv. Banking Relationships* Percent

Outperform (Buy) 65% Outperform (Buy) 6%

Market Perform (Hold) 34% Market Perform (Hold) 2%

Underperform (Sell) 1% Underperform (Sell) 0%

* Percentage of companies in each rating category that are investment banking clients, defined as companies for which William Blair has received compensation for investment banking services within the past 12 months.

Company Profile: The William Blair research philosophy is focused on quality growth companies. Growth companies by their nature tend to be more volatile than the overall stock market. Company profile is a fundamental assessment, over a longer-term horizon, of the business risk of the company relative to the broader William Blair universe. Factors assessed include: 1) durability and strength of franchise (management strength and track record, market leadership, distinctive capabilities); 2) financial profile (earnings growth rate/consistency, cash flow generation, return on investment, balance sheet, accounting); 3) other factors such as sector or industry conditions, economic environment, confidence in long-term growth prospects, etc. Established Growth (E) – Fundamental risk is lower relative to the broader William Blair universe; Core Growth (C) – Fundamental risk is approximately in line with the broader William Blair universe; Aggressive Growth (A) –the broader William Blair universe; Core Growth (C) – Fundamental risk is approximately in line with the broader William Blair universe; Aggressive Growth (A) –Fundamental risk is higher relative to the broader William Blair universe.The ratings and company profile assessments reflect the opinion of the individual analyst and are subject to change at any time.The compensation of the research analyst is based on a variety of factors, including performance of his or her stock recommendations; contributions to all of the firm’s departments, including asset management, corporate finance, institutional sales, and retail brokerage; firm profitability; and competitive factors.

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The shifting healthcare system realities after reform

Health & Medicine

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