Webinar given by William Blair Company did good job on describing healthcare reform recent history and after effects.

1. Welcome To
The Shifting Halthcare System –
g y
Realities After Reform
Wednesday, June 2, 2010
Webinar
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 compensation
for investment banking services in the next 3 months.
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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
y / g g y ,
made without any representation as to accuracy or completeness. Opinions expressed are current as of the date appearing in this material only.
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2. Featuring
Ben Andrew Ryan Daniels
Principal Principal, CFA
Group Head – Healthcare Sector Healthcare Services Analyst
William Blair & Company William Blair & Company
Health Care Equity Research Group
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4. Contents
 Healthcare Reform: Timeline of Key Events & Next Steps
 Realities After Reform
 Implications for Healthcare as an Industry and an Investment
p y
 Q&A Session
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5. Healthcare Reform: Timeline of Key Events
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& Next Steps
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6. Healthcare Reform: Timeline of Key Events & Next Steps
2008 2009 2010
November 4, 2008
,
Barack Obama elected
44th President of the
United States of America
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7. Healthcare Reform: Timeline of Key Events & Next Steps
2008 2009 2010
June 5, 2009
Senator Ted Kennedy Issues Bill
• Access to healthcare with no annual/lifetime limits
•G
Guaranteed Coverage
t dC
• Requires individual and employer contributions
• Public Insurance Option
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8. Healthcare Reform: Timeline of Key Events & Next Steps
2008 2009 2010
July 14, 2009
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House Presents “America’s Affordable Health Choices Act”
• Includes Public Plan Option
• E ti t 96% Coverage of U.S. residents
Estimates C fUS id t
• New surtaxes to pay for subsidies
• Requirement to accept all applicants
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9. Healthcare Reform: Timeline of Key Events & Next Steps
2008 2009 2010
July 22, 2009
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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
healthcare reform at the White House
h lth f t th Whit H
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10. Healthcare Reform: Timeline of Key Events & Next Steps
2008 2009 2010
August 2009 – Summer Recess
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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
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11. Healthcare Reform: Timeline of Key Events & Next Steps
2008 2009 2010
September 9, 2009
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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.”
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12. Healthcare Reform: Timeline of Key Events & Next Steps
2008 2009 2010
September 16, 2009
p
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
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13. Healthcare Reform: Timeline of Key Events & Next Steps
2008 2009 2010
October 29, 2009
House Bill Released
• House leaders unveil a 1,990-page Healthcare Reform Bill
• C t estimated at $1 05 t illi
Cost ti t d t $1.05 trillion over 10 years
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14. Healthcare Reform: Timeline of Key Events & Next Steps
2008 2009 2010
November 7, 2009
House Passes Healthcare Reform Bill
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15. Healthcare Reform: Timeline of Key Events & Next Steps
2008 2009 2010
November 18, 2009
Senate Releases +2,000-page Reform Bill
• Initial cost estimated at $848 billion over 10 years
• E ti t d coverage for 94% of the population
Estimated f f th l ti
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16. Healthcare Reform: Timeline of Key Events & Next Steps
2008 2009 2010
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
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17. Healthcare Reform: Timeline of Key Events & Next Steps
2008 2009 2010
January 19, 2010
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Scott Brown wins Massachusetts Senate Seat
• In a remarkable turn of events, Scott Brown wins the
Special Election to Fill Senator Ted Kennedy’s
Massachusetts Senate seat
M h tt S t t
• Importantly, Senators no longer have the 60 votes need to
end filibuster debate
• Many pundits declare healthcare reform dead
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18. Healthcare Reform: Timeline of Key Events & Next Steps
2008 2009 2010
February 13, 2010
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WellPoint Makes Headlines / Healthcare Reform Becomes
“Health Insurance Reform”
• Anthem Blue Cross announces a 25% increase in
individual i
i di id l insurance policies
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• Obama administration uses Anthem news as a lightening
rod for healthcare reform debate
• CEO Angela Braly soon thereafter called to testify in front
of Congress
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19. Healthcare Reform: Timeline of Key Events & Next Steps
2008 2009 2010
February 25, 2010
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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
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20. Healthcare Reform: Timeline of Key Events & Next Steps
2008 2009 2010
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
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21. Healthcare Reform: Timeline of Key Events & Next Steps
2008 2009 2010
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
the Senate Bill)
th S t
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22. Healthcare Reform: Timeline of Key Events & Next Steps
2008 2009 2010
March 23, 2010
The Patient Protection and Affordable Care Act
is Signed into Law by President Obama
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23. Healthcare Reform: Timeline of Key Events & Next Steps
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 26
parent s
2010 2011 2012 - 2018
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24. Healthcare Reform: Timeline of Key Events & Next Steps
2011 Key Initiatives
Plans must offer preventive services with no copayments
Long-term care premiums start being collected
Drug discounts begin
Medicare payroll tax increases from 1.45% to 2.35% for
those making over $200,000 ($250,000 for joint filers)
2010 2011 2012 - 2018
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25. Healthcare Reform: Timeline of Key Events & Next Steps
2014 Key Initiatives
Exchanges created
Citizens must have health insurance or pay fine
($95 in 2014)
Employers with 50 or more employees must
2012 Key Initiatives
y provide coverage or pay a $3,000 per employee fee
Medicaid expansion to 133% poverty level
N/A
Insurance industry pays annual fee of $8 Billion
2012 - 2018
2013 Key Initiatives 2015 -2017 Key Initiatives
Medicare pilots (bundled care) begin Fines for lack of insurance coverage
continue to increase each year
2018 Key Initiatives
Excise tax on devices (2.3%)
(2 3%) 40% excise tax on health plans valued
at more than $10,200 (individual) or
Loss of tax deduction for $27,500 (family)
subsidizing Part D
Hospital ta increase o 90 bas s
osp ta tax c ease of basis
points for those earning over
$200,000
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26. Realities After Reform
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27. Realities After Reform
 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 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,
capita than any other industrialized nation our healthcare quality scores trail those of
nation,
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.
healthcare system.
h lh
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28. Realities After Reform
 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 T
$8.5 $13 0 $4 5
intragovernmental).
 Present value of unfunded Medicare & Medicaid liabilities is about $50 Trillion.
Percentage of U.S. GDP Consumed By Healthcare Expenditures
50
45
40
35
30
A l l Ot h e r H e a l t h Ca r e
25
20
15
M ed i c ai d
10
5 M ed i c ar e
0
2007 2012 2017 2022 2027 2032 2037 2042 2047 2052 2057 2062 2067 2072 2077 2082
Source: Congressional Budget Office
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29. Realities After Reform
 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
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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
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30. Realities After Reform
 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
billion.” (NYT, M h 21
billi ” (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
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big 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)
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 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 This (March 23
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31. Realities After Reform
 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
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 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
 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
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32. Realities After Reform
 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 minutes.
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 expensive
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 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 demand.
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
guarantee access to high-quality care?
t t hi h lit ?
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33. Implications for Healthcare as an
Industry and an Investment
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34. 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
 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
consumers
 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)
(extremely “sell” public)
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35. Implications for Healthcare as an Industry and an Investment
 One of the key points is that we believe the healthcare reform process has only
j
just begun.
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
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36. Implications for Healthcare as an Industry and an Investment
 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 Advantage
Medicaid HMOs Clinical Labs Hospice Home Oxygen Home Health
PCPs Dialysis Providers Surgery Centers SNFs Specialty Hospitals
Preventive Care & Psychiatric Hospitals Managed Care
Disease Mgmt. Imaging
No Impact
Dental
Veterinary
Healthcare Outsourcing
Medical Waste
Private Pay Seniors Housing
Value-added devices Generic devices Low-tech devices Imaging equipment Me-too devices
Diagnostics
Aesthetics
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37. Implications for Healthcare as an Industry and an Investment
 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
Higher-quality lower cost healthcare deliver sources (surgery centers, PBMs, and
centers PBMs
diagnostics providers)
 Innovative products and services companies (medical technology, biotechnology,
and specialty pharmaceuticals)
 Preventive healthcare companies and enablers (HCIT, laboratories, and disease
management providers)
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38. Q&A
Ben Andrew Ryan Daniels
Principal Principal, CFA
Group Head – Healthcare Sector Healthcare Services Analyst
William Blair & Company William Blair & Company
Health Care Equity Research Group
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39. 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.
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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
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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) –
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