RISK CAPABILITY 2.0 Moving Beyond the Tipping Point BY BRAD BENTON

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1 RISK CAPABILITY 2.0 Moving Beyond the Tipping Point BY BRAD BENTON MANAGING PARTNER DHG HEALTHCARE

2 INTRODUCTION At DHG Healthcare, our broader industry perspective is technically grounded in a concept we refer to as "Risk Capability." This technical perspective is supported by considerable foundational detail, but generally speaking we believe that healthcare organizations (principally providers, but increasingly encompassing other non-payer emerging industry players) must gain a baseline level of organizational wherewithal to both responsibly and confidently accept a revenue contract with risk characteristics. Importantly, the level of urgency and pace associated with core institutional goals in this respect must match related market demand, both currently evidenced and as might be anticipated over a longer term. The concept of Risk Capability has been core to DHG Healthcare's technical perspective for close to four years now. Over this period, we have helped hundreds of organizations in their individual journeys towards achieving Risk Capability as we (and they) define the term. Central to that work is the idea of how markets are evolving relative to the mix of fee-for-service ("FFS") vs. non-ffs medicine. The term "tipping point" has emerged in the industry lexicon as an overarching term to describe that point at which the evolution of non-ffs medicine captures organizational attention and becomes a meaningful driver of institutional strategy and execution. Our national market observations indicate that we have, in virtually all markets, now moved beyond "the tipping point" as defined above. In fact, we strongly believe that, while recognizing that in many markets core industry profitability remains currently rooted in FFS medicine, the strategic and executional focus of the vast majority of organizations we encounter is shifting to an operational playbook build that articulates a strategic platform and execution framework built on value-based care and population health. This active transition underway in U.S. healthcare is a compelling development for attention and further study. Clearly, there is a need for continued consideration of FFS medicine and related revenue streams given their more immediate impact on operating margins (depending, of course, on payer mix and market evolution), and we recognize that ongoing effective management of this dynamic as the organization makes the turn towards its unique risk capability focus is a sophisticated skill in and of itself. Nevertheless, the emergence of a dominant risk capability focus in the strategic planning of most institutions is a remarkable development, given the long path to this point along the industry's journey. Having reached this point doesn't mean that executing this new focus is itself any less complex, as explicit consideration of a number of key transformational characteristics "beyond the tipping point" is required, including: The complex and provocative federal regulatory environment is important but not overriding; Changes in state Medicaid programs may well be fundamentally transformative in the nearer term (potentially leading vs. following federal programs); The business model disruption associated with traditional payer relationships requires new, forward-looking strategies (which may be unique, novel and/or nascent) to ensure business opportunity in disruption is properly considered; Internal initiatives require new levels of discipline, and affordability mandates alignment of those initiatives; Clinical transformation cannot be a "boil the ocean" program and must be well-aligned with non-clinical operational change (including alignment with broader institutional strategies, deeper understanding of population characteristics, and views towards future economic sustainability); and, among others, The industry seems to be recognizing that healthcare is, by some important practical definition, emerging as a "right" and, if that is the case, it is critical that health similarly emerges as a personal and societal obligation therefore, we believe that the highperforming healthcare organization understands how to effectively plan for, reconcile, and execute around this crucial concept. 2 3

3 ARTICULATING THE ENVIRONMENT "BEYOND THE TIPPING POINT As we consider the industry ecosystem "beyond the tipping point," the following graphic articulation emerges: The conceptual diagram above implies a number of key pivots, including: Master of Both Beyond the tipping point is a world that is neither "all" value-based care nor is it exclusively oriented toward FFS medicine, thus requiring a forward-thinking clinical model, a balanced financial approach, a deft management touch, and transformational agility throughout a health/ healthcare organization's related change efforts. New Lens There are a number of important modeling characteristics that speak to strategic, operational, financial, governance and cultural matters that emerge in the unprecedented business and societal environment of a post-tipping-point world, thus requiring a true fresh lens on organizational strategic planning and linkage of that plan in real time to execution. The view through this new lens will most likely envision significant new resource investments that will not be fully funded by current operations, but are nonetheless necessary to form the platform for successful advancement of new care delivery and health management methods. Revenue Portfolio Construction There are profound new business fundamentals related to active construction of a revenue plan that contemplates the best revenue portfolio approach that optimizes margin and advances organizational interests, given the current market state-of-the-state, mission and community focus, and other relevant factors. This itself requires dynamic financial modeling and scenario planning that is not generally in evidence today. True Partnerships Finally (among other considerations), a mandate emerges for consideration of a health/ healthcare organization's "relationship portfolio" relative to partnering opportunities, market scale and scope, appropriate levels of urgency and pace, and what's required of leadership and 4 5

4 governance to optimize that portfolio with deep consideration of related structural challenges. In particular, we are skeptical of the "advertisements" in the market regarding provider/payer partnerships these relationships tend towards a bias that rewards the "partnership" for the hard work of clinical transformation on the part of the provider, which then disproportionately advantages the payer. This is an important example of how relationship portfolio considerations are crucial to business model evolution in a post-tipping-point marketplace. The above are just a handful of the important pivot points relative to more traditional healthcare strategies. Our market observations are stressing the need for a level of thoughtfulness and high acumen in weaving these concepts into a decidedly different and undoubtedly more complex strategy for future success. The strategies which led to past success are likely not optimal or even appropriate for the new ecosystem yet it is difficult to abandon this legacy of past success. The level of dynamic, rapid market change we are currently observing is the critical phenomenon that leads us to conclude that we have, in fact, moved into a national post-tipping-point environment. Considerations for Forward-Looking Health and Healthcare Organizations Building on the discussion above, there are a number of important strategic/executional matters for health and healthcare organizations to consider, with some level of urgency, to appropriately respond to the challenges and opportunities presented by the "post-tipping-point" market. While not an exhaustive list, a few of the more important considerations are briefly articulated below: New Definition of Growth // We believe that growth must be considered through a new and more wide-angled lens, considering best opportunities for volume retention and enhancement while also considering non-ffs transitions that contribute to improved margin. The concept of a sustainable revenue portfolio contemplates the central importance of growth to mission; yet, traditional views of growth (greater market share, better managed care rates, new volumes, etc.) may be ineffective in the creation of the post-tipping-point revenue portfolio that optimizes margin. New strategies associated with service line partnerships, new clinical funds flow models, and "new lens" views to M&A, institutional scale, and services scope should be explored and brought to conclusion with urgency and pace. Purchaser Focus // The creation of the sustainable revenue portfolio requires a deeper, more nuanced, and more sophisticated view towards how the purchasers of healthcare (and, increasingly, buyers of services and technologies associated with health) are impacting the ecosystem and, fundamentally, economic margins in the industry. There is a new and highly complex interplay in the post-tipping-point environment between governmental programs (including volatile economic pressures and "stroke of the pen" risks in those programs), traditional commercial business which has been the foundation of historical economic sustainability, direct-to-employer contracting which creates a new value proposition for both parties, and the questionable value associated with payer intermediary functions. The effective reconciliation within organizational strategy of this dynamic is crucial to success. Clinical Enterprise Maturity // The transformation of the broadly-defined clinical platform requires a new and important level of leadership and vision, both in terms of management acumen and clinical enterprise buy-in. This is to further ensure that sustainable revenue portfolio creation both anticipates the necessary clinical framework and actively executes a population health strategy that is sensible and resonant in the context. While the intertwining of current and potential value based reimbursement models is confusing at best, the core purpose still remains focused on improving quality and reducing cost; to fundamentally achieve these goals at a meaningful level, providers must assume they will be subject to some level of significant financial risk against performance. Whether following mandatory or voluntary pathways, organizations must continue to grow their capabilities through participation in non-ffs "experiences" in both the governmental and commercial realms, creating an incubation environment that "tests" an organization's readiness for dominant non-ffs revenue streams. Recognizing that federal administrative program changes are an expected evolution and that they don't signal an abandonment of the value based care model is an important perspective for the successful health/healthcare organization. The urgency to move forward in developing new and more successful methods in the delivery of care across the continuum is an anchoring concept and should not be impacted by these recent changes. These concepts define the journey towards clinical enterprise maturity in the post-tipping-point ecosystem. 6 7

5 CONCLUSION Opportunity Creation and Realization // We believe that the post-tipping-point business model dynamic will penalize a reactive strategic and operational posture. The continuing emergence of true business model industry step-changes throughout the ecosystem demands that clinical and operational leaders take a proactive stance with respect to strategy creation that not only acknowledges the concepts described here, but prepares the health/healthcare organization to actively operationalize that strategy. This concept proactive strategy creation and a commitment to dynamic operationalizing of those strategies leads us to the idea that strategy and execution must be more formally joined together than has ever been the case in our industry. Strategies that stand as conceptual models or, even worse, as (for all practical purposes) marketing platforms are irresponsible and inappropriate for the ecosystem as we define it in this discussion. Strategy creation must be linked, in real time, to execution plans supported by enterprise performance optimization platforms. We believe this concept is possibly THE critical success factor in the post-tipping-point environment. As noted in the Post-Tipping-Point artifact on page 4, the overall Risk Capability 2.0 organizational framework can be summarized by the following characteristics: Responsible Confidence in Economic Portfolio Transition Thoughtful and Deliberate Response to Market Forces Meaningfully Positive Community and Patient Clinical Impacts Organizational Preparedness and Transformational Agility Committed Governance and Collaborative Culture Alignment of Mission and Strategy with Pursuit of Value-based Care In conclusion, we understand the difficulty associated with both embracing these concepts and driving strategy creation and execution against them. The rapid change in the markets, coupled with the confusion created by our federal government's approach to healthcare transformational change and the broader environmental dynamic driven by the so-called 4th Industrial Revolution (aka, in this context, Industry 4.0), is a call-out for courage. The translation of healthcare as a societal right and health as a personal obligation and required direct linkage between the two defines the hard work of transformation in our industry and requires clinical and operational leadership and change courage at unprecedented levels. While often slow to transform itself, historically our nation's clinical delivery system has shown that it can be responsive to massive change, and we remain optimistic that the post-tipping-point ecosystem actually provides the deep impetus for the next wave of change that will incorporate the best of our innovative spirit and reflect our most sincere commitment to achievement of the Triple Aim the combination of which will set the stage for a renovated and truly sustainable U.S. health ecosystem. 8 9

6 ABOUT THE AUTHOR BRAD BENTON // MANAGING PARTNER Brad is the managing partner of DHG Healthcare, the national healthcare industry practice of Dixon Hughes Goodman LLP. He joined the firm in December 2012, and is currently located in the Firm's Atlanta office. Brad was previously admitted to the partnership of an international firm in June 1993, and his professional career spans over 35 years. He has served (among other roles) as the partner-in-charge for his former firm's Southeast healthcare practice and as the regional partner-in-charge for that firm's overall audit practice in the South. In his current leadership role with DHG, he is responsible for practice operations across all of DHG Healthcare's audit, tax, and consulting businesses, which comprise the largest industry segment within DHG. Brad also serves on the DHG Executive Committee, which is the governing body for the Firm. FOR MORE INFORMATION CONTACT BRAD AT: //

7 ABOUT DHG HEALTHCARE DHG Healthcare is ranked by Modern Healthcare as the 10th largest privately-held healthcare consultancy and serves the industry with approximately 300 dedicated healthcare industry professionals across consulting, assurance and tax. DHG Healthcare's consulting business includes a distinctive capabilities and solutions portfolio sharply focused on critical business issues facing healthcare organizations in today's transformative environment. We have aligned our practice organizational structure and delivery framework to support transformational themes related to the achievement of "Risk Capability" which we believe is critical to the successful future of our healthcare clients. dhg.com/healthcare 2018 Dixon Hughes Goodman LLP. DHG Healthcare. All rights reserved. / PN