Accountable care organizations: Financial, clinical, and implementation considerations for academic medical centers

Transcription

1 Commissioned by UHC Accountable care organizations: Financial, clinical, and implementation considerations for academic medical centers Eric L. Smithback, FSA, MAAA Juliet M. Spector, FSA, MAAA Gabriela Dieguez, FSA, MAAA David P. Mirkin, MD Introduction The Patient Protection and Affordable Care Act of 2010 established accountable care organizations (ACOs) as a part of Medicare. Per the Centers for Medicare and Medicaid Services (CMS) website, ACOs are groups of doctors, hospitals, and other health care providers, who come together voluntarily to give coordinated high quality care to the Medicare patients they serve. In general, the expected financial impacts of ACOs on a healthcare system are quite complex. ACOs are intended to produce savings for the Medicare system by reducing unnecessary care and duplication, redirecting care to costefficient providers, and preventing medical errors. From a provider s perspective, savings to the Medicare system will equate to revenue declines. Therefore, the perceived success or failure of the ACO from the provider s perspective may be different than from Medicare s perspective. In return for reducing their revenues, the providers receive a share of the savings (revenue reductions.) They may be able to offset some of the revenue reductions by reducing their direct expenses (internal expenses of providing care). However, they will incur additional administrative expenses with regard to the ACO. Administrative expenses include technology (such as an e- consult system), staff (hospitalists, administrative staff), physician incentive programs, etc., all of which are necessary to achieve ACO program requirements. The basic financial equation for a provider used in this paper is: Net Gain / Loss = - Revenue reductions + Bonus/share of revenue reductions - Start-up costs of the ACO - Administrative costs of operating the ACO + Reduction in direct expenses The net financial impact to the provider is difficult to estimate on the back of an envelope because it has to account for all of the items above. How do academic medical centers enter into the ACO equation? As stated above, the financial impact of a provider participating in Medicare's ACO program will be quite complex. An academic medical center (AMC) will have additional financial considerations. An ACO could include not only AMCs, but also community hospitals and freestanding facilities that care can be redirected to. In order to illustrate some of the financial implications, we have modeled the potential impact of two hypothetical ACOs on an AMC, one ACO that includes only one hospital, the AMC, and one ACO that includes a community hospital in addition to the AMC. Most ACOs will involve more complicated networks of providers than our scenarios, but for the sake of illustrating the economic impacts, we chose a fairly simple model. University HealthSystem Consortium (UHC) is an alliance of 115 academic medical centers and 259 of their affiliated hospitals representing approximately 90% of the nation's non-profit academic medical centers and has commissioned this study. In constructing the models we have had to make a wide range of assumptions about the services delivered by the AMC, including the types of hospital, other facilities, physicians, and other services; the ability of the ACO to create savings for the Medicare program; and the administrative expenses involved in both the setup and the ongoing administration of the ACO. Because these assumptions could vary significantly from one ACO to the next (as well as one AMC to the next), the results for our hypothetical ACOs are illustrative only. However, we feel they are sufficiently meaningful to enable discussions about the potential consequences for an AMC if it were to enter into an ACO. Assumptions Using the methodology and assumptions described in the Modeling Approach section below, we developed a range of scenarios to illustrate the financial impact of ACOs on the AMC. The model is based on a typical Medicare population of aged individuals reimbursed on a diagnosis-related group (DRG) basis. The scenarios we tested all assume the following: ACO start-up expenses. Start-up expenses are $5.0 million and we have amortized this cost on a straight line over three years at $1.7 million per year. 1 P a g e

2 Ongoing administration. There are ongoing expenses incurred in order to administer the ACO, which we have estimated as $2.8 million per year (increased in scenarios with more lives and/or more aggressive management.). This assumption is probably on the lower end of the range that can be expected for this number of attributed lives. Reduction in direct expenses. Half of the AMC s internal costs of providing care can be eliminated to offset the revenue declines (i.e., 50% of the AMC s costs are direct, and all of the direct costs can be eliminated as an offset to revenue declines). Alternatively, it is possible that an AMC operating at 100% capacity could find new patients to offset the reductions in services to existing patients. The direct expenses would then be paid for by the revenues from the new patients. : AMC Only We have defined to be an ACO with the AMC as its only hospital. makes the following assumptions, which will vary with subsequent scenarios: Bonus. Of the savings to the Medicare program, 60% is returned in the form of bonuses from CMS. This assumption requires that the ACO meets its quality standards. In conjunction with this assumption we also assume that the ACO operates under the two-sided model in the Medicare Shared Savings Program (in other words the ACO is responsible for sharing losses with CMS as well as sharing savings). We have not modeled the Pioneer program. Level of utilization management. The AMC performs aggressive but achievable utilization management. Overall the impact of management is about an 8% decrease in revenue. Timing of savings. assumes that utilization and expense reductions occur immediately. Membership. The ACO has 25,000 members. The financial results under are shown in the table in Figure 1: Figure 1 Annual Financial Impact of ACO Current ACO Change Revenue Inpatient/SNF $105.7 $95.3 ($10.4) Outpatient $36.3 $32.0 ($4.3) Physician $67.6 $62.2 ($5.4) Other $29.9 $30.9 $1.0 Total Patient Revenue $239.5 $220.4 ($19.1) Bonus $11.5 $11.5 Start-up Expenses Amortized Over 3 Years ($1.7) ($1.7) Ongoing Administration ($2.8) ($2.8) Reduction in Direct Expenses $13.1 $13.1 Gain/Loss $0.9 Gain/Loss AMC Only $2.4 The net effect of the ACO program is a $0.9 million gain per year for the first three years. Skilled nursing facilities (SNFs) and to a lesser extent other providers will also have reduced revenue as part of utilization management. We assume that the AMC will not share in the revenue reductions of these other providers, but the AMC will receive the bonus from these management initiatives. As a result, we remove the revenue reductions to other providers from the bottom line and show a gain of $2.4 million per year. We have not modeled results after the first three years, as it is difficult to predict what CMS will do after the initial contract period. The gains primarily result from two sources: (1) Because we have assumed that half of the revenue loss is offset by reductions in direct expenses, and the bonus is 60% of the revenue loss, there is effectively a 10% gain from utilization savings; and (2) because we have assumed that inpatient care is being reimbursed using DRGs, there are some savings in direct expenses that are due to reductions in length of stay, which are not offset by revenue declines. In order to achieve the results above, a lot of things have to go right. The utilization savings are aggressive, and will require a substantial commitment by the providers. The full bonus must be received, meaning that not only cost but quality targets need to be met. The full amount of direct expenses must quickly be cut. (Or the lost services/patient-days must be quickly replaced by new patients.) Based on our general observations, it can be difficult to meet quality targets and replace lost patient days. Therefore, these results may be overly optimistic. In addition, it is common to pay profit sharing bonuses to physicians as incentives to manage care. These profit-sharing payments can reduce the relative gain to other parties in the ACO. About half of the savings in are from reductions in inpatient admissions. The table in Figure 2 shows some of the metrics that illustrate the source of the savings. 2 P a g e

3 Figure 2 Annual Source of Savings (utilization per 1,000) Current ACO % Change Inpatient Admits % Inpatient Days 1, , % Surgical Admits % Major Diagnostic studies* 2, , % Physician visits** 11, , % LTCAH/SNF 1, , % *Includes Radiology (CT, MRI, PET), Cardiovascular for Outpatient Facility **Includes inpatient visits, office visits Below we show alternative financial results that are due to varying some of the assumptions in : 1) Bonus. An ACO that meets all the requirements for receiving shared savings payments under the two-sided model will receive a shared savings payment of up to 60% of all the savings under the updated benchmark, as determined on the basis of quality performance. If the ACO fails to achieve minimum attainment levels on all quality measures in a domain, it will not be eligible for shared savings. Based on the quality scores (which apply to years 2 and 3), the ACO can achieve a varying shared savings rate up to a maximum of 60%. In order to simplify this assumption, we looked at three scenarios, which are illustrated in the chart in Figure 3: a) The bonus is 60% of shared savings. b) The bonus is 30% of shared savings. c) There is no bonus. This assumes that the ACO failed to meet its quality requirements and is thus not eligible for shared savings. Figure 3: Annual Financial Impact of the ACO Varying the CMS Bonus Assumption $4.0 $2.0 $0.0 ($2.0) ($4.0) ($6.0) 60% of Savings $2.4 30% of Savings ($3.3) ($8.0) ($10.0) No Bonus ($9.1) 3 P a g e

4 2) Level of utilization management. The largest impact on results is the level of utilization management. In above we have used what can be termed aggressive but achievable management. The chart in Figure 4 also illustrates: a) Best practices. This level of utilization management is achievable in theory. In practice only tightly integrated group practice systems come close to it. b) Aggressive practices. This is the baseline for. The utilization savings expected are shown in Figure 2. c) Moderate practices. This shows some savings, but not at the aggressive level originally assumed. d) Current practices. We have seen examples where despite an attempt to manage utilization, little is achieved. Here we illustrate the results if utilization does not change. Figure 4: Annual Financial Impact of the ACO Varying the Effectiveness of Management $4.0 $3.0 $2.0 Best Practices $3.1 Aggressive Practices $2.4 $1.0 $0.0 ($1.0) ($2.0) Moderate Practices ($1.1) ($3.0) ($4.0) ($5.0) Current Practices ($4.5) If there is no reduction in utilization; there is a loss that is due to administrative expenses and start-up costs. The more effectively the ACO can manage its population and costs, the better the financial results will be, although CMS has put a ceiling on how favorable the financial results can be for the ACO. There is a 15% cap in determining the bonus. In Figure 4, the Best Practices scenario has hit this cap. 3) Timing of savings. above assumes all utilization reductions are instantaneously achieved. In reality, these savings occur gradually. Furthermore, reductions in marginal expenses can occur slowly. Expenses can rise because of things like separation expenses. The chart in Figure 5 is with utilization management reductions and marginal expense reductions grading linearly throughout the period. 4 P a g e

5 Figure 5: Annual Financial Impact of the ACO by Year of Program $1.5 $1.0 $0.5 $0.0 ($0.5) ($1.0) ($1.5) ($2.0) ($2.5) ($3.0) ($3.5) ($4.0) Year 1 ($3.4) Year 2 ($1.1) Year 3 $1.2 If savings occur linearly over three years, as opposed to instantaneously at the outset, the ACO s breakeven during the initial three-year term is highly unlikely. 4) Membership. The dollars involved, with the exception of start-up costs, should be fairly close to proportional to membership. Because start-up costs are relatively constant, a higher membership can amplify the results. For example, a 25,000-member population produces a gain of $2.4 million, but a 100,000-member population will produce roughly a $15.3 million gain. It should be noted that with 25,000 members there is a significant chance that a bonus or penalty will occur solely to statistical chance. This can occur because both the target and the actual expenses are subject to statistical fluctuation. A 25,000-member population has a much higher chance of random fluctuation than a 100,000-member population. illustrates the following key points that an AMC should keep in mind when entering into an ACO contract. Most ACO savings result from reduced utilization, which in turn reduces participating provider revenue. ACOs can also reduce non-participating provider revenue. If certain providers are left out of the ACO umbrella, the ACO may benefit from receiving the bonus for the management initiatives without sharing in the revenue loss of the non-participating providers. For an ACO to deliver economic return, shared savings must exceed provider revenue reductions and administrative costs. In practice, implementing utilization management on one population the Medicare population subject to CMS risk-sharing can reduce utilization on other populations, such as other Medicare members and commercial populations. Offsetting utilization reductions with shared savings becomes more challenging when utilization patterns reduce provider revenue on populations where no shared savings are earned. If latent demand is sufficient to replace volume lost to utilization declines, shared savings are incremental revenue and financial performance will improve beyond what we have shown. (If volume is not replaced with a comparable payor mix, variable costs must be reduced accordingly.) In practice, replacing lost patients with new patients is difficult, and may be impossible in an environment where other payors and providers are also reducing utilization. If volume is not replaced, any savings share below the percentage of direct costs (50% in this example) will be insufficient to offset the adverse revenue impact of utilization review. The law of diminishing returns suggests that shared savings may be increasingly difficult to sustain after initial utilization reductions are achieved. 5 P a g e

6 Scenario 2: AMC + Community Hospital Our second scenario illustrates the impact of utilization management and shared savings for an ACO that includes both an AMC and a community hospital. The distribution of inpatient and outpatient services between the AMC and the community hospital were based on actual Medicare claim data for a mid- sized city; 48.3% of hospital and specialty services are provided by the AMC and the remaining services are provided by the community hospital. The results for this model are shown in the table in Figure 6. Figure 6 Source of Savings Alternate Composition of the ACO Scenario 2 AMC Community Other Providers Total Total Change in Patient Revenue ($10.1) ($6.7) ($2.3) ($19.1) Bonus $6.1 $4.0 $1.4 $11.5 Allocation of Bonus $0.8 $0.5 ($1.4) $0.0 Start-up Expenses Amortized Over 3 Years ($0.8) ($0.9) $0.0 ($1.7) Ongoing Administration ($1.4) ($1.4) $0.0 ($2.8) Reduction in Direct Expenses $7.0 $5.3 $0.8 $13.1 Gain/Loss $1.6 $0.8 ($1.4) $0.9 Note that the cost of providers not affiliated with the AMC or the community hospital (such as SNFs) decreases. We assume that the AMC and the community hospital will not share in the other providers losses, so the bonus for the AMC and community hospital is increased. In Scenario 2 we reflect the types of admissions that occur in AMCs versus community hospitals. The scenario was developed to analyze whether certain types of admissions in AMCs, which cannot be avoided (such as organ transplants), would produce a more favorable outcome for the AMC. In practice, although the gain to the AMC is slightly higher as a percentage of revenue, both hospitals tend to share in the gain, and the AMC does not emerge with a completely disproportionate share of the gains. In other words, the AMCs' service mix does not insulate it from the financial impact of the ACO, although it is in a slightly better position than the community hospital. One reason for this is that the service mix we used was drawn from actual data, and there was substantial overlap between the services at the AMC and the community hospital. This overlap is a concern for the AMC, to the extent that the community hospital performs these common services less expensively and that an aggressive ACO could be effective at redirecting these services to the community hospital. Further Issues There are many issues that could affect this analysis that we have not specifically addressed. Some key ones are: 1) The underlying practice of managing care is generally not something that can be restricted to one set of patients. Either the physicians manage care or they don t. This means that the installation of an effective approach to managing care will, at least to some extent, affect all care. However, bonuses will typically be available on only some patients. The implication is that, in practice, revenue losses will be far higher than we have projected, and can extend to commercial populations rather than just the Medicare population. For a typical AMC where a Medicare ACO will cover only a small portion of their admissions, the impact of managing care spreading to other populations could be substantial. To the extent that the reductions in utilization can be quickly replaced with new patients, the financial impact will be mitigated. But if this is not the case, revenue losses for other patients can easily dwarf the impact of the bonuses. 2) In some markets, ACO development may threaten traditional referral patterns and consequently AMC market share. If the perceived threat to referrals is sufficiently high, some AMCs may elect to participate in ACOs defensively. In those cases, the failure of shared savings to offset utilization reductions and administrative costs may not affect an AMC s decision to participate. 3) AMCs get significant funding from Disproportionate Share Hospital (DSH), Indirect Medical Education (IME), and Graduate Medical Education (GME) payments. In the Medicare ACO programs, a worrisome issue for academic medical centers is the risk that a physician group could beat their targets by shifting patients from academic medical centers to cheaper community medical centers assuming the targets included the IME/DSH of those academic medical centers. The final regulation for MSSP has excluded DSH/IME from the benchmark. However, the Pioneer program may operate differently. Considering how these payments would affect the revenue would add additional complexity to the models that the current paper does not 6 P a g e

7 consider, but a particular organization would need to build this complexity into their individual models. 4) ACOs are far more complicated in reality than our treatment of them in this paper. Issues such as how patients are attributed to ACOs are difficult to understand and model. Random fluctuation can significantly change the amount of bonus payable to (or penalty paid by) an organization. Organizations may need to set aside capital to cover the contingency of a penalty (in some cases, state insurance requirements could actually compel this). All these issues and more would need to be addressed before an ACO is formed. * * * * * The remainder of this report documents our methodology and assumptions. These assumptions do not apply to any specific AMC. While this will give a reasonable picture for a hypothetical delivery system, an AMC that wished to enter a decision-making process would need to calibrate the model for local utilization and cost levels, current levels of care management, its business strategy and corporate culture, and other factors specific to its situation. In fact, some AMCs will require assumptions that are quite different from those in this report. For that reason, it is certain that the financial results for any given AMC will be different from those illustrated here. However, the principles will generally be the same. Modeling approach Our analysis was based on an actuarial model of medical costs developed using Milliman research. The specific steps we took were: 1) The initial model of health costs, before any adjustment for utilization management, was developed using the Milliman Health Cost Guidelines (HCGs), an industry standard that has been produced for 60 years. The HCGs comprise an extensive amount of research into healthcare costs and allow extensive amounts of customization for demographics, reimbursement levels and other factors. The key assumptions we used in developing this model were: a) Standard Medicare aged demographics based on the national composition of Medicare enrollees by age and gender. b) Standard Medicare benefit levels for Parts A and B. c) 2010 Medicare allowed charges and utilization levels adjusted to a mid-size city. d) Payments made on a DRG basis. 2) We then allocated the costs between the AMC and other providers using the matrix shown in Figure 7. Figure 7 Service Matrix : AMC Only Scenario 2: AMC + Community Part A Benefits Inpatient Facility Medical AMC AMC+Community Surgical AMC AMC+Community Psychiatric AMC AMC+Community Alcohol/Drug Abuse AMC AMC+Community Skilled Nursing Facility Other Providers Other Providers Home Health Care Other Providers Other Providers Part B Benefits Outpatient Facility Emergency Room AMC AMC+Community Surgery AMC AMC+Community Radiology AMC AMC+Community Pathology/Lab AMC AMC+Community Pharmacy AMC AMC+Community Cardiovascular AMC AMC+Community PT/OT/ST AMC AMC+Community 7 P a g e

8 Figure 7 Service Matrix Other AMC AMC+Community Professional PCP, Immunization, Physicals AMC AMC+Community Specialist AMC AMC+Community Other Professional Services (continued) Chiropractor AMC Other Providers Outpatient Psych/AD AMC Other Providers Vision Exams AMC Other Providers Hearing and Speech Exams AMC Other Providers Other Ambulance Other Providers Other Providers DME and Supplies Other Providers Other Providers Prosthetics Other Providers Other Providers Prescription Drug Part D (f) Excluded Excluded Benefits Not Covered by Medicare Excluded Excluded When services were allocated both to the AMC and to other providers, we used allocation factors that varied by broad service categories and were based on data from Medicare experience for a mid-size city. For physician services and other services where the Medicare data does not identify whether the provider is associated with an AMC, we allocated the services using the proportion developed for facility services. Overall this allocation strategy does not affect results in the AMConly ACO model and causes only modest changes to the results in the two-hospital ACO model. Although not always true, AMCs tend to have higher charge levels than other providers, which is not reflected in the model. 3) To the medical costs above, we added provision for: a) Bonus attainment levels. Failure to achieve all quality thresholds will result in less than 60% shared savings. Direct costs are assumed to be 50% of revenue. If less than 50% of savings are shared, it will be difficult for providers to recover revenue lost to utilization management unless latent demand replaces volume. Start-up costs of $5 million. This was based on input from UHC, and is at the low end of the range posited by the American Hospital Association (AHA). We have also seen substantially higher estimates for ACO start-up costs. We allocated these on a straight-line basis as $1.7 million per year. We did not adjust for interest costs. b) Ongoing costs of administration of $2.8 million for the utilization management functions. These are based on the staff that would be needed to perform the utilization management functions we have embedded in our model. Overall, we believe the ongoing administrative costs we have used are the minimum necessary, and probably understate the costs for most organizations. For example, the administrative cost projection does not include things like electronic medical records systems with automated referral management programs, which a well-performing ACO will likely need. Also, FTEs assumed in this model are based on marginal FTEs. Utilization management may come with fixed costs in additional to these marginal costs. In the case of smaller numbers of attributable lives, these fixed costs can be significant relative to revenue. 8 P a g e

9 4) We then developed adjustments to the model for utilization management. a) Our base model assumes effective inpatient and outpatient utilization management, care and disease management, and panel management. b) We also show results if only half of the potential benefits of these programs are achieved. Many organizations only reach this level of savings. c) In addition, we show the impact of extremely aggressive levels of utilization management. For most organizations, these levels are not attainable. d) We also show financial results if no material utilization changes are achieved. There are certainly examples of this in practice. The types of utilization management assumed in the model are: 1) Inpatient utilization management (IP UM): IP UM is used to avoid or reduce payment for medically unnecessary hospital utilization. It typically consists of hospital admission and concurrent stay reviews to identify and avoid or not pay for medically unnecessary inpatient admissions or days. The plan functions involved in IP UM are: Medical necessity review for admissions (this includes admissions diversion programs that divert Emergency department admissions to outpatient care if the admission is not medically necessary) Medical necessity review for length of stay (LOS) and discharge including transition of care management to avoid discharge delays Hospitalist program focused on avoiding admissions, reducing length of stay, and eliminating delays in discharge Typical work tasks 1 and outcomes for an ACO with 25,000 Medicare beneficiaries would be: o Performing approximately 18,000 inpatient hospital medical necessity reviews annually with the expectation that this would reduce admissions and LOS by 1,000 admits and 16,000 days respectively. Using the assumptions listed in this paper, IP UM would require up to 4.0 RN FTEs and 0.5 physician FTEs. 2) Outpatient utilization management (OP UM): OP UM consists of performing precertification on certain high-cost outpatient procedures and other services subject to overutilization or performed by non-aco providers. The goal is to redirect services from non-aco providers to ACO providers (leakage control) and also to reduce medically unnecessary services. Typical work tasks and outcomes for an ACO with 25,000 Medicare beneficiaries would be: Reviewing requests for roughly 30,000 services annually for medical necessity. OP UM would require 3.0 RN FTEs and 1.0 physician FTEs. 3) Case/disease management Case management consists of large and small case management aimed at reducing emergency room (ER) visits for frequent flyer members, the appropriate post-discharge follow-up with patients aimed at reducing readmissions, coordination of care for members with complex problems, and the monitoring of care for patients with high-cost conditions such as transplants or traumatic brain injuries. Disease management programs target members with a specific disease to improve clinical outcomes. The ACO model assumes two target populations for disease management: members with diabetes and members with asthma. 4) Plan (population management) functions: PCP panel management The PCP panel management plan functions in this model include: E-visits E-consults Urgent care clinics Provider incentives Hospitalist program PCP referral management PCP fee increase E-visits reduce PCP office visits and e-consults reduce specialist referrals and consultations. Urgent care clinics reduce ER visits by shifting services from ER to urgent care. A provider incentive program is expected to reduce specialist visits by encouraging PCPs to expand their scopes of practice. Hospitalists can help eliminate medically unnecessary inpatient admissions and days. A PCP referral management program helps PCPs refer patients to lower cost providers. Finally, a PCP fee increase is typically used to attract and retain PCPs. Detailed results In the results above we presented fairly collapsed results for a number of scenarios. The commentary should be sufficient to understand the scenarios and many of the implications of those results. In the appendixes are more detailed results for the scenarios we modeled. 1 Using the care management and utilization assumptions listed in this white paper. 9 P a g e

10 Reliances This work will be subject to the Consulting Services Agreement between UHC and Milliman dated March 19, In conducting our analysis, Milliman relied upon information published by the government. We did not audit or independently verify any of the information furnished, except that we did review the data for reasonableness and consistency. To the extent that any of the data or other information relied on by us was incorrect or inaccurate; the results of our analysis could be materially affected. The ACO models used to develop the results in this letter were based on Milliman research. In addition, the results reflect actuarial judgment and industry assumptions and practices. Although Milliman believes that the results appropriately reflect past experience, there is no expectation that actual future experience will conform to these assumptions. It is highly probable that actual experience will develop differently from that projected. Milliman's work is prepared solely for the benefit of UHC. Except as set forth below, Milliman's work may not be provided to third parties without Milliman's prior written consent. Milliman does not intend to legally benefit any third-party recipient of its work product, even if Milliman consents to the release of its work product to a third party. Notwithstanding the foregoing, Milliman s work includes production of a white paper or other publication (the White Paper ). The parties agree that UHC may distribute or submit for publication the final, non-draft version of the White Paper; provided, however, that any such distribution of the White Paper shall be in its entirety and include attribution to Milliman. Following initial publication of the White Paper, UHC shall have the right to abstract or summarize the White Paper provided that such abstraction or summary also includes citations providing attribution and allow the reader to obtain a copy of the complete White Paper. Mentions of Milliman s work will provide citations that will allow the reader to obtain the full report. No Milliman report shall be used by UHC in connection with any offering, prospectus, securities filing, or solicitation of investment. Professional reviewers engaged by UHC or independent journals to provide peer review of Milliman s work must agree to terms of confidentiality that are reasonable and customary in the industry. Any piece of Milliman s draft work to be provided to peer reviewers must receive prior Milliman approval, and Milliman shall not unreasonably withhold such approval. Eric Smithback, Juliet Spector, and Gabriela Dieguez are consulting actuaries at Milliman and are members of the American Academy of Actuaries and meet its qualification standards to render this opinion. V:\166UHC\110189\WorkFiles\ACOWhitePaper_ docx 10 P a g e

11 - Appendices Commissioned by UHC Figure 3 Detail Financial Impact of ACO 25,000 Members Changes in Bonus 60% of Savings 30% of Savings No Bonus Revenue Inpatient/SNF $95.3 $95.3 $95.3 Outpatient $32.0 $32.0 $32.0 Physician $62.2 $62.2 $62.2 Other $30.9 $30.9 $30.9 Total Patient Revenue $220.4 $220.4 $220.4 Change in Patient Revenue ($19.1) ($19.1) ($19.1) Bonus $11.5 $5.7 $0.0 Loss Offset (other providers) $1.4 $1.4 $1.4 Start-up Costs Amortized Over 3 Years ($1.7) ($1.7) ($1.7) Ongoing Administration ($2.8) ($2.8) ($2.8) Reduction in Marginal Expenses $13.1 $13.1 $13.1 Gain/Loss $2.4 ($3.3) ($9.1) 11 P a g e

12 Figure 4 Detail Financial Impact of ACO 25,000 Members Best Practice Current ACO Change Revenue Inpatient/SNF $105.7 $84.2 ($21.5) Outpatient $36.3 $28.6 ($7.7) Physician $67.6 $48.3 ($19.3) Other $29.9 $26.6 ($3.3) Total Patient Revenue $239.5 $187.7 ($51.8) Bonus $21.6 $21.6 Start-up Expenses Amortized Over 3 Years ($1.7) ($1.7) Ongoing Administration ($4.0) ($4.0) Reduction in Marginal Expenses $34.8 $34.8 Gain/Loss $1.2 Gain/Loss AMC Only $3.1 Figure 4 Detail Financial Impact of ACO 25,000 Members 50% of Aggressive Practice Current ACO Change Revenue Inpatient/SNF $105.7 $100.5 ($5.2) Outpatient $36.3 $34.2 ($2.2) Physician $67.6 $64.9 ($2.7) Other $29.9 $30.4 $0.5 Total Patient Revenue $239.5 $229.9 ($9.6) Bonus $5.7 $5.7 Start-up Expenses Amortized Over 3 Years ($1.7) ($1.7) Ongoing Administration ($2.8) ($2.8) Reduction in Marginal Expenses $6.5 $6.5 Gain/Loss ($1.8) Gain/Loss AMC Only ($1.1) 12 P a g e

13 Figure 5 Detail Financial Impact of ACO 25,000 Members Timing of Savings Year 1 Year 2 Year 3 Revenue Inpatient/SNF $102.2 $99.5 $96.7 Outpatient $34.3 $33.4 $32.5 Physician $66.7 $64.9 $63.1 Other $33.1 $32.2 $31.3 Total Patient Revenue $236.3 $229.9 $223.6 Change in Patient Revenue ($3.2) ($9.6) ($16.0) Bonus $1.9 $5.7 $9.6 Start-up Expenses Amortized Over 3 Years ($1.7) ($1.7) ($1.7) Ongoing Administration ($2.8) ($2.8) ($2.8) Reduction in Marginal Expenses $2.2 $6.5 $10.9 Gain/Loss ($3.6) ($1.8) $0.0 Gain/Loss AMC Only ($3.4) ($1.1) $1.2 Membership Detail Financial Impact of ACO 100,000 Members Aggressive Utilization Controls Revenue Inpatient/SNF Outpatient Physician Other Total Patient Revenue Bonus Start-up Expenses Amortized Over 3 Years Ongoing Administration Reduction in Marginal Expenses Gain/Loss Gain/Loss AMC Only Current ACO Change $422.8 $381.3 ($41.5) $145.4 $128.1 ($17.3) $270.3 $248.7 ($21.6) $119.6 $123.5 $3.9 $958.1 $881.5 ($76.6) $45.9 $45.9 ($1.7) ($1.7) ($10.5) ($10.5) $52.3 $52.3 $9.5 $ P a g e