MARKET. Honolulu. Published March 2013 Copyright 2013 HealthLeaders-InterStudy, A Decision Resources Group Company Copyright Strictly Enforced

2013 OVERVIEW MARKET Honolulu Published March 2013 Copyright 2013 HealthLeaders-InterStudy, A Decision Resources Group Company Copyright Strictly Enforced

HONOLULU MARKET OVERVIEW Honolulu Counties Covered: Honolulu Key Cities Covered: Honolulu Population: 963,607 Contents: 3 Updates: Key Market Events 4 Executive Summary 6 Honolulu Market 10 Health Systems & Hospitals 23 Physicians 28 Health Plans 36 Medicaid/Medicare/Uninsured 39 Pharmacy 41 Legislation 43 Employers 46 Demographics & Statistics Want to compare markets or regions to one another? Go to the data export to see a quick snapshot of the top market players and the assessment of each healthcare segment, as ranked by HLI s experienced market analysts. For assistance call 1-800-643-7600. HealthLeaders-InterStudy Honolulu Analyst Jeannie Naujeck jnaujeck@hl-isy.com Market Analyst Jeannie Naujeck Principal Director, Managed Markets Analysis Carolyn McMeekin Assistant Directors, Managed Markets Analysis Renée Burnham, Josh Kelley, Dave Raiford Editors Holly Fults, Keith Wagner Design and Production Stephen Benton Key Account Directors Matt Hanvey, Jolayne Perry, Bob Fucile Corporate Training Manager Jacky Lancio CORPORATE OFFICE One Vantage Way, B-300 Nashville, TN 37228 Phone: 615.385.4131 Fax: 615.385.4979 Toll Free: 888.293.9675 www.hl-isy.com Except where otherwise indicated, information in this product is from analysis of HealthLeaders-InterStudy data, interviews with local experts, news sites, and industry reports. Published March 2013. Copyright 2013 HealthLeaders-InterStudy, A Decision Resources Group Company. All Rights Reserved. Reproduction, distribution, display, transmission, or creation of derivative works, of this report in any form, in whole or in part, is prohibited, without the prior written permission of HealthLeaders-InterStudy. Selling or otherwise providing this report to third parties, in whole or in part, violates the contractual agreement under which this report is provided and is a violation of federal copyright statutes. Violation of federal copyright law is punishable by fines up to $100,000. This report is intended for the sole use of a HealthLeaders-InterStudy Named Authorized User or for those who have received this Report with the consent of HealthLeaders-InterStudy. Questions regarding use of this product should be directed to HealthLeaders-InterStudy, One Vantage Way, B-300, Nashville, TN 37228; 615.385.4131. 2

KEY MARKET EVENTS BACK TO CONTENTS Updates: Key Market Events Update March 2013 - HealthLeaders-InterStudy publishes annual Market Overview for Honolulu The annual report provides data and analysis of several sectors of the Honolulu healthcare market, including hospitals and health systems, physicians, health plans, Medicaid, Medicare, the uninsured, pharmacy, legislation, and employers. 3

Executive Summary Market Outlook Buoyed by record tourism numbers, Hawaii s economy is making a big comeback from a dismal 2011 when the closure of two hospitals put a severe strain on Honolulu s emergency, long-term, and acute-care facilities. Health services will be restored to West Oahu when The Queen s Health Systems reopens one of those hospitals in early 2014. With a large number of residents on Medicaid or Medicare, or uninsured, health systems and insurers are moving rapidly on cost control and payment reforms. The dominant health plan and largest health system are raising the bar with a new contract that pegs half of provider pay increases to performance targets, a model that is poised to become the standard in the market. Patient-centered medical homes are embedding nutritionists and dietitians to further manage chronic diseases affected by lifestyle, and the market s largest insurer is tightening controls on drug adherence and safety through a new pharmacy benefit management agreement. Highlights:»» The purchase of Hawaii Medical Center West by The Queen s Health Systems will relieve the burden on Oahu s acute-care facilities caused when that facility and Hawaii Medical Center East closed in late 2011. Queen s paid $21.2 million for the hospital and will spend more than $50 million this year preparing it for reopening in 2014. Queen s also assumed sole responsibility for organ transplants in the state after the closure of HMC East.»» A new five-year contract between Hawaii Medical Service Association and Hawaii Pacific Health will advance the pay-for-quality model with aggressive performance targets, and we expect this to become the standard in the market. Beginning in 2014, 50 percent of provider pay increases will be tied to quality and effectiveness metrics. The shared savings/shared loss model could give providers an incentive to prescribe more generic drugs.»» Prescription fill rates are up drastically in Hawaii, but the state and insurers are seeking further controls on pharmaceuticals in this already constrained market, with pushback against pricing of repackaged drugs dispensed by physicians in workers compensation cases. Hawaii s Medicaid pharmacy guidelines, adopted in 2012, encourage generic prescribing. The state has also launched a more transparent online prescription tracking system to help curb drug-shopping and a rising rate of prescription drug overdoses.»» Private hospitals are again backing a provider tax that will trigger federal matching funds to help reimburse them for Medicaid and uninsured care. The tax generated a total of $81 million to be distributed to hospitals in fiscal year 2014 and is especially important now that the state is directing an annual $10 million federal appropriation for such care to public hospitals instead of private ones.»» A mainland hospital owner is seeking to take over operations of eight public hospitals on the neighbor islands; privatization could ease the state s financial burden for unreimbursed care and provide more specialty services locally, reducing the need for residents to travel to Oahu for high-margin services such as heart surgery.»» Legislators, health systems, and the University of Hawaii medical school are seeking new ways to deal with the chronic physician shortage. The state must start filling the pipeline with new physicians or risk falling off a physician cliff over the next 10 years, as half of its physicians reach retirement age. 4

»» HMSA is embedding nutritionists and dietitians in its medical homes to take a more active role in member lifestyle management. HMSA also has a new PBM agreement with CVS Caremark that adds programs to improve drug adherence and safety by more closely monitoring members with chronic conditions and offering cost-savings on drugs to maximize compliance. 5

Honolulu Market Analysis For Honolulu Healthcare Market Market Indicators Table 3-2: Market Stage: Consolidated* Market» Moderate consolidation/integration of physician groups» High consolidation/integration of health systems/hospitals» Moderate use of disease management, utilization management» Health plans have implemented a number of cost/quality controls for physicians/hospitals» PPO benefit option prevails *For definitions of other market stages, see the Market Overview Product Manual. Source: HealthLeaders-InterStudy, 2013. 6

Table 3-4: Situation Analysis by Segment O Health Systems and Hospitals Neutral for health systems and hospitals. Look for steady patient volumes and stable earnings. O Physicians Neutral for physicians. Look for earnings to remain stable. + Health Plans Positive for health plans. Look for growth in health plan enrollments and/or increased profitability. O O Pharmacy Employers Neutral for pharmaceutical sales. Expect unchanged PMPM costs for health plans and/or overall stability in the use of branded drugs. Neutral for employers. Expect stable healthcare premium increases, with no change in efforts at healthcare cost containment. Table 3-5: Market Consolidation Hospital segment Physician segment Health plan segment High: 2 or 3 organizations control about 80% of the market.»» Moderate: 4 or 5 organizations control about 70% of the market.» Low: More than 5 organizations control about 70% of the market. Leading Organizations & Health Plans Table 3-7: Health Systems/Hospitals Name Total # of Hospitals Total # of Beds Market Share* Hawaii Pacific Health 3 479 35% The Queen s Health Systems 1 533 30% Kaiser Permanente Hawaii 1 241 15% *Based on inpatient discharges. Sources: HealthLeaders-InterStudy, 2013; based on data from Billian s HealthDATA, 2012. Table 3-8: Physician Organizations Name Total # of Physicians Hawaii Independent Physician Association 815 Pacific Medical Administrative Group 780 Hawaii Permanente Medical Group 600 Source: HealthLeaders-InterStudy, 2013. 7

Table 3-9: Total Enrollment* Plan Enrollment Market Share Hawaii Medical Service Association 592,082 63% Kaiser Foundation Health Plan 154,801 16% AlohaCare 47,997 5% *All HMO, PPO, POS, indemnity, Medicaid, and Medicare products. Source: HealthLeaders-InterStudy, as of July 1, 2012. Table 3-10: HMOs* Plan Enrollment Market Share Hawaii Medical Service Association 266,508 53% Kaiser Foundation Health Plan 154,634 31% AlohaCare 47,997 10% *All HMO products, including Medicaid and Medicare. Source: HealthLeaders-InterStudy, as of July 1, 2012. Table 3-11: PPOs* Plan Enrollment Market Share Hawaii Medical Service Association 320,418 76% University Health Alliance (HI) 32,446 8% Hawaii Medical Assurance Association 29,713 7% *Includes fully and self-insured commercial and Medicare PPOs. Source: HealthLeaders-InterStudy, as of July 1, 2012. Table 3-12: POS* Plan Enrollment Market Share UnitedHealth Group 1,555 47% Cigna HealthCare 954 29% WellPoint** 780 24% *Includes fully and self-insured point-of-service plans. **Projected. Source: HealthLeaders-InterStudy, as of July 1, 2012. Table 3-13: MCO-Managed Medicaid* Plan Enrollment Market Share Hawaii Medical Service Association 79,643 45% AlohaCare 46,789 26% Kaiser Foundation Health Plan 22,368 13% *Includes Title 19, CHIP, and other managed Medicaid lives. Source: HealthLeaders-InterStudy, as of July 1, 2012. 8

Table 3-14: MCO-Managed Medicare* Plan Enrollment Market Share Hawaii Medical Service Association 28,503 40% Kaiser Foundation Health Plan 18,580 26% UnitedHealth Group 13,178 19% *Includes HMO, PPO, PFFS, and other managed Medicare lives. Source: HealthLeaders-InterStudy, as of July 1, 2012. Table 3-15: Major Employers Name # of Employees State government 49,198 Federal government 41,301 University of Hawaii Systems 16,843 City and county of Honolulu 11,287 The Queen s Medical Center 7,789 The Corporation of The Church of Jesus Christ of Latter-day Saints 6,844 Hawaii Pacific Health 6,096 Kokusai Kogyo Co. 5,236 Sources: HealthLeaders-InterStudy, 2013; January 2012 Employer Vantage. Table 3-16: Pharmacy Chains Name Costco, CVS/pharmacy, Good Neighbor Pharmacy, Long s Drugs, Medical Center Pharmacy, Queen s Physician Office Building Pharmacies, Safeway, Sam s Club, Target, The Pillbox, Times Supermarkets, Walgreens, Wal-Mart Source: HealthLeaders-InterStudy, 2013. 9

Health Systems & Hospitals Table: Situation Analysis O THIS SECTOR IS: NEUTRAL Sector Outlook With a new owner in place for Hawaii Medical Center West, Oahu s overtaxed emergency rooms will get some relief in early 2014 when the hospital reopens as The Queen s Medical Center West Oahu after much-needed renovations. The bankruptcy and eventual failure of HMC boosted Queen s admissions, as The Queen s Medical Center took over as the state s only facility for organ transplants and radiation oncology. However, Queen s and Hawaii s other health systems have had to absorb a large number of charity and unreimbursed care cases from HMC s low-income patient pool in addition to managing a diminishing pool of funds for reimbursements, aggressive new pay-for-performance contracts, and an aging population. Highlights:»» Market composition: Nonprofit hospitals dominate the Honolulu area, with Hawaii Pacific Health as the market leader, followed by The Queen s Health Systems, Kaiser Permanente Hawaii, and Castle Medical Center. Hawaii Medical Center, which closed its two hospitals in late 2011 after failing to emerge from Chapter 11 bankruptcy protection with a buyer, was the market s fifth-largest system in terms of inpatient discharges. One of its hospitals, Hawaii Medical Center West in Ewa, has been purchased by The Queen s Health Systems and will reopen as an acute-care hospital called The Queen s Medical Center West Oahu in early 2014 after significant renovations. The market also includes the University of Hawaii Cancer Center, a National Cancer Institute designated cancer center since 1996. It collaborates with the UH John A. Burns School of Medicine, The Queen s Medical Center, Hawaii Pacific Health, and Kuakini Medical Center.»» Hospital makeup: The one-county Honolulu market currently has nine acute-care hospitals (excluding the Tripler Army Medical Center campus and Shriners Hospitals for Children Honolulu), with an estimated 72,688 inpatient discharges annually and 1,952 total acute-care beds. Medicare and Medicaid account for an average 20 percent and 8 percent, respectively, of the area s acute-care discharges (based on the most recent federal Medicare hospital statistics from Billian s HealthDATA).»» Financial performance: The closure of Hawaii Medical Center s two hospitals HMC West in Ewa and HMC East in Liliha sent patients to the nearest hospitals, Kaiser Permanente Moanalua Medical Center and Tripler Army Medical Center, both closed systems that nevertheless had to accept emergency patients. Kaiser Permanente cites the disruption as one reason for its lowered financial performance in 2012. Hawaii s private hospitals absorbed an estimated $150 million of charity care, bad debt, and otherwise unreimbursed care in 2012, up from $115 million in 2011 (Healthcare Association of Hawaii). 10

»» Government reimbursement cutbacks: In an abrupt change of policy, Gov. Neil Abercrombie s administration in May 2012 decided to give most of an annual $10 million federal appropriation for charity care to the state s public hospital system instead of diverting it to private hospitals to help buffer their unreimbursed costs for uninsured and underinsured patients. In 2011, private hospitals received $9.1 million of the money; in 2012, they received only $1.7 million. The Queen s Medical Center and Kapi olani Medical Center for Women & Children in Honolulu have typically been the largest beneficiaries, based on the amount of charity care they give. Hawaii s public hospitals include Hilo Medical Center, Kona Community Hospital, and Maui Memorial Medical Center, which are outside the Honolulu market.»» Contracting Hawaii Pacific Health has signed a five-year pay-for-performance agreement with Hawaii Medical Service Association. The contract ties 50 percent of provider pay increases to HEDIS measures. For more information, see the Hawaii Pacific Health profile.»» CMS reimbursements: In October 2012, the Centers for Medicare & Medicaid Services began withholding 1 percent of regular hospital reimbursement based on performance, including the rate of hospital readmissions and patient experience. The highest-scoring hospitals will get all of their Medicare deductions back, and the lowest-scoring hospitals will get nothing back. The level of deduction will increase, topping out at 2 percent in late 2016. Honolulu hospitals ranked 255 out of 295 hospital referral regions in patient satisfaction in 2010; the average hospital readmission penalty in the referral region is 0.2 percent (Kaiser Health News analysis of Centers for Medicare & Medicaid Services data). Castle Medical Center in Kailua had the highest penalty, at 0.7 percent. The Queen s Medical Center and Kaiser Foundation Hospital each had no penalty.»» Public hospitals: Eight public hospitals on the neighbor islands of Hawaii (the Big Island), Lanai, and Maui are in talks with Phoenix-based Banner Health, which runs 23 hospitals on the mainland and wants to assume operation of the struggling hospitals. The hospitals, which are subsidized by the state and need an estimated $400 million in improvements, are members of Hawaii Health Systems Corp., the state s 12-hospital public health system, and are vulnerable to reimbursement and subsidy cuts. State legislators are considering whether to change the law to allow a private company to acquire parts of HHSC. Private investment in the low-performing state-funded hospitals could improve the care and services offered and reduce the number of patients traveling to Honolulu hospitals for specialty care. A multiyear investment in cardiology services at one of the hospitals, Maui Memorial, has sharply ramped up the number of open-heart surgeries performed on Maui and reduced the number of patients traveling to Oahu. Public hospitals must receive approval from the state to launch such services, however, as well as find the money for personnel and equipment.»» Information technology initiatives: Utah-based Medicity is developing the infrastructure for the Hawaii Health Information Exchange. A secure direct messaging and patient referral system has already been launched, with more than 300 providers joining the network. In 2012, the state legislature resolved the state s more than 50 privacy statutes into one set of privacy standards for patient health data disclosure that aligns with HIPAA and other federal privacy laws. The exchange will launch its second phase later in 2013, which will allow providers to view lab results and patient medical records. The market s two largest systems, Hawaii Pacific Health and Queen s, also share their electronic medical records with each other through an Epic system. 11

»» Telemedicine: In October 2012, the Hawaii Telestroke Network, a partnership between The Queen s Medical Center and the state Department of Health, won a three-year state grant totaling $454,212 to link small rural hospitals, including Hilo Medical Center, Kauai Veterans Memorial Hospital, Maui Memorial Medical Center, and Wilcox Memorial Hospital, to Queen s neurologists on Oahu. The project is already in place at Molokai General Hospital and Wahiawa General Hospital.»» Significant legislation: Hospitals are again backing legislation in 2013 to establish a provider fee for private hospitals and large nursing homes that would leverage funds collected from a 3 percent tax on inpatient procedures and a 2.4 percent tax on outpatient procedures to get federal matching funds, creating a bigger pool of funds for Medicaid reimbursements. The law was enacted last year but sunsets in 2013. For fiscal year 2014, which begins July 1, 2013, a total of about $81 million will be distributed from the pool to private hospitals based on the amount of unreimbursed care they provided. The legislation is especially important now because the Abercrombie administration is directing an annual $10 million federal appropriation for such care to public hospitals.»» Hawaii Care Fund: The Queen s Health Systems and Hawaii Pacific Health are working on a partnership with the state to create a $10 million venture capital fund for healthcare called the Hawaii Care Fund. Local media reports that the state is contributing $5 million, with the rest coming from Queen s and Hawaii Pacific Health. The fund will support healthcare startups that run tests at both the University of Hawaii Cancer Center and the UH Burns School of Medicine.»» Quality programs: Hawaii ranked second worst in the nation for patient safety during hospital surgeries (2011 National Healthcare Quality Report, released by the U.S. Department of Health and Human Services, based on CMS data). The patient safety score was based on appropriate use of antibiotics to help prevent infection after surgery. Hawaii also received poor ratings in the areas of pneumonia care, pain drugs for hospice patients, and kidney transplants. For overall healthcare quality, Hawaii ranked 24th in the nation. However, the state had the lowest number of breast and prostate cancer deaths and low rates of hospitalization for avoidable conditions. CMS data show that Hawaii has the lowest overall infection rate of any state. The Leapfrog Group ranked seven of 12 Hawaii hospitals average or worse in its June 2012 Hospital Safety Scores based on 26 measures of hospital safety. Straub Clinic & Hospital and Kaiser Permanente Moanalua Medical Center earned A ratings. Six of 12 Hawaii institutions, including two that have closed, received C grades. Hospitals contested the scores, saying the data was flawed or skewed, and said the Leapfrog scores were inconsistent with state and national averages for various quality measures and patient satisfaction surveys. 12

Hawaii Pacific Health Table 4-1 Local hospitals: Local hospital beds: Physicians employed: 3 479 587 1,613 Acute-care hospitals:» Kapi olani Medical Center for Women & Children, Honolulu, 204 beds» Straub Clinic & Hospital, Honolulu, 159 beds» Pali Momi Medical Center, Honolulu, 116 beds Major outpatient centers: Physicians affiliated: PBM: GPO: PharmaCare for outpatient, internal for inpatient MedAssets» Surgicare of Hawaii, a joint venture among Surgery Care Affiliates LLC, Hawaii Pacific Health Partners Inc., and Honolulu Surgery Center LP; Hawaii Pacific Health Partners is an HPH subsidiary.» Part owner, along with other health systems, of the Cancer Center of Hawaii Physician groups:» Kapi olani Medical Specialists, more than 100 physicians» Straub Clinic, more than 200 employed physicians Other details:» 49 outpatient clinics and service sites, including Kauai Medical Clinic (on Kauai outside the Honolulu market) Sources: HealthLeaders-InterStudy; based on data from Billian s HealthDATA. Description Nonprofit Hawaii Pacific Health, the largest health system in the Honolulu market by inpatient discharges, has three hospitals on the island of Oahu and one on Kauai outside the Honolulu market. HPH specializes in women s health, cardiovascular medicine, bone and joint services, pediatric medicine, and oncology. In addition to hospitals, the health system s closely aligned physician organizations include Kapi olani Medical Specialists, Straub Clinic, and Kauai Medical Clinic, a multispecialty group with four locations on Kauai. HPH accounts for 35 percent of inpatient discharges and 25 percent of total acute-care beds (most recent federal Medicare hospital statistics). The average occupancy rate is 81 percent, and the average length of stay is 5.5 days. Medicare and Medicaid account for an average 18 percent and 9 percent, respectively, of acute-care discharges. Nearly half of births on Oahu and about a third of births statewide occur at Kapi olani Medical Center for Women & Children, which has the state s only emergency room and intensive care unit for pediatric patients. The medical center also serves as a major training facility for pediatric and obstetrics/gynecology residency programs operated by the UH Burns School of Medicine. Women s services include screening, diagnostics, and treatment for breast and gynecological cancers. Straub Clinic & Hospital includes an acute-care facility in Honolulu and a dozen clinic locations statewide, including nine on the island of Oahu, two on Hawaii (the Big Island), and one on Lanai. More than 200 employed physicians provide primary and specialty care at the clinics and hospital, whose services include minimally invasive open-heart surgery, cancer treatment, and bone/joint care. Pali Momi Medical Center provides care to West Oahu residents and has an adjoining medical office building used by more than 100 physicians. The medical center includes a cardiac catheterization unit, a women s center, a retina center, and a minimally invasive surgical suite that has telemedicine equipment. 13

Hawaii Pacific Health also includes a hospital outside the Honolulu market: Wilcox Memorial Hospital in Lilue (on the island of Kauai). It has ownership interests of one-third or more in multiple joint ventures, including Surgicare of Hawaii, Kona Ambulatory Surgery Center, Pacific Radiopharmacy, ASC Pacific Ventures, Invision LLC, and the Cancer Center of Hawaii. News and Analysis System president Ray Vara stepped in as CEO of Hawaii Pacific Health in March 2013; under Vara s decadelong tenure as chief of operations, the system managed an increase of patient volume by nearly half. HPH has signaled it is serious about cutting costs, signing what is to date Hawaii Medical Service Association s most aggressive shared savings/shared loss agreement with a provider. It is a somewhat surprising development, considering that HPH and HMSA have had heated negotiations in the past over costs and reimbursements. The contract, which starts in 2014, puts HPH at the vanguard of pay-for-performance reform in this market, and we expect the rest of the market will follow suit. Financial performance: Moody s, Standard & Poor s and Fitch all gave Hawaii Pacific Health an A- bond rating in September 2012, with a stable or positive outlook for the state s largest nonprofit healthcare organization. S&P cited HPH s strong financial performance and management team as reasons for its upgrade. Expansion plans: Work on the first phase of the Kapi olani Medical Center for Women & Children s 15-year, $160 million redevelopment is proceeding apace. In fall 2013, work will begin on a $36.3 million renovation and expansion of the neonatal and pediatric intensive care units that will add private rooms. That phase should take about 40 months, hospital officials estimate, and will add 24 beds to the neonatal intensive care unit, for a total of 70. The hospital is adding 36 beds total. Future phases of the expansion will add new teaching facilities for UH Burns School of Medicine students, nurses, pharmacists, and other healthcare workers. The Kapi olani Health Foundation is raising $30 million in private donations to help pay for the remodel and is two-thirds of the way to its goal with more than a year to go. Community donations were up 51 percent in 2012 and totaled $10.8 million, with strong business support for the capital improvements. Contracting: Hawaii Pacific Health s new five-year contract with the Hawaii Medical Service Association is the most aggressive attempt yet in the market at reining in medical costs through a shared savings/shared losses model. The agreement, which begins in 2014, ties 50 percent of provider payment increases to HEDIS performance measures, including quality improvement, care access, and cost-savings. The contract covers HPH s physician network and all facilities in the system. HMSA says it will make investments to help Hawaii Pacific Health reach its goals. Through 2013, HPH is under a three-year contract similar to those HMSA has signed with other health systems in Hawaii that bases 15 percent of revenues on similar criteria. The new agreement, beginning in 2014, covers more than 700,000 HMSA members. Under the 2014 contract, HPH will also be reimbursed for care management services that HMSA had previously administered, which translates to an estimated 90 percent growth in preventive care and chronic management services for HPH. Bone marrow program: In December 2012, Kapi olani Medical Center for Women & Children began collecting bone marrow in Hawaii, becoming the first facility in the state to do so since Hawaii Medical Center East closed a year before. Kapi olani is a National Marrow Donor Program Collection Center of the National Marrow Donor Registry. The center collects bone marrow for both children and adult recipients but performs only pediatric transplants. The hospital hopes to perform adult transplants in the future and also is seeking approval for stem cell collections. Technology initiatives: Hawaii Pacific Health was given the 2012 Enterprise Health Information and Management Systems Society Davies Award of Excellence. The award recognizes excellence in the use of 14

electronic medical records to improve quality and safety in an acute-care setting. HPH ranks in the top 5 percent of hospitals nationwide in EMR adoption. In October 2012, Hawaii Pacific Health purchased two surgical robots, one for its Kapi olani Medical Center for Women & Children and one for Pali Momi Medical Center, at a cost of $4.5 million. The Kapi olani robot will be used for pediatric and ob/gyn surgeries and for training medical students, as well as for other types of surgeries. Key personnel changes: Hawaii Pacific Health President Ray Vara took over as CEO after Chuck Sted left the organization March 1, 2013. Sted was CEO for eight years. The system had been planning for his succession for the past year. 15

The Queen s Health Systems Table 4-2 Local hospitals: Local hospital beds: Physicians employed: Physicians affiliated: PBM: GPO: 1 533 137 1,062 N/A N/A Acute-care hospitals:» The Queen s Medical Center, Honolulu, 533 beds Other details:» The Queen s Health Care Centers, five clinics statewide, including two on Oahu in Honolulu and Kapolei, served by about 40 primary-care and specialist physicians» Hamamatsu/Queen s PET Imaging Center, a joint venture between The Queen s Medical Center and Hamamatsu Photonics of Japan» Queen s Development Corp., a for-profit organization that provides healthcare support services throughout Hawaii and the Pacific region; the corporation holds a 90 percent interest in Queen s medical office buildings as well as pharmacies within those facilities.» Diagnostic Laboratory Services, the largest locally owned clinical testing lab in Hawaii, with more than 50 locations statewide» Part owner, along with other health systems, of the Cancer Center of Hawaii Sources: HealthLeaders-InterStudy; based on data from Billian s HealthDATA. Description The Queen s Health Systems is a nonprofit corporation that includes the state s largest hospital, The Queen s Medical Center, which is located in downtown Honolulu. The system acts as a medical referral center in the Pacific Basin and offers a range of primary-care and specialty services. The Queen s Medical Center accounts for 30 percent of inpatient discharges and 27 percent of total acutecare beds in this market (most recent federal Medicare hospital statistics). The average occupancy rate is 77 percent, and the average length of stay is 7.0 days. Medicare and Medicaid account for an average 23 percent and 10 percent, respectively, of acute-care discharges. The Queen s Medical Center is known for programs in cancer, cardiovascular disease, neuroscience, orthopedics, behavioral health, and trauma. The medical center offers a number of physician residency programs in conjunction with the UH Burns School of Medicine. The Queen s Cancer Center, which opened in 2007, provides comprehensive cancer treatment and research. The cancer center is designed to reduce the need for Hawaii residents to seek care on the mainland. The medical center campus also includes two medical office buildings. The Queen s Health Care Centers include two clinic locations in the local market. One location is in Honolulu and provides primary care, specialty care, imaging, and physical and occupational therapy. The other location is in Kapolei and provides primary and specialty care. The health system also includes Molokai General Hospital, a 15-bed rural healthcare facility with criticalaccess hospital designation on the island of Molokai, and CareResource Hawaii, a joint venture with Kuakini Medical Center that provides home healthcare, skilled nursing, and rehabilitative therapy In December 2012, the system finalized its purchase of the former Hawaii Medical Center West. The renamed The Queen s Medical Center West Oahu will reopen in 2014 following extensive renovations. News and Analysis With the purchase of Hawaii Medical Center West in Ewa its first major acquisition since purchasing Molokai General Hospital in 1987 The Queen s Health Systems establishes a significant new geographic 16

presence on Oahu. Queen s also took over organ transplants and became the only nuclear commissionapproved radiation oncology facility in the state when HMC East closed. Financial performance: Queen s paid $21.2 million for HMC West s land and building and will invest another $52 million for hospital equipment and renovations. In regulatory filings, Queen s said it would pay $25.2 million in cash and finance the rest. The company will need to hire about 400 new employees to reopen the hospital, which will provide approximately $50 million annually in charity care and is not expected to make a profit for five years. Expansion plans: Queen s will reopen HMC West as The Queen s Medical Center West Oahu in early 2014 after extensive renovations that include an expansion and modernization of emergency, surgical, and imaging services. The new hospital will serve about 35,000 patients a year, with 22 emergency rooms and four operating rooms, double what they were. It is licensed for 130 beds, though Queen s plans to reopen with 70 beds and add more as needed. Queen s projects it will have more than 3,000 inpatient admissions and more than 27,000 emergency and outpatient visits in its first year. Despite the struggles former owner St. Francis Healthcare had making a profit because of the uninsured and underinsured demographic of West Oahu, the area is changing as a new mix of younger, commercially insured families move into the area. As a condition of the deal with St. Francis, the new facility cannot offer abortions or assisted suicide. Physician relationships: In March 2012, a federal judge ordered The Queen s Medical Center to reinstate privileges for the oncologists of Pacific Radiation Oncology LLC after they filed a lawsuit alleging Queen s was trying to establish a monopoly on radiation oncology services by restricting use of its radiology department to only its employed oncologists. The PRO oncologists had been offered jobs at Queen s but turned them down because accepting the offer of employment would have required them to give up their investments in equipment at the Cancer Center of Hawaii clinics at Hawaii Medical Center s shuttered hospitals. Cancer center: The cancer center at The Queen s Medical Center has been awarded funding to continue in the National Institutes of Health s National Cancer Institute network of community cancer centers for the next two years. Queen s has been part of the NCI Community Cancer Centers Program since 2010. The network of community hospitals works to expand cancer research, improve access to cancer care, and improve the quality of care for cancer patients at community hospitals in urban, suburban, and rural areas. Telemedicine: The Hawaii Telestroke Network that links The Queen s Medical Center neurology experts to emergency physicians in rural communities are in the middle of a three-year state grant worth $454,212 to install and operate the video technology at seven hospitals. The system is being used at Molokai General Hospital and Wahiawa General Hospital and is in the contracting and credentialing phase with Maui Memorial Hospital and Hilo Medical Center. Lack of consistent funding has been a barrier to widespread adoption of telemedicine in Hawaii, despite the numbers of residents living in remote or inaccessible areas and advocacy efforts by health systems and physician associations. Quality programs: The Queen s Medical Center was the only Hawaii hospital to be given an A for hospital safety by The Leapfrog Group in a report released in July 2012. The scores are based on preventable medical mistakes, injuries, accidents, and infections. More than half of the state s hospitals received a C or lower grade. Organ transplants: Queen s is currently operating the only organ transplant center in Hawaii and the Pacific Rim, a service that disappeared after the bankruptcy and December 2011 closure of Hawaii Medical Center East. In February 2012, the legislature and Gov. Neil Abercrombie fast-tracked a bill appropriating $1.8 million in emergency funds to establish the Queen s Transplant Center and a kidney disease management program. 17

New heart treatment: Queen s is the first hospital in Hawaii and one of the first in the United States to offer a new, minimally invasive treatment for aortic stenosis, or narrowing of the heart valve. Heart valve replacement is performed through a catheter inserted through the groin, eliminating the need for open heart surgery, which carries a risk of serious complications. The new surgery, transcatheter aortic valve replacement, could benefit between 400 and 500 patients per year in Hawaii who suffer from severe aortic stenosis and are not good candidates for open heart surgery. Contracting dispute: In October 2012, The Queen s Medical Center sued Kaiser Foundation Health Plan in Honolulu Federal Court for more than $4 million, claiming that KFHP has been underpaying Queen s for care given to KFHP members since March 2012. An agreement between the two parties dating to 1996 allowed KFHP members to go to Queen s for services not offered by Kaiser at a discounted rate. That agreement expired at the end of 2011. Queen s alleges that Kaiser Foundation Health Plan has continued reimbursing the system at a discounted rate of 80 percent or less and is asking for the difference plus punitive damages. The lawsuit also names Stratose, a company that KFHP uses to arrange discounts. Key personnel changes: Susan R. Murray has been named chief operating officer of The Queen s Medical Center West Oahu, the former Hawaii Medical Center hospital that will reopen next year under Queen s ownership. Awards: The Queen s Medical Center is a top-ranking facility in Honolulu for nine specialties: cancer, cardiology and heart surgery, gastroenterology, geriatrics, gynecology, nephrology, orthopedics, pulmonology, and urology (U.S. News & World Report). The Queen s Medical Center is recognized as a Magnet facility by the American Nurses Credentialing Center, the credentialing arm of the American Nurses Association. Parent company earnings: The health system s total operating revenues for the year ended June 30, 2012, were $888.4 million, up from $826.1 million in 2011. Net income was $53.9 million, down from $74.7 million the year prior. 18

Kaiser Permanente Hawaii Table 4-3 Local hospitals: Local hospital beds: Physicians employed: Physicians affiliated: PBM: GPO: 1 241 600 450 N/A Broadline Acute-care hospitals:» Kaiser Permanente Moanalua Medical Center & Clinic, Honolulu, 241 beds Physician groups:» Hawaii Permanente Medical Group, 600 staff and part-time/on-call physicians Health plan:» Kaiser Foundation Health Plan, which has 154,801 members in Hawaii as of July 1, 2012 Other details:» Eighteen outpatient clinics statewide, including 10 in the local market Sources: HealthLeaders-InterStudy; based on data from Billian s HealthDATA. Description Kaiser Permanente Hawaii includes a medical center in Honolulu and 18 outpatient clinics statewide, including 10 on the island of Oahu. Hawaii Permanente Medical Group employs physicians who staff KP medical facilities in the local area and employs about 4,400 staffers statewide. The organization s health plan has the second-largest total enrollment in the local market. Kaiser Permanente accounts for 15 percent of local inpatient discharges and 12 percent of total acute-care beds (most recent federal Medicare hospital statistics). The average occupancy rate is 71 percent, and the average length of stay is 5.6 days. Oakland-based Kaiser Permanente, founded in 1945, is a group-practice prepayment program that is composed of the nonprofit Kaiser Foundation Health Plan and Kaiser Foundation Hospitals and their subsidiaries, along with the for-profit Permanente Medical Groups, whose physicians are salaried employees. Nationwide, the integrated system has 37 medical centers, 611 medical offices, and about 16,700 physicians. The health plan had about 9 million members in nine states and the District of Columbia as of year-end 2012. Moanalua Medical Center & Clinic offers a range of specialty services that include cardiothoracic surgery, neurosurgery, hematology/oncology, orthopedics, a neonatal ICU, maternal fetal medicine, and a diabetic limb treatment center. The medical center also includes an ambulatory surgery center, an ambulatory treatment center, a clinical decision unit, physicians offices, an outpatient clinic, and ancillary support services, including laboratory, pharmacy, and diagnostic imaging. News and Analysis Kaiser Permanente is both expanding facilities and trimming its workforce to reflect its focus on primary care. The system is spending on new facilities and upgrades and hiring specialty physicians throughout Hawaii, but it is also saving money by cutting management positions and nursing staff, and delegating some clinical work to less-credentialed, lower-cost staffers. Other cost-cutting measures include closing or capping hours at two urgent-care facilities while expanding access to preventive care. KP officials cited an increase in unreimbursed care after Hawaii Medical Center s two hospitals closed, plus uncertainty over future reimbursements, as reasons for poor operational performance during 2012 and the subsequent need to cut costs. 19

Financial performance: Kaiser Foundation Health Plan s premium increases could hurt patient volume if members switch to HMSA, which raised rates by only about 1 percent in 2013. But medical service accessibility is especially important in Hawaii, and Kaiser Permanente Hawaii s strategic new locations on Oahu and Maui could keep members in place. Expansions: Kaiser Permanente plans to spend $320 million to add facilities, renovate existing properties, and upgrade and add technology throughout Hawaii over the next five years, with $105 million in spending in 2013 on Oahu, Maui, and Big Island projects alone. They include:»» A $170 million renovation at the Moanalua Medical Center & Clinic was completed at the end of 2012 and included a neonatal intensive care unit, diagnostic imaging services, and private patient rooms.»» KP is building a new 12,000-square-foot clinic in Pearlridge Center in Honolulu that is expected to open in fall 2013. The clinic will provide family medicine and pediatric care as well as behavioral health, lab, and pharmacy services.»» A new physical and occupational therapy center in Wailuku on the island of Maui is due to open in October 2013.»» The system broke ground in July 2012 on a $15 million expansion of the Koolau Clinic in Kaneohe that is slated for completion in late 2013. The project adds 6,000 square feet for a total of 17,000 square feet and adds two new exam rooms and more room for pharmacy services. The Koolau clinic serves about 37,000 patients per year.»» Kaiser broke ground in September 2012 on a new 40,000-square-foot clinic in North Kona on the Big Island and expects to complete it in mid-2014. The new building will house 30 examination rooms. It will serve more than 20,000 Kaiser Permanente members in the growing but underserved community of North Kona and replaces the existing clinic in Kailua-Kona. Physician relationships: KP is adding new physicians at a steady clip, hiring an average of two new specialists per month on Oahu to staff its medical center and clinics. The system added seven specialists on Maui in 2012. Staffing cuts: In January 2013, Kaiser Permanente Hawaii informed the Hawaii Nurses Association that it would cut at least 47 registered nurses half on Oahu and replace them with lower-skilled licensed practical nurses and medical assistants. It is also closing the Honolulu Urgent Care Clinic, which saw about 30 patients a day, and cutting hours at the Moanalua Ambulatory Treatment Center. KP said it intends to expand primary care, reducing the need for urgent-care visits. KP employs about 850 RNs in Hawaii; about 25 accepted a contract buyout in late 2012. Contract dispute: Kaiser Foundation Health Plan is being sued by The Queen s Medical Center in Honolulu Federal Court after KFHP allegedly underpaid Queen s for care given to KFHP members beginning in March 2012. KFHP members have been able to go to Queen s since 1996 for services that KP does not provide. Queen s alleges that the contract expired in 2011 but KFHP continued to reimburse at the discounted rate of 80 percent or less, and is asking for more than $4 million plus punitive damages. The lawsuit also names Stratose, a company employed by KFHP to help arrange discounted prices. Key personnel changes: Kaiser Permanente s president and chief operating officer, Bernard Tyson, will replace retiring chairman and CEO George Halvorson at the end of 2013. Tyson has worked at Kaiser for 28 years and previously directed its hospital systems. Halvorson, 65, plans to step down in December 2013 after leading the company since 2002. Parent company earnings: Kaiser Permanente, including Kaiser Foundation Health Plan Inc., Kaiser Foundation Hospitals, and their subsidiaries, reported net income of $2.6 billion in 2012, up 30 percent from 2.0 billion in 2011. Total operating revenue was $50.6 billion in 2012, up from $47.9 billion in 2011. Total membership was 9 million members as of Dec. 31, 2012, up by 131,000 members from the prior year. 20

Other Health Systems and Hospitals Nonprofit Castle Medical Center is a 160-bed hospital that is the primary healthcare facility on the windward side of the island of Oahu. Castle, which is owned by Roseville, Calif.-based Adventist Health, places an emphasis on healthy living and offers an employee wellness program. The medical center s specialties include heart care, joint care, bariatric surgery, and a birth center. Castle is located just outside Kailua, and the campus includes two buildings: the main medical center and the Weinberg Medical Plaza and Wellness Center. It has nearly 300 affiliated physicians. Castle Medical Center accounts for 10 percent of inpatient discharges and 8 percent of total acute-care beds (most recent federal Medicare hospital statistics). Medicare and Medicaid account for an average 24 percent and 6 percent, respectively, of acute-care discharges. Castle is building a $3 million open-heart surgery center that will fill a void created when HMC East closed. HMC East performed about 160 cardiac surgeries per year. Castle will convert some of its 111 medical and surgical beds to intensive care unit beds and renovate operating rooms to create the center. It will be led by Henry Louie, a well-known cardiac surgeon on Oahu who formerly based his practice at HMC East and headed up the 130-physician practice Hawaii Physician Group. The new center is expected to open by April 2013 and perform about 85 surgeries its first year. The center is part of Castle s $24 million renovation, which will expand the ED, add an outpatient imaging center, and remodel the behavioral health unit. Nonprofit Kuakini Health System includes Kuakini Medical Center, a teaching hospital in Honolulu with medical and surgical residencies and a geriatric fellowship under the UH Burns School of Medicine. Kuakini is raising $8 million for a new research building that will include a secured frozen tissue and blood specimen storage facility, a repository laboratory, a work area for specimen analysis, patient exam rooms, and offices for the Kuakini Honolulu Heart Program, Kuakini Honolulu-Asia Aging Study, and other new research projects sponsored by the system. The new $103 million, 150,000-square-foot University of Hawaii Cancer Center opened in Kakaako in February 2013. It is the only National Cancer Institute designated cancer center in the Pacific and has formed a research consortium with other regional providers to pool resources and expertise. The University of Hawaii Cancer Consortium includes the UH Cancer Center, The Queen s Health System, Hawaii Pacific Health, UH Burns School of Medicine, and Kuakini Health System. The center is headquarters for one of the NCI s Minority-Based Community Clinical Oncology Programs. The Center s NCI designation was renewed for five years in June 2012. The two-hospital Hawaii Medical Center system was closed in late 2011 and its title was returned in April 2012 to former owner St. Francis Healthcare under order by a bankruptcy judge. The Queen s Health Systems purchased the former Hawaii Medical Center West in Ewa and will reopen it in early 2014. St. Francis has indicated that it will transform Hawaii Medical Center East in Liliha into a long-term care facility. Until its hospitals closed, HMC was the market s fifth-largest health system by inpatient discharges. HMC s percentage of patients with Medicaid coverage was the highest in the market, and its percentage of patients with Medicare was among the highest. 21

Table 4-4: Honolulu Hospitals Name City Beds The Queen s Medical Center Honolulu 533 Kuakini Medical Center Honolulu 357 Kaiser Permanente Moanalua Medical Center & Clinic Honolulu 241 Kapi olani Medical Center for Women & Children Honolulu 204 Castle Medical Center Kailua 160 Wahiawa General Hospital Wahiawa 159 Straub Clinic & Hospital Honolulu 159 Pali Momi Medical Center (formerly Kapi olani Medical Center at Pali Momi) Honolulu 116 Kahuku Medical Center Kahuku 23 Tripler Army Medical Center (includes Matsunaga VA Medical Center) Honolulu N/A Shriners Hospitals for Children Honolulu Honolulu N/A Sources: HealthLeaders-InterStudy, 2013; based on data from Billian s HealthDATA, 2012. 22

Physicians Sector Outlook Table: Situation Analysis O THIS SECTOR IS: NEUTRAL The physician shortage has stabilized but continues to be a concern in Honolulu and Hawaii, especially in rural regions. Nearly half of the state s practicing physicians are between the ages of 55 and 64, meaning half of the existing supply may be lost to retirement over the next 10 years. The state s high cost of living estimated at 30 percent to 40 percent higher than the mainland is a factor; Hawaii routinely loses younger physicians to states like California. Legislators plan to introduce bills to forgive or repay medical school loans for those who stay in Hawaii and practice in rural areas, as well as expand the number of primary-care residencies at hospitals. Legislation also includes incentives to train native-born residents in all healthcare fields, as they are less likely to leave for the mainland and more likely to reflect the diversity of the population. Highlights:»» Market composition: Many Honolulu physicians belong to large IPAs or are employed by hospitals, with a few small singleand multispecialty groups remaining in the market. Among younger physicians, the trend is toward hospital employment. About 65 percent of physicians have solo practices or are in small groups; 80 percent are taking new patients; and 71 percent accept new Medicare patients (Physician Licensure Survey provided by the Hawaii/Pacific Basin Area Health Education Center at the University of Hawaii in a report to the 2013 Legislature).»» Physician supply: Hawaii is currently short an estimated 600 physicians, both in primary care and specialty areas, with more than a quarter of the state s practicing physicians already at retirement age and close to half reaching age 65 within the next decade, according to the Hawaii/Pacific Basin Area Health Education Center. The average age of physicians in Hawaii was 54 in 2012. The shortage would be worse if not for delayed retirement and 100 new licensed physicians coming into practice, center officials told the state Legislature in December 2012. The greatest shortage is in primary care, particularly on neighbor islands, and in specialties including anesthesiology, general surgery, infectious disease, neurosurgery, and pathology. Rural areas have the greatest need. With higher demand and an aging population, state lawmakers are considering bills intended to alleviate the physician shortage, including a loan repayment program for physicians who work in rural communities, as well as measures that would increase Medicaid reimbursements for hospitals and outpatient care and appropriate money for hospitals to hire more physicians. The Hawaii Physician Workforce Assessment team estimates that Hawaii could be short 1,600 physicians by 2020 if action is not taken. In September 2012, the University of Hawaii John A. Burns School of Medicine launched the state s first loan repayment program for primary-care providers who pledge to work in rural areas statewide. Hawaii has about 40 federally recognized healthcare shortage areas. The program is funded with $300,000 in seed money from The Queen s Medical Center, the Hawaii Medical Service Association. and a matching federal grant through the Affordable Care Act. 23

»» Nurse practitioners and physician assistants: While Hawaii s nurse practitioner supply ranks in the middle of all states, Hawaii has a shortage of physician assistants. The state had 211 total physician assistants as of 2010, or 16 physician assistants per 100,000 population, compared with 27 per 100,000 population nationwide, ranking Hawaii 44 among the 50 states and the District of Columbia on that measure (Kaiser Family Foundation analysis of data from the American Academy of Physician Assistants). Nurse practitioners in Hawaii can independently diagnose and treat patients without physician involvement. State statute recognizes them as primary-care providers. Nurse practitioners can also prescribe, after meeting certain state requirements.»» Pay for performance: Virtually all Hawaii health providers are now working under an outcomes-based payment model with Hawaii Medical Service Association. Fourteen Hawaii hospitals are under a pay-for-performance program that bases up to 15 percent of provider revenues on quality health outcomes. Metrics include the use of electronic medical records and the rate of bloodstream infections. Beginning in 2014, Hawaii Pacific Health will have up to 50 percent of provider pay increases tied to performance targets under a new five-year contract. Kaiser Permanente Hawaii has similar incentives for performance, although its physicians are salaried within a closed system.»» Government reimbursement levels: Primary-care physicians in Hawaii saw reimbursements go up by about a third in January 2013 under new federal regulations requiring Medicaid patients to be reimbursed at Medicare rates. Specialists are excluded from the new rates. Hawaii has more than 850 primary-care providers participating in Medicaid, according to the state Department of Human Services, and the Hawaii rate increases will total about $45 million in the first year. The higher payments are part of a two-year pilot; after 2014, it is up to individual states to decide whether to continue (2008 and 2012 Kaiser Commission on Medicaid and the Uninsured/Urban Institute Medicaid Physician Fee Surveys).»» Patient-centered medical homes: In 2011, HMSA launched its patient-centered medical home initiative, freezing fee-for-service rates at 2010 levels and providing incentives for primary-care practices to adopt a medical home model through a per-member, per-month fee for participating providers, pay-for-performance bonuses, and shared savings. As of December 2012, HMSA reported that 482 primary-care providers in Hawaii had achieved PCMH designation. HMSA has started conducting annual provider audits to ensure compliance with medical home requirements. The state s largest independent physician group has taken the lead in moving its member practices to a medical home model that maximizes revenues for providers under HMSA guidelines.»» Information technology: Utah-based Medicity is developing the infrastructure for the Hawaii Health Information Exchange, and more than 300 providers have joined the network. The exchange will launch its second phase later in 2013, which will allow providers to view lab results and patient medical records.»» EMR/e-prescribing: Hawaii ranks higher than the national average in electronic medical record adoption. More than 86 percent of physician practices in Hawaii had an EMR system as of 2012 (National Ambulatory Medical Care Survey conducted by the Centers for Disease Control and Prevention). However, only 52 percent intended to participate in Medicare and Medicaid meaningful use incentive programs. As of July 2012, 237 providers had received $14.7 million in payments under the Centers for Medicare & 24

Medicaid Services incentive programs. Hawaii Pacific Regional Extension Centers help healthcare providers convert from paper to electronic medical records and assist them in becoming meaningful users. About 700 providers have used the centers. Hawaii is one of six states that has not launched a Medicaid EMR program and is therefore ineligible for federal incentives to Medicaid providers for adopting EMR systems. Under the Medicaid Electronic Health Record Incentive Program, providers can get up to $63,750 over six years if they demonstrate their use of EMR improves quality and reduces errors. Hawaii has about 6,500 Medicaid fee-for-service providers. Medicaid providers that have not successfully participated in the EMR program will have reimbursements cut in 2015. Hawaii DHS attributes the lack of a plan to staff and budget cutbacks. By the end of 2011, about 41 percent of physicians were routing prescriptions electronically, compared with 16 percent in 2009 (Surescripts State Progress Reports). 25

Hawaii Independent Physicians Association Table 5-1 Type: IPA Total Physicians: 815 Primary-Care Physicians: 325 Internal Guidelines: No Medical Management: No Clinical IS: Yes Hawaii Independent Physicians Association is the largest physician organization in the state and touts its technology focus and negotiating clout with health plans over reimbursement rates, including compensation for preventive medicine. The IPA also stresses the use of evidence-based medicine and opposes health plans that increase patients share of the payment for medical services, putting physicians at risk for nonpayment. The IPA offers employers the option of directly contracting with its physicians instead of going through an insurance company or third-party administrator. As part of the contract, the IPA is willing to create aligned incentives between the employer and physicians to improve the quality and efficiency of care. HIPA supports worksite wellness initiatives and provides screening for diabetes, kidney disease, sexually transmitted diseases, heart disease risk factors, and various cancers. Results of the screenings are communicated to employees primary-care physicians. The association offers support to its members in transitioning to a patient-centered medical home model that meets HMSA requirements and maximizes revenue under the HMSA system. It has a mentorship initiative that aims to help train and retain new physicians by pairing medical students with veteran physicians. HIPA also sponsors a healthcare think tank and supports expansion of the Hawaii Pacific Regional Extension Centers, a division of the Hawaii Health Information Exchange that supports providers in transitioning to electronic medical records. Pacific Medical Administrative Group Table 5-2 Type: IPA Total Physicians: 780 Primary-Care Physicians: N/A Internal Guidelines: No Medical Management: Yes Clinical IS: N/A Pacific Medical Administrative Group is an IPA that provides professional services to more than 86,000 PPO and HMO covered lives. The group was incorporated in 1988 with 200 physicians and is now approaching 800. It is the exclusive physician group for more than 40,000 patients in HMSA s Pacific Health Care HMO network. The medical group and HMSA also jointly own Partners for Quality Health, a management services organization that provides physicians with data about their practices. The data are used to improve the quality and efficiency of care. PMAG is affiliated with Kapi olani Medical Center for Women & Children, Pali Momi Medical Center, Kuakini Medical Center, and The Queen s Medical Center. 26

Hawaii Permanente Medical Group Table 5-3 Type: Staff model Total Physicians: 600 including staff and part-time/on-call Primary-Care Physicians: N/A Internal Guidelines: Yes Medical Management: Yes Clinical IS: Yes Hawaii Permanente Medical Group is a for-profit, multispecialty physician group practice that provides care exclusively to Kaiser Foundation Health Plan members at Kaiser Permanente s hospital in Honolulu and outpatient clinics, which are concentrated in the local market but are also spread throughout the state. Physicians in the group receive a salary and have access to an electronic medical record system, KP HealthConnect, which includes electronic charting and prescribing. The EMR is available at KP s inpatient and outpatient medical facilities. Straub Clinic Table 5-4 Type: Hospital-owned Total Physicians: >200 employed Primary-Care Physicians: N/A Internal Guidelines: Yes Medical Management: Yes Clinical IS: Yes Founded in 1921, Straub Clinic became part of Hawaii Pacific Health, the largest hospital system in the Honolulu market, in 2001. Straub Clinic is a multispecialty group with 12 clinic locations statewide, including nine on the island of Oahu, two on Hawaii (the Big Island), and one on Lanai. It operates Doctors on Call, a 24-hour nonemergency medical service aimed at tourists and business visitors with clinics at two Waikiki hotels. Specialties provided by clinic physicians include cardiac care, bone/joint services, and cancer treatment. Hawaii Pacific Health has implemented a full electronic medical record system that links its hospitals and clinics. The Epic EMR system is equipped with physician order entry and a clinical decision support system. It allows providers and patients to sign in from any computer and access medical records. Seven Straub clinics are recognized by the National Committee for Quality Assurance as Level 1 patientcentered medical homes. Additional Physician Organizations»» Kuakini Physician Hospital Organization The PHO has about 175 physicians, including 40 primary-care providers. It which does business as Kuakini Health Network, a nonprofit joint venture between physicians and Kuakini Medical Center. The PHO was created in 1996 for the purpose of contracting and providing healthcare services under managed care. Physician specialties include cardiovascular, cancer, orthopedics, pulmonary, diagnostic imaging, and geriatric services.»» Kapi olani Medical Specialists This group has more than 100 physicians who provide care to women and children. Its physicians have a wide range of pediatric specialties. There are also adult hospitalists and gynecological oncologists. KMS partners with Kapi olani Medical Center for Women & Children, which is part of Hawaii Pacific Health. 27

Health Plans Table: Situation Analysis + THIS SECTOR IS: POSITIVE Table 6-1: Local & State Enrollment >>> Commercial HMO: Commercial PPO: Commercial POS: Indemnity: Managed Medicaid: Managed Medicare: Local 301,425 381,608 3,301 3,491 178,914 70,685 State 420,081 510,667 4,449 4,645 280,541 99,043 Source: HealthLeaders-InterStudy, as of July 1, 2012. Sector Outlook Most Hawaii health plans are locally based, operate as nonprofits, and are generally good stewards of healthcare dollars; Hawaii was the only state in the nation in 2012 where all health plans met new medical loss ratio requirements and did not have to refund premium dollars. Insurers cooperate well with health systems on tamping down costs by emphasizing preventive care and incentivizing care coordination through medical homes and meaningful use of electronic medical records. The market is rapidly moving toward aggressive pay-for-performance targets; its largest insurer and largest health system begin a new contract in 2014 that bases half of provider pay increases on performance measures, setting a new baseline for all future negotiations. Medicare enrollment will continue to go up as the number of eligible residents increases from one in five currently to one in four by 2030 (U.S. Census data). Highlights:»» Market composition: Hawaii Medical Service Association dominates in Honolulu, with 63 percent of total enrollment. The next largest insurer is Kaiser Foundation Health Plan, with 16 percent of total enrollment, followed by AlohaCare, with 5 percent. Hawaii Medical Service Association is also the largest insurer in the state, with 61 percent of total enrollment, followed by Kaiser Foundation Health Plan, with 17 percent, and AlohaCare, with 6 percent. 28