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May 20, 2014 - Managed Care & Healthcare Facilities. GNPH ACA WEBINAR –P A Y O R P E R S P E C T I V E. Global Gov

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North America Equity Research May 20, 2014

STRICTLY PRIVATE AND CONFIDENTIAL

GNPH ACA WEBINAR–PAYOR PERSPECTIVE

Managed Care & Healthcare Facilities Justin Lake AC

Global Government Relations and Public Policy Pierce Scranton

383 Madison Ave, 32nd Floor, New York, NY, 10179 212-622-6600 [email protected] J.P. Morgan Securities LLC

Executive Director

Michael Newshel

Neal Miniyar

Andrew Tom

212-622-5075 [email protected] J.P. Morgan Securities LLC

212-622-3662 [email protected] J.P. Morgan Securities LLC

212-622-5846 [email protected] JP M J.P. Morgan S Securities iti LLC

See the end pages of this presentation for analyst certification and important disclosures, including non-US analyst l t disclosures. di l J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Justin Lake – The Payor Perspective Managed Care & Healthcare Facilities Justin Lake 383 Madison Ave Ave, 32nd Floor, Floor New York York, NY NY, 10179 212-622-6600 [email protected] J.P. Morgan Securities LLC

GNPH ACA WEBINAR

Managing Director in the healthcare group at J.P. Morgan Research. Specialize in coverage of managed care, hospitals and small/mid cap healthcare providers including dialysis and surgical facilities. Justin is currently dual-ranked No. 1 in Institutional Investor’s “All-American Research Team” survey for both Managed Care and Health Care Facilities. Similarly, in the Greenwich Associates poll, Justin is ranked No. 1 in Healthcare Services. Prior to joining J.P. Morgan in 2012, Justin worked at UBS in a similar capacity covering the space for 11 years. MBA from NYU Stern School of Business and CFA charter holder.

2

Pierce Scranton – Congressional Update Global Government Relations and Public Policy Pierce Scranton J P Morgan Chase & Co J.P. Co.

Pierce Scranton is Executive Director of Global Government Relations and Public Policy. Policy He is responsible for coordinating the firm’s position and advocacy strategy on tax and fiscal policy and also works on advocacy related to financial regulatory reforms. Pierce joined JPMorgan Chase after a decade of government service in which he held a variety of senior positions and political roles, most recently serving as Economic Policy Director for Governor Romney’s presidential campaign. He previously served as Chief of Staff at the White House Council of Economic Advisers, where he advised senior White House and Administration officials ffi i l on a wide id range off d domestic ti and d iinternational t ti l economic i iissues.

GNPH ACA WEBINAR

Before joining the White House, Mr. Scranton served as Senior Policy Advisor to the Secretary of Commerce where he was a key advisor on international trade and investment policy. He previously worked in the International Trade Administration, where he helped develop strategies to assist U.S. businesses in resolving international trade disputes. Mr. Scranton M S t also l spentt severall years on Capitol C it l Hill working ki ffor fformer Washington W hi t State St t Congresswoman C Jennifer J if Dunn, D who h served on the House Ways and Means Committee and the Joint Economic Committee. Mr. Scranton graduated from Kenyon College with a degree in political science.

3

Overview of Healthcare Reform  Coverage Expansion

– Subsidized private coverage on Health Exchanges/Marketplaces – Medicaid expansion to higher income threshold  Pay-Fors

– Medicare reimbursement cuts for providers and health plans – Premium taxes and other fees  Delivery System Change

– Quality bonuses and penalties in Medicare reimbursement – Accountable Care Organizations (ACOs) and bundled payments – Comparative effectiveness research

GNPH ACA WEBINAR

 Broader Trends Beyond the Affordable Care Act

– – – – –

More integrated care and risk sharing with providers Narrow networks and value Consumer/retail level choice Private exchanges Utilization trends

4

Reform Impact on Insurers

 Additional Medicaid members  New exchange market with subsidies

PROS

 Dual eligible shift to managed care

 Margin compression in existing business  No more underwriting  3-to-1 3 to 1 ma maximum im m age bands for premi premiums ms  Rate review

CONS

 Possible employer “dumping of coverage”  Premium taxes and other fees  Minimum medical loss ratios

GNPH ACA WEBINAR

 Medicare Advantage cuts

Ultimate net impact of reform depends on the long-term viability and profitability of exchanges and employer responses

5

Coverage Expansion Estimated Coverage Changes from ACA  ACA core is

expanding health coverage, expected to reach 26M of ~50M uninsured  Half expected to enroll

on exchanges, with ~80% qualifying for government subsidies

2014

2015

2016

2017

2018

Exchanges

+6

+13

+24

+25

+25

Medicaid

+7

+11

+12

+12

+13

Employer



-2

-7

-7

-8

Nongroup

-1

-3

-4

-4

-4

Uninsured

-12

-19

-25

-26

-26

Revisions to CBO Estimates  About half to get

GNPH ACA WEBINAR

 Official Congressional g

Budget Office projections have been lowered over time

Mar 2012

Mar 2010

Jul 2012

30

Net C Coverage Expansion

covered by Medicaid expansion, half by exchanges

35

Feb 2013

26m Current Est 

25

May 2013/Feb 2014

20

15

10 2014

Source: CBO

2015

6

2016

2017

2018

2019

2020

2021

2022

3 R’s R s – Premium Stabilization  Risk adjustment, reinsurance and risk corridor programs (known as 3Rs) should mitigate most

extreme downside scenarios for exchange earnings Risk Adjustment

Description Risk Mitigated g

Risk Corridors

Reinsurance

Permanent Plans with lower-than-average risk scores transfer funds to plans with higher risk scores Enrolling patients with higher health risks relative to competitors

Temporary (2014-16) C Costs ffor an individual above Losses/gains / reduced when attachment point and below cap allowable costs are +/- 3% of are reimbursed at coinsurance % target Guaranteed issue Underestimated total medical disproportionately drawing highercosts cost patients into exchanges

 But timeline means 2014 exchange earnings won’t be known definitively until mid-2015  Plans have to submit pricing for 2015 in two months, with limited claims experience

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 It may take until 2016 or 2017 for pricing to be adjusted appropriately to the risk pool

3/31/14 2014 Open Enrollment Ends

5/1/14 Latest Coverage Start for Open Enrollment

5/31/14 2015 Rate Submissions Due

11/15/14-1/15/15 2015 Open Enrollment

7

6/30/15 Notified of 2014 Risk Adjustments & Reinsurance

7/31/15 2014 Risk Corridor and MLR Calculations Due

Risk Corridors

% of Target Costs (Premiums - Allowable Admin Costs/Profits)

92% Pay 80% of gain to HHS

97% Pay 50% of gain to HHS

103% No Payments or Charges

108%

HHS compensates 50% of loss

HHS compensates 80% of loss

50% 40% 30%

Limits upside

EB BIT Margin

20% 10% 0% 10% -10%

Mitigates downside

-20% -30%

Corridors - HHS C S Definition

8

120%

Without Risk C Corridors

115%

MLR

110%

105%

100%

95%

90%

85%

80%

75%

70%

65%

60%

55%

50%

GNPH ACA WEBINAR

-40% 40%

Private Exchanges Overview Public Exchanges

Private Exchanges Active

Private Exchanges Retirees

Stakeholders

Federal and/or state gvt, individual, small group employers

Employer and employee

Retired employees and employers

Plan Design

Actuarial metal tiers catastrophic, bronze, silver, gold, platinum and 10 essential benefits

Customizable product to address the needs of any employer group

Medicare Advantage, Med Supp, Part D, and traditional Medicare

Target Market

Individuals and small group. Current size of the uninsured and individual market is 50M/11.5M

Employer-sponsored coverage. Current size of the employer market is 150M (80M in ASO)

Retired employees. 12M of 48M total eligibles today have some form of employer-sponsored coverage

Plan Options

O average, a consumer can On choose from 53 plans from at least 2 different companies

S Single carrier exchanges can have 3-5 plan options vs. a multicarrier which can have 10+

Traditional Medicare and Part D offered everywhere and MA/Med Supp options vary by county

Risk-based insurance

Risk or self-insured

Risk or self-insured

GNPH ACA WEBINAR

Risk

Public Exchanges

Private Active Exchanges

 Trader Joe’s “dumped” part-time

 Walgreens shifts 160,000 active

employees’ health care coverage

employees to the Aon Hewitt private active employer exchange

9

Private Retiree Exchanges  IBM moves 110,000 retirees to

Extend Health private retiree active

Private Exchange Players Towers Watson

Aon Hewitt

Mercer

Buck

Hi t History

Launched au c ed O OneExchange e c a ge in Jan 2013

St t d in Started i late l t 2011

Launched au c ed Mercer e ce Marketplace in Jan 2013

Launched in 2010 under MMA product. d t RightOpt Ri htO t launched in 2014.

Number of Employers

Not disclosed but major employers include IBM, Time Warner, DuPont, Caterpillar, CSX, General Electric and Whirlpool

19 employers

At least 5 major employers for 2014

20-30 employers

400,000 retirees

600,000 active, 250,000 retirees

Not disclosed

>400,000 total

60% growth for 2014 with 20% long-term growth rate

Corporate exchange to more than triple in 2014

At least 5 major employers that range in size from 800-25K each

No guidance

2014 Covered Lives Growth Expectations

GNPH ACA WEBINAR

Pl Participation Plan P ti i ti

10

2014 Est Private Exchange g Lives Aon 850,000 Towers Watson 400,000 Buck (Xerox) 400,000 CaliforniaChoice 150,000 HealthPass 30,000 Bloom Health 25,000 Medica 13,000 Liazon 10,000 GlidePath 1,500 Mercer ? Optum ? Willis North America ? Total ~1.5-2M

Private Exchange Attraction to Employers 1. Shift to Defined Contribution  Shift from defined benefit to defined contribution (1) removes employer from employee health benefit decisions, (2) gives

employer greater health benefit subsidies – moves to CPI growth over medical cost inflation, inflation and (3) greater transparency – may drive behavioral change

2. Greater Product Choice  Likely greater choice of products for employees (Metal level plans)

3. Best-in-Class Local Market Discounts  Potential for g greater plan choice including g best-in-class local market discounts

4. Reduced Admin Costs  Employers can lower admin costs by outsourcing benefit designs to the insurers and avoiding the back office costs of

overseeing benefits and processing claims

5. Product Innovation  Greater employee cost responsibility and increased individual cost-sharing may drive competition and greater innovation from

GNPH ACA WEBINAR

managed care such as narrow networks, ACOS, etc.

6. Risk- Based Annual Contracts  Can be set up under risk based annual contracts which give more definitive defined contribution

11

Cost Hurdle for Converting to Risk COSTS

Medical Costs

Avoiding state-mandated benefits and implementing wellness and disease management programs can lower medical costs for f self-insured f plans

Commissions

Self-insured employers pay consultants to help them choose and negotiate g with claims administrators, but the costs are typically yp y less than the broker commissions that are baked into risk premiums. May be offset by lower admin costs on back end

3-6%

Health Plan Profits

Profits per life covered are much higher for insured plans to compensate them for taking on the underwriting risk

0 2% 0-2%

Premium Taxes

Self-insured Self insured plans do not have to pay existing state premium taxes that are baked into the price of full-risk plans

New Industry Fee

Self-insured S lf i d plans l also l avoid id the th Aff Affordable d bl Care C Act’s A t’ new iindustry d t premium fee that insurers are passing along through higher premiums

1-2% 1 2%

1%

GNPH ACA WEBINAR

2-2.5% %

9-11%

Savings can be achieved by self-insuring instead of buying full risk plan

12

Interest in Private Exchanges % of Surveyed Employers Considering Private Exchanges Result 7-29% * 32% 33% 44% 47% 52% 50 80% ** 50-80%

Source Kaiser/HRET Survey of Employer-Sponsored Health Benefits 2013 Mercer Marketplace Private Exchange Survey National Business Groupp Surveyy Aon Hewitt Corporate Health Care Exchange Survey J.D. Power and Associates 2012 Member Health Plan Survey HealthPass New York Survey Oliver Wyman Wyman'ss Employer-Sponsored Employer Sponsored Healthcare: What Happens Now

*7% for firms with 200-999 employees, 13% for 1,000-4,999 employees, and 29% for ≥5,000 employees.

GNPH ACA WEBINAR

**62% for firms with 10-50 employees, 57% for 51-100, 55% for 101-3,000, and 49% for >3,000 employees. Additional ~20% would consider as long as they saw savings >10% savings.

13

Medical Cost Trend  Utilization has been depressed since recession but concerns about inflection  Severe Q1 weather and reform implementation make it harder to detect underlying shift  Increase in aggregate health spending in Q1 likely driven by newly insured  2014 premium pricing generally assumes 50-100 bps uptick in utilization

GNPH ACA WEBINAR

Personal Health Care Spending Growth – Price & Utilization

Source: Altarum Institute, based on Health Sector Economic Indicators Data 14

Cyclical vs vs. Secular Debate  Rebound in utilization has historically had long lag time behind economic recovery  Increasing recognition that secular factors could restrain utilization long term  Deductibles and employee burden of healthcare costs are increasing and more focus on

controlling costs at employers, payors and providers  But so far health plans have been reluctant to assume a “new normal” in pricing

GNPH ACA WEBINAR

Growth of HSA-Qualified High Deductible Health Plans (millions)

Source: America’s Health Insurance Plans (AHIP). 15

Delivery System Changes in ACA  ACA primarily focused on getting coverage for uninsured, but includes a number of initiatives to

base more Medicare reimbursement on value and quality  ACOs and bundled payments allow providers to benefit financially from controlling costs  Funding for comparative effectiveness research  Cost controls in ACA experimental, potentially laying groundwork for more significant changes

Quality and Value-Related Reforms to Medicare in the Affordable Care Act 2011  Innovation Center  Coordinated Care

Office for Dual Eligibles

GNPH ACA WEBINAR

 Physician Bonuses

for Quality Data

2012  Hospital

Readmissions Penalties  Medicare Shared

Savings (ACOs)

2013  Hospital Inpatient

Value Based Purchasing  Bundled Payment

Pilot

 Independence at

Home

16

2014  Quality data reporting

for LTCHs, IRFs, hospices, inpatient psychiatric facilities, and cancer facilities

2015  Penalty for hospital

acquired conditions  Physician value-

based payment modifier

Value Shift is Broader than ACA  With or without ACA, the healthcare delivery system is moving from volume-based, fee-for-service

reimbursement for providers to value-based value based, risk risk-sharing sharing systems that incentivize doctors to control costs and integrate care  “Land grab” as hospitals, insurers and large management groups consolidate physicians  Price transparency and narrow networks to restrain unit costs; integrated care and standardized

GNPH ACA WEBINAR

protocols to prevent hospitalizations and other more costly downstream care

Source: Health Affairs. 17

Narrow Network Adoption  The use of tiers of health care providers and facilities based on specified performance metrics,

including cost efficiency and measures of quality quality. Copayments are then reduced for consumers who seek care from those providers and facilities that fall into a higher-performing tier and are increased for those providers and facilities that fall into a lower performing tier.  Particularly prevalent in the individual public exchange market where cost is key  In a recent McKinsey study of exchange plans, 70% of networks were found to be narrow or ultra-

GNPH ACA WEBINAR

narrow

Source: McKinsey. 18

Perspectives on Narrow Networks

GNPH ACA WEBINAR

Payor Perspective

Provider Perspective

• Market segmentation - offer different value propositions at difference d e e ce p price ce po points s

• Some are voluntarily removing themselves from narrow networks where the economics won’t work

• Value-based Value based purchasing and bending the healthcare cost curve

• P Potential t ti l opportunity t it to t partner with a payor

• Migrate care away from the high-cost settings

• Fighting exclusion in instances where the volume growth won’t offset the discount

19

Hospital Owned Health Plans  In the transition to fee-for-service to fee-for-value, a growing number of hospitals are managing

risk thru directly providing insurance coverage  Research from a recent Advisory Board Company survey indicates 20% of hospital networks now

market an insurance product and another 20% are exploring insurance options  Notable players:

• Geisinger • Intermountain Healthcare • University of Pittsburgh

• Henry Ford Health System • Kaiser Permanente

 Potential to create more competition for the standalone insurers, but if this trend has legs, we

are likely in the very early days of a transition

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“Many of [the hospital systems] are also folks we do business with,” said Juan Davila, Blue Shield of California’s senior vice president for network management. “There’s a potential for that to be difficult.”

Source: Advisory Board Company, WSJ. 20

Disclosures Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. t For F all ll Korea-based K b d researchh analysts l t listed li t d on the th front f t cover, they th also l certify, tif as per KOFIA requirements, i t that th t their th i analysis l i was made d in i goodd faith f ith andd that th t the th views i reflect their own opinion, without undue influence or intervention. Important Disclosures

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J.P. Morgan Global Equity Research Coverage IB clients* JPMS Equity Research Coverage IB clients*

Overweight (buy) 43% 57% 43% 75%

Neutral (hold) 45% 49% 50% 66%

Underweight (s ell) 12% 36% 7% 59%

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Disclosures

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Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules. Brazil: Ombudsman J.P. Morgan: 0800-7700847 / [email protected]. General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise. "Other Disclosures" last revised December 7, 2013.

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