Craig E. Samitt, MD, MBA Chief Operating Officer, Fallon Clinic, Inc.

1. The Metamorphosis of Fallon Clinic:Transforming the Financial Performance of a Multi-specialty Group Practice Craig E. Samitt, MD, MBA Chief Operating Officer, Fallon Clinic, Inc. Healthcare Financial Management Association Meeting May 17, 2005

2. Our Focus for Today • An introduction to Fallon Clinic. • What is the vision that is driving our metamorphosis? • What role has our financial transformation played in catalyzing our operational transformation? • What tactics have we’ve used to enhance our bottom line?

3. An Introduction to Fallon Clinic • Established in 1929 by Dr. John Fallon and other Mayo Clinic MDs. • Largest private multi-specialty group practice in Massachusetts, in 26 locations. • 250 physicians and 1700 staff. 150,000 patient base. • A national leader in clinical quality • A vision to transform our industry

6. Fallon Clinic’s Belief (Obsession #1): “Health Care Delivery is the only service industry that doesn’t act like one.” Fallon Clinic’s Vision: “To become the gold standard in healthcare, with service excellence as our differentiating factor.”

7. Fallon Clinic’s Belief (Obsession) #2: Health care does not apply the tools and techniques other industries use to excel. • Market Research • Business Process Re-Engineering • Business Process Outsourcing • Automation and Heavy IT investments • Behavioral Interviewing • Performance Management • Balanced Scorecards and Metrics • Marketing

8. “Vision without execution is called hallucination”Steven Case, AOL Time Warner, Inc.

9. Fallon Clinic’s Transformational Plan Success & Pride Customer Service & Loyalty Physician & Staff Recruitment, Motivation & Satisfaction Operational Efficiency, Revenue Maximization, and Enhancing the Bottom Line Clinical Effectiveness, Quality & Safety

10. Our Focus Today Relates to: Success & Pride Customer Service & Loyalty Physician & Staff Recruitment, Motivation & Satisfaction Operational Efficiency, Revenue Maximization, and Enhancing the Bottom Line Clinical Effectiveness, Quality & Safety

11. Specifically, how has Fallon Clinic achieved it’s financial transformation? Our Focus Today Relates to: Operational Efficiency, Revenue Maximization, and Enhancing the Bottom Line

12. "I think, ladies and gentlemen, that this calls for a wave. Harris, would you start us off?"

13. Liquidity: Days Cash on Hand FY05 Target

14. Liquidity: Debt to Equity FY05 Target

15. Collections: Fee-For-Service 93.0% FY05 Target 90.3% 86.1% 79.9% 78.8%

16. Collections: Days in A/R FY05 Target

17. FY04 Consolidated Operating Profit (pre-tax)

18. The Drivers of Financial Transformation Payor Mix & Contract Negotiation Process Re-Engineering & Technology Business Process Outsourcing Divestiture Of Assets Revenue Cycle & Coding Enhancements External Benchmarking

19. Step 1. Changing the payer mix and renegotiating contracts • Moving beyond exclusivity with a single health plan • Strategic contracting with the new health plans • Evaluating the winner and loser contracts, and developing an aggressive negotiating stance • Termination of some • Conversion of some to group contracts • Renegotiation of all others.

20. New Payers and Revised Contracts • New payor contracts • New group contracts • Renegotiated existing contracts (Formerly One Health Plan)

21. Revenue Mix (Gross FFS) by Payer

22. Step 2. Divestiture of non-core assets • Evaluating which assets are core to our strategic mission and vision, and which will remain profitable into the future. • In order to enhance cash flow, divesting non-care assets • Pharmacy Chain • Partial ownership in rehab hospital • Real-estate divestitures

23. Step 3. Enhancing the Top Line • Process mapping and re-engineering of the revenue cycle • Encounter forms • Denials • Courtesy Discounts • Bad Debt • Coding versus productivity benchmarking and training • Physician compensation adjustments • Development of high-margin, new clinical programs.

24. Revenue Collection Rate FY05 Target

25. Step 4. Benchmarking our performance • Evaluating which of our core internal disciplines are more costly than the performance of peer organizations. • Fallon Clinic completed it’s own home-grown benchmarking study. • Detailed results may be found in the appendix.

26. Overhead Cost Analysis: Process • External consulting expertise sought through a formal RFP • 5 firms sent Request for Proposal • None responded • Alternatively, a study was conducted through GPIN (Group Practice Improvement Network) using a survey/questionnaire & phone interviews. • The study was designed & directed by Fallon Clinic

27. GPIN Respondents • Criteria established for organizational comparisons • Multi-specialty groups with the ability to analyze hospital and ambulatory overhead costs separately. • 15 organizations expressed interest • 7 organizations participated • Data incomplete in some areas • Consistent comparisons could generally be made against 3 or 4 of the 7 other organizations • Comparison groups cohorts were not necessarily consistent from metric to metric.

28. 10 Areas Successfully Analyzed • Clinical Support Staff • Occupancy • Information Systems • Medical Records & Transcription • Revenue Operations • Human Resources • Finance • Marketing • Compliance, Risk Management & Nursing Administration

29. GPIN Respondents: Geographical Base Fallon Clinic Worcester, MA Woodland Clinic Woodland, CA Medical Associates Health Centers Milwaukee WI Palo Alto Medical Foundation Palo Alto, CA Vanderbilt Medical Group Nashville TN CIGNA Medical Group Phoenix, AZ Esse Health Webster Groves MO BJC Medical Group St. Louis MO

30. GPIN Respondents: Background Information

31. Sample of Overhead Analysis Data:Clinical Support Staff • The remainder of the analysis can be found in your appendix.

32. Overhead Analysis: Takeaways • Clinical support mix was high • $1.0 million in expense was recognized via re-configuration of staffing mix. • Occupancy costs were high • Analysis of space utilization with reduction in clinical and administrative occupancy. • IT costs were high • Detailed staffing review with aim toward outsourcing non-core functions to a lower cost option. • Dictated and transcribed lines/MD were high • Implement EHR

33. Step 5. Business Process Outsourcing • Outsourcing of commodity functions to lower cost alternatives (both nationally and internationally) • Human Resources • IT • Transcription • Revenue Operations (Considered but did not) • Developing alternative means of financing cost centers with rapidly rising expenditures • Captive formation

34. Fallon Clinic Malpractice PremiumsOur Captive (CMIC) vs. Commercial Market Premium Cost in Millions

35. Step 6. At Fallon Clinic, process re-engineering is king • Process has been the key ingredient in helping other service leaders differentiate. • Ritz Carlton • Southwest Airlines • With this in mind, Fallon Clinic has scrutinized and fixed nearly every broken business process. • Example: Telephones

36. Telephone Complaints

37. Step 6 Continued. Complete technological transformation through “nested ROIs” • Nested ROIs is our expression for strategic capital investing, beginning with low cost high ROI and proceeding to high cost lower ROI. • This strategy has enabled us to transform technologically • Voice recognition • Telephones • PACS • EHR

38. Thank You. Questions?

39. Contact Information Craig E. Samitt, MD, MBA Fallon Clinic, Inc. 100 Front Street Worcester, MA 01608 Tel: 508-368-5480 E-mail: craig.samitt@fallon-clinic.com

40. Fallon Clinic Administrative & Clinical Overhead AssessmentAppendix and Supporting DetailCraig E. Samitt, MD, MBAAmerican Medical Group AssociationMarch 11, 2005

41. 1. Clinical Support Staff Costs

42. 2. Occupancy Current Central Massachusetts Market Rate = $15.50 per square foot (base rent and taxes)

43. 3. Information Systems

44. 4. Medical Records & Transcription

45. 5. Revenue Operations

46. 6. Human Resources

47. 7. Finance

48. 8. Marketing

49. 9. Compliance, Risk Management & Nursing