Onsite Medical Clinic Feasibility Study

An Analysis Prepared for

Escambia County School District

Presented By:

November 2011

TABLE OF CONTENTS

Executive Summary ............................................................................... 1

Data and Assumptions ........................................................................... 4

The Cost of Operating a Clinic ............................................................... 6

Potential Claim Savings........................................................................ 11

Wellness and Disease Management Opportunities

....................... 15

Other Considerations........................................................................... 18

Appendices

1. Executive Summary
The Escambia County School District (the District) engaged Gallagher Benefit Services (GBS) to conduct a study of the feasibility of operating one or more primary care medical clinics for the benefit of employees, retirees, and their eligible dependents covered under the Districts health insurance plan. The plan is self-funded and is administered by United Healthcare (UHC). There are currently over 5,500 employees and 8,800 total members covered under the plan, and annual claim costs under the plan are approximately $40 million. The GBS study consisted of the following 3 separate sections. 1. We estimated the cost of operating the clinic(s). Because of the range of costs relating to the administrative fees that we have seen from different clinic vendors, we estimate the cost using high and low administrative cost assumptions. We also assumed that more than one location would be necessary to provide access to all District employees. In the work that follows, we use the term clinic to mean the clinic concept, regardless of the number of locations. 2. We estimated the potential reduction in claims paid under the health plan due to a combination of services provided directly at the clinic and a reduction in unnecessary services attributable to the gatekeeper function played by the clinic. We made the estimates using two different assumptions about the % of primary care physician (PCP) office visits that are redirected to the clinic. We termed the assumptions moderate and high utilization. 3. We estimated the potential for other health plan savings related to improved health of covered members as a result of wellness and disease management initiatives supported by the clinic. This is the most subjective component of the study. The projected first year results of the study are summarized in the following table. The savings associated with step 3 above are not included in this table as they are projected to emerge over a longer period of time.
Moderate Utilization Low High High Utilization Low High

Administrative Fee Assumption Estimated Direct Claim Savings Projected Clinic Expense Total First Year Savings/(Cost)

$1,359,838 $1,911,912 ($552,074)

$1,359,838 $2,431,080 ($1,071,242)

$1,970,658 $2,360,765 ($390,107)

$1,970,658 $2,879,933 ($909,275)

The key conclusions we draw from the table are as follows.

The single most important conclusion is that in order for a clinic to have any significant favorable impact on health care costs, it is imperative that it includes programs that successfully affect the health of the covered population in a way that reduces future medical trend. The pure exchange of services from external physicians to clinic providers will not generate enough savings to provide a significant return, given the expense of operating the clinics. It is likely that in the first year of operation, the clinics will cost more than they will save, so the net financial impact will be negative. Assuming increased utilization, it is reasonable to expect to reach break even in the second year. The most critical factor in the financial success of the clinic is the level of utilization. To the extent employees use the facilities as a substitute for seeing their PCP and the clinic successfully manages referrals and testing than is currently the case, the direct savings can be expected to come close to covering the operating costs of the clinics in the first year and exceed the cost in future years. If the levels assumed in the study are not reached (and they are by no means easy targets), the clinic will produce a significant net loss. There is a wide variation in the models and costs offered by clinic vendors. Our study assumes a physician based model, with an MD supported by an RN and a Medical Assistant. Other models use Nurse Practitioners or Physician Assistants. The choice of vendor will affect administrative fees, professional salary expenses, and savings potential. In addition to the hard dollar analysis above, we considered the potential for the clinics to support programs aimed at improving the health of plan members. The District has an unusually high frequency of chronic disease conditions, as documented in the following table produced by our proprietary data warehouse application known as GBS Insider, based on claims incurred between July 2010 and June 2011.
Benchmark % of Claimants 21.0% 35.6% 4.8% 38.6% 100.0%

Clinical Category Non Claimants Healthy Claimants Acute Claimants Chronic Claimants Total

# of Claimants 684 2,377 292 3,339 6,692

% of Claimants 10.2% 35.5% 4.4% 49.9% 100.0%

We also looked at the results for prior periods and found an even higher frequency of chronic conditions. The % of claimants that our algorithm identifies as chronic was right at 50% for the 2010/11 year, but was 55% in each of the two prior years. The difference may be related to the 2010/11 data not being complete, as it does not include claims paid after June 30, 2011. The actual chronic % compares to our (age adjusted) benchmark of just under 40%. This is a significant difference, as the chronic claimants have consistently represented 90% of the Districts health plan claims. 2

We also use GBS Insider to develop a Health Risk Index (HRI), which is a measure of the average health risk of the population. Because the Districts population is older than our standard population, due at least in part to the number of retirees covered by the plan, we expect a higher HRI for the District than for our standard population. In fact, against a standard HRI of 1.00, our model produces an expected HRI of 1.26 for the District, while the actual HRI for the 2010/11 year was 1.36, or 8% higher than expected. If a clinic can successfully reduce the HRI to the expected level using programs outlined below, the annual claim savings would be in the order of $3 million. It is unrealistic to expect all members to use the clinic, so the likelihood of reducing the HRI to at or below the normative level is small, but even moving it 1/3 of the way toward the norm is worth an estimated $1 million per year. So while the direct savings related to replacing external medical services with clinic services might ultimately generate small savings, it is the clinics ability to improve the health of the population that has the potential to flatten the medical trend and generate significant long term savings. The role of a clinic in reducing the frequency of, and claims related to, chronic claimants includes two key functions. Engaging the 45% to 50% of members who are not currently considered chronic in actions that will minimize the probability that they will develop chronic conditions. We will label this effort as Wellness initiatives. Engaging the 50% to 55% of members who are already identified as having chronic conditions in activities designed to encourage compliance with their treatment plans and promote the most efficient care. We will label this effort as Disease Management. A review of the Disease Burden report from our GBS Insider database shows much higher than expected frequencies of diabetes, congestive heart failure, and circulatory disease. Many of the conditions that fall under these categories are lifestyle related. An effective on site medical clinic can play an important role in promoting healthier lifestyles and ultimately reducing the frequency of these diseases and improving the efficiency of the care for members who already have them. In summary, if approximately 1/3 of the members covered by the District plan can be encouraged to use a clinic for primary care and preventive services, and if the members that do use the clinic are actively engaged in wellness and disease management programs, we believe a clinic can successfully reduce health claim costs by more than the cost of operating the clinic. Furthermore, greater savings can be expected in the long term if the clinic can successfully reduce medical trend by even 1% to 2%, which we believe is a very attainable target. The following sections document the assumptions and methods used to derive the values presented in the table above, and address in more detail the potential savings related to wellness and disease management initiatives that could be provided through the clinic. 3

2. Data and Assumptions

The study uses data from the following sources: Claims data, including utilization, unit cost, and clinical measures, is based on the Districts data for the 3 years ending June 30,2011. The claim data is provided to GBS from UHC through quarterly data feeds and GBS stores the data in our proprietary data warehouse application known as GBS Insider. As a test of our own data, we also used reports of District experience prepared by UHC. Data regarding the cost of operating clinics is taken from GBS experience with clients who have implemented clinics and from RFPs and RFIs we have been involved with on behalf of clients considering a clinic model. The study is based on key assumptions regarding what portion of primary medical services can be redirected to the clinic, how effectively the clinic will serve as a gatekeeper for specialist referrals and diagnostic testing, and what impact the clinic will have on future medical trends. We have used data from our own clients to develop a starting point for these assumptions, but we expect to see variation between clients in the results. In prior RFPs and RFIs, we have asked vendors for input on these assumptions as well, and although the vendors tend to be (in our opinion) somewhat optimistic in setting utilization and effectiveness assumptions, their feedback is valuable as a reasonableness test of our assumptions. Finally, in order to recognize the range of possible results depending on how a clinic is received by plan members, we prepared results using two separate sets of utilization assumptions. Under the Moderate utilization scenario, we assumed that 25% of primary care services would be redirected to the clinic. Under the High utilization scenario, we assumed that 35% of primary care services would be redirected to the clinic. Under both scenarios, we assumed that the clinic would have some success in controlling unnecessary use of specialist referrals and diagnostic testing, and that a portion of the generic prescription drugs would be dispensed through the clinic. We assumed a greater impact on these services under the High utilization scenario than under the Moderate scenario. We did not make any assumptions about how health risk or medical trend will be affected and how those factors would affect future claim costs. Each employer needs to decide how aggressively it wants to pursue wellness and disease management initiatives through a clinic, and there is a wide range of available options. As a result, we have quantified the apparent opportunity but have not made any 4

assumptions about how the District would pursue the opportunity and what the impact of those efforts would be. There is no standard medical delivery system for clinics. We assumed that the clinic would use an MD based delivery system, but there are other options that would affect both the cost of operating a clinic and the expected return. For example, some vendors prefer delivery systems based on RNs or physician assistants (PAs), with MD involvement limited to oversight. Those models will generally have lower professional staffing fees, but may also have less ability to treat as many conditions or to perform the gatekeeper function. Overall, we do not believe that one system has an inherent financial advantage over the other available systems and that the results of the study would be similar regardless of the delivery system we assumed. The assumptions are set out in more detail in the following sections of this report.

3. The Cost of Operating a Clinic

In order to estimate the cost of a operating a clinic, we first have to understand the volume of services that are expected to be provided. The volume is a function of the number of eligible employees and the assumed utilization rate for those employees. The following chart shows the location of the Districts covered employees and retirees by county, and our estimate of the % of employees in each county that would have reasonable access to clinics located in Escambia County.
% of Total 88.1% 8.4% 1.7% 0.8% 0.3% 0.8% 100.0% Estimated % Eligible 100% 100% 50% 50% 0% 0% 97.7% Estimated Eligible 4,877 464 46 21 5,408

County Escambia (FL) Santa Rosa Baldwin (AL) Escambia (AL) Okaloosa Other Total

Employees 4,877 464 92 42 14 46 5,535

Of the 5,535 employees on the census file we used, a vast majority would be expected to have access to a clinic assuming that at least two locations are offered. It is possible to operate a single location, but that would reduce the access considerably. A geo access study can determine what % of employees live (or work) within an acceptable distance of one or more given locations. Based on the current member to employee ratio, we estimate that if 5,408 employees would have reasonable access to a clinic, then there are approximately 8,600 total members with access. Professional Staffing Costs Based on the historical frequency of primary care visits adjusted to calendar year 2012, we expect the 8,600 eligible members to have a total of approximately 21,800 primary care office visits in 2012. Under the Moderate utilization assumption, we assume 25% of these visits, or 5,450 visits, will go through the clinic. Under the High utilization scenarios, 35% of the visits, or 7,630 visits, go through the clinic. We use the expected number of visits to develop an estimate of the number of hours the clinic needs to operate in order to provide the expected services. Key assumptions in this step are: There will be 3 office visits per hour. Only 60% of the appointments at a clinic actually replace an office visit. The other 40% are a combination of services for which the member would not have sought treatment in the absence of a clinic, and visits related to health risk assessments or other wellness programs that also do not replace a visit. This assumption is based on GBS experience, but will vary by employer.

The optimal utilization of available appointments is 85%. Vendors generally tell us that clinics that operate at 100% capacity will results in problems for employees getting appointments or walk in treatment and that will eventually hurt utilization. The vendors generally suggest that a clinic should have between 80% and 90% of the available appointment time scheduled. Based on these assumptions, the recommended number of available appointment hours is developed as follows for the Moderate and High utilization assumptions.
Moderate 25% 5,452 60% 9,087 3 3,029 85% 3,563 71 2 35 High 35% 7,633 60% 12,721 3 4,240 85% 4,989 100 3 35

% of PCP Visits Directed Through Clinic Target Physician Visits in Clinic % of Visits in Clinic Replacing a PCP Visit Total Available Visits Needed to Meet Target Utilization Visits per Hour Required Physician Hours Target Utilization of Available Appointment Time Target Available Appointment Hours Required Hours per Week (50 weeks per year) Recommended # of Locations Recommended Weekly Hours per Location

Under the Moderate utilization scenario, we project a total of 3,563 appointment hours will be needed, while under the High utilization scenario we project 4,989 hours will be needed. Assuming 50 weeks per year that equates to 71 hours per week for the Moderate scenario and 100 hours per week for the High scenario. Based on these results, we have assumed 2 locations operating at 35 hours per week for the Moderate scenario and 3 locations operating at 35 hours per week for the High scenario. We have assumed that each location would have an MD, an RN, and a Medical Assistant (MA). This is a fairly typical model for the MD based clinic. We have estimated hourly rates based on current RFP and RFI responses from a range of clinic vendors. The following table summarizes the resulting projected professional staffing costs.
Moderate Utilization Hourly Rate $120 $35 $20 Hours/Week 35 35 35 Annual Cost $218,400 $63,700 $36,400 $318,500 2 $637,000 High Utilization Annual Hours/Week Cost 35 $218,400 35 $63,700 35 $36,400 $318,500 3 $955,500

MD RN Medical Assistant Subtotal Per Location # of Locations Total Staffing Cost

We project an annual cost of $318,500 per location based on a 35 hour week, and produces total annual costs of between $637,000 (Moderate) and $955,500 (High). Administrative Expenses Clinic vendors will also pass along an administrative fee for their services. The fee covers a variety of services such as hiring professional staff, obtaining insurance, communication services, reporting, maintaining systems, integrating data with the plans TPA, and other services that vary by provider. Some vendors charge a separately identified administrative fee, while others combine their administrative fees with provider staffing and supplies in a single fee. We felt that for purposes of this study it made more sense to separately identify the administrative expenses. Because of the range we see in the market, we present both Low and High cost scenarios.
Per Capita Fees (PEPM) Low High Low High $15 $23 $973,440 $1,492,608

Annual Fees

For a population of approximately 5,400 employees, we project the annual administrative fees will be somewhere in the $1 to $1.5 million range. It is possible to negotiate lower fees, but for a full service clinic we think this is a reasonable estimate. Drugs and Supplies We assumed that the clinic would include a generic drug dispensary to take advantage of unit costs savings available on generic drug purchasing. We estimated drug utilization based on current patters and assumptions about how many drugs would be dispensed through the clinic. Those assumptions are described in more detail in the Cost Savings section. We also estimated the cost of supplies (latex gloves, syringes, and other medical supplies) based on responses to other RFPs and RFIs. The estimated cost of drugs and supplies is shown in the following table.
Generic drugs Utilization Moderate High Supplies Utilization Moderate High # of Drugs 21,608 29,244 Annual Visits 9,087 12,721 Cost Per Drug $5 $5 Cost Per Visit $5 $5 Annual Cost $108,038 $146,219 Annual Cost $45,433 $63,606

Rent We estimated the cost of renting a medical facility. In the event the District is able to use its own property to house the clinic, this expense would be eliminated. Following is our estimate of the cost of renting clinic space.
# of Locations 2 3 Square Feet Per Location 2,000 2,000 Total Square Feet 4,000 6,000 Annual Cost/ Square Foot $20 $20 Total Annual Cost $80,000 $120,000

Utilization Moderate High

Other Expense We also estimated the cost of other expenses such as obtaining necessary licenses, insurance, and cleaning services, is estimated as a % of the cost of rent. This will be a relatively minor expense, as shown below.
Licenses, Insurance, Cleaning, etc. Assumed % of Rent Moderate Utilization - Annual High Utilization - Annual 10% $8,000 $12,000

Start Up Expenses Finally, we estimated the start up costs of starting the clinics. These expenses would be incurred in the first year of operation, although some may be amortized. The start up expenses will depend on whether a facility needs to be built out or if the District is able to rent space that is already compatible with use as a clinic. The build out cost will also depend on whether the District is able to use its own staff to do the build out. It is important to note that building out a medical facility requires adherence to codes and requirements that are stricter than a regular build out. Based on other RFP submissions, we estimate the build out costs for a space not currently used as a medical facility to be as follows:
Typical Build Out Expense for location not currently used as a medical facility Moderate Utilization (2 Locations) High Utilization (3 Locations) $30,000 $60,000 $90,000

For a facility that is currently in use as a medical facility, the build out expense will be nominal.

Summary of Expenses The total of all estimated expenses is summarized in the following table.
Moderate Utilization Low High $637,000 $973,440 $153,472 $80,000 $8,000 $1,851,912 $60,000 $1,911,912 $637,000 $1,492,608 $153,472 $80,000 $8,000 $2,371,080 $60,000 $2,431,080 High Utilization Low High $955,500 $973,440 $209,825 $120,000 $12,000 $2,270,765 $90,000 $2,360,765 $955,500 $1,492,608 $209,825 $120,000 $12,000 $2,789,933 $90,000 $2,879,933

Administrative Fee Assumption Professional Salaries Administrative Fees Equipment and Supplies Rent Other Total Annual Expense Start Up Expense Total First Year Expense

Under Moderate utilization, we project annual expenses, before start up costs, to be between $1.85 million and $2.4 million. The build out cost, if required, for 2 location s is estimated to be $60,000. Under High Utilization, we project annual expenses, before start up costs, to be between $2.3 million and $2.8 million. The build out cost, if required, for 3 location s is estimated to be $90,000. The key conclusion from this section is that operating a clinic is expensive and will only make financial sense if there are significant potential savings.

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4. Potential Claim Savings

Hard Dollar Savings Clinic vendors tout savings that can be classes as direct, or hard dollar, savings, and indirect, or soft dollar, savings. This analysis focuses on the hard dollar savings. We will comment on soft dollar savings at the conclusion of this section. A clinic offers the opportunity to save costs on two broad types of services: Services that are provided directly in the clinic, such as primary and preventive care visits and generic drugs, and Services that are often over utilized for which the clinic can serve as a gatekeeper that reduces unnecessary utilization, such as specialist visits, diagnostic tests and brand name drugs. Vendor estimates of the potential for these savings vary depending on their model and steps taken to encourage clinic utilization. The higher the utilization, the greater the potential for generating both types of savings. In order to promote clinic utilization, employers often waive all or most employee cost sharing for services performed in the clinic. As cost sharing in general has increased in recent years, this has become a more meaningful incentive. Some employers who offer HRA/HSA programs increase funding of spending or reimbursement accounts for using the clinic. Some employers use the clinic as a focal point for wellness activities in an attempt to engage employees in clinic use. Based on our experience with employers who have implemented clinics, and on information provided in responses to RFPs and RFIs, we prepared the following Moderate and High utilization assumptions.
Moderate % of Services in Clinic Primary Care/Preventive Care Visits Generic Drugs % of Services Avoided Specialist Visits Outpatient Diagnostic Services Brand Drugs 25% 15% High 35% 20%

10% 10% 5%

15% 15% 8%

Vendors believe it is possible to see even higher clinic utilization over time, and while we agree with that there are practical limits that cannot be ignored. For example, clinics do not normally offer pediatric services, so most children visits will not be directed to a clinic. Covered spouses who do not work for the District may not find the clinic locations to be convenient. In addition, individuals with chronic conditions are most likely to have established physician relationships and may be more reluctant to use 11

a clinic. Since those with chronic illnesses have the highest frequency of visits, this means that the people responsible for the largest share of costs may be least likely to use a clinic. All of these factors suggest that reaching levels such as 50% or more of Primary Care visits going through a clinic is difficult and even over a period of years may not be possible. We developed the current utilization and unit costs for services that could be affected by the clinic using reports from GBS Insider. Those reports provided historical utilization per 1000 covered members and average plan cost for the selected services. We adjusted the historical data to an assumed starting point of January 1, 2012 using normative utilization and unit cost trend assumptions. We also assumed that for services such as diagnostic services and brand drugs, the services eliminated would be less expensive than the average service in that category. The logic for that is that most serious visits and tests are less likely to be eliminated. The baseline 2012 utilization for services that can reasonably be expected to be affected by a clinic is summarized below.
Baseline Utilization and Unit Cost # of Services Unit Cost Annual Claims 3,151 3,952 $ $ 110 40 $ $ $ $ $ $ $ $ $ $ 346,620 159,263 505,883 1,015,992 601,219 206,999 829,614 1,225,637 1,250,397 5,129,858

Type of Service Preventative

Service Preventative Medicine Immunizations Subtotal PCP Specialist Consultation Lab/Pathology Radiology Other Subtotal

Other Physician

18,657 16,236 1,397 30,469 17,313 22,511

$ $ $ $ $ $

54 37 148 27 71 56

Outpatient Facility Pharmacy

Diagnostic Generic Brand Subtotal

6,524 126,713 52,015

$ $ $

507 10 129

$ $ $ $ $

3,307,051 1,242,065 6,698,791 7,940,856 16,883,648

Total for These Services

We project the total claim cost, assuming current plan design and enrollment, for members eligible to use the clinic based on their location, to be $16.9 million. Keeping in mind that we expect it to cost somewhere between $2 and $3 million to operate a clinic, depending on the utilization and model, it will take significant reductions in the cost of these services just to break even.

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The following table shows the resulting projected annual claims for each of the indicated service categories, and in total, as well as the total projected savings for both the Moderate and High utilization scenarios.
Moderate Utilization $259,965 $119,447 $379,412 $761,994 $547,109 $190,439 $763,245 $1,139,843 $1,162,869 $4,565,499 High Utilization $225,303 $103,521 $328,824 $660,395 $520,055 $182,159 $730,060 $1,096,945 $1,119,106 $4,308,719

Type of Service Preventative

Service Preventative Medicine Immunizations Subtotal PCP Specialist Consultation Lab/Pathology Radiology Other Subtotal

Baseline $346,620 $159,263 $505,883 $1,015,992 $601,219 $206,999 $829,614 $1,225,637 $1,250,397 $5,129,858

Other Physician

Outpatient Facility Pharmacy

Diagnostic

$3,307,051 $1,242,065 $6,698,791 $7,940,856 $16,883,648

$3,075,558 $1,055,755 $6,447,587 $7,503,342 $15,523,811 $1,359,838

$2,959,811 $993,652 $6,321,984 $7,315,636 $14,912,990 $1,970,658

Generic Brand Subtotal Total for These Services Estimated Annual Savings

The projected savings for each service type are shown below.
Type of Service Preventative Service Preventative Medicine Immunizations Subtotal PCP Specialist Consultation Lab/Pathology Radiology Other Subtotal Moderate Utilization $86,655 $39,816 $126,471 $253,998 $54,110 $16,560 $66,369 $85,795 $87,528 $564,359 High Utilization $121,317 $55,742 $177,059 $355,597 $81,165 $24,840 $99,554 $128,692 $131,292 $821,139

Other Physician

Outpatient Facility Pharmacy

Diagnostic

$231,494 $186,310 $251,205 $437,514 $1,359,838

$347,240 $248,413 $376,807 $625,220 $1,970,658

Generic Brand Subtotal Total for These Services

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The key finding here is that even using relatively aggressive utilization assumptions, the hard dollar savings are less than the projected cost of operating a clinic. This does not mean that the clinic is not financially viable, as utilization should increase over time and the clinic does provide a tool for affecting health care costs in other ways. This is discussed in more detail in the following section. It has also been our experience that some vendors will suggest that other types of direct claim savings are possible through a clinic. Some will suggest that a clinic can reduce emergency room (ER) use, for example. We have also seen suggestions that inpatient utilization can be reduced. Our experience with employers who have implemented a clinic does not support these claims, at least in the near term. The clinic will provide only primary care, so anything requiring more acute treatment should be referred to the proper setting. Certainly there are ER visits that are unnecessary and there may be cases where an employee might avoid an ER visit by going to the clinic, but these should be very infrequent. A successful clinic might affect inpatient admissions in the long run (as will be discussed in the next section), but that will depend entirely on how the clinic is integrated with the employers wellness and disease management programs. We have not included savings related to occupational health (workers compensation, fit for duty physicals, etc.). Using a clinic for workers compensation services is possible but the potential for material savings is limited. Savings for required physicals are much more significant for employers that have their own police and fire staff, such as cities and counties. Soft Dollar Savings Most clinic vendors promote the notion of soft dollar savings. Sources of soft dollar savings include things like the following: Reduced absenteeism since employees can receive medical treatment without being away from work for long periods of time. Enhanced productivity while at work (presenteeism) Reduced employee turnover and recruiting costs Increased compliance with treatment plans that will lower long term costs Although we agree that an employer may benefit to some degree from each of these items, we have not made any attempt to quantify these sources of savings. For the most part, we do not have any credible baseline against which to measure these items, and in some cases it is hard to measure them at all. We do not suggest that these items have no value, but we believe they are too subjective and hard to measure to be included in a feasibility study.

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5. Wellness and Disease Management Opportunities

In the prior section, we concluded that the potential for direct claims savings under reasonable clinic utilization assumptions was likely to be less than the cost of operating a clinic in the first year of operation. Despite that conclusion, long term savings are possible if the clinic can be used to improve the performance of other aspects of the health insurance program. Two likely candidates for improvement are wellness and disease management programs. Wellness programs can be defined as initiatives aimed at preventing employees from moving down the health spectrum from healthy to less healthy. Most wellness programs focus on promoting exercise, healthy eating habits, smoking cessation, weight loss, and appropriate wellness visits and screenings. A number of published studies have suggested that 50% or more of health care costs can be linked to lifestyle issues. If those studies are accurate, even small improvements in the overall wellness of a population could have a material impact on health care claims. Disease management programs can be defined as initiatives aimed at ensuring that individuals who already have health conditions that require treatment actively participate in treatment plans that provide efficient care leading to the best possible health outcomes. Some conditions, such as diabetes, asthma, heart disease, and cancer, are natural candidates for disease management. Disease management programs also exist for a number of other conditions that are less obvious, ranging from behavioral health to rehabilitation therapy. A successful clinic can be used to promote employee participation in both wellness and disease management programs. Participation can be encouraged through plan design incentives, premium credits, and enhanced employer funding of healthcare reimbursement or savings accounts. While similar incentives can be developed in the absence of a clinic, the convenience of a clinic may make employees more likely to participate and remain engaged in these programs. In order to estimate the potential impact of improved wellness and disease management programs, it is necessary to understand the prevalence of manageable conditions and the general level of wellness in the population. Using GBS insider, we reviewed the prevalence of various health risk conditions in the District population, as well as the overall health risk in the population. We found the following (see the referenced reports in the Appendix section of this report): The average demographic risk factor for the District has consistently been in the 1.45 to 1.50 range. This is very high, suggesting a much older population that our norm. The population includes a significant number of retirees. Of the 8,800 members, nearly 1,300 are retirees, and average demographic factor for the retirees is approximately 2.35. The demographic risk factor for active employees is still very high, at 1.30 to 1.35.

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The population has an unusually high prevalence of chronic conditions. Over the last 3 years, our clinical algorithms suggest that 50% to 55% of the population is considered a chronic claimant, compared to our norm of just under 40%. The population has a much lower incidence of non claimants that our norms would predict. Our benchmark is that right around 20% of members would have no claims, but the District has consistently been at 10%. The Health Risk Index (HRI), a measure of the overall health status of the population, has been consistently high, with scores of close to 1.60 for years ending June 30 2009 and 2010. The score for the year ending June 30, 2011 is better, at 1.36, but that figure is under stated because we do not have the runout claim data from the 2010/11 year included at this time. Our health risk model has consistently predicted that the risk scores would improve, but we have not seen that yet. There may be some improvement in 2010/11, but we wont know for sure until we get the runout data included. The fact that the risk scores have not regressed to the mean suggests the either the disease management efforts to date have not been successful or that the healthier lives have been getting less healthy at a faster rate than expected. The Disease Burden report shows relatively high frequencies of diabetes, circulatory disease, and malignancies. These are all conditions that lend themselves to effective disease management. Based on these results, we conclude that the Districts health claims could be reduced by a more robust disease management program, and that the District would also benefit from an effective wellness plan. Quantifying the potential savings is not as precise as estimating current direct savings that might be achieved through a clinic, but we can mare a reasonable estimate. Following is a summary of the health risk index and claims by claimant category for the 12 months ending June 30, 2011.
Benchmark % of Claimants 21.0% 35.6% 4.8% 38.6% 100.0% Retrospective Health Risk Index 0.000 0.337 1.084 2.381 1.3591

Clinical Category Non Claimants Healthy Claimants Acute Claimants Chronic Claimants Total

# of Claimants 684 2,377 292 3,339 6,692

% of Claimants 10.2% 35.5% 4.4% 49.9% 100.0%

% of Total Claims 0.0% 7.5% 2.4% 90.1% 100.0%

Chronic claimants account for 90% of the total claim cost. If we assume that a % change in the HRI corresponds to a comparable % change in the health claim cost, then for each 1% by which a successful disease management program is able to reduce the HRI for chronic claimants, we estimate a claim savings of 0.9%, or approximately $350,000.

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A successful wellness program will reduce key risk factors and that will also translate to lower HRI scores, although that may be more a result of a change in the mix of the categories above. Preventing members from moving from healthy claimants to chronic claimants will keep the overall HRI lower and will reduce claim costs over time. Each 1% shift from chronic to healthy claimant in the table above reduces the overall HRI by over 1.5%, which we estimate would translate to annual claim savings of approximately $600,000. These potential savings are likely to occur over a longer time period of perhaps 2 to 3 years at best. Also, estimating claim savings by looking at changes in the HRI is complicated by the fact that even in the absence of any disease management or wellness program, there is often movement in the HRI from year to year. If one year has an unusually high frequency of serious illnesses, it is common that the next year is not as bad, as experience tends to move back to normal over time. In order to attribute savings to these programs, it is necessary to track experience for given conditions over time and compare the progression of risk scores before and after the programs are introduced, taking into consideration the progression of the scores in an environment with no such programs. Finally, many employers are taking stronger steps in this area without using a clinic, so the real question is how much can the performance of these programs be improved by using a clinic. Disease management and wellness vendors will generally agree that the biggest barrier to success is that not enough employees are truly engaged in the programs. To the extent a clinic serves as a tool for increasing the engagement level of employees, the programs should be more effective. A discussion of strategies for promoting employee engagement through a clinic is beyond the scope of this report, but we recommend that if the District does issue an RFP for clinic vendors, the approaches taken by vendors to engage employees be given a material weight in the evaluation process. After all the caveats and unknowns, the question remains: How much can a well designed clinic contribute to health plan savings by improving the health risk of the covered population? Based on the theoretical analysis, there is more potential for savings related to health improvement than for avoiding office visits and other medical procedures and prescriptions. Our history with clients has been mixed, but it is also somewhat limited as we still have only a relatively small sample of clients that have implemented clinics. Based on what we have seen, it is possible to slow the growth of healthcare costs though more effective wellness and disease management programs, and we certainly have examples of clinics successfully engaging employees in health promotion activities. Therefore, we believe a clinic can play a role in slowing the growth of healthcare costs and that the magnitude of potential savings is at least as significant as the short term direct cost savings that can be achieved.

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6. Other Considerations
As we prepared this report, there were other issues that presented themselves that we think are worth noting. One key factor that drives clinic utilization is the location of the facility. For school districts, this is often an issue because employees are spread out over several work locations and it is often difficult to find a single location for a clinic that provides ready access to all employees. In our work, we assumed either 2 or 3 separate locations would be necessary to provide access to all District employees. As part of the study, we looked at the home zip codes of all employees to determine just how spread out the population is. We also had a concern that the over 1,000 retirees might be spread around the country and would therefore have no ability to access a clinic in Escambia County. The results of our study suggested that 88% of plan participants live in Escambia County and would have reasonable access to a clinic. We also found that 8.4% lives in Santa Rosa County and would presumably have reasonable access as well, and that another 2.5% reside in neighboring Alabama counties of Baldwin and Escambia. We assumed that half of the lives living in the two Alabama counties would have reasonable access. In total, we estimate that almost 98% of covered employees and retirees combined could have reasonable access to a clinic if the locations are carefully selected. A second issue we think is important to note is that we are just starting to see clinic vendors try to partner with medical TPAs. One of the problems we have experienced with clients that have introduced clinics is the lack of sufficiently detailed reporting about the nature of services performed in the clinic and the inability to integrate that data with the medical TPA data. As clinics mature, we expect some of the reporting issues will be resolved, but it remains an issue today with many vendors. The possible partnering of clinic vendors and medical TPAs might also prove to be one method of addressing this issue. One example of this partnering is the combination of Blue Cross Blue Shield of Florida (BCBSFL) and clinic vendor Healthstat, which we understand has started in the Escambia County area. The possible partnering of vendors is, from our standpoint, not entirely a benefit to employers. There is a great deal of variation between clinic models and we dont believe an employer should be steered to one model over another because of their choice of medical vendor. Just as GBS would not bring a packaged TPA solution to an employer, we see problems with a carrier bringing a packaged clinic solution. Our job is to determine the best TPA for each employer and we feel the same way about a choice of clinic vendors. Finally, we think it is important to keep in mind that while employer sponsored clinics have been around in some form for decades, the more recent explosion in this field has not been going on long enough to have a great deal of credible history. This analysis is based more on our assumptions and what if scenarios than it is on hard data. While we believe our findings are reasonable, and consistent with the experience that we do have, there is still an element of uncertainty regarding the long term results under clinics programs. The District should keep this uncertainty in mind when evaluating its options regarding clinics. 18