2016 Orthopedics Landscape ... US Market, 2016–2026 Sg2 IP Forecast Population-Based Forecast Sg2 OP Forecast Discharges Millions 5-Year 10-Year Hip Knee Outpatient Hip/Knee Replacement

2016 Orthopedics Landscape

Mike Graham

Director, Orthopedic Intelligence

Sg2

Confidential and Proprietary © 2016 Sg2 2

How does the

Sg2 forecast

work?

Can we expect

continued growth

in Orthopedics

over the next

decade?

Sg2 Forecast Overview

• What are we thinking about?

• 10-year overview for Orthopedics

• Procedure Highlights

Total Joint Replacement

Spine Care

Rehabilitation

3Confidential and Proprietary © 2016 Sg2

Sg2’s Impact of Change® Forecasts

Sg2 Impact Factors

Population

Epidemiology

Economics

Policy

Innovation & Technology

Systems of CARE

System

of CARE

Days, LOS,

Volumes,

Sg2 Impact

Factors

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ORTHOPEDICS SPINE

What are we thinking about?

ASC Urgent Care Post Acute Virtual Health

Total Joint

Replacement

Foot &

Ankle

Upper

Extremity

Hip

Fx

Sports

Med

Rehab Neuro

Spine

PainPM&R

Ortho

Spine

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Sg2 ANALYTICS

400

440

480

520

560

600

2016 2021 2026 2.0

2.2

2.4

2.6

2.8

3.0

2016 2021 2026

+11%

+21%

Orthopedics Experiences Outpatient Shift

Note: Analysis excludes 0–17 age group and includes orthopedics service line only.

Sources: Impact of Change® v16.0; HCUP National Inpatient Sample (NIS). Healthcare Cost and Utilization Project (HCUP). 2013. Agency for Healthcare Research and Quality,

Rockville, MD; OptumInsight, 2014; The following 2014 CMS Limited Data Sets (LDS): Carrier, Denominator, Home Health Agency, Hospice, Outpatient, Skilled Nursing Facility;

The Nielsen Company, LLC, 2016; Sg2 Analysis, 2016.

+2%

+7%

+14%

+7%

+6%

Inpatient Orthopedics Forecast

US Market, 2016–2026 Outpatient Orthopedics Forecast

US Market, 2016–2026

Sg2 IP Forecast Population-Based Forecast Sg2 OP Forecast

Discharges

Millions 5-Year 10-Year

Volumes

Millions 10-Year5-Year

+12%

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Sg2 ANALYTICS

Orthopedic Procedures:

10-Year Growth Projections

Sources: Impact of Change® v16.0; HCUP National Inpatient Sample (NIS). Healthcare Cost and Utilization Project (HCUP). 2013. Agency for Healthcare Research and Quality,

Rockville, MD; OptumInsight, 2014; The following 2014 CMS Limited Data Sets (LDS): Carrier, Denominator, Home Health Agency, Hospice, Outpatient, Skilled Nursing Facility;

The Nielsen Company, LLC, 2016; Sg2 Analysis, 2016.

21% 3%

IP

Hip Fracture

11%

29%

82%

103%

OP

IP

Shoulder Replacement

Sg2 IP Forecast

Population-Based Forecast

Sg2 OP Forecast

6%

19%

136%

–4%

Cervical Spinal Fusion

Lumbar Spinal Fusion

4%

13%

595%

–31%IP

OP

IP

OP

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Sg2 ANALYTICS

0.8

1.0

1.2

1.4

1.6

2016 2021 2026

+12% +25%

TJR Procedures will continue to

transition to the OP Setting

Note: Analysis excludes 0–17 age group.

Sources: Impact of Change® v16.0; HCUP National Inpatient Sample (NIS). Healthcare Cost and Utilization Project (HCUP). 2012. Agency for Healthcare Research and Quality,

Rockville, MD; IMS LifeLink® PharMetrics Health Plan Claims Database, 2011, 2013; The following 2013 CMS Limited Data Sets (LDS): Carrier, Denominator, Home Health

Agency, Hospice, Outpatient, Skilled Nursing Facility; The Nielsen Company, LLC, 2015; Sg2 Analysis, 2016.

–1%

+3%

Inpatient Hip/Knee Replacement

US Market, 2016–2026

Sg2 IP Forecast Population-Based Forecast Sg2 OP Forecast

Discharges

Millions 5-Year 10-Year

Hip

Knee

Outpatient Hip/Knee Replacement

US Market, 2016–2026

Volumes

Thousands 10-Year5-Year

0

100

200

300

2016 2021 2026

+2%

0

500

1,000

2016 2021 2026

+12%

+187%

+6%

+457%

+224%

+633%

+4%

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Sg2 ANALYTICS

Big changes are coming!

By 2026, more than half of all total joint replacements will

occur in the outpatient setting.

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2016 2018 2020 2022 2024 2026

Inpatient Outpatient

85%

15%

75%

25%

68%

32%

63%

37%

57%

43%

49%

51%

Note: Analysis excludes 0–17 age group.

Sources: Impact of Change® v16.0; HCUP National Inpatient Sample (NIS). Healthcare Cost and Utilization Project (HCUP). 2012. Agency for Healthcare Research and Quality,

Rockville, MD; IMS LifeLink® PharMetrics Health Plan Claims Database, 2011, 2013; The following 2013 CMS Limited Data Sets (LDS): Carrier, Denominator, Home Health

Agency, Hospice, Outpatient, Skilled Nursing Facility; The Nielsen Company, LLC, 2015; Sg2 Analysis, 2016.

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Adoption of Outpatient Joint Replacement Varies

Substantially by Region…And Market

Colorado 40% OP

Massachusetts 1% OP

Virginia 6% OP

Sources: Sg2 Ambulatory Market Strategist; Health Intelligence Company, LLC; Sg2 Analysis, 2016.

El Paso 3-year change = -8%

San Antonio 3-year change = 64%

Houston 3-year change = 20%

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Which Risk Factors Will Accelerate the Shift?

My TJR surgeons

are independent and/or

own an ASC. Local payers have set a

precedent in the market.

A significant %

of my IP TJR volume has

an LOS ≤ 2 days.

Direct-to-employer

ortho bundled payments

exist in my market.

State law allows

overnight stays.

11Confidential and Proprietary © 2016 Sg2

54%

35%

43%

47%

38%

8%

36%

Patient

education

Prehab Pain

protocols

Physical

therapy Anesthesia

technique

Virtual

health

software

Navigators

Process Needs to Be Seamlessly Executed

Changes in Pathways and Protocols Indicates presence at XYZ Hospital

Source: Sg2 Survey of Members 2016; Sg2 Interviews and Analysis 2016

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Additional Analysis That May Benefit Future TJR

Opportunity Assessments

Key Questions to Inform Your TJR Strategy Supporting Analysis

Who are the patients in my market today and

how will their needs change over time?

• Patient acuity/comorbidity analysis

• Consumer segmentation

• Demographic and LOS analysis

What are the current strengths and gaps in my

System of CARE that would help or hinder the

development of a bundled payment program?

• Organizational or market System

of CARE gap analysis

• In-migration/out-migration analysis

How can I strengthen alignment with physicians

and other partners to prevent leakage and

mitigate risk?

• Physician referral patterns (eg,

Patient Flow mapping)

• Sg2 cost analysis

• Physician supply/demand

CARE = clinical alignment and resource effectiveness; TJR = total joint replacement.

Confidential and Proprietary © 2016 Sg2 13

How can we

optimize our

growth in Spine?

What will the role

of OP Rehab

evolve in a

value-based

environment?

Sg2 Forecast Overview

Total Joint Replacement

Spine Care

• Maximizing your local System of CARE

• Preparing for Value-based Reimbursement

• Changing role of PM&R

• The essential nature of OP Rehab

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Sg2 ANALYTICS

400

480

560

2016 2021 2026 0.6

0.7

0.8

0.9

2016 2021 2026

Utilization Shifts Redefine Growth Opportunities

Note: Analysis excludes 0–17 age group. Sources: Impact of Change® v16.0; HCUP National Inpatient Sample (NIS). Healthcare Cost and Utilization Project (HCUP).

2013. Agency for Healthcare Research and Quality, Rockville, MD; OptumInsight, 2014; The following 2014 CMS Limited Data Sets (LDS): Carrier, Denominator, Home

Health Agency, Hospice, Outpatient, Skilled Nursing Facility; The Nielsen Company, LLC, 2016; Sg2 Analysis, 2016.

IP Spine Forecast

US Market, 2016–2026

OP Spine