Special Full Board Strategic Planning Workshop Agenda

SPECIAL FULL BOARD STRATEGIC PLANNING WORKSHOP AGENDA

Monday, January 23, 2017 Graybill Auditorium 5:30 p.m. Dinner buffet for board members and invited guests Palomar Medical Center Downtown Escondido 6:00 p.m. Meeting 555 E. Valley Parkway, Escondido, CA 92025

PLEASE TURN OFF CELL PHONES OR SET THEM TO SILENT MODE UPON ENTERING THE MEETING ROOM

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I. CALL TO ORDER…………………………………………………………………………………. 1 6:01

II. ESTABLISHMENT OF QUORUM………………………………………….……………………. 2 6:03

III. PUBLIC COMMENTS1..…………………,…………………..…………………………………... 15 6:18

IV. * INFORMATION ITEMS…………………………….…………………………………………….

A. Downtown Campus / Update on Sale………………………………..……...……...…………. 15 6:33

B. Review/Discussion: Draft Palomar Health Strategic Plan (ADD A-Pp2-91)…..…………… 71 1 7:44

V. PUBLIC COMMENTS1..…………………………………………..……...... ………….. 15 7:59

VI. ADJOURNMENT…………………………………………………………………………………... 1 8:00

NOTE: If you have a disability, please notify us by calling 760-740-6375 72 hours prior to the event so that we may provide reasonable accommodations ______ Asterisks indicate anticipated action. Action is not limited to those designated items.

1 5 minutes allowed per speaker with a cumulative total of 15 minutes per group. For further details & policy, see Request for Public Comment notices available in meeting room.

Draft Strategic Plan

TO: Special Full Board Strategic Planning Workshop

MEETING DATE: Monday, January 23, 2017

FROM: Della Shaw, Executive Vice President Strategy

Background: The purpose of the workshop will be to discuss and receive input about the Draft Strategic Plan from the Board of Directors.

Budget Impact: N/A

Staff Recommendation: Discussion and input

Committee Questions

COMMITTEE RECOMMENDATION:

Motion:

Individual Action:

Information:

Required Time:

ADDENDUM A

Palomar Health Strategic Plan

Letter from the President and Board Chair

To our Palomar Health Family and Community:

With the uncertain landscape of healthcare today, it is vital for Palomar Health to have a clear vision and strategic direction so we can be prepared for the future. To this end, we have developed our strategic plan through a comprehensive process listening to our Board of Directors, leaders, physicians, employees, and community members.

Our strategic plan describes how Palomar Health is navigating toward the future with purpose to create sustained value for the communities we serve. We will keep our strategic plan vibrant with frequent evaluation and adaption to the changing external factors. We remain committed to our mission – Heal, Comfort and Promote Health in the communities we serve. We recognize that high quality, safety, and excellent patient care will allow us to serve our community for generations to come.

Our culture of caring is focused on Patient First. This means that we put the needs of every patient first, every time. The key to our success has been the collaboration of our experienced team of physicians, nurses, and staff who care for others, as they would expect their family members or themselves to be cared for.

We are now in position to navigate with the goal to deliver high quality, standardized care with 100% reliability. At the end of the day, it is about how our hearts touch the lives of our patients and their families through our guiding values of compassion, excellence, integrity, services, teamwork, and trust.

Thank you for your support and commitment, and for entrusting your care to Palomar Health.

Dara Czerwonka Bob Hemker Chair of the Board of Directors President & CEO

Table of Contents PALOMAR HEALTH STRATEGIC PLAN ...... 1 LETTER FROM THE PRESIDENT AND BOARD CHAIR ...... 2 TABLE OF CONTENTS ...... 3 EXECUTIVE SUMMARY ...... 4 PLANNING FOR THE FUTURE ...... 5 STRATEGY MAP | OVERVIEW ...... 6

STRATEGY...... 6 FINANCIAL PERFORMANCE...... 6 CUSTOMER VALUE ...... 6 VALUE CREATING INTERNAL PROCESSES ...... 6 JOBS, SYSTEMS, AND CLIMATE...... 7 STRATEGY MAP | DETAILED VIEW ...... 8

CUSTOMER VALUE | MARKET DIFFERENTIATION ...... 8 OPERATIONAL EXCELLENCE | WHAT WE DO AND HOW WE DO IT ...... 8 ORGANIZATIONAL CAPABILITIES | PATIENT FIRST CULTURE ...... 9 TAKING THE LONG VIEW | LONG-TERM STRATEGIC PLANNING ...... 11

STRATEGIC FRAMEWORK ...... 11 LONG-TERM PLANNING | KEY OBJECTIVES ...... 11 STRATEGIC PRIORITIES ...... 12 EXECUTIVE SUMMARY CONCLUSION ...... 18 PALOMAR HEALTH | STRATEGY ...... 19

PALOMAR HEALTH | QUALITY ...... 53 PALOMAR HEALTH | SAFETY ...... 56 PALOMAR HEALTH | PATIENT EXPERIENCE ...... 59 PALOMAR HEALTH | PHYSICIAN EXPERIENCE AND ALIGNMENT...... 62 PALOMAR HEALTH | BRAND ...... 66 OPERATIONAL EXCELLENCE ...... 69 ORGANIZATIONAL CAPABILITIES ...... 74 SUMMARY AND FINAL REMARKS ...... 90

Executive Summary California, like the rest of the country, has experienced years of healthcare turbulence. Industry disruption across the country has led to mergers, acquisitions and closures of hospitals, and the growth in publically traded, for-profit mega healthcare systems whose decisions are made by governing boards on behalf of shareholders far removed from their main streets. Fortunately for the citizens served by the Palomar Health District and represented by their citizen boards who know their names and care about their friends and neighbors, our communities can feel reassured that their voices are heard in matters of their communities’ healthcare needs – indeed, serving the needs of our communities is the very reason for our existence.

Healthcare district hospitals are not immune to the winds that buffet healthcare today. Like all healthcare systems, we must develop new models of care delivery that more efficiently and effectively meet our communities’ healthcare needs in a manner that is sustainable for the long term. Also like other healthcare providers, we understand that the most effective way to ensure the sustainability of our district well into the future will include:

 A clinically integrated network to aggregate populations and leverage risk and capital  Effective management of administrative and overhead costs  Viable reimbursement through the influence of network size and value  Local access to high quality healthcare services for the patient in the communities we serve Where districts differ from other providers is in our planning and execution of these strategies. We understand the importance of maintaining access to care at the local level and unlike private health systems, whether not-for-profit or for-profit, districts make community health decisions in an open, transparent, and representative environment.

Planning for the Future

Over an eighteen-month period that began in early 2015, Palomar “True North is the internal compass Health engaged in a comprehensive strategic planning process. that guides you successfully through Throughout our planning process, our fiduciary responsibility and life. It represents who you are as a commitment to the Triple Aim remained our True North - improving human being at your deepest level. It our patients’ experience of care, including quality and satisfaction, is your orienting point – your fixed improving the health of our population, and reducing the cost of health point in a spinning world – that helps you stay on track as a leader. Your care. True North is based on what is most Throughout the process, Palomar Health engaged a broad, important to you, your most cherished values, your passions and representative constituency in comprehensive dialogue about the motivations, the sources of future of health and healthcare in our community. Using Scenario satisfaction in your life.” Planning methodology, we took both a short-and long-term view of the healthcare industry and considered Palomar Health’s role in that Bill George, “True North” future. Maintaining relevance and reliability as a healthcare provider framed our thinking. While we planned for a number of possible future scenarios, we were cognizant of the need to build agile and resilient systems that could respond to unpredictable market forces. We considered the current and future role of other providers as partners, collaborators, and competitors, and the impact that each could have on the future of Palomar Health and our community – severally or collectively. We considered how Palomar Health would create sustained value for the communities that we serve and how that we could differentiate our value from other providers. We were appreciative that value is defined through the eyes, minds, and hearts of our customers and that our customers include patients and their families, physicians, payers, and the "In the long term the most important question for a community. We understood that although each of these customers may company is not what you are but define value differently, it is, nonetheless, our responsibility to align our what you are becoming." organizational capabilities, actions, and behaviors to create value for Gary Hamel each. Building and retaining a highly skilled, dedicated, and compassionate workforce will be essential in creating customer value - this is the core of our strategy execution.

Strategy Map | Overview

A Balanced Scorecard Strategy Map provides a framework to show how strategy links intangible assets to value-creating processes. We used standard strategic planning methodology as the foundation for our strategic planning1. As shown below, the original Strategy Map format developed in 2015 transitioned to a format consistent with the Studer Group Evidence-Based Leadership framework in fiscal year 2017. The work that follows reflects our use of the Balanced Scorecard Strategy Map as a strategic management system and a strategic execution measurement system. The results of our execution will be measured against goals in our Balanced Score Card.

2015 – 2016 Strategy Map 2017 Strategy Map

Strategy | Palomar Health will be recognized as the dominant provider of integrated health services. We measure successful execution of the strategy by our market share and value-based metrics of care. Financial Performance | The financial perspective of the strategy map describes the outcomes of the strategy in financial terms. We describe Palomar Health’s financial perspective as Mission-Sustaining Financial Performance, and use a number of contributing financial indicators to measure our successful execution. The financial perspective is a lagging indicator. Customer Value | The customer perspective defines the value proposition, or market differentiation, that we will create for our targeted customers. Palomar Health describes our customer value proposition as Quality, Cost, Experience, and Brand, and reflects them in our strategy statement as ‘value-based metrics of care’. The customer perspective is a lagging indicator. Value Creating Internal Processes | The internal process perspective describes the critical few processes that are expected to have the greatest impact on the strategy outcomes. These intangible internal processes create customer values of quality, cost, and experience and lead to brand engagement and loyalty. Palomar Health describes the internal process perspective as Operational Excellence, which we will achieve through

1 Robert S. Kaplan, Marvin Bower Professor of Leadership Development at Harvard Business School, David P. Norton, Co- Founder and President of the Balanced Scorecard Collaborative, “The Balanced Scorecard” and “Strategy Maps” 6

Clinical Integration, Effectiveness and Efficiency, Hassle-free Experiences, and Consumerism. The internal process perspective is a leading indicator. Jobs, Systems, and Climate | The learning and growth perspective identifies the intangible assets that are most important to our strategy. The objectives in this perspective identify what jobs (the human capital), which systems (the information capital), and what kind of climate (the organization capital/culture) are required to support value-creating internal processes. Palomar Health describes the learning and growth perspective as Organizational Capabilities and Patient First Culture. The learning and growth perspective is a leading indicator.

Strategy Map | Detailed View

Customer Value | Market Differentiation Palomar Health will create value that matters to our customers through:

 Differentiation in excellent and consistent quality,  access to healthcare and health information when, where and how our customers want it,  convenient, hassle-free experiences for those seeking, receiving or providing care,  integration of clinical information that increases quality and experience and reduces cost and risk,  products and services that meet or exceed our population’s healthcare needs and our customers’ expectations,  exceptional service, both before and after every interaction,  enduring relationships of trust and confidence with those that we serve.

We will measure our success in creating customer value differentiation by our quality, cost, experience, brand, and financial outcomes. Creating value differentiation will require new behavior and accountability. Palomar Health is committed to the success of our employees and physicians in this work. We will use evidence-based leadership tools and training throughout the organization, and measure our success by the reliability of our value creation as reflected in our Balanced Score Care (BSC) results. Operational Excellence | What We Do and How We Do It “More than cost or quality, experience drives whether a patient What we do every day is extraordinary. Medicine is complex and the will come back to a health system – margin for error is narrow and punishing, both to the patient and to and then return over and over again those who provide care. Our providers and support staff are driven by as a repeat customer.” a higher purpose and commitment to serve others, to heal, to The Advisory Board comfort, and to give life-sustaining care. What matters most to our customers is how we give care. That is true regardless of the skill and training of our providers and staff, the lifesaving procedures we perform, the advanced technology we use, or the modern, sleek aesthetics of our buildings. According to The Advisory Board, “a range of studies and surveys have found that experience drives loyalty, and loyalty drives business. For health care providers to realize their potential they must convert patients from being satisfied to loyal. Satisfaction measures only a patient’s perception at a specific moment in time, whereas experience encompasses the complete set of interactions a patient has with the health system over time. Satisfied patients leave every day, but loyal patients stay for life. More than cost or quality, experience drives whether a patient will come back to a health system ― and then return over and over again as a repeat customer” (Advisory Board, “Competing on Consumer Experience”, 2015). Operational excellence makes superior customer experience possible. Leaders who strive to achieve excellence in what they do are vigilant about processes and systems that affect both the customers we serve and each other. In high reliability organizations, each employee pays close attention to operations and maintains awareness of what is or is not working. There are no assumptions. This operational attentiveness to processes leads to observations that inform decision-making and result in new or improved processes that

create customer value. We have identified four areas that are critical to operational excellence that creates customer value: 1. An efficient and effective system of care that reduces waste and eliminates defects, both of which are critical to creating quality as defined by our customers; 2. Clinical integration that allows providers to work together to create "There is nothing so useless as doing efficiently that and enhance access, improve quality, and reduce cost and risk; which should not be done at 3. Elimination of customer hassles and barriers that create a suboptimal all." experience for our customers and lead to loss of their trust, loyalty, and engagement and result in loss of market share; Peter F. Drucker 4. Our approach to consumerism must recognize our provider network interdependencies and the importance of working collaboratively to create a consumer-focused network. Our customers’ health and wellness network includes physician offices, hospital- and privately-owned outpatient testing and treatment facilities, skilled nursing facilities, inpatient acute care settings, their homes, virtual care technologies, and other emerging techniques. Customers judge the value of each provider relative to their own needs and the providers’ quality, cost and convenience. The providers our consumers choose and the health systems with which those providers align will influence a consumer’s future choice of a healthcare system. Palomar Health’s consumer strategy should include strategic pricing that leads to patient preference and more market share capture. Both Palomar Health and community physicians should include strategies for on-demand, convenient access models tailored to include options that match interactions with the care needs of our multi-generational, multi-cultural population, from on-site face-to-face visits to virtual care. Organizational Capabilities | Patient First Culture

Culture and Systems that Create Operational Excellence Ultimately, the creation of all customer value starts here. Individuals and teams that are passionate about their work create operational excellence. Every interaction, by every person, at every level across the entire healthcare system, including our “Focus on Patient First and community network of providers, creates operational excellence. Some highly reliable outcomes will allow Palomar Health to of the most critical work over the life of our organization will be our navigate with purpose.” ongoing commitment to developing our workforce; creating and sustaining organizational knowledge, supporting systems, and human Bob Hemker, CEO, Palomar capital; and building a culture that reflects the values and behaviors of Health the Patient First organization that we aspire to be. To prepare for the next ten years, we considered our current state against these future needs and asked some important questions: What skills, capabilities, and tools are needed to execute our strategy successfully? How will we sustain our passion for service and our ability to embrace change and improvement to achieve our vision? How will we fulfill our purpose – individually and collectively? How will we live our values? We understand that employee and physician engagement is critical to maximizing operation excellence and creating superior patient experiences. "When patterns are broken, new worlds emerge." 9 Tuli Kupferberg 10

We are committed to building a culture that engages our employees and physicians and creates a world-class workforce through our investment in talent and leadership development. To accelerate our work, Palomar Health partnered with Malcolm Baldridge National Quality Award winner, Studer Group to help facilitate this cultural transformation.

Taking the Long View | Long-Term Strategic Planning With our strategic framework in place, we began long-term planning in March 2016. The planning group included members of the Palomar Board of Directors, Executive Management Team, Medical Staff Leaders and Department Chairs, Medical Directors, service-line leaders, and key community stakeholders. Strategic Framework

Long-Term Planning | Key Objectives

The key objectives of our long-range strategic planning:  Learn from one another and from leading experts in the health industry  Consider a range of plausible, alternate health industry futures  Identify key certainties and uncertainties and consider changes needed in each possible future  Develop insight and shared understanding of potential challenges and opportunities in those future environments  Explore different viewpoints in-depth and look for common ground  Provide a basis for 5-year strategic plan

The process of long term planning began with education about the healthcare industry as it exists today and as it may evolve over the next decade. Over the following weeks and subsequent planning sessions, participants completed an extensive analysis of our current market position and opportunities to strengthen our market performance, improve our service-line performance, and increase our physician network loyalty.

Palomar Health Strategic Planning Process Timeline

Strategic Priorities Based on an extensive analysis of internal and external data and stakeholder interviews, we identified five strategic priorities that are critical to the future of Palomar Health and the population we serve. Those priorities are:

 Strong Physician Alignment and Networks  Population Health Management  Effective and Efficient Care  Creation of Value that Matters to Customers  Regional Collaborations, Partnerships, and Alignments

STRONG PHYSICIAN ALIGNMENT AND NETWORKS Build physician-hospital alignment and physician engagement as the foundation of a high-value network that will meet the Population Heath Management needs of our community and ensure that Palomar Health is the preferred provider of care in North County.

Why? As both providers of care and customers of our health system, physicians are critical for our success. Strong physician relations and engagement is a key factor in physician satisfaction and retention. An engaged physician workforce is linked to enhanced patient care and experience, greater efficiency and lower costs, and improved quality and patient safety.

What is the impact? Quality | Cost (Finance) | Experience | Brand | People

How will we do it? Aligning goals and processes through the practice of Evidence-Based Leadership

How will we show evidence of successful strategic execution? Balanced Score Care Results

POPULATION HEALTH MANAGEMENT Build the physician network, technology, systems, and community alignment and collaborations needed to support meaningful Population Health Management for the communities we serve.

Why? The level and quality of population health management in the ambulatory setting has a tremendous impact on the cost, quality, and experience of care at Palomar Health. Alignment of care management resources across the continuum improves clinical quality, total cost of care for both Palomar Health in the acute care setting and at a population level, and elevates community health. Palomar Health can serve as a collaborator and capital partner in the development of a robust care management infrastructure with an integrated primary care and post-acute care network connected with an integrated IT platform.

What is the impact? Quality | Cost (Finance) | Experience | Brand | People

How will we do it? Aligning goals and processes through the practice of Evidence-Based Leadership

How will we show evidence of successful strategic execution? Balanced Score Care Results

EFFECTIVE AND EFFICIENT CARE Develop effective and efficient systems that support achievement of the Quadruple Aim to enhance patient experience, improve population health, reduce costs, and improve the life of health care providers, including clinicians and staff.

Why? Operational excellence creates an environment that makes superior customer experience and employee engagement possible. Efficient and effective systems of care reduce waste and eliminate defects, which leads to lower costs and higher quality. Eliminating hassles and barriers to giving or receiving care improves customer experience and employee engagement, which leads to higher trust, loyalty, and engagement and results in higher quality, lower costs and increased market share.

What is the impact? Quality | Cost (Finance) | Experience | Brand | People

How will we do it? Aligning goals and processes through the practice of Evidence-Based Leadership

How will we show evidence of successful strategic execution? Balanced Score Care Results

CREATE VALUE THAT MATTERS TO CUSTOMERS Attract, create, and retain loyal customers - where customers are defined as our patients and their families, physicians, payers, and our community - by achieving the Triple Aim initiatives of enhancing customer experience, improving population health, and reducing costs.

Why? Value is defined through the eyes, minds, and hearts of our customers who include patients and their families, physicians, payers and the community. Although each of these customers, actual or potential, may define value differently, it is our responsibility to align our organizational capabilities, actions, and behaviors to create value for each so that we remain the health system of choice for the communities we serve. This is the core of who we are, what we do, and how we do it. Our success will be measured by our quality, cost, experience, brand, and market share.

What is the impact? Quality | Cost (Finance) | Experience | Brand | People

How will we do it? Aligning goals and processes through the practice of Evidence-Based Leadership

How will we show evidence of successful strategic execution? Balanced Score Care Results

REGIONAL COLLABORATIONS, PARTNERSHIPS, AND ALIGNMENTS Through collaborations, partnerships, and affiliations in the region, Palomar Health will build aligned networks that ensure community access to comprehensive, clinically integrated, value-based care that will meet the needs of the population we serve for generations to come.

Why? The new value proposition requires new strategies and capabilities, and in some cases, new partners. The industry has new and emerging models of care where patients choose health care companies that organize care for them. There will be a continued decline in inpatient utilization as population health management models of care evolve and outpatient care delivered in ambulatory settings increases. Larger networks and tighter collaborations will be necessary to aggregate lives, assemble intellectual and financial capital required to absorb and manage risk, and make investments in information technology to support population health management.

What is the impact? Quality | Cost (Finance) | Experience | Brand | People

How will we do it? Aligning goals and processes through the practice of Evidence-Based Leadership

How will we show evidence of successful strategic execution? Balanced Score Care Results

Executive Summary Conclusion Our strategic plan is a living document that exists to support of Palomar Health’s achievement of a sustainable, competitive advantage and increased market share by creating customer value differently or better than our competitors create. While our plan is comprehensive, long-range strategic planning is inherently imperfect in this disruptive healthcare environment, and adjustments to our strategic plan will be required as the industry evolves. We will evaluate the sequence and timing of accretion for each of the five strategic priorities over the next five years. To ensure that this plan remains relevant and useful as a guide in sustaining competitive advantage, the organization will review strategic execution outcomes on a quarterly basis, assess any necessary changes, and update the strategic plan annually. As you to read the remainder of this document, you will see that our Patient First culture served as the foundation of our planning. The report begins with a comprehensive assessment of our current capabilities as well as those capabilities needed to support population health management in the future, new or changing delivery models, evolving value-based reimbursement, and transformational consumer demands. We identified gaps and considered the risks of acting or not acting to remove those gaps. Following each section, you will find key takeaways for that area. The document does not contain tactics for addressing gaps or key takeaways. Each year leaders in the organization will develop tactics and measurable goals that support value-creating outcomes that will be measured on the Palomar Health Balanced Score Card. In keeping with the format of the Executive Summary, the document is organized around the format of the Palomar Health Strategy Map: Section I Strategy of Market Dominance (community need, market share, and consumer segmentation) Section II Financial Performance Section III Customer Value (quality, safety, experience, and brand) Section IV Operational Excellence (effective and efficient care, clinical integration, hassle free experience, and consumerism) Section V Organizational Capabilities (workforce, physician workforce, information technology, facilities, and culture) Section VI Final Remarks/Conclusion In addition to this strategic plan document, a separate overview of our system entitled Palomar Health Organization Profile is available. This report provides an overview of our healthcare system and network as of the date of the report, December 2017. The Palomar Health Organization Profile will be updated as needed to ensure that it remains an up-to-date source document.

Palomar Health | Strategy Strategy Statement| Palomar Health will be recognized as the dominant provider of integrated health services as measured by our market share and value-based metrics of care. Understanding the population we serve is important as we develop strategic plans that achieve the overlying strategy related to market share dominance. To do that requires examination of our market through several lenses:  Community Need  Consumer Segmentation  Consumer Market Share  Physician Market Share Palomar Health Market | Community Need California’s health care districts were formed based on the recognition of and desire to meet the unmet health needs in resource-limited communities. Understanding this history, it behooves Palomar Health to continue to understand the needs of the community and create a strategy that is flexible enough to meet the changing demands of the population.

COMMUNITY NEED | CURRENT STATE Palomar Health has taken a number of steps to understand the community within and around the district, a critical first step to creating a health system that will be able to meet current and future demand. We have assessed this internally, through market analysis, and participated in external initiatives that have helped us to define our population, establish relationships with organizations within the community, and prioritize the needs of the community. The North Inland region of San Diego, as defined by the San Diego County Health and Human Services Agency, is a diverse region, with urban, suburban, and rural areas and is comprised of individuals of different ethnicities and varying levels of educational attainment. Of the roughly 589,006 residents who live in the region2 3 approximately 53.3% are white, 30.4% are Hispanic, and 10.9% are Asian/Pacific Islander. While the majority of residents are English only or bilingual, a significant percentage (12.1%) of the population reports speaking only Spanish at home. Additionally, 14.3% were over the age of 65, the highest of any other San Diego region. Various assessments have prioritized the specific health needs in our region and together, they demonstrate significant alignment. Behavioral health was identified clearly as a leading health need within North County. To meet this need, Palomar Health opened a Crisis Stabilization Unit, which has created a new venue to treat behavioral health patients outside of the emergency room setting. Palomar Health also offers a number of classes for cardiovascular disease and diabetes and works with local schools to assess obesity levels in youth. Finally,

2 Based on SANDAG Current Estimates Released 04/2016; Prepared by County of San Diego HHSA, Public Health Services, Community Health Statistics Unit, 2016. 3 County of San Diego HHSA, Public Health Services, Community Health Statistics Unit, 2016. 2014 Demographic Profiles: San Diego County. 19

Palomar Health has invested in a population health-based information technology infrastructure that will allow for improved health outcomes and care coordination across the continuum. Social needs assessments were also completed to help identify the external elements that affect the health of the Palomar Health district population. The following social determinants of health were found to be significant contributors to the top health needs: food insecurity and access to healthy food, access to care or services, homelessness and housing, physical activity, education, cultural competency, transportation, insurance issues, stigma, and poverty. An inventory of the current activities that are supported by Palomar Health to address the health and social needs has been completed. Palomar Health currently participates in a number of programs that address a large number of the identified social determinants of health including physical activity programs for youth and partnerships to care for homeless individuals. However, areas remain where resources are lacking. Palomar Health actively participates in the hospital-focused needs assessments and convenes Community Action Councils in different parts of the Palomar Health district. The Community Action Councils have created a forum for Palomar Health to communicate with community partners and discuss initiatives happening in the community. However, the structure of the community action councils and their ability to address emerging issues in their current form remains rather limited. Additionally, tracking of Palomar Health-supported initiatives is limited and awareness of these efforts in the community remains insufficient.

COMMUNITY NEED | FUTURE STATE The efforts Palomar Health has taken to define the community, establish venues to communicate with community partners, and collaborate with regional groups to prioritize needs have given Palomar Health a foundation from which we can begin to tailor our efforts to better align with the needs of our community. As we move towards being a population health-focused organization, we will need to ensure the existence of a systematic method to collect information and create dynamic plans and strategic partnerships to meet community needs better in the future. An important population to consider in future planning is the health of our Palomar Health employees who struggle with health needs similar to the overall community. Additionally, innovative strategies to serve high- need populations who may incur additional social barriers to care will also need to be considered. While it is becoming increasingly more important to recognize the interdependence of the health system and social services, Palomar Health cannot and should not be responsible for providing all social services. Continuously examining potential partnerships with community-based organizations that have greater expertise in this area and researching evidence-based best practices on how to help link our patients with available resources when and how they need it will be important. In the near future, we plan to connect outpatient clinics and FQHCs to our population health-based information technology platform, which will allow better data sharing. This will allow for better care of chronic conditions, such as cardiovascular disease and diabetes, and improve the overall quality of the patient experience.

COMMUNITY NEED | RISKS AND GAPS An analysis of identified community needs and current Palomar Health-driven initiatives identified a few key areas where we have limited capacity and/or significant opportunity to address currently identified needs: Cultural Competency | Increasing diversity in the region has created a need to evaluate and ensure that we are adequately equipped to meet the cultural needs of our patients. Insurance Issues | Constant change in healthcare has created uncertainty and confusion in the community on how to get and use insurance. Education to inform the community about how to access and use Palomar Health resources effectively is important. Food insecurity | Roughly, 13.3% of San Diego County residents are food insecure and that percentage increases to 20.8% among San Diego County children.4

The effectiveness of current efforts with CACs has yet to be determined. Additionally, community awareness of current efforts appears to be limited.

COMMUNITY NEEDS | FILLING GAPS AND REDUCING RISK Data Driven Assessments | Continued participation in data driven assessments will allow for increased organizational awareness of the changing needs expressed by community residents. HealtheIntent software utility should be explored to maximize its value for care coordination and access to care. Address Recognized Gaps Based on Assessments of Community Need | An analysis of the organization’s current level of cultural and community competency will help determine the extent to which this area should be addressed. Explore options for patient education on insurance, analyzing district-specific barriers to care, and assessing current protocols to determine social needs of patients (i.e. food insecurity) which impact the risk of poorer health outcomes. Develop Meaningful Partnerships | The CACs will be an important channel through which to gather information and report out on the successes of community collaborations. Continue to engage the community through our CACs as part of an ongoing, constantly evolving process to assess the needs of our community. Continue to ask partners how we can add value to better meet community needs and ensure the partnership remains meaningful to all parties. Increase Awareness of Ongoing Community Efforts | Develop a strategy to catalog initiatives and increase media presence regarding Palomar Health’s work supporting the needs of the community. Baseline and follow-up data on desired outcomes should be collected for current efforts supported by Palomar Health in the community in order to improve reporting of results to internal and external groups. Create a World-class Workforce | Build cultural competency skills as appropriate and increase focus on employee wellness, in particular as it relates to prioritized, highly prevalent health needs.

4 Feeding America, ‘Food Insecurity in San Diego County,’ 2014. 21

COMMUNITY NEED | KEY TAKE AWAYS

1. As we continue to move towards population health, we must put intentional effort into defining our community and understanding their needs so we can continue to provide the best care. 2. Health care is no longer limited to the four walls of the hospital and we must be increasingly aware of the need to provide the right care – medical, social, or otherwise - for individuals in the right place long before they need care in an acute patient setting and well after they leave. 3. An initial inventory of activities designed to address community needs have demonstrated gaps that should be addressed including an assessment of our cultural competency and efforts to increase awareness and education related to insurance issues. 4. The organization should develop a structure to systematically track initiatives being supported by Palomar Health to address community needs. This should be done on an ongoing basis. 5. Palomar Health should develop a strategy to meet community need that facilitates enduring community partnerships but is flexible enough to meet the changing demands of the region. 6. Increased value could be derived from our work within the community (i.e. through our Community Action Councils) with the use of a more data driven, structured approach. This will help add value for all community partners involved.

Market Share | Service Line

Palomar Medical Center Escondido and Palomar Medical Center Poway have both earned designated Centers of Excellence status in multiple service lines, including cardiac care, joint replacement, spine, and maternity care. Supported by a reputation for excellent clinical quality and patient satisfaction, Palomar Health has experienced recent growth in volumes for specific programs, and we have opportunity to further increase market share within our Primary Service Area for key service lines where there is heavy competition. Market share for Palomar Medical Center Downtown Escondido and Palomar Medical Center Escondido (collectively bundled in the market share data as Palomar Medical Center Escondido) peaked in 2013 following the 2012 opening of the new hospital, while market share for Palomar Medical Center Poway has steadily declined for the last five years. The following market share calculations reflect where patients who live in our district received their hospital-based care (Source: OSHPD).

SERVICE LINE | OVERALL MARKET SHARE

IP Overall - All Service Lines % Market Share Trend Lines based on discharge volume highest year indicated by marker 2012 vs Facilities 2012 2013 2014 2015 2012 2013 2014 2015 2015 Palomar Medical Center - Escondido 35.6% 37.8% 38.1% 37.7% 2.0 ppt

Palomar Medical Center - Poway 12.5% 12.3% 12.2% 11.7% -0.8 ppt

Palomar Health 48.1% 50.1% 50.3% 49.4% 1.3 ppt

Scripps (4 Facilities) 15.9% 15.1% 14.7% 15.2% -0.7 ppt

Sharp (7 Facilities) 10.3% 9.8% 9.9% 10.5% 0.3 ppt

Rady Childrens Hospital - San Diego 6.0% 6.2% 6.8% 6.7% 0.6 ppt

UCSD 5.0% 5.2% 4.8% 5.1% 0.1 ppt

Kaiser Foundation Hospital - San Diego 6.1% 5.2% 4.4% 4.3% -1.8 ppt

Tri - City Medical Center 3.3% 3.2% 4.2% 3.8% 0.5 ppt

Other (301 Facilities) 5.3% 5.2% 5.0% 5.1% -0.2 ppt

IP Overall - All Service Lines Discharge Volume Trend Lines highest year indicated by marker 2012 vs Facilities 2012 2013 2014 2015 2012 2013 2014 2015 2015 Palomar Medical Center - Escondido 15,134 16,163 16,297 16,468 1,334

Palomar Medical Center - Poway 5,295 5,246 5,227 5,114 -181

Palomar Health 20,429 21,409 21,524 21,582 1,153

Scripps (4 Facilities) 6,770 6,461 6,285 6,660 -110

Sharp (7 Facilities) 4,362 4,166 4,230 4,610 248

Rady Childrens Hospital - San Diego 2,565 2,646 2,895 2,914 349

UCSD 2,119 2,229 2,075 2,211 92

Kaiser Foundation Hospital - San Diego 2,576 2,209 1,873 1,871 -705

Tri - City Medical Center 1,396 1,381 1,777 1,642 246

Other (301 Facilities) 2,251 2,203 2,135 2,222 -29

Total: 42,468 42,704 42,794 43,712 1,244

Source: SpeedTrack – OSHPD Data 2012, 2013, 2014 & 2015 (Excluding Normal Newborn [DRG 795]) Inpatient Discharges for patients whom live within the Palomar Health District (Primary Service Area)

CARDIAC SURGERY | CURRENT MARKET SHARE

IP - Cardiac Surgery % Market Share Trend Lines based on discharge volume highest year indicated by marker 2012 vs Facilities 2012 2013 2014 2015 2012 2013 2014 2015 2015 Palomar Medical Center - Escondido 25.2% 18.6% 23.4% 22.0% -3.2 ppt

Scripps (3 Facilities) 40.3% 43.6% 39.1% 44.0% 3.7 ppt

Sharp (3 Facilities) 10.2% 14.1% 16.3% 13.3% 3.1 ppt

UCSD 6.4% 7.9% 3.4% 8.0% 1.6 ppt

Rady Childrens Hospital - San Diego 10.5% 7.6% 9.8% 6.3% -4.2 ppt

Tri - City Medical Center 3.5% 3.4% 4.9% 3.7% 0.2 ppt

Other (17 Facilities) 3.8% 4.8% 3.1% 2.7% -1.2 ppt

IP - Cardiac Surgery Discharge Volume Trend Lines highest year indicated by marker 2012 vs Facilities 2012 2013 2014 2015 2012 2013 2014 2015 2015 Palomar Medical Center - Escondido 79 54 76 66 -13

Scripps (3 Facilities) 126 127 127 132 6

Sharp (3 Facilities) 32 41 53 40 8

UCSD 20 23 11 24 4

Rady Childrens Hospital - San Diego 33 22 32 19 -14

Tri - City Medical Center 11 10 16 11 0

Other (17 Facilities) 12 14 10 8 -4

Total: 234 237 249 234 0

Source: SpeedTrack – OSHPD Data 2012, 2013, 2014 & 2015 (Excluding Normal Newborn [DRG 795]) Inpatient Discharges for patients whom live within the Palomar Health District (Primary Service Area)

CARDIAC SURGERY | CURRENT STATE Cardiac surgery services are consolidated to Palomar Medical Center Escondido, a designated Cardiac Care Center of Excellence. This service line includes cardiac valve, coronary bypass, and other cardiothoracic procedures. The cardiac surgery program experienced significant growth in the latter half of 2016, driven primarily by the addition of an independent cardiothoracic surgeon who shifted some of his practice from Sharp to Palomar Health. The Valve Program at Palomar Medical Center Escondido launched in August 2015. The program uses protocols for identification of admitted patients who have potential clinical need of valve replacements. Once identified, the patient is eligible for a multi-disciplinary consultation between a cardiologist and cardiothoracic surgeon to determine clinical necessity; if a need exists, an optimal treatment plan is

developed. Following national best practice guideline to ensure ongoing monitoring of at-risk patients, a skilled nurse practitioner coordinates patient follow-up with their primary care physicians and cardiologists.

CARDIAC SURGERY | FUTURE State Advancements in minimally invasive technology | Cardiac surgery practices will shift toward minimally invasive procedures that require an up-front investment in program infrastructure, skilled surgeons, staff training, and equipment. We anticipate a drastic shift from open heart to minimally invasive Transcatheter Aortic Valve Replacements (TAVR) procedures over the next five years; therefore, it will be important to invest in program development to maintain the viability of the service line. Palomar Medical Center Escondido has been a late entrant as a provider for TAVR. Proactive outpatient tracking and management of patients with progressive cardiovascular conditions | Outpatient screenings are expected to identify patients and allow for consultation and treatment before their conditions progress and create higher risks for successful outcomes. Atrial fibrillation or heart failure management programs can support the ongoing pharmacological and psychosocial management of cardiovascular conditions and other related comorbidities. Decline in overall procedural volumes within the market| Cardiac surgery procedural volumes are projected to decrease two percent over the next five years; therefore, in order to grow volumes, Palomar Health must secure market share from key competitors. Scripps is our greatest competitor, particularly since they have a contractual agreement with Kaiser for treatment of their cardiovascular patients. Under existing agreements, all Kaiser patients who are treated at a Palomar Health facility, and who require interventional cardiology procedures or cardiac surgery, are transferred to Scripps. Shift to value-based reimbursement | Treatment for cardiovascular diseases accounts for nearly $1 of every $6 spent on health care in the United States. In 2010, an estimated $444 billion was spent on cardiovascular disease treatment, medication and lost productivity from disability. In 2006, hospitalization costs due to cardiovascular problems for Medicare beneficiaries reached a high of $32.7 billion.5 In July 2016, CMS announced expansion of episode payment models for coronary artery bypass graft (CABG) and acute myocardial infarction (AMI) procedures and treatment. This bundle payment model is a clear shift to expanding value-based reimbursement for cardiovascular conditions. This supports CMS overall goal of lowering cost of care. We anticipate additional conditions will be added to the list of bundled services in the coming year.

CARDIAC SURGERY | CHALLENGES/RISKS 1. Physician alignment | Maintaining the engagement and alignment between our cardiovascular surgeons and cardiologists will promote a multi-disciplinary approach in determining patients’ treatment options. It will also be important that primary care physician use evidence-based criteria in making timely referrals to cardiovascular specialists for consults and interventions.

5 Sources: American Heart Association. Heart Disease and Stroke Statistics - 2009 Update; CDC, Heart Disease and Stroke Prevention Addressing the Nation's Leading Killers, At A Glance, 2011

2. Demonstrating value to ensure network inclusion | Managing cost, length of stay, and appropriate inpatient admissions will be important factors in becoming a preferred provider for narrow networks. Performance against these metrics will be demonstrated through national registries as well as claims data from payers. 3. Maintaining competitive position in the market with the highest quality physicians | Falling behind in cardiovascular technology advancements (tools and skilled physicians) and care protocols will hinder our ability to be a serious market competitor. 4. Competition for consumers | Scripps Prebys Cardiovascular Institute opened March 2015 and is positioned as an attractive option for consumers with health plans that allow broader choice of providers. Sharp and UCSD have the ability to provide the same level of care and have strong brand perceptions in the community. This will require investment of marketing dollars to ensure community perception of Palomar Health brand as a high-quality provider of tertiary cardiovascular services.

CARDIAC SURGERY | KEY TAKEAWAYS 1. Strong alliances between primary care physicians, cardiologists, cardiothoracic surgeons, and cardiac rehabilitation will ensure the highest quality of coordinated care across the continuum and result in program growth and patient loyalty to Palomar Health. 2. Continued investment in maintaining a strong valve program will enable us to identify inpatients with valve disease and ensure they receive ongoing care and interventions at the clinically appropriate time. Other condition-based outpatient management programs can support growth of hospital- based services by improving the identification and monitoring of patients requiring tertiary services. 3. Promoting the cardiovascular program with physicians and our community will support “top of mind” consideration for patients seeking cardiovascular care and increased retention of patients who live within our district. 4. There is long-term opportunity for success by delivering excellent episodes of care – reducing cost per case on inpatient procedures, growing referrals from physicians, and attracting commercial volumes through steerage and/or inclusion in narrow networks. This capability can be applied to other procedures and other service lines.

CARDIOLOGY | MARKET SHARE

IP - Cardiology % Market Share Trend Lines based on discharge volume highest year indicated by marker 2012 vs Facilities 2012 2013 2014 2015 2012 2013 2014 2015 2015 Palomar Medical Center - Escondido 40.1% 46.1% 46.9% 46.7% 6.6 ppt

Palomar Medical Center - Poway 13.0% 11.5% 10.3% 9.7% -3.3 ppt

Palomar Health 53.0% 57.5% 57.2% 56.3% 3.3 ppt

Scripps (4 Facilities) 22.6% 20.4% 19.8% 21.3% -1.3 ppt

Sharp (5 Facilities) 6.0% 7.1% 6.9% 7.5% 1.5 ppt

UCSD 5.1% 4.8% 4.5% 4.6% -0.5 ppt

Tri - City Medical Center 3.7% 3.4% 4.2% 3.1% -0.6 ppt

Other (125 Facilities) 3.6% 3.3% 2.7% 3.1% -0.5 ppt

Rady Childrens Hospital - San Diego 2.7% 1.8% 2.5% 2.2% -0.5 ppt

Kaiser Foundation Hospital - San Diego 3.2% 1.8% 2.2% 1.8% -1.4 ppt

IP - Cardiology Discharge Volume Trend Lines highest year indicated by marker 2012 vs Facilities 2012 2013 2014 2015 2012 2013 2014 2015 2015 Palomar Medical Center - Escondido 1,434 1,655 1,590 1,589 155

Palomar Medical Center - Poway 464 412 350 330 -134

Palomar Health 1,898 2,067 1,940 1,919 21

Scripps (4 Facilities) 809 734 672 724 -85

Sharp (5 Facilities) 215 256 234 256 41

UCSD 183 172 152 158 -25

Tri - City Medical Center 133 121 143 105 -28

Other (125 Facilities) 128 117 92 105 -23

Rady Childrens Hospital - San Diego 97 63 84 76 -21

Kaiser Foundation Hospital - San Diego 116 63 75 63 -53

Total: 3,579 3,593 3,392 3,406 -173

Source: SpeedTrack – OSHPD Data 2012, 2013, 2014 & 2015 (Excluding Normal Newborn [DRG 795]) Inpatient Discharges for patients whom live within the Palomar Health District (Primary Service Area)

CARDIOLOGY | FUTURE State

Shift of services to the outpatient setting | Cardiology services will continue to shift to an outpatient setting (both hospital and clinic-based) as regulatory scrutiny of short-stay inpatient admissions continues to increase. Newer devices will allow treatment for patients formerly not suitable for intervention. As readmissions decrease, outpatient services and care management will increase, thereby decreasing inpatient services and commensurately resulting in expansion of services in the outpatient setting. The outpatient setting could be a combination of physician office-based care as well as disease-based care programs that involve at-home monitoring or telehealth visits with a provider.

 Inpatient Growth/Decline Trends: Cardiac Cath (Interventional Cardiology): -6% Electrophysiology: -5% Medical Cardiology: -11%  Outpatient Growth Trends: Cardiac Cath (Interventional Cardiology): -9% Electrophysiology: 21% Medical Cardiology: 13% Alternative payment models expanding care episode timeframes | The CMS Hospital Readmissions Reduction Program is putting a heavy emphasis on cardiovascular care. Fifty percent (50%) of the six conditions included for FY 2017 are Cardiovascular related; three percent (3%) of all inpatient Medicare revenue is at risk. In addition, the new CMS Episode Payment Model includes Acute Myocardial Infarction (AMI) as a focus for prospective bundled payments and includes care 90-days post-discharge. Increased focus on prevention and management | The formation of Accountable Care Organizations (ACOs) and other innovative care delivery models will support increased focus on prevention and medical management in the outpatient setting. This outpatient focus will be evident in screening programs that enable health systems to capture latent patient populations.

CARDIOLOGY | CHALLENGES/RISKS Delivering short-stay services in a coordinated, cost-effective manner | With an increasing emphasis on appropriate care, selection of the appropriate site of care has been under intense scrutiny, particularly for observation and short stay inpatient cases. Short-stay scrutiny is particularly significant to cardiovascular services, given the high proportion of one- to two-day cardiovascular inpatient stays; approximately 22% of cardiac admissions and 7% of vascular admissions are short-stay and at risk for payment denial. To ensure cardiovascular care is provided in the appropriate setting, service line leadership should evaluate cardiovascular procedures that commonly have 1-2 day length of stay, such as chest pain and hypertension. Using that information, administrators can focus on perfecting short-stay management, while hardwiring care coordination across sites, providers, and time to ensure seamless care delivery. Assigning accountability for a coordinated patient experience across different levels and sites of care delivery | As services shift to the outpatient setting, enhancing operational oversight over ambulatory

services will also create greater accountability for appropriate care delivery. This would require a different organizational structure than exists today, but may be possible with a future Clinically Integrated Network. Preparing for transformative payment and care delivery models | Cardiovascular services account for a significant portion of avoidable spend opportunity. Nearly 90% of hospital referral regions have at least one Accountable Care Organization (ACO), and the cardiovascular service line stands out to ACOs and other risk-bearing entities as a primary Two-Midnight rule: opportunity for managing total costs. The two-midnight rule may Inpatient admissions will generally be payable under drive declining overall revenue because of the shift to lower paying Part A if the admitting outpatient status. Providers must focus on appropriate patient triage, practitioner expected the careful monitoring and re-evaluation of cases, and greater overall patient to require a hospital efficiency for outpatient cases that do not meet admissions standards. stay that crossed two midnights and the medical Meanwhile, the Hospital Readmissions Reduction Program, which record supports that penalizes hospitals for readmissions for certain conditions within a reasonable expectation. specified timeframe post discharge, is expanding the conditions Medicare Part A payment is included under the program. Alternative payment models are generally not appropriate for expanding the amount of time beyond the hospital discharge (30, 60, hospital stays not expected to or span at least two midnights. 90 days) that will be included in the hospital’s reimbursement and the Inpatient Quality Reporting Program is expanding scrutiny of our utilization. Success will require thinking beyond traditional quality metrics to prove value and prepare for alternative payment models. Defining our value proposition to appeal to more selective customers | Payers, referring physicians, and even employers are directing patients as they become increasingly accountable for the quality and cost of care, and these customers are becoming more selective in how and where they choose to provide care to the populations they serve. Insurers employ several strategies to direct enrollees to high quality, low-cost providers: patient steerage, tiered co-pays, and narrow networks. To stay within these insurer networks, cardiovascular programs must focus on becoming high-value providers across the entire continuum. At the same time, referring providers are increasingly incentivized to seek high-value specialists for their patients, and they expect a similar level of partnership and service. It is critical for cardiovascular physicians to become preferred specialist partners to maintain future referrals. To appeal to payers and referring providers, hospitals must position and market their cardiovascular program as a partner in delivering value across stakeholder groups. Providing tools and an infrastructure that supports physician alignment in providing evidence-based care | Hospital-based procedural volumes are reliant on strong alignment between cardiology and primary care physicians. Elimination of variation in identification of appropriate clinical indications for specialist referrals and procedure eligibility will be important in creating evidence-based care. Managing a high-quality network | Attracting and retaining a high-quality provider panel with an optimal balance between invasive and non-invasive cardiologists will be important. Palomar Health will also need to consider how best to leverage mid-level providers, such as nurse practitioners, in the inpatient setting while maintaining equity and consistency across service levels to physicians.

CARDIOLOGY | KEY TAKEAWAYS

1. Successful market share growth will require oversight of the cardiovascular service line across different sites of care and could involve non-traditional approaches (telemedicine) to manage patients in an outpatient setting. 2. Marketing the quality of our cardiovascular program along with establishing program differentiators, will enable us to compete successfully in the market. 3. Continued focus on clinical and service excellence concurrent with the expansion of services through investments in physician and staff education and technology will keep the service line relevant and competitive. 4. Improving patient access to cardiovascular care will help reduce patient use of competitor systems. This is likely to include expanding services to other sites across the district to provide easier, more convenient patient access. In order to create a cost-effective and quality patient experience, the staffing model for these services is likely to be a blend of physicians, nurses, pharmacists, social workers and other ancillary staff.

JOINT REPLACEMENT | CURRENT MARKET SHARE

IP - Joint Replacement % Market Share Trend Lines based on discharge volume highest year indicated by marker 2012 vs Facilities 2012 2013 2014 2015 2012 2013 2014 2015 2015 Palomar Medical Center - Escondido 22.9% 25.8% 34.1% 31.5% 8.5 ppt

Palomar Medical Center - Poway 19.8% 20.1% 17.3% 19.6% -0.2 ppt

Palomar Health 42.7% 45.9% 51.4% 51.0% 8.3 ppt

Scripps (4 Facilities) 22.9% 21.9% 19.0% 22.2% -0.7 ppt

Sharp (4 Facilities) 19.5% 16.1% 12.8% 10.3% -9.2 ppt

UCSD 5.8% 5.9% 5.9% 5.9% 0.1 ppt

Kaiser Foundation Hospital - San Diego 5.2% 5.0% 5.2% 5.3% 0.1 ppt

Tri - City Medical Center 2.1% 3.1% 3.6% 3.6% 1.5 ppt

Other (48 Facilities) 1.5% 1.9% 1.6% 1.4% -0.1 ppt

Alvarado Hospital Medical Center 0.4% 0.1% 0.4% 0.3% 0.0 ppt

IP - Joint Replacement Discharge Volume Trend Lines highest year indicated by marker 2012 vs Facilities 2012 2013 2014 2015 2012 2013 2014 2015 2015 Palomar Medical Center - Escondido 392 445 627 652 260

Palomar Medical Center - Poway 338 347 318 406 68

Palomar Health 730 792 945 1,058 328

Scripps (4 Facilities) 391 378 350 460 69

Sharp (4 Facilities) 333 278 236 213 -120

UCSD 99 102 109 122 23

Kaiser Foundation Hospital - San Diego 89 86 96 109 20

Tri - City Medical Center 36 54 66 75 39

Other (48 Facilities) 25 32 30 29 4

Alvarado Hospital Medical Center 6 2 8 7 1

Total: 1,709 1,724 1,840 2,073 364

Source: SpeedTrack – OSHPD Data 2012, 2013, 2014 & 2015 (Excluding Normal Newborn [DRG 795]) Inpatient Discharges for patients whom live within the Palomar Health District (Primary Service Area)

JOINT REPLACEMENT | CURRENT STATE Our current joint replacement surgeon panel includes seven orthopedic surgeons with Arch Health Partners, one orthopedic surgeon with Graybill, and various independent surgeons. Kaiser is not included in this

analysis, although they represent 58% of Total Joint Replacements at Palomar Health. Palomar Medical Center Escondido and Palomar Medical Center Poway have received Centers of Excellence designations and have excellent clinical quality and patient satisfaction scores. Palomar Medical Center Escondido performs more total joint replacements than any other hospital in San Diego County. Kaiser physicians are responsible for 60% of system joint replacement volumes (total, partial, revision for hip, knee, shoulder, and ankle).

JOINT REPLACEMENT | FUTURE STATE Overall growth is being driven by an aging population and increase in osteoarthritis. New material technologies have also opened the door to primary joint replacements in younger patients, which is expected to drive procedure growth. Minimally invasive techniques and advanced surgical technology are enabling the shift of these procedures to lower cost setting; as physicians become more familiar with these advancements, we anticipate more cases shifting to outpatient surgery centers. While coverage of outpatient joint replacements is expanding among private payers, Medicare has limited the growth of outpatient joint replacements by requiring that the procedure be performed in an inpatient setting. Inpatient Growth Trends | Inpatient joint replacements in our primary service area expected to grow by 8% over the next 5 years. Outpatient Growth Trends | Outpatient joint replacements in our primary service area expected to grow by 132% over the next 5 years.

JOINT REPLACEMENT | CHALLENGES/RISKS

 High demand for operating room time at Palomar Medical Center Escondido limits growth and creates long patient wait-times for surgery.  Maintaining excellence through demonstrated long-term outcomes.  limited ambulatory surgery center availability impacts the ability for Palomar Health to maintain market share as cases continue to move to lower cost settings.  Kaiser continued utilization of Palomar Health for joint replacement.

JOINT REPLACEMENT | KEY TAKEAWAYS 1. Palomar Health will continue to focus on its Center of Excellence strategy and establish a strong service line leadership structure to oversee future programmatic development around cost, quality, and the customer experience. 2. Palomar Health has earned a strong reputation for joint replacements based on excellent patient outcomes, a sophisticated pain protocol to reduce post-operative pain and a robust patient education program. 3. Specialists in the Escondido area have limited operating room capacity for new patients, and decisions about access at Palomar Medical Center Escondido, redirecting patients to specialists at Palomar Medical Center Poway, or establishing an Ambulatory Surgery Center alternative are important in maintaining or growing our market share. 4. Increased focus on patient outcomes has put the orthopedics program data under a microscope. There is an opportunity for continued improvement as well as promotion of our program success.

SPINE | CURRENT MARKET SHARE

IP - Spine % Market Share Trend Lines based on discharge volume highest year indicated by marker 2012 vs Facilities 2012 2013 2014 2015 2012 2013 2014 2015 2015 Palomar Medical Center - Escondido 31.2% 33.7% 32.5% 32.7% 1.5 ppt

Palomar Medical Center - Poway 4.2% 2.9% 2.3% 1.6% -2.7 ppt

Palomar Health 35.5% 36.5% 34.7% 34.3% -1.2 ppt

Scripps (4 Facilities) 29.9% 26.9% 27.4% 31.3% 1.4 ppt

Sharp (3 Facilities) 11.3% 11.8% 10.2% 9.3% -2.0 ppt

Kaiser Foundation Hospital - San Diego 5.0% 4.4% 7.0% 6.8% 1.7 ppt

UCSD 4.6% 5.7% 4.6% 5.9% 1.3 ppt

Alvarado Hospital Medical Center 3.7% 4.3% 5.0% 4.1% 0.4 ppt

Tri - City Medical Center 3.6% 4.3% 5.9% 4.0% 0.4 ppt

Rady Childrens Hospital - San Diego 2.8% 3.0% 3.1% 2.2% -0.6 ppt

Other (51 Facilities) 3.6% 3.2% 2.1% 2.1% -1.5 ppt

IP - Spine Discharge Volume Trend Lines highest year indicated by marker 2012 vs Facilities 2012 2013 2014 2015 2012 2013 2014 2015 2015 Palomar Medical Center - Escondido 287 315 332 417 130

Palomar Medical Center - Poway 39 27 23 20 -19

Palomar Health 326 342 355 437 111

Scripps (4 Facilities) 275 252 280 399 124

Sharp (3 Facilities) 104 110 104 119 15

Kaiser Foundation Hospital - San Diego 46 41 72 86 40

UCSD 42 53 47 75 33

Alvarado Hospital Medical Center 34 40 51 52 18

Tri - City Medical Center 33 40 60 51 18

Rady Childrens Hospital - San Diego 26 28 32 28 2

Other (51 Facilities) 33 30 21 27 -6

Total: 919 936 1,022 1,274 355

Source: SpeedTrack – OSHPD Data 2012, 2013, 2014 & 2015 (Excluding Normal Newborn [DRG 795]) Inpatient Discharges for patients whom live within the Palomar Health District (Primary Service Area)

SPINE | CURRENT STATE Our specialist panel includes one surgeon from Arch Health Partners and eight other independent, unaffiliated surgeons. All system spine cases are performed at Palomar Medical Center Escondido and can be performed by either orthopedic surgeons or neurosurgeons. Our largest four-physician spine specialty group has close alignment with Alvarado Hospital, one of our largest competitors. Although Alvarado Hospital is in our secondary market, by focusing on physician loyalty, we see significant potential to recapture patients who live in our district and go to competing hospitals for spine procedures. Tri-City Medical Center has a closely aligned surgical group and spends significant dollars advertising their surgical spine capabilities. Scripps Green has created additional capacity by transferring cardiac services to the Scripps Memorial La Jolla campus, thereby creating available space for orthopedics and spine patients.

SPINE | FUTURE STATE Growth in spine cases will be driven by an increase in obesity, which puts greater stress on the spine, as well as the growing population of Baby Boomers who want to remain active as they age. Recent technological advances are leading to earlier utilization of surgical techniques. Outpatient volumes are increasing as minimally invasive techniques are used for fusion and non-fusion alternatives in the cervical and lumbar spine. In addition, payers have been encouraging providers to reduce surgical admissions and use lower-cost outpatient settings. Inpatient Growth Trends | Inpatient spine procedures in our primary service area are expected to decline by -0.4% over the next 5 years. Outpatient Growth Trends | Outpatient spine procedures in our primary service area are expected to grow 20% over the next 5 years.

SPINE | CHALLENGES/RISKS

 Exclusion from narrower networks poses a potential risk to the growth of our spine services.  Providing options for conservative approaches to spine conditions and assisting patients in navigating those options with their physicians based on clinically proven best practices will be important.  Limited outpatient and ambulatory surgical center infrastructure limits our ability to capitalize on the fast-growing outpatient surgical spine market.  Recent challenges with availability of operating room block time will limit future growth.  Intra-operative imaging capabilities limit growth and physician recruitment  Collectively, Palomar Health spine surgeons have limited office hours in Poway and Escondido.  Several of our specialists split their work between multiple facilities.

SPINE | KEY TAKEAWAYS 1. Palomar Health will continue to focus on its Center of Excellence strategy and establish a strong service line leadership structure to oversee future programmatic development around cost, quality and the customer experience. 2. Palomar Health must develop a plan to provide outpatient surgery to ensure alignment with market trends and consumer demand.

3. Growth will result from a coordinated outreach strategy that targets both consumers and aligns primary care providers with our growing group of loyal specialists. 4. Increasing specialist loyalty will require resources to upgrade surgical equipment and remove other barriers and hassles that could potentially create a negative user experience.

NEUROSURGERY | CURRENT MARKET SHARE

IP - Neurosurgery % Market Share Trend Lines based on discharge volume highest year indicated by marker

Facilities 2012 2013 2014 2015 2012 vs 2015 2012 2013 2014 2015

Palomar Medical Center - Escondido 22.9% 18.2% 12.0% 13.6% -9.2 ppt

Scripps (3 Facilities) 22.9% 36.4% 32.0% 40.9% 18.1 ppt

UCSD 28.6% 4.5% 20.0% 18.2% -10.4 ppt

Sharp Memorial Hospital 8.6% 4.5% 0.0% 13.6% 5.1 ppt

Rady Childrens Hospital - San Diego 8.6% 9.1% 12.0% 4.5% -4.0 ppt

Tri - City Medical Center 2.9% 0.0% 4.0% 4.5% 1.7 ppt

Other (5 Facilities) 2.9% 13.6% 8.0% 4.5% 1.7 ppt

Kaiser Foundation Hospital - San Diego 2.9% 13.6% 12.0% 0.0% -2.9 ppt

IP - Neurosurgery Discharge Volume Trend Lines highest year indicated by marker Facilities 2012 2013 2014 2015 2012 vs 2015 2012 2013 2014 2015

Palomar Medical Center - Escondido 8 4 3 3 -5

Scripps (3 Facilities) 8 8 8 9 1

UCSD 10 1 5 4 -6

Sharp Memorial Hospital 3 1 0 3 0

Rady Childrens Hospital - San Diego 3 2 3 1 -2

Tri - City Medical Center 1 0 1 1 0

Other (5 Facilities) 1 3 2 1 0

Kaiser Foundation Hospital - San Diego 1 3 3 0 -1

Total: 35 22 25 22 -13

Source: SpeedTrack – OSHPD Data 2012, 2013, 2014 & 2015 (Excluding Normal Newborn [DRG 795]) Inpatient Discharges for patients whom live within the Palomar Health District (Primary Service Area)

NEUROSURGERY | CURRENT STATE Our specialist panel includes two surgeons in the same independent group, one surgeon from University of California San Diego, and one unaffiliated surgeon. All system neurosurgery cases are performed at Palomar

Medical Center Escondido. Services include brain and skull-based surgery including neurostimulators, cranial tumor resection, transcranial resection, intracranial vascular procedures, deep brain stimulators, and craniotomies. University of California San Diego represents the greatest threat to our market share, absorbing cases that were traditionally beyond Palomar Health’s capabilities. Due to program evolution at Palomar Health, we now have the capability to perform these more complex cases. In order to grow volumes, we need to reinforce this message with the physician and consumer community. In 2016, Tri-City Medical Center announced an affiliation with University of California San Diego to bring new neurosurgeons to the region with the intention of sending higher complexity cases to the University of California San Diego - Hillcrest campus.

NEUROSURGERY | FUTURE STATE Neurosurgery growth will be driven by the projected increase in the diagnosis of neurological diseases. Drivers include an aging population and an increase in awareness of disease symptoms. A public focus on prevention, as well as recent technology advances, drive diagnostic services and surgical interventions. Inpatient Growth Trends | Inpatient neurosurgery in our primary service area is expected to grow by 17% over the next 5 years. Outpatient Growth Trends | Outpatient neurosurgery in our primary service area is expected to grow by 15% over the next 5 years.

NEUROSURGERY | CHALLENGES/RISKS

 Ensuring alignment between the neurosurgery trauma physician on-call panel, growth strategy, and physician retention will be essential.  Recent challenges with capacity of the MRI could have a negative impact on growth and customer experience.

NEUROSURGERY | KEY TAKEAWAYS 1. Additional neurosurgeons are bringing new energy into the program. 2. Palomar Health can leverage its model for Center of Excellence development to oversee future programmatic development around cost, quality and the customer experience. 3. Multi-disciplinary care coordination would improve communication and patient flow between primary care physicians and specialists. 4. Growth will result from a coordinated outreach strategy that aligns primary care providers from the primary and secondary service areas with our growing group of loyal specialists.

NEUROLOGY | CURRENT MARKET SHARE

NEUROLOGY | CURRENT STATE Our clinical teams at both Palomar Medical Center Escondido and Palomar Medical Center Poway specialize in the most advanced stroke care. The Joint Commissions recognizes both medical centers as Primary Stroke Centers - a designation they have held since 2009. Our current neurology team is comprised of thirteen neurologists, including one large area group with locations in Carlsbad, Escondido, La Jolla, and Poway and relationships with other hospitals in the market. The Epilepsy Monitoring Unit, established in 2015, has been successful in providing a niche service to the community. We also have offer sleep lab services in San Marcos.

NEUROLOGY | FUTURE STATE Many neurology subspecialties involve a range of providers and sites, which can create challenges in communication and patient flow. Lack of multidisciplinary care coordination can negatively affect in-network referral opportunities, care efficiency and patient expectations. With nearly one in five Medicare dollars spent on patients with Alzheimer’s disease and other memory disorders, cost management is increasingly important. National prevalence of Alzheimer’s disease is expected to increase almost three fold to 13.2 million persons by 2050.6 Low reimbursement for treatment and high demand for care have created challenges to providers in offering comprehensive care in a financially sustainable manner.

NEUROLOGY | CHALLENGES/RISKS Navigating the neuroscience workforce shortage | One strategy for meeting demand is to leverage advanced practitioners. By positioning mid-level providers along many parts of the care pathway, such as patient triage and follow-up, these providers create access to specialists who can focus on patients that are more acute without sacrificing care quality. Tele-neurology solutions and utilization of remote consults can also serve to expand coverage and improve timeliness of care. Streamlining coordination across the care continuum | Formalizing intake and triage protocols creates standardized care pathways and supporting systems that ensure patients receive appropriate care from the appropriate provider while elevating care quality. Similar to other service lines, other systems have chosen to employ dedicated nurse navigators to facilitate provider communication, guide patient care transitions, and improve overall patient experience across care episodes. Improving early diagnosis to manage cost of care | Low reimbursement and high demand for care create urgency in development of efficient care models that may bend the cost curve. Approaches may include early diagnosis and prevention, which could help reduce expensive future treatments and interventional procedures. Targeting increasingly savvy health care consumers | With more availability of information on cost and quality measures, consumers are making more deliberate decisions about their health care. Prioritizing access, short wait time for appointments, subspecialty neurologist availability, and conveniently located care sites can support patient satisfaction and increase network use.

6 JAMA, Hebert, Scherr, Bienias, et al, August 2003 38

Creating a coordinated regional strategy | The variety of subspecialty opportunities within the neurosciences can result in an unclear program scope and imbalance of resources. A coordinated approach matches services to market need by identifying niche subspecialties that support program regionalization and market differentiation.

NEUROLOGY | KEY TAKEAWAYS 1. Telehealth solutions are no longer considered an innovation and are now expected conventional delivery for neurology 2. Comprehensive service line development will require dedicated focus and commitment of resources. 3. There are potential opportunities to differentiate the neurosciences program through better coordination of services.

MEDICAL ONCOLOGY | CURRENT MARKET SHARE

IP - Medical Oncology/Hematology % Market Share Trend Lines based on discharge volume highest year indicated by marker 2012 vs Facilities 2012 2013 2014 2015 2012 2013 2014 2015 2015 Palomar Medical Center - Escondido 29.0% 35.2% 32.9% 32.4% 3.4 ppt

Palomar Medical Center - Poway 11.1% 9.7% 8.8% 8.5% -2.5 ppt

Palomar Health 40.0% 44.9% 41.7% 40.9% 0.9 ppt

Rady Childrens Hospital - San Diego 13.2% 13.3% 15.9% 16.1% 2.9 ppt

UCSD 9.5% 13.2% 11.8% 12.3% 2.7 ppt

Scripps (4 Facilities) 11.5% 11.4% 12.5% 12.1% 0.6 ppt

Sharp (4 Facilities) 6.8% 5.1% 7.7% 8.5% 1.8 ppt

Other (44 Facilities) 6.0% 3.5% 2.8% 4.4% -1.6 ppt

Kaiser Foundation Hospital - San Diego 8.6% 6.4% 5.1% 4.2% -4.4 ppt

Tri - City Medical Center 4.4% 2.1% 2.6% 1.5% -2.8 ppt

IP - Medical Oncology/Hematology Discharge Volume Trend Lines highest year indicated by marker 2012 vs Facilities 2012 2013 2014 2015 2012 2013 2014 2015 2015 Palomar Medical Center - Escondido 325 372 342 338 13

Palomar Medical Center - Poway 124 103 92 89 -35

Palomar Health 449 475 434 427 -22

Rady Childrens Hospital - San Diego 148 141 165 168 20

UCSD 107 140 123 128 21

Scripps (4 Facilities) 129 120 130 126 -3

Sharp (4 Facilities) 76 54 80 89 13

Other (44 Facilities) 67 37 29 46 -21

Kaiser Foundation Hospital - San Diego 97 68 53 44 -53

Tri - City Medical Center 49 22 27 16 -33

Total: 1,122 1,057 1,041 1,044 -78

Source: SpeedTrack – OSHPD Data 2012, 2013, 2014 & 2015 (Excluding Normal Newborn [DRG 795]) Inpatient Discharges for patients whom live within the Palomar Health District (Primary Service Area)

MEDICAL ONCOLOGY | CURRENT STATE

Cancer Care Associates is the dominant provider in our primary service area. Palomar Health occupies a niche as a provider of radiation therapy and inpatient medical oncology. We currently have a tumor board, and our existing specialist panel covers oncology-related procedures. Currently, the majority of chemotherapy is provided in clinic settings by community physicians. Scripps Health recently announced a partnership with MD Anderson to create Scripps MD Anderson Cancer Center, a comprehensive and clinically integrated cancer care program covering eight counties from Santa Barbara to the Mexican border. Scripps MD Anderson Cancer Center will be overseen by physician and administrative leaders from both organizations. It will offer patients access to MD Anderson’s world- renowned treatment protocols, standards of care, extensive clinical trials and translational research. Patients will have access to comprehensive cancer care, including medical oncology, radiation oncology, surgical oncology, pathology, laboratory and diagnostic imaging, as well as other clinical and support services. Scripps and MD Anderson have communicated that close collaboration between the two organizations will be a hallmark of the new Scripps MD Anderson. They promise that Scripps MD Anderson Cancer Center will bring a multidisciplinary approach to local cancer patients and provide a new dimension of innovative care and treatment options. Through joint tumor boards, MD Anderson will also provide opinions for diagnosis and treatment. The program promises that it will offer a patient-centered approach to care, with multidisciplinary teams of oncology specialists supporting patients and families in making informed, evidence-based medical decisions. They also promise to offer an array of patient support services, including genetic counseling, nurse navigation, integrative medicine, palliative care, imaging services and social worker assistance in one convenient, patient-friendly environment.

MEDICAL ONCOLOGY | FUTURE STATE New treatments | Increasing use of new targeted drugs and immunotherapies, which are typically given after initial chemotherapy has failed, creates new treatment possibilities. Potential rise in oral chemotherapy use could reduce infusion volumes in the future, though few oral drugs currently are being marketed as replacements for standard infusion therapies. While a similar number of patients will likely receive radiation therapy, the number of visits may decline if hypo fractionation, which treats patients with fewer visits, gains preference under bundled payment models. CMS reimbursement changes | In 2016, the CMS five-year Oncology Care Model began, which takes an episodic approach to cancer treatment to help contain cost and enhance patient care. Providers will be paid one of two ways – capitation or performance-based incentive based on episode of care. Insurance coverage | Expanded insurance coverage may increase cancer screenings, leading to slight rise in diagnoses. Narrow networks preclude some patients from accessing certain providers. Complementary services | Growing trend in hospital cancer care programs offering services that complement their treatments, such as social, psychological, spiritual and dietary services. Coordinated cancer services | In addition to offering more complementary services, hospitals' cancer care programs are also working to coordinate their services more effectively. Cancer centers are bringing clinical providers and providers of complementary services together in a multidisciplinary team-based approach.

The team may include a medical oncologist, surgical oncologist, radiologist, pharmacist, dietician, and rehabilitation professional, and the team would develop each patient's care plan in consultation with one another to ensure treatment of the whole patient. Palliative care services | Beyond survivorship programs, hospital cancer programs are also offering palliative and end-of-life care for cancer patients. Palliative care involves the management of symptoms and focuses on improving cancer patients' quality of life. Palliative care providers take an empathetic approach to caring for patients, ensuring both their physical and emotional needs are met.

Inpatient Growth Trends | Inpatient Medical Oncology and Hematology services in our primary service area are expected to decline by 2% over the next 5 years. Outpatient Growth Trends | Outpatient Oncology services in our primary service area are expected to grow by 12% over the next 5 years.

MEDICAL ONCOLOGY | CHALLENGES/RISKS

Complete the Care Continuum. Cancer patients typically navigate a fragmented health care system. Oncology leaders have long understood the importance of care coordination and wraparound services like palliative care and psychosocial support. Yet, few have made the necessary investments to ensure that patients are well served throughout all phases of care, from primary prevention and screening to treatment, survivorship, and, when necessary, palliative care. Completing the care continuum involves proactively identifying patient needs and responding with appropriate interventions that boost outcomes, improve the patient and physician experience, and reduce costs. Managing patient symptoms and triaging patients to the appropriate care setting are key priorities as cancer treatment becomes more complex. Program administrators are beginning to realize that they cannot provide all of the services that their patients require—nor do they have to. Consequently, more community hospitals are pursuing affiliations with academic centers to offer patients access to advanced clinical trials and subspecialty expertise. Strengthen Referral Streams | The complexity of the cancer referral pathway creates multiple potential leakage points as a patient moves from diagnosis to treatment. In addition, the increase in insurers’ use of narrow networks means large patient populations might be forced to bypass a health system entirely due to coverage limitations. Leaders should position their hospitals for inclusion in health exchange insurance plans’ networks. Despite this evolving referral environment, traditional marketing and outreach channels remain valuable in securing the loyalty of self-directed patients and referring physicians. Hospital leaders must focus on communicating their performance to these stakeholders, highlighting metrics such as survival, adherence to clinical guidelines, and patient satisfaction. While common over the past decade, physician employment is just one of many strategies available to improve referral dynamics, and in places where employment is not possible, such as our state, alternatives to this strategy will be needed to minimize the risk of a failed acquisition. Optimize Service Footprint | Health systems need to leverage limited resources to provide the best care, at the lowest cost, to the largest population possible. Increasingly, cancer programs span multiple sites of care, and hospital leaders must make difficult decisions to avoid redundancies, enhance cohesion, and improve market share. While these decisions may involve consolidation or divestiture, this is not always the case. Oncology satellite facilities, for example, can help optimize a system’s footprint by decompressing

chemotherapy volumes at the main facility or expanding a system’s presence in a new market. On the other hand, consolidating certain low-demand, complex surgeries at a single hospital often improves clinical and financial outcomes. Meanwhile, telehealth can extend program reach by helping providers care for rural populations and others with limited access. Significant barriers to new market entrants | Our market is dominated by well-established comprehensive oncology services provided by systems whose brands are perceived by the community as the highest quality, with access to the latest technology and most highly trained physicians. These market leaders create significant differentiation and brand barriers, which challenge potential new entrants who consider building and maintaining in a competitive program. Partnerships and alignments with existing programs will create the best options for Palomar Health to provide local, comprehensive oncology services to patients in the market we serve. MEDICAL ONCOLOGY | KEY TAKEAWAYS

1. Assess the potential to partner with local physician groups to offer patients chemotherapy close to home. 2. Identify opportunities to collaborate with the Mayo Clinic to offer patients access to clinical trials and subspecialty expertise 3. Optimize infrastructure to capitalize on niche services.

OTHER SERVICE LINES | CURRENT MARKET SHARE

Increasing market share will require that Palomar Health continuously scan the market and community needs assessments to identify services we can provide. This will involve making strategic decisions that consider the opportunities, risks, investments required, and expertise needed to create sustainable programs. Other service lines under consideration for future development include, but are not limited to the following:  Women’s services (cardiac care, uro-gynecology, obstetrics)  Urology  Gynecology  General surgery (including robotics) Future annual updates to the strategic plan will include analysis on service lines that are selected for further program development and growth.

OTHER SERVICE LINES | KEY TAKEAWAYS

Continued investment in market research tools and analytical expertise will support Palomar Health executive leadership in thoughtful evaluation of opportunities These investments will involve allocation of resources including management time, staffing support, technology, and marketing,

Market Share | Physicians

PHYSICIAN MARKET SHARE | CURRENT STATE

Two other views of market share include 1) primary care physician referral preference for specialists who perform the majority of their work at Palomar Health, and 2) specialty physicians’ use of Palomar Health for

the majority of their work.7 Calculation of market share considers only the primary care physicians who have office addresses in our Primary Service Area (PSA), but excludes primary care physicians that are part of the Kaiser, Scripps, and Sharp Rees-Stealy foundation groups. Our market analysis has identified the greatest opportunity for growth is through increasing the alignment of primary care physicians with Palomar Health specialists and services.

Primary Care Specialists Cardiac Surgery Splitter8 Loyal9 Cardiology Splitter Loyal Electrophysiology Splitter Loyal Neurosurgery Splitter Splitter Spine Surgery Splitter Splitter Joint Replacement Loyal Loyal Kaiser Foundation, Scripps, and Sharp physicians not included

PHYSICIAN MARKET SHARE | FUTURE STATE The power of networks will grow exponentially and shifts in network composition will have to power to secure or collapse health care systems. The services we deliver to our community in the coming years will extend beyond the traditional bricks and mortar of an acute care hospital. New medical advances and expanded healthcare coverage will continue to reduce hospital admissions. Some of these medical technologies will result in less invasive interventions and will drive growth into ambulatory settings. By collaborating with our physicians to develop our service lines, establish development, establish criteria for appropriateness of admissions, adopt cost-effective medical technology, and manage post-discharge care, will enable Palomar Health to successfully compete and grow market share. Payers, particularly Medicare, continue to add risk and reward for performance by shifting greater portions of payment calculation to quality and value. CMS has set a target of transitioning 50% of payments to alternative value-based payment models by 2018. Understanding how these reimbursement models work and being proactive in aligning our cost structure, quality improvement programs, and outcomes reporting will allow for successful market positioning. Mirroring the retail industry, consumerism is an emerging trend in healthcare. Consumerism will require transformation of our traditional delivery models to meet the demands and preferences of targeted segments of our population. Our ability to grow by attracting specific segments of our population will require investments in targeted program development and marketing to attract patients who actively research their health system, physician, and treatment options.

7 Source: Crimson Market Advantage 8 Splitter designation means 30-70% of direct or downstream revenue generated by the physicians comes to a Palomar Health facility 9 Loyal designation means >70% of direct or downstream revenue generated by the physicians comes to a Palomar Health facility 44

PHYSICIAN MARKET SHARE | RISKS AND GAPS

 Competing health systems significantly outspend Palomar Health advertising in our area.  Capacity restraints in key service lines will limit growth opportunity.  Competing health systems restrict patients’ referrals outside their physician network and use aggressive repatriation to keep their attributed members in network.  IPAs aligned with competing health systems dominate our northern and coastal secondary service areas (SSAs), limiting our ability to grow market share in those areas.  Physician engagement and alignment with Palomar Health is well below competitor rankings  Primary Care Physicians have significant splitter behavior, sending a significant share of their specialty referrals to competitor-aligned specialists.  Primary Care Physicians name access issues as significant for specialty care.

PHYSICIAN MARKET SHARE | FILLING GAPS AND REDUCING RISK Build Comprehensive and Coordinated Service Continuum | Evolve our Center of Excellence approach to look more comprehensively across venues for care delivery – hospital, outpatient clinic, and even patients’ homes. Continue to leverage the infrastructure to ensure physicians are satisfied with the services provided while they and their patients are interacting with Palomar Health. Focus on multidisciplinary care coordination to avoid missed referral opportunities, inefficient care and mismanaged patient expectations. Strengthen Referral Streams | While Palomar Health specialists have demonstrated quality and service, only a select few attract referral sources from across San Diego County and beyond. Develop a plan to attract referrals from providers who have historically referred to other health systems, particularly in our primary service area. Develop education programs that focus on identifying and diagnosing patients earlier in the disease progression. Address Service Gaps | As our specialists near their capacity for growth, wait times for surgery are becoming longer and we face the possibility of losing patients to competitors. Explore recruitment of additional specialists or ways to make current specialists more efficient. Establish Employee-Driven Referral Stream | Pursue direct-to-employer contracting opportunities with employer groups to extend geographic reach. Maximize Service Offerings to Reduce Costs | Continue to focus on high quality care at the right price to ensure inclusion in future narrow networks. Clinical Quality/Centers of Excellence | Leverage service line structure for programmatic development that meets the Triple Aim goals of reduced cost, increased quality and customer experience. This structure includes triad relationships between medical directors, administrators, and nursing. Respond to new reporting requirements for the Readmission and Surgical Site Infection program and prepare for future data reporting mandates by participating in surgical registries. Prepare for Value-Based Payment Models | The CMS Readmissions Reduction Program and the Comprehensive Care for Joint Replacement bundled payment initiative increases pressure on providers to focus on the patient’s cost of care and quality for 90-days post discharge. Collaborate with post-acute providers to improve post-surgical care.

Create a Coordinated Regional Strategy | Match services to market need by identifying niche subspecialties to support program regionalization and differentiation from competitors. Assess market demand to match health and wellness offerings with community needs. Create a Foundation for Ongoing Patient Loyalty | Continue to reinforce a strong reputation based on excellent patient outcomes, reduced post-operative pain, and a robust patient education program. Create a Care Experience to Attract Selective Customers | Patients will shop for the best options and they are willing to travel for services considered to be synonymous with quality, innovation and value. Continue to reinforce our quality reputation through promotion to consumers.

PHYSICIAN MARKET SHARE | KEY TAKE AWAYS 1. Loyal physician networks are critical to our success. 2. Our loyal physician network size has to be large enough to protect against market intrusion by competing system networks, and to secure and hold market dominance. 3. Growth will result from strong alliances between our health system and the primary care physicians, specialists, and ancillary care providers as well as from strong primary care physician connections to specialists with strong loyalty to Palomar Health. 4. Palomar Health Centers of Excellence have earned strong reputations for excellent patient outcomes, which has driven growth through word-of-mouth referrals. Palomar Health will continue to focus on its Center of Excellence strategy and our focus on cost, quality, and the customer experience. 5. Avoid future capacity restraints by focusing on prevention as well as strategies that shift care from the hospital to ambulatory care settings such as physicians’ offices, surgery centers, and post-acute facilities. 6. Increased focus on patient outcomes has put our data under a microscope. There is an urgency to promote our successes and improvements around access, quality, and patient satisfaction.

Market | Consumer Segmentation

CONSUMER SEGMENTATION | CURRENT STATE Health systems have historically segmented their service population according to demographics such as age, gender, income, and education level available through the US Census. This type of segmentation has limited utility for enabling health systems to attract individual consumers through new services and selective marketing. Specifically, health systems have had a “one size fits all” approach for patient access with provider convenience at the center. Health systems are also focused on consistency and standardization to ensure the quality of care. Currently, we have the ability to create targeted messaging campaigns to households where one individual has a higher risk of certain conditions based on their purchasing patterns. These marketing tools have enabled us to better target individuals who would be interested in our community education classes. These demographics might drive provider selection and utilization. For example, the median household income for residents in the PSA-South skews higher than PSA-North and has higher geographic proximity to both primary care physicians aligned with competitor systems and hospitals themselves. This implies that the PSA-South population has more economic freedom and location convenience to choose other providers.

2015 2020 Projected Change 2015 2020 Projected Change Attribute PSA - North PSA - North PSA - South PSA - South Total Population 302,646 319,885 5.7% 236,979 250,255 5.6% Households Count 97,555 102,022 4.6% 83,197 86,872 4.4% Male Population Count 150,339 159,164 5.9% 116,352 122,777 5.5% Female Population Count 152,308 160,720 5.5% 120,627 127,479 5.7% Median Age 34.9 36.1 3.4% 39 39.6 1.5% Median Household Income $55,328 $57,389 3.7% $94,962 $100,333 5.7% Per Capita Income $24,663 $25,829 4.7% $41,337 $43,270 4.7% Unemployment Rate 5.80% 5.80% NC 4.70% 4.70% NC Racial backgrounds also differ within our PSA. PSA-North skews toward the Hispanic and multi-race population, whereas PSA-South skews more towards the White and Asian population. This knowledge can inform Palomar Health on provider recruitment and cultural/language sensitivities in serving these populations.

PSA - PSA - Race North South White 62.9% 67.5% Black 2.4% 2.2% American Indian/Alaskan Native 1.4% 0.5% Asian 7.3% 20.4% Hawaiian/Pacific Islander 0.3% 0.2% Other Race 21.0% 4.4% Multirace 4.6% 4.8% Hispanic 41.0% 13.3% Non-Hispanic 59.0% 86.7% Education level also differs across our district. The population in PSA-North is more likely to have completed high school. The population in PSA-South is much more likely to have completed a bachelor’s or graduate degree. This implies different needs around health education, awareness, and reading/comprehension ability for communicating with our population.

Education (Population 25+) PSA - North PSA - South Population Total 253,644 206,372 Less than 9th grade 17.7% 5.0% 9th-12th grade no diploma 14.5% 5.4% HS graduate 16.1% 12.5% College no diploma 15.4% 16.2% Associate degree 9.9% 6.3% Bachelor's degree 14.0% 23.1% Graduate or prof school degree 12.4% 31.5% While average income and race differ, distribution by age in the 65+ category is largely similar across the PSA. PSA-South shows a higher proportion of individuals in the 40-60 year old range, whereas PSA-North has a higher percentage of 15-35 year olds. This implies a need for specific services utilized more heavily in these age bands. Palomar Health provides occupational health services to local employers. There are almost 1,500 employers based in North San Diego County, representing 138,334 workers or approximately 1 out of 5 residents. North San Diego County employers average less than 100 employees; however, there are more than 500 employers in the top 20 employers.

Employees At Ranking Company Name Employers Count This Location

1 Forestry and Fire Protection California Department of 3500 Number of employers 1,471 2 Bae Systems National Security Solutions Inc. 2200 Total employees 138,334 3 Northrop Grumman Systems Corporation 2000 Average employees 94 4 PALA CASINO SPA & RESORT 1800 Median employees 50 5 Northrop Grumman Space & Mission Systems Corp. 1300 6 Palomar Community College District Financing Corporation 1200 7 Palomar Health 1200 8 Palomar Mountain Outdoor School Camp 1100 9 Sony Electronics Inc. 1000 10 Broadcom Corporation 860 11 Catalina Solar 2, LLC 826 12 Catalina Solar Lessee, LLC 826 13 Edf Renewable Asset Holdings, Inc. 826 14 High Ridge Wind, LLC 826 15 Jetmore Wind, LLC 826 16 Oasis Repower, LLC 826 17 Roosevelt Wind Holdings, LLC 826 18 Slate Creek Wind Project, LLC 826 19 Wheatland Wind Project, LLC 826 20 Daybreak Game Company LLC 800

CONSUMER SEGMENTATION | FUTURE STATE The modern approach to consumer segmentation involves researching our current customers’ needs and preferences specific to accessing healthcare services and interacting with their health care system. Preferences can reflect differences in generations, ethnic norms, life stage, family status, and individual likes/dislikes. Customers who have similar needs and preferences can be grouped together and named as “segments” so we can more easily describe them. Through our market research, we have determined the following segments to have the highest representation in our Primary Service Area. Detailed segment descriptions inform us on their communication channel preferences for messaging (TV/Radio/Newspaper/Internet), scheduling appointments, physician selection, class attendance, and access challenges. Below is a brief description with more in-depth information on their channel preferences segments with respect to age and income:  Booming with Confidence: This segment is at their peak earning years and approaching retirement.  Cultural Connections: This segment is mid-career, diverse, with lower incomes, and greater likelihood of being single parents.  Flourishing Families: This segment tends to be more affluent families an in our area tend to be predominantly white or Asian.  Golden Year Guardians: This segment is retired and well into their Medicare years with a fixed income  Middle-Class Melting Pot: This segment is mid-career and mid-scale in income without kids.  Family Union: This segment is mid-career and higher-income with more individuals living in the home.  Power Elite: This segment is pre-retirement and high-income. Knowing our customer segments will help drive how we (1) design services that meet a group of individuals’ common needs for access to convenient and effective care and (2) market those services to those groups to make it easy for them to choose Palomar Health. When we apply consumer segmentation to future program development, we will package our network of high quality providers and consistent outcomes with unique access points. One example of this might be launching telemedicine capabilities for specific services where the individuals who typical look for those services prefer this method. In the future, we will be able to develop programs that target specific demographic sub-segments (for example, a certain age and gender group for specific conditions that might be unique to that group). By funding research and providing resources to support program and service line development, we can better meet our population’s needs, compete successfully with larger systems, and maintain mission-sustaining margin.

CONSUMER SEGMENTATION | RISKS AND GAPS Application of consumer segmentation will be a shift in how we design and market our programs. It requires investments into segmentation research and collaboration between Business Development, Marketing, and Operations in program design and launch. Our investments in staff and external research resources to date have been limited, and we are aware that local competitors have funded teams and patient outreach surveys. Our competitors are investing in many ways to attract and retain patients in our district, negatively impacting our market share and our ability to serve the community. If we can offer innovative and easy ways for our patients to find and select Palomar Health as “their” system, we will have potential differentiators that can support market share growth. Health systems nationally are struggling with how to shift their business models to offer improved customer experience and cost-effective access to care. This is viewed as industry problem with many vendors developing solutions to support providers. Currently our segmentation research is specific to our PSA population but it is broad in scope with limited application. Without a commitment of resources and mindshare to understand the needs And preferences of individual consumers in our district, we risk falling behind our competition and losing these patients. We have an opportunity to lead the way and improve the health of our population through better access to the right level of care at the right time.

CONSUMER SEGMENTATION | FILLING GAPS AND REDUCING RISK Apply Consumer Segmentation Discipline to Program Development | Continue to build knowledge of our community’s health care needs and preferences and integrate into development of new services. Application of segmentation can also mean changing how we deliver current services. Invest in Smart Marketing Tools | Invest in resources to align marketing messaging with target market segments. By being more targeted, this will allow us to spend limited marketing dollars more wisely. This would be done in conjunction with broader brand awareness efforts. CONSUMER SEGMENTATION | KEY TAKE AWAYS 1. Consumer segmentation is a way of grouping individuals according to what they have in common. Many industries use consumer segmentation research as a way of understanding their customers (current and prospective) so they can deliver better products and services and grow their businesses. 2. Understanding consumer needs and preferences for how individuals in our community want to access services will enable us to reduce out-migration of our residents to competitors. 3. Consumer segmentation is a discipline that can be leveraged during both the design phase of new services as well as implementation and marketing.

Palomar Health | Financial Performance

FINANCE | CURRENT STATE

Palomar Health’s financial performance is stable and continuing a three year trend of improvement in every financial indicator and measure. Continued balance sheet strength through improved liquidity, and improved operational performance driven by efficiency and effectiveness, will be key to maintaining momentum. The recent rating upgrade from Standard & Poor’s is a clear indication of the recognition by external stakeholders that the organization is well on its way to staying relevant and focused on the future.

FINANCE | FUTURE STATE Pressure on reimbursement will continue over the foreseeable future. Changes resulting from the Affordable Care Act, bundled payment models, and the transition to pay-for-performance programs are continuing to drive the need to be more effective and efficient in care delivery. The most significant costs in any healthcare system are labor and supplies. When rate increases no longer result in adequate revenue increases to cover inflation and increases in the two primary cost categories, we must fundamentally look at how to drive cost out of our delivery model. Additionally, a constant market force shift to more risk based models of reimbursement such as capitation will inspire hospitals and providers to manage the costs of patient care to ensure margins are sustainable. Reimbursement strategies for the most significant payer categories will be increasingly important. For example, with the California expansion of Medi-Cal it is anticipated that 30% of California’s population will be in a Medi-Cal program within the next 3-5 years. Strategies for this payer category will be critical to the future success of all providers. Partnering with community programs, clinics and providers to ensure patients are treated in the lowest cost of care setting as appropriate to their needs will be essential.

FINANCE | RISKS AND GAPS

 Inability to control and reduce costs throughout the delivery of care continuum; ensuring patients get the right care, in the right setting, at the lowest cost and highest quality (inpatient, outpatient, or continuum) is the only way to effectively manage cost.  Loss of focus on managing capitated patient care and resulting cost  Challenges with all payers and negotiated rate increases; continued reductions in rates instead of increases  Labor costs continuing to rise coupled with inflationary increases that are outpacing reimbursement potential; inability to manage our labor expense  Loss in volume/market share without replacement  Inability to complete the closure and monetization of the downtown campus timely  Careful deployment of capital resources  Leveraged balance sheet: no additional capacity for debt

FINANCE | FILLING GAPS AND REDUCING RISK

Continue to Aspire to Achieve a Medicare Cost Profile | Continue to hone our cost model and delivery of care to a sustainable margin on Medicare reimbursement. While Palomar Health has taken significant steps in the last couple of years on this journey, the cost structure is still well above Medicare reimbursement. This will be critical to maintaining profitability in the near future. Eventually it will be necessary to sustain a Medi- Cal cost profile. Develop Individual Strategies for Each Payer Category | Partnering with community providers, payers and clinics will be necessary to manage patient populations. Lowest cost of care settings and health management will be crucial to success. Reduction of Overhead Cost Structure | Utilizing facilities, equipment and labor effectively are essential to maintaining margins. Focus on Efficiency | Increasing effective patient throughput, minimizing unnecessary readmissions, and increasing overall quality of care are critical.

FINANCE | KEY TAKE AWAYS

1. Efficiency and providing care at the lowest cost possible is necessary. 2. Strategies are needed for managing different patient populations to maintain margins at various reimbursement levels. 3. Maintaining market share and volume is critical. 4. A focus on future changes in reimbursement to provide the greatest adaptability to market shifts will be important.

Customer Value Palomar Health | Quality Before addressing the state of health care quality at Palomar Health, it would be important to recognize that “health care quality” can mean different things to different people. For some it may mean the best possible clinical outcomes, regardless of the resources utilized to achieve those outcomes. It may mean the ability to be seen by a doctor right away, to be treated courteously by the doctor and hospital staff, and to have the doctor spend a lot of time with the patient and his family. For still others health care quality may equate to a doctor’s adherence to best-practice guidelines, irrespective of his or her bedside manner. What is High-Value Care? How do governmental agencies define “health care quality”? According to Dr. Carolyn M. Clancy, former Director of the Agency for Health Care Research and Quality, “Simply put, health care quality is getting the right care to the right patient at the right time – every time”. CMS has made it clear that they are not interested in just high-quality health care but rather in high-value health care. High Value = High Quality/Low Cost. So how does CMS define high-value care? By virtue of how they have chosen to incentivize reimbursement in their pay-for-performance programs, CMS has defined high-value care as care that:

 involves low rates of hospital-acquired complications and infections,  improves patient survival (decreases mortality),  decreases Medicare spending per beneficiary (entails efficient resource utilization), and  results in positive patient experiences (as measured, for example, by Hospital Consumer Assessment of Healthcare Providers and Systems). Formerly, CMS had focused more attention on the process of health care delivery (core measures). Over time, CMS has increasingly focused on health care outcomes – in terms of decreased complications and increased survival rates.

QUALITY | CURRENT STATE Hospital-acquired complications and infections | Only a few years ago Palomar Health had been scoring just below the bottom 25th percentile hospitals. More recently, Palomar Health has been scoring just above the 25th percentile hospitals. We recognize this as an opportunity for improvement. Both Palomar Medical Center Escondido and Palomar Medical Center Poway have made remarkable strides in reducing rates of Catheter-Associated Urinary Tract Infections. Palomar Medical Center Escondido has traditionally performed well in demonstrating low rates of Central Line-Associated Blood Stream Infections. As CMS increasingly focuses their attention on the prevention of hospital-acquired infections, we have identified unacceptably high rates of Clostridium difficile (C. diff) infections at both our hospitals. We are taking measures to educate our staff and leadership regarding the necessity of adhering to infection control practices and the importance of documenting C. diff infections as being present on admission, when applicable. There is also system-wide movement toward ensuring appropriate antibiotic stewardship.

Patient survival rates | Both Palomar Medical Center Escondido and Palomar Medical Center Poway are currently showing mortality rates “No different than the National Rate” for the various conditions and procedures reported on the Hospital Compare website. However, the 2014 Office of Statewide Health Planning and Development (OSHPD) report of Hospital Inpatient Mortality Indicators for California showed Palomar Medical Center Poway worse than State Average mortality rates in Stroke and Hip Fracture patients, and Palomar Medical Center Escondido worse than State Average mortality rates in Craniotomy and in Percutaneous Coronary Intervention patients. We are investigating these reported mortality rates and may find that causes include deficiencies in documentation and/or coding and may not indicate deficiencies in the quality of medical care provided. Efficiency in resource utilization | It is important to note that CMS tracks spending per beneficiary for patients from 3 days prior to a hospital admission through 30 days following hospital discharge. The latest data indicate higher-than-average spending by the Home Health Agency, Hospice, and Skilled Nursing Facilities for services utilized by our patients upon discharge from both medical centers. This represents an opportunity to identify and deploy cost-saving measures. 30-day readmission rates are another aspect of resource utilization efficiency tracked separately from spending per beneficiary. Historically, both medical centers had performed very well in this measure. However, we have recently identified a concerning trend of higher-than-expected hospital readmission rates for Palomar Medical Center Poway hip/knee replacement patients. We are studying to understand the root problem and devise appropriate solutions. Patients’ Experience of Care | The patient experience of care aspect of health care quality is so important that it has been addressed separately in the Patient Experience section of this report.

QUALITY | FUTURE STATE The Quality Department of the Patient Experience Division of Palomar Health will continue to monitor our health system’s progress toward achieving ever-improving scores on the various quality metrics tracked and published by health care quality rating agencies. As new quality metrics emerge, we will continue to educate our leaders and front-line staff about these metrics and engage them to develop action plans to achieve high performance on the new metrics while maintaining high performance on the existing ones. It is our hope that health care quality rating agencies will continue to identify metrics that are useful in promoting health- quality health care and that they will retire metrics that have not demonstrated value in improving patient care. In the future, it will be increasingly important that Information Technology seamlessly support health care providers in appropriate documentation and treatment of patients’ conditions. Finally, we are hopeful that, over time, patients and families will become increasingly engaged in their own health care processes in order to optimize health care outcomes, costs, and experience for all.

QUALITY | RISKS

 Failure to understand the “rules of reporting”  Failure of care providers to document appropriately  Failure of coders and chart reviewers to abstract/code appropriately  Failure to invest the required resources to ensure a robust review process

 Failure to provide continual feedback to relevant stakeholders on the ever-evolving state of Quality  Failure of stakeholders to take appropriate actions

QUALITY | GAPS

 Education of care providers regarding appropriate documentation  Education of coders and chart reviewers regarding appropriate abstracting/coding  Adequate resources to support labor-intensive chart reviews necessary for accurate reporting  Partnership with post-discharge facilities to identify opportunities to increase efficiency and decrease costs  Development of Information Technology solutions that can seamlessly support health care providers in appropriate documentation and treatment of patients’ conditions

QUALITY | KEY TAKE AWAYS

푸풖풂풍풊풕풚 1. Value = 푪풐풔풕 2. There are various definitions of Quality. 3. Focus on Quality metrics with financial impact is important. 4. Metrics that have financial impact are not the only measures of Quality. 5. Our primary objective is to provide safe, quality care to our patients. 6. Quality Assurance Performance Improvement is important. 7. Documentation, abstracting and reporting skill is critical; they determine our publically reported performance. 8. Leaders and providers must be accountable for continuous quality improvement.

Palomar Health | Safety The purpose of this section is to define the High Reliability Organization (HRO), share Palomar Health's journey toward our future state of High Reliability and note the gaps to overcome to reach success. When speaking of HROs we think of the safety record of hazardous industries like commercial aviation and nuclear power. These organizations have achieved a level of safety that is not yet apparent in the acute care hospitals and medical centers of the United States. According to a 2013 report from the Minnesota Department of Health, operations on the wrong patient or the wrong body part occur as often as 50 times per week. Fires break out in our operating rooms about 600 times a year, often seriously injuring patients (ECRI Institute, 2013). Why are aviation and nuclear power industries so much safer than health systems? There are five key characteristics of HROs as described by Weick and Sutcliffe.10

1. HROs are obsessed with failure. Their employees are always vigilant, seeking to identify new threats to safety. 2. People working in HROs refuse to simplify their observations and experiences. They recognize that threats to safety are complex and an apparently easy solution to a "near miss" is likely not a well thought out solution. 3. Employees recognize that small changes to an organization's operations can result in great threats to safety. Therefore, they are motivated to report even small deviations from expected performance. In order to promote the reporting of such deviations employees and physicians need to feel safe that the reported errors will not result in punishment. 4. HROs realize despite all efforts, bad things will happen, but these organizations have a commitment to resilience. Resilience is the ability to recognize an error quickly and contain it. 5. HROs place decision-making in the hands of the person or people with the greatest expertise relevant to the threat. Organizational hierarchy takes a backseat to those identified as experts in the field.

SAFETY | CURRENT STATE How are we doing at Palomar Health? Much like many other hospitals in the United States, our journey is just beginning. Below are a few examples that illustrate where we are in the healthcare industry: Until recently, there was acceptance of some rate of failure as an inevitable feature of daily work. It was not until Peter Pronovost, MD from Johns Hopkins Take HROs’ obsession with failure. In healthcare, until recently, there was acceptance of some rate of failure as an inevitable feature of daily work. It was not until Peter Pronovost, MD from Johns Hopkins demonstrated that catheter-associated urinary tract infections (CAUTIs) can be 100% prevented that people came to recognize that even a single failure was unacceptable. Another example is our tendency to simplify the world around us with one-size-fits-all "best practice" solutions. Chassin and Loeb illustrate this point with The Joint Commission's Universal Protocol intended to

10 Source: Weick, Karl E. and Kathleen M. Sutcliffe, Managing the Unexpected: Resilient Performance in an Age of Uncertainty, 2007, San Francisco: Jossey-Bass

prevent wrong-site surgery. 11 The Joint Commission offered three simple steps: (1) verify the identity of the patient, (2) mark the surgical site, and (3) conduct a “time-out" in the operating room to verify once again the patient, the procedure, and the site. This solution wound up being too simple. Even with this “best practice” solution, wrong site surgeries can continue to occur due to other errors, such as in the surgery scheduling procedure. HROs refuse to simplify their observations and experiences.

SAFETY | FUTURE STATE According to Chassin and Loeb, there are three changes healthcare organizations must make in order to achieve High Reliability status: 1. Leadership must commit to the ultimate goal of zero patient harm 2. A culture of patient safety must be incorporated throughout the organization 3. Effective process improvement tools must be adopted and deployed throughout the organization Chassin and Loeb define leadership as the governing body, senior management, physicians, and nurse leaders. The goal of zero harm is crucial – HROs are obsessed with failure. When it comes to incorporating a culture of safety, simply assessing the culture and tabulating the results will not change culture. Effective actions are required, such as our recent commitment to participate in the BETA HEART program. Finally, process improvement tools that are effective must go beyond our basic Plan-Do-Check-Act cycle. HROs have deployed Lean and six sigma tools to achieve the kinds of successes we seek. Table 1 below illustrates the stages of organizational maturity toward high reliability. Our current state falls somewhere between "Developing" and "Advancing”. The recent decision to move forward with our customers’ values depicted in the five pillars of Quality, Patient Experience, Finance, People, and Brand is another step toward HRO. The alignment of our goals and focus on our Zero Harm Index demonstrate movement toward the most mature "Approaching" phase as described below. With our Zero Harm Index cascading from the CEO to all leaders, are advancing towards organizational maturity among ‘management.’ More specifically, the “Approaching” stage for management aims for zero patient harm for all vital clinical processes with some demonstrating zero or near zero rates of harm.

11 Source: Chassin, Mark R. and Jerod M. Loeb, High Reliability Health Care: Getting There from Hear, the Milbank Quarterly, Vol 91, No. 3, September 2013 (pp459-490) 57

SAFETY | RISKS AND GAPS

In order to achieve HRO status, there must be a culture that encourages reporting of errors, which medical safety literature describes as a Just Culture. Justice requires compassion and respect for one another, which can be measured through an assessment of a health system's culture of safety. At Palomar Health, we used the survey tool from the Agency for Healthcare Research and Quality to ascertain our employees' attitudes toward safety. From this survey, we learned that our gap is a fear of reporting (domain entitled "Non- punitive response to error”). For employees to trust that the reporting of adverse events will be used constructively, a culture change is required. Our solution is to advance a culture of safety. An initiative that supports that change is our participation in the BETA HEART program, which is an acronym for Healing, Empathy, Accountability, Resolution, and Trust. BETA, our insurance carrier, teaches Just Culture as part of the program. This commitment to HEART is a prerequisite to achieving safety and HRO status. This has been well-recognized by our Board of Directors and our Chief Executive Officer as evidenced by the creation of the Vice President Culture and Talent Planning position. Intimidating or disrespectful behaviors suppress the reporting of safety problems, and inappropriate behavior can be is experienced by anyone at any level of a health care organization. The danger of intimidating behavior is that it causes the recipient of the behavior to avoid seeking important clarification from the prescriber. HROs do not tolerate such behavior because those behaviors suppress the reporting of adverse events.

SAFETY | KEY TAKEAWAYS

1. High Reliability Organizations achieve safety and are proud of it. People who work in HROs are comforted knowing the hospital is safe for themselves and their loved ones. 2. HROs require a culture of compassion, integrity, teamwork, excellence, service, and trust - the values of Palomar Health. 3. HROs are obsessed with failure. When failure cannot be avoided, HROs contain the consequences of errors, thereby limiting the scope of adverse events. 4. The path to a successful HRO requires buy-in from the board of directors, management team, staff, and doctors. The commitment to excellence must pervade Palomar Health. 5. The quest for zero harm and ability to achieve zero harm in some vital clinical processes are hallmarks of a mature Highly Reliable Organization. We are moving from good to great.

Palomar Health | Patient Experience

Patient Experience plays a very important role in quality outcomes and reimbursement. By Fiscal Year 2018, the CMS value-based purchasing weighting for the Patient Experience Care Domain, will be 25%, equal to the other three domains of Safety, Efficiency and Clinical Care. We will be accountable for not only the quality of the care our patients receive, but also for how they feel about their experience while receiving that care. It is incumbent upon us to do all we can to address both avoidable and inherent suffering of our patients and families by providing compassionate and connected care. This requires an intentional focus that includes teamwork, improved care coordination, and respectful and inclusive interaction with patients and families such that we have removed all barriers to optimal care. To ensure we provide the best possible outcomes, we must be thoughtful and intentional about how we design clinical, operational, cultural, and behavioral aspects of the care we provide. In a recent evaluation of correlations between HCAHPS and Press Ganey Inpatient Patient Experience Survey question, “Would you recommend this hospital?” it is clear that favorable ratings for the following items are most likely to ensure a favorable patient experience and higher ratings for recommending the hospital: Press Ganey | Questions that measure how patients “feel” about their experience and care:

 Staff worked together to care for you

 Staff included you in decisions about your treatment HCAHPS | Questions that measure perceived “frequency” of care provided:

 Staff did all they could to help with pain

 Nurses explain in a way you understand

PATIENT EXPERIENCE | CURRENT STATE

Would you recommend this hospital? | From June 2014 through June 2016, Palomar Medical Center Escondido sustained near top decile performance, ranking in the 80th percentile in Q4 FY16. Palomar Medical Center Poway dropped from the 60th percentile in Q4 FY14 to the 44th percentile in Q4 FY16. Communication with Nursing | Palomar Medical Center Escondido has remained steady since FY14, ranking at the 49h percentile in Q4 FY16. Palomar Medical Center Poway has remained flat ranking in the 25th percentile in Q4 FY14 and 31st percentile Q4 FY16. Physician Communication | Palomar Medical Center Escondido has remained relatively flat ranking in the 62nd percentile FY14 and 66th percentile in Q4 FY16. Palomar Medical th th Center Poway dropped from the 87 percentile in FY14 to the 45 “Even when functional outcomes percentile in Q4 FY16. are equivalent, [patients] value care that is provided timely and System Overall | Palomar Health ranked in the 17th percentile in 2012 and fee of chaos and confusion.” achieved as high as the 87th percentile in 2014. Our Q4 FY16 rank is the Michael Porter, Thomas Lee 54th percentile, which is significant improvement over the last 4 years, but an indication of our inability to hardwire performance. Palomar Health has experienced a great deal of change over the past several years – from changes in senior level leadership to the decision to close Palomar Medical Center Downtown Escondido. This has undoubtedly had some impact on the organization’s consistency in practice and focus. Understanding how critical it is to hear, understand, and consider the patient voice in care delivery redesign at all levels, we work collaboratively with our Patient and Family Advisory Council. These dedicated volunteers are former patients and family members who teach us to hear their voices through their participation at various levels of the organization, from committees of the Board of Directors to front line staff projects. Their patient-centric view has been an invaluable resource in creating understanding. Among the challenges of providing compassionate, connected care is consistency of leadership, engagement of staff, and a commitment at the highest level of the organization to a Patient First culture. While we are deploying evidence based, best practice across all disciplines, we have not consistently provided appropriate education, tools, and support. Nor have we consistently measured and monitored leader implementation and practice, or hardwired accountability for performance.

PATIENT EXPERIENCE | FUTURE STATE Healthcare’s continual transformation demands that we perform at a different level. Our customers (patients, potential patients, families, physicians, payers, and community) have choices about where they provide health care and how they consume health care, from traditional institutional providers such as hospitals, to ambulatory and retail providers, to web-based telemedicine and mobile apps, or a choice to delaying or avoid care entirely. In healthcare’s future state, Palomar Health has the potential to compete for customer loyalty against very nimble entrepreneurial competitors, who may resemble us but in a more customer-centric way. Safety and quality will be expected so these factors will not provide differentiation if present among all providers; however, absence of one or both would create significant negative market

differentiation. The best providers will successfully create positive, memorable experiences that demonstrate their commitment to convenience, trust and a hassle-free delivery. By doing so, these providers create brand loyalty and engagement. The customer will define value and quality and their definitions may not align with our current internal perception of how to high-value, high-quality care. According to Michael E. Porter and Thomas H. Lee, “ . . . the overarching goal for providers must be improving value for patients where value is defined as the health outcomes achieved that matter to patients relative to the cost of achieving those outcomes. Improving value requires either improving one or more outcomes without raising costs or lowering costs without compromising outcomes, or both. Failure to improve values means . . . failure.”12 What outcomes matter to patients? According to Porter and Lee, they care about crucial functional outcomes, level of discomfort during care, how long it takes to return to normal activities, delays in access to specialists, delay in commencing treatment that prolong the wait to return to normal life. Even when functional outcomes are equivalent, they valued care provided timely and fee of chaos and confusion. With the growth of high deductible health plans, cost transparency has grown in importance to purchasers of care – patients, employers, and payers. The ability to compare prices across competing providers will accelerate our efforts to make cost available to the public. Confusing, hard to understand bills add chaos and confusion to an otherwise good experience and diminish the patient and family’s perception of value and quality. Where prices are comparable, experience, including convenience and hassle-free access to care, will prevail. In a recent Advisory Board survey of consumer healthcare preferences, when asked if consumers preferred to access care near where they worked or near where they lived, a significant number responded, ‘neither’ preferring to access care through an app. When Toby Cosgrove and the Cleveland Clinic embarked on their journey to improve patient experience, they discovered how important it was for employees to understand that patients did not want to be in the hospital. They were afraid, sometimes, terrified, often confused, and always anxious. They wanted reassurance that the people taking care of them really understood what it was like to be a patient. Their families felt the same way. Their studies also revealed that patients often used proxies in their ratings. If the room was dirty, they might take it as a sign that the hospital delivered poor care. Patients tended to be more satisfied when their caregivers were happy; if caregivers were unhappy, it might indicate that something was going on that they did not want to reveal. Most importantly, the Cleveland Clinic realized that all employees are caregivers and that the doctor-centric relationship should be replaced by a caregiver-centric one.13

12 Source: Michael E. Porter and Thomas H. Lee. “The Strategy that Will Fix Healthcare”, Harvard Business Review article, October 2013. 13 Source: James Merlino and Anath Raman, “Health Care’s Service Fanatics: How the Cleveland Clinic Leaped to the Top of Patient-Satisfaction Surveys”, Harvard Business Review, May 2013 61

PATIENT EXPERIENCE | FILLING GAPS AND REDUCING RISK

Palomar Health’s partnership with The Studer Group to develop evidence-based leadership will help focus efforts to reduce leadership performance variability, standardize best practices, and raise performance accountability. In the coming year, leadership performance evaluations will use quantitative outcome measures, which include system-wide, all-leader accountability for patient experience outcomes. This is a significant paradigm shift for the organization and it portends accountability for Patient First behaviors necessary for creating highly reliable service delivery. Our service excellence team will continue to work collaboratively across all areas of service to ensure alignment of clinical excellence, operational efficiency, caring behaviors, and an organizational culture that connects mission, vision, and values for our staff. We will continue to educate staff, working across disciplines to build skills that lead to extraordinary, sustainable, patient experience. With persistence and commitment, we will develop a ‘culture of always’ that ensures that we provide quality, compassionate and connected care to 100% of the patients, 100% of the time.

PATIENT EXPERIENCE | KEY TAKE AWAYS 1. Providing value that matters to patients is critical. 2. Palomar Health has not been successful in creating and sustaining highly reliable practices and performance that deliver value that matters to our customers (patients and their families, physicians, community). 3. Palomar Health patient experience scores have been erratic and trending downward in some key areas. 4. While creating a culture of accountability starts with leadership, accountability for creating a superior service experience applies to all employees at all levels. Employee engagement is critical. 5. We must invest in the tools, equipment, and technologies that support efficient, hassle-free environment of care for our employees, patients and their families, physicians, and the community. 6. We must create service standards that are sensitive to our multi-generational and multi ethnic population. 7. We must create behavior standards for all employees to provide clarity around expectations and assign clear accountability.

Palomar Health | Physician Experience and Alignment

Merriam Webster defines experience as “the process of doing and seeing things and of having things happen to you”. At the most basic level, physicians’ experience in using our facilities is the entry point for creating satisfaction with our organization. Creating satisfaction allows us to move to the next level of creating physician engagement, and engaged physicians work collaboratively to create and deliver extraordinary value-based care. Physicians have choices about which hospitals and health care systems they choose to work in or refer their patients to by way of specialty physician referrals. Like other key customers, their choices are based on their

perceived value received by choosing one product or service over another. Value is unique to each customer, but some things are universal –a hassle free experience, high quality, efficient and effective systems that create convenient access and ease of use, an organization that seeks to understand customers’ preferences and needs and works to meet those needs, and a place that builds customer relationships that leads to brand loyalty and commitment. In addition the preceding customer satisfiers, whether a physician is employed for a large health system or in a physician owned practice, they report greater satisfaction when they are knowledgeable about the mission of their organization and the key activities driving organizational success. Physicians report higher satisfaction when physicians and executives work together consistently to do what is required for the success of their healthcare organization. Physicians who are committed to the organization’s mission, vision, and values want to make positive contributions to maintain and enhance the performance of the organization. With that in mind, it is clear that those things that are ‘physician satisfiers’ lead to something even more important – physician engagement. An engaged physician workforce is strongly connected to creation of enhanced patient care, greater efficiency and lower costs, improved quality, patient safety, and meeting regulatory requirements. Engagement is a key factor in physician brand loyalty and retention.

PHYSICIAN EXPERIENCE AND ALIGNMENT | CURRENT STATE Operational Initiative #3 was developed in fiscal year 2013 with a goal to ‘develop and implement a strong physician integration and alignment model that allows for effective communication, partnership and accountability in the management and care of patients’. The initial milestones included the following:

 Create and charter a Physician Leadership Council,  Prepare and execute a Physician Leadership Skills Assessment,  Review results of the assessment and identify targeted areas for improvement,  Develop and implement a comprehensive training module for physician leaders,  Modify/Develop contract addendum for Medical Directors, and  Reassess physician leadership skills. In support of the initial milestones, the Academy for Applied Physician Leadership (AAPL) was born. By fiscal year 2015, the initiative contained multiple milestones, divided into three phases: Phase I

 Generate physician culture vision and accountability compact  Clarify key leadership roles for Palomar Health physicians: Medical Directors and Department Chairs  Implement AAPL program (Modules 7-8)  Obtain medical staff approval for MD Orientation Design  Identify and develop key physician mentors  Create/begin implementation of physician communication strategy  Address top (2) Physician Engagement Opportunities for Palomar Health  Integrate medical staff into executive management meetings

Phase II

 Implement AAPL program (Module 9and Business Skills Clinics)  Implement Physician Orientation Program Phase III  Complete AAPL program Cohort 1 (Final Business Projects)  Identify and complete design for Cohort 2 – AAPL  Solidify Medical/Nursing director dyad model, structure, and metrics All the milestones for Operational Initiative #3 have been met, and with the creation of the Executive Vice President of Physician Alignment position, there is clear accountability for further alignment and engagement efforts. Operational Initiative #3 contained the following outcome measures:

 Press Ganey Physician Engagement  Participation Rate for the Physician Engagement Survey  Press Ganey Patient Satisfaction System Mean  Press Ganey Patient Satisfaction Overall Mean Physician and Nursing Questions

PHYSICIAN EXPERIENCE AND ALIGNMENT | FUTURE STATE Physician engagement and alignment continues to be core to the success of the health system. We continue to strengthen our relationships with our physicians. Through the use of the Press Ganey Physician Voice Survey and physician focus groups, we are eliciting feedback from our physicians to improve their view of the health system and accelerate their engagement. The Physician Voice Survey performed in April 2016 showed our physician engagement in the 39th percentile nationally and alignment in the 45th percentile. Information from the Physician Voice Survey and physician focus groups indicated the following opportunities to improve engagement and alignment:  Strengthen the Medical Director program  Strengthen dyad relationships  Continue to provide physician leadership education  Provide support to the organized Medical Staff in succession planning  Administrative Rounding on Physicians  Ensure physicians have the tools to provide the highest quality and safe care  Create a strong network of community physicians  Improve interconnectivity to our community physicians  Strengthen the continuum of care  Understand what physicians need from us In order to strengthen our relationships with both our physicians in the hospital and in the community, Palomar Health is developing a Clinically Integrated Network (CIN) with the support of The Advisory Board. The CIN allows for alignment through collaborative care and supports the infrastructure enabling value-based initiatives. The network includes independent and foundation providers, supports a clinical quality program,

and allows for collective negotiations with payers. In addition, the CIN supports clinical integration initiatives and provides administrative and information technology support for the network and allows for scaling management capabilities to multiple populations. The CIN is a physician led, professionally managed enterprise to support population health, improve care, and reduce the costs of delivering care. The CIN will be an inclusive enterprise and multiple entities have been invited to participate, including Arch Health Partners, Graybill Medical Group, Sharp Community Medical Group, our local FQHCs, Kaiser, and CEP America. As part of our Population Health Strategic Initiative, Palomar Health has already installed information technology that will allow integration of patient clinical information across the continuum of care (Cerner HealtheIntent). The health system continues to work closely with Sharp Community Medical Group in order to strengthen relationships with Arch Health Partners, Graybill Medical Group and the independent North Inland physicians. Regular meetings occur with the parties to discuss issues of common interest and to foster a unified approach to ensuring that the community physician supply and specialty mix will support community needs.

PHYSICIAN EXPERIENCE AND ALIGNMENT | FILLING GAPS AND REDUCING RISK

 Continue to develop solutions that remove hassles in practice for our physicians  Improve the daily life of our physicians both inside and outside the hospital  Assist physicians in medical practice succession planning  Increase outreach to practice based community physicians though our physician integration team  Increase face-to-face interaction between administration and doctors inside and outside the hospitals  Continue to foster communication amongst our medical groups  Successfully launch the Clinically Integrated Network  Develop initiatives to address health services for MediCal beneficiaries  Increase recognition of the contributions and skills of our physicians

PHYSICIAN EXPERIENCE AND ALIGNMENT | KEY TAKE AWAYS 1. Physician engagement and alignment is the key to our success. 2. Physician engagement and alignment is dependent on relationships both inside and outside the hospital. 3. The CIN is a key strategy for collaboration with our physicians in quality improvement and increasing physician engagement and alignment. 4. Communication with and recognition of our physicians must be intentional, active, and continuous. 5. Leveraging physician leadership to drive engagement and alignment is imperative in our healthcare market. 6. Attainment of high quality, safe care at a reasonable cost with optimal patient experience can occur through physician engagement and alignment.

Palomar Health | Brand A Brand is an emotional connection - what people think and feel when they hear an organization’s name. Our Brand is about consistently keeping our promise of value to those we serve – the quality, cost, and experience of the care we give. We achieve consistency and reliability in how we keep our promise through our organizational values of service, compassion, teamwork, integrity, excellence, and trust. Our Brand Promise is exceptional care and an exceptional experience in giving and receiving that care. By living the Brand Promise in everything we do, our name and logo become ‘trust marks’ to the community – symbols that remind them of their trust in Palomar Health While we use a variety of tools to tell the story of our brand to the community - the logo, slogan, web site, social media, billboards, and other media - they are not the Brand of Palomar Health, only the vehicles and tools we use to tell our Brand Story. The success of an organization’s brand can be measured in multiple ways: Volume growth | With a strong brand, patients are more likely to be more loyal and to spread the word to families and friends that Palomar Health is a great place to receive care. As a result, utilization of various service lines will increase over time. Brand perception studies | Awareness studies can be conducted through quantifiable methods (such as surveys) or qualitative means (such as focus groups or interviews). Impressions | This is the number of people who have been exposed to a particular message—whether it is through a TV commercial, radio spot, billboard or print ad. Campaign analytics | With direct mail and email campaigns, we can analyze the number of people who receive the message and convert to patients. Web analytics | With web analytics, we can measure how many people visit our web site, how long they stay on a particular page, and whether or not they click for more information. “True North is the internal Health education classes | In addition to tracking registration and compass that guides you successfully through life. It attendance, we can see which classes are the most popular, how represents who you are as a people heard about us, and the number of attendees who later human being at your deepest level. become patients. It is your orienting point – your Social media interactions | Analytic tools allow us to track the number fixed point in a spinning world – of people who like, share or click on social media posts to help spread that helps you stay on track as a leader. Your True North is based our brand. on what is most important to you, BRAND | CURRENT STATE your most cherished values, your passions and motivations, the Brand perceptions studies in 2011, 2014, and 2016 have consistently sources of satisfaction in your life.” shown that Palomar Health lacks visibility in the market—particularly Bill George, “True North” compared to our competitors who are vastly outspending us with their media buy. As a result, Palomar Health only has 49.5 percent market

share in our primary service area at the end of 2015 (Source: OSHPD). In a perception survey conducted by Anderson Direct Marketing in 2014, participants were asked about their overall impressions of local hospitals based on anything they may have heard or know about them. Respondents to the survey rated Palomar Health lower than Scripps Health, UCSD, and Sharp HealthCare, but above Kaiser and Tri-City Medical Center. The respondent responses also revealed that the main reason for the lower scores were that people were simply not aware of Palomar Health. However, respondents who had been patients at Palomar Health tended to rate the organization higher than those who had not. There is an opportunity to share these patient success stories in the market and capitalize upon the many positive experiences our patients have at Palomar Health. When asked about which hospitals have focused specializations, Scripps Health and Sharp HealthCare ranked the highest, with Palomar Health ranking third and Tri-City Medical Center at the bottom. UCSD and Kaiser were not listed in this section. By not promoting our services, we are missing an opportunity to establish our credibility in the community. The study also showed that respondents view Scripps Health and Sharp HealthCare as integrated, multi- faceted, multi-location systems, but they were less certain about Palomar Health. Most, if not all, respondents were not aware that Palomar Medical Center Poway and Arch Health Partners are affiliated with Palomar Health. In a word association exercise, participants considered Palomar Health as “under the radar” and a “minor leaguer” compared to the other “major players” in the market. A study by SPM Marketing & Communications in 2016 resulted in similar findings. In a series of telephone and in-person interviews with more than 160 individuals—from frontline employees and middle management to executives and external community leaders—the feedback was that Palomar Health does not have a visible brand and is not top-of-mind in the community. In addition, our own employees reported not feeling a sense of pride and unity.

BRAND | FUTURE STATE

To be visible and successful in a highly competitive market, Palomar Health’s brand must be promoted across multiple channels predominantly and consistently. Externally, our branding objective is to be top of mind for residents of North County and the dominant provider in our primary service area. Internally, the goal is align our brand with our mission, vision, values and behaviors so that we provide exemplary service to our patients, attract, and retain the best employees.

BRAND | FILLING GAPS AND REDUCING RISK

To succeed in a competitive market, Palomar Health, like other health systems, must think like retailers and take a proactive and aggressive approach to promoting our brand. Health systems who underestimate the importance of investing in a brand are at risk of losing market share to more agile and progressive competitors. Without a coherent brand strategy  Palomar Health may continue to experience a decline in market share.  Primary care physicians may continue to refer patients to our competitors.

 Consumers will have greater brand awareness and preference for our competitors.  Employees will not have a sense of pride in our system.  It will be difficult to attract top talent to our organization.

BRAND | KEY TAKE AWAYS 1. Brand is the quality, cost, and experience of the care we give. It is who we are, what we do, and how we do it. A cohesive, recognizable brand will help Palomar Health. 2. Advertising will not replace the need for consistency in ‘always’ delivering value that matters to our customers, which is critical in creating and sustaining a dominant market Brand. 3. Consistency in ‘always’ will be developed through evidenced-based leadership performance. 4. A trusted brand drives volume and increases market share. 5. While advertising is not the same as ‘brand’, it is critical that we continue to expand advertising and marketing that can differentiate Palomar Health from our competitors in the market and increase the community’s awareness of Palomar Health as a health system that they can trust. 6. Community perception of trust and confidence in Palomar Health builds employee pride and morale and helps us attract and retain top talent. 7. The Palomar Health brand as a symbol of trust engages physicians. 8. Philanthropists donate to organizations that make meaningful difference to the world, the community, and the lives they serve; telling our Brand Story supports cultivation of philanthropy that will support the work that we do.

Operational Excellence Market forces, including financial incentives, transparency, evidence-based practices, affect the strategic and financial performance of health care organizations at a constant speed. Forward-thinking health systems are making the investments needed to address more effective and efficient care models. In order to move towards operational excellence, we are building a foundation that balances technology, workforce, and culture that supports continuous process improvement and workflow efficiencies. Specifically, we have introduced new clinical decision support through enhanced analytics, supported participation in the regional health information exchange, and optimized our patient portal. In order to support these additions, Palomar Health has introduced evidence-based leadership principals and tools to build the agile leadership team needed for excellent operational performance that leads to strategic execution. We are putting mechanisms and processes in place to support our goals of hiring the right person, for the right position, at the right time, and engaging and retaining that talent. With an engaged workforce, guided by an aligned vision and mission that is supported by our values and behavior standards, our leaders can create operational excellence that will lead to the achievement of our strategic goal to become the dominate provider of integrated health care services.

OPERATIONAL EXCELLENCE | EFFECTIVE AND EFFICIENT CARE

As a system, we must demonstrate efficiencies that reduce costs, increase the effectiveness of what we do. Being effective means achieving organizational goals. Being efficient means achieving goals with minimal resource waste. To ensure balance between efficiency and effectiveness, we must consider changes and improvements through the eyes of our customers and understand our cost profile, including supply chain demands and expenses. This involves much more than just reducing labor and supply chain costs; we must work together with our physicians and staff to engage in critical conversations around what is required for care now and for the future. It involves identifying and redesigning inefficient care processes and improving patient flow through streamlined and consolidated operations to maximize standardization. Competitive advantage will be created through efficient and effective performance of our employees which results in higher customer and employee satisfaction and engagement. It is critical that we embrace evidence-based leadership frameworks and process improvement methodologies, and continuously evaluate our performance in order to be accountable to our vision, our community, and our patients.

OPERATIONAL EXCELLENCE | CLINICAL INTEGRATION It is clear that the new healthcare realities require us to design fundamentally different models of care, both in our fiduciary role of providing access to high quality health care the communities we serve, and to do so in a way that ensures mission-sustaining financial performance. Our provider community is very sophisticated – one of the most evolved managed care markets in the country – yet, lack of interoperability to support clinical integration means that care remains fragmented for the patients we collectively serve. Hospital based providers’ visibility into the patient ambulatory medical record at the time of admission, or the primary care physician’s visibility into the hospital medical record when their patient is admitted creates

barriers to quality and safety, increases the cost of care, and negatively impacts the patient’s experience of the car they receive from all providers, regardless of setting. There is little disagreement that patient-centric approaches are requisite for management of our population’s health care needs. Clinical integration supports a ‘whole patient’ approach whereby the patient medical record can be accessed by a care team from across the continuum to coordinate and collaborate on the best care possible for the patient. Clinical integration removes barriers to the coordination of patient care and increases the efficiency of care delivery.

Fiscal year 2014 | Palomar Health approved a 5-year population health management strategic initiative, which began with a comprehensive baseline gap analysis of our delivery system design and supporting technology needs. Based on that assessment, we developed a roadmap for population health management, which included a goal of creating clinical integration.

Fiscal year 2015 | Palomar Health initiated a 3-year technology roadmap, which began with selection of an interoperability platform to support necessary bi-directional sharing of clinical information between our acute care facilities and pre- and post-acute care providers, and to provide other capabilities to support population health management, including predictive analytics.

Fiscal year 2016 | HealtheIntent interoperability platform was installed, which will allow clinical information sharing across the continuum of providers for the purpose of increasing positive patient experience, improving quality, and reducing costs. During this same year, we began participation in data sharing with the San Diego Health Connect (SDHC) Health Information Exchange (HIE).

Fiscal year 2017 | We began implementation of new technology for measuring quality and cost performance and improving care outcomes (Advisory Board Crimson Continuum of Care). The technology provides comparative internal cost and external clinical quality benchmarks and variation.

ORGANIZATIONAL EXCELLENCE | HASSLE FREE EXPERIENCE

Earlier in this report, there was discussion about the way we create value for customers that leads to our differentiation in this competitive market. Two key elements of customer value that warrants reemphasizing in the context of operational excellence are:  Access to healthcare and health-related information when, where, and how our customers want it “Even when functional outcomes are equivalent,  A convenient, hassle-free experiences for those seeking, receiving [patients] value care that is or providing care provided timely and fee of chaos and confusion.” We also discussed Porter and Lee’s theory that patients assign value to care that is ‘free of chaos and confusion’, even when functional outcomes M. Porter and M. Lee were equivalent.14

14 Michael Porter, and Thomas Lee, “The Strategy that Will Fix Healthcare”, Harvard Business Review, October 2013 70

What does this mean to us? How do we create access to care or ensure that care-related information is provided when, where and how our customers want it? How do we provide it in a way that is user-friendly and free of hassles for the customers we serve and to our employees and physicians who serve them? Organizations that excel at demand creation “examine the lives of customers through the lens of a Hassle Map—a detailed study of the problems, large and small, that people experience whenever they use their products. Each extra step, wasted moment, avoidable risk, needless complication, less-than-optimal solution, awkward compromise, and disappointing outcome is a friction point on the Hassle Map. Each represents an opportunity for a creative organization to create new demand by eliminating the friction or even reversing it, turning hassle into delight”15. There are different kinds of hassles that our employees and the customers they serve may encounter in our system16:

 The hassles created by multiple steps in a process, often including too many activities that are needlessly complicated, or whose value and purpose is unclear to the customer. As an example, the number of ‘clicks’ or screens that physicians, nurses, and other caregivers must go through to get to the area in the EMR in which they need to document or find critical patient information; physician credentialing processes; or the prospective employee candidate application process.  The number of people, departments, and sources that customers must engage with to complete a process, which often leads to confusion, waste, excess choice, and information overload. As examples, we think of patients’ appointment scheduling, parking, registration, way-finding, pre- certification, insurance coverage, hospital bills, follow up care scheduling; and intradepartmental and co-worker codependency requiring multiple calls, follow up, and waits.  The trade-offs between customer needs that are equally desirable but appear to be mutually exclusive such as the need to choose low cost or quality, convenience or variety, personal service or speed—but never both. Moving from supply-side thinking to demand thinking means that we need to ask questions like17: What is the psychology of our customer? What do they want out of life? How do we offer services that meet those desires? If not, why not? Which hassles drive our customers crazy? Are there hassles they barely notice because they are such familiar aggravations, but which we might be able to fix? What is using Palomar Health services really like to our customers? What are our product strengths? What are our weaknesses? Where do we waste our customers’ time, even if only a few seconds? Where do we waste their money, even if only a dollar or two? Where do we create needless confusion, even if it is only short-lived? Where do we require our customers to take extra steps, even if only one or two? Where do we generate avoidable risks, even if they seem unlikely or remote?

15 Slywotzky, Adrian, “Demand – Creating What People Love Before They Know They Want It. New York: Crown Publishing Group, Random House. 16 Slywotzky, Adrian, The Art of Hassle Map Thinking (Oliver Wyman: Change This), No. 86:01, 6. 17 Slywotzky, p. 10. 71

Identification of, and thriving from, opportunities created by our discovery of hassles inherent in our operations will allow opportunity for breakthrough thinking, creation of new customer value, and market differentiation.

OPERATIONAL EXCELLENCE | CONSUMERISM Consumerism in health care is not new but it has accelerated in recent years. Contributors to the acceleration include:

 Rising costs and financial risk for consumers for their care through higher co-pays, deductibles, and out-of-pocket costs have created price sensitivity for consumers, thereby creating a demand for access to comparative information about health care providers and costs.  Retail giants like Amazon have made the ‘1-Click’ experience commonplace to consumers, across all age groups and demographics.  Consumers’ have a growing expectation for the same level of transparency from healthcare as they experience in retail where quality and cost are easily compared before the purchase.  Consumers’ show growing satisfaction in their experience with retail clinics, urgent care clinics, telehealth, mHealth, and a myriad of apps and web-based resources for care; indeed, some surveys reflect that a significant number of consumers prefer these settings over their primary care physicians’ office. Consumers have growing dissatisfaction with hassles in that obstruct their purchase or use of any products – virtually or reality-based. Rising Costs | Consumers’ responses to sharing a larger share of financial risk for their health care services creates provider financial risk. Consider the information from Brot-Goldberg:18 1. Spending reductions following implementation of high-deductible health plans have resulted in a 25% reduction in physician office spending and an 18% reduction in Emergency Department spending. 2. Households are reporting insufficient liquid assets to pay deductibles:  24% of household with mid-range deductible of $1,200 single/$2,400 family  35% of households with higher-range deductible of $2,500 single/$5,000 family 3. 56% of all consumers and 74% of consumers who have deductibles higher than $3,000 are searching for price information before getting care. Facing increasing financial pressure from rising premium costs, consumers are choosing to bear high cost exposure. Nearly 90% of exchange enrollees nationally are in bronze or silver plan (20% bronze, 69% silver)19 Higher deductibles and inability to pay those deductibles may create increased bad debt pressures for what was once a better-insured lower risk population for hospitals. It also means that our consumers will delay or forego needed healthcare in all but the most critical situations. It may also create ‘seasonality’ as consumers wait until their deductibles are met later in the year before they seek higher cost hospital services.

18 Brot-Goldberg Z. et al, “What Does a Deductible Do? The Impact of Cost-Sharing on Health Care Prices, Quantities and Spending Dynamics”, The National Bureau of Economic Research, October 2015. 19 Health-Pocket.com, “2015 Obamacare Deductibles Remain High but Don’t Grow Beyond 2014 Levels”, November 20, 2014, available at www.healthpocket.com. 72

Demand for Retail-like Experience | Amazon’s, Jeff Bezos, said “[I have a] passion to figure out customer- focused strategies as opposed to, say, competitor-focused strategies. If you’re competitor focused, you tend to slack off when your benchmarks say you’re the best. But if you focus is on customers, you keep improving”. This thinking is what led to the retail experience that our patients, prospective patients, and many of us, like and have grown to expect from our health care providers. Bezos and his team do not concentrate on what is going to change over the next five to ten years, but on what will not change; and for them, those things that will not change are all related to customer expectations - selection, low prices, and fast delivery. Their energy goes into defect reduction (High Reliability Organization) that lowers cost structure, and leads to lower prices for their customers. They also believe that transparency is fundamental and leads them to think differently about marketing and service. Bezos says that, “If in the old world you devoted 30% of your attention to building a great service and 70% of your attention to shouting about it, in the new world that inverts”. When people look back at Amazon, I want them to say that we uplifted customer-centricity across the entire business world. If we can do that, it will be really cool”. 20 Transparency | Rising costs and financial burden, along with consumers’ search for better quality and experience in health “Yes, you should wake up every morning terrified with your sheets drenched in sweat, care providers and services has led to a proliferation of but not because you’re afraid of our resources for that information, sometimes referred to as competitors. Be afraid of our customers, ‘Crowdsourcing’. because those are the folks who have the Given the consumers’ search for information on which to base money. Our competitors are never going to their health care decisions, and many health systems’ inability send us money.” to share that information in an understandable, consumer- Jeff Bezos, CEO, Amazon friendly way, providers are increasingly crowdsourced through on-line reports and reviews by sources such as Hospital Compare, California Health Care Compare, Why Not the Best, and even Yelp, Twitter and Facebook. Consulting Yelp for advice during a critical life decision may seem like an incredibly risky way to find high quality providers, but for some, Yelp is a trusted resource with growing acceptance. Even crowdsourcing sites that rely on quantitative data rather than opinions can be incomplete or misleading and create damage to the brand. The best approach for Palomar Heath is to create exceptional patient/consumer experiences and value so that crowdsourcing reflects positive messages about our brand. The powerful brand influence of crowdsourcing creates information about our performance in all areas; it is important that we proactively develop crowdsourcing messages and tools, and develop the resources that allow close monitoring of crowdsourcing sites - even in real-time. Health Care Experience | Like the consumer experiences discussed in the Retail section, there is growing consumer dissatisfaction with traditional health care provider delivery models. While a significant number of consumers prefer to receive health care in their physician’s office or in a hospital, consumers say that the

20 Kirby, J and Stewart, TA, “The Institutional Yes”, Harvard Business Review, October 2007

experience in those settings is not satisfactory. They are moving to more convenient and affordable settings like the local drug stores, grocery stores, or their own living rooms. A recent report published by Oliver Wyman refers to these alternative sites as the ‘new front door to healthcare’. By offering a variety of fully integrated, consumer-friendly access points to the system, these more convenient settings drive higher consumer engagement that leads to higher satisfaction and better health. They predict that these alternative care settings that provide the right care in the right place at the right time is a compelling value proposition, and has the potential to disrupt the entire market. They caution that provider organizations should “view this as the beginning of a fundamental reset in consumer expectations”. 21 Organizational Capabilities Organizational capabilities includes our workforce (knowledge and skills), facilities, the culture, the physical tools and technology, knowledge and skills, and information systems required to create, plan, design, and deliver products and services to customers and stakeholders. Organizational capacity is a mix of tangible (people, tools, systems, and structures) and intangible assets (ideas, culture) that allow the organization that in combination, and make effective execution of strategy possible.

WORKFORCE | CURRENT STATE

Palomar Health continues to work toward development of a world-class workforce to ensure operational excellence and execute our strategy. We have had challenges in reaching our work force development goals and have developed specific goals and supporting tactics that will address current challenges and help ensure success. Days to Fill Rate | The first step in developing a world class workforce is finding the right person with the right skill and talents. To provide context, it currently takes Palomar Health 51 days to fill an open position (Days to Fill rate), compared with a community average of 59 days. While the Days to Fill rate has cost implications, we are purposely and thoughtfully balancing our focus on finding the right “fit” for the organization against the speed in which a position is filled. This thoughtful and deliberate approach is essential in offsetting the significant challenges created by quickly hiring candidates that do not match the skill, character, and work attitude needs of the organization, resulting in turnover and replacement through another hiring process. Retention and Turnover Rate | Palomar Health retains 93.8% of newly hired employees through their first 90 days of employment (retention rate). The retention rate at one-year drops to 78.4%, and after the first year, approximately one in every four employees (25%) leaves the organization. Overall, the turnover rate has been improving with a 12.9% turnover rate for all employees (down from 14%) and the nursing turnover has improved to 12.78% (down from 13.7%). While improving, our turnover rates remain approximately one percent (1.0%) higher than the community standard. Changing Workforce Demographics | Shortages of skilled workers in key positions resultant of an aging workforce are projected. In addition, changing workforce demographics create other challenges in attracting, recruiting, and retaining key talent.

21 Smith, G, Lapsley, H, and Shellenbarger, D, “The New Front Door to Healthcare is Here”, Oliver Wyman, 2016, p. 2. 74

Palomar Health is recruiting across a multi-generational workforce with varying career needs and work-life balance desires. Each of these segments adds different skill sets and dynamics to our Palomar Health workforce. For example, millennials bring a very different dynamic to the workforce including preference for work-life balance, different learning styles, communication needs and styles, and technology adoption. Employee Engagement | Palomar Health continues to experience increases in employee engagement, but we are still at a moderate or average level when compared to benchmarked healthcare systems (Press Ganey). An employee’s engagement is most highly impacted by their immediate supervisor (Gallup, Press Ganey), and skilled leadership is requisite for highly engaged employees. Unfortunately, our leadership turnover rate has been as high as 26%, and while we support the growth of employees into leadership positions, almost 50% of our leaders rose through the organization as internal promotions. Without appropriate and thoughtful development plans that prepare employees for leadership roles, the learning curve can often be steep for these individuals, unsettling for the employees they supervise, and have a negative impact on organizational performance. Labor Costs | Salaries and benefits are more than 55% of the total operating expenses with an additional 1% spent on contract labor. With continued pressure around declining revenue and upcoming union negotiations, the ability to manage labor expense will remain a challenge and an area of focus for Palomar Health. With rising health insurance costs, an ongoing focus on illness prevention and overall employee wellness provides our greatest opportunity to manage costs and improve the well-being of our workforce. Recognizing that family health history, risk behaviors, appropriate nutrition, exercise, and stress management are important influencers of overall health, our wellness programs focus on key areas that are within control of our employees. For instance, stress comes from a variety of work and non-work sources and while studies have shown that a certain amount of stress is productive, excessive stress impact health, lowers engagement and increases turnover. Encouraging employees to participate in wellness activities that can positively impact their overall health and well-being will continue to be an important focus for the organization. Regulatory Environment | California’s ever-changing legislative environment creates continued pressures for the healthcare industry – both financially and administratively. Each year California enacts new laws that impact labor. In the past year alone California has enacted laws impacting paid sick leave requirements, increased requirements for health insurance coverage (ACA), revisions to Kin Care, gender pay equity rules, expansion of retaliation rules, changes in exempt status requirements, minimum wage increases, and violence in the workplace.

WORKFORCE | FUTURE STATE

A world-class workforce requires the right employees, in the right position, with the right skill set and at the right cost. It is a highly engaged team dedicated to providing safe, high quality patient care while exceeding for the patients’ experience expectations. Since the leadership team of any organization drives as much as 80% of the culture of that organization, the leadership team must be committed and skilled at leading others in a constantly changing environment.

WORKFORCE | FILLING GAPS AND REDUCING RISK

Palomar Health is conducting an evaluation of our hiring process and working on areas that will make the hiring process faster, easier and more customer-focused. This includes adding additional tools to help assess candidates’ organizational fit – especially at the leadership level. Leadership development will include an interviewing skills course and a hiring course that will include skills for screening applicants, responding to applicants, and interviewing. In addition, new employee orientation and on boarding will better align with a Patient First culture. We have multiple plans in place to help address the potential workforce shortages of the future. We are working with a coalition of California hospitals through the California Hospital Association to address labor shortages by partnering with schools and other community resources. In addition, our Pathmaker program continues to be a strong recruitment source for the workforce of tomorrow. A task force is currently assessing perceived tools and equipment needs in the organization. That task force will develop a plan that addresses and prioritizes identified needs. Leadership development continues to be a top priority. Supervisors are now attending a newly created mandatory LEAP program (Learn, Engage, Apply, and Perform) that builds basic leadership skills. In addition, working with the Studer Group, leadership development will focus on eliminating leadership variability, standardizing best practices, and raising performance accountability. The redesigned leader evaluation process will create greater accountability using the Balanced Score Card. Managing labor productivity is challenging; it requires manual, cumbersome, time intensive processes. To help address this critical area, Palomar Health engaged Advantas to create staffing plans for volume and trends, evaluation of overtime, call in and other administrative staffing challenges. In addition, Palomar Health is implementing new software to help manage staffing targets based on patient acuity and volume changes, (Cerner’s Clairvia). The health and well-being of staff and leaders continues to be a high priority. We will place additional emphasis on resources for stress reduction, including personal financial management, which is a source of stress for many employees. We will continue to find creative ways to involve people in increased physical activity and nutritional food choices to keep their bodies strong and healthy.

WORKFORCE | KEY TAKE AWAYS 1. Well prepared, highly skilled leadership is critical to building a workforce capable of delivering patient first care, ensuring operational excellence that creates customer value and mission sustaining financial performance and strategy execution. 2. Retention is critical for creating high performance and operational excellence. 3. Continuous workforce re-training will be essential for optimal performance in our dynamic healthcare environment. 4. Employee engagement is critical 5. We must invest in the tools, equipment, and technologies that support efficient, hassle-free work environment.

6. We must create an environment that allows a multi-generational workforce to find meaning, purpose, and ability to thrive, including work-life balance, is not optional. Creation of this environment will require transformational thinking.

PALOMAR HEALTH | PHYSICIAN MANPOWER

As has been clearly outlined in previous sections Market Share, Physician Market Share, Patient Experience, Physician Experience, and Quality, a strong physician network is critical for accomplishing Palomar Health’s Mission to heal, comfort and promote health in the communities we serve. To ensure that the physician network is adequate in size and specialties needed to support the comprehensive health needs of the communities we serve, we conduct regular assessments of the current and projected community needs for health care services in our Primary Service Area (PSA) and the adequacy of physicians to provide those health care services. In order for Palomar Health to actively support physician manpower planning through financial assistance that complies with §411.357 - Exceptions to the Referral Prohibition Related to Compensation Arrangements, we must first assess the adequacy of the physician supply in our Primary Service Area (PSA), which is the geographic area served by our hospitals. The geographic area served by each of our hospitals is defined by statute as ‘the area composed of the lowest number of contiguous zip codes from which the hospital draws at least 75 percent of its inpatients’. Palomar Medical Center Escondido and Palomar Medical Center – Poway have unique geographic areas although those areas overlap in some areas. Therefore, Palomar Medical Center Escondido and Palomar Medical Center – Poway PSAs are separately assessed for community needs. Palomar Medical Center - Primary Service Area (PSA) 92027 Escondido 92056 Oceanside 92026 Escondido 92128 San Diego 92025 Escondido 92057 Oceanside 92069 San Marcos 92064 Poway 92078 San Marcos 92083 Vista 92082 Valley Center 92081 Vista 92028 Fallbrook 92054 Oceanside 92029 Escondido 92129 San Diego 92084 Vista 92003 Bonsall 92065 Ramona 92096 San Marcos

Palomar Medical Center Poway - Primary Service Area (PSA) 92064 Poway 92027 Escondido 92128 San Diego 92126 San Diego 92065 Ramona 92026 Escondido 92129 San Diego 92131 San Diego 92127 San Diego 92029 Escondido 92025 Escondido 92069 San Marcos

Setting the Stage | Definitions and Designations In fiscal year 2016, Palomar Health retained GE Healthcare Camden Group to conduct a third party physician needs assessment for both Palomar Medical Center and Pomerado Hospital. A shortage of physicians in our service area is evidenced by the e federal government designation of parts of our service area as a Health Professional Shortage Area (HPSA). A HPSA is defined as “an area, facility, or population group with a shortage of primary care physicians, as indicated by a population-to-primary care physician ratio of at least 3,500:1. Other factors taken into consideration include the poverty rate, infant mortality rate, fertility rate, and indicators of insufficient capacity to meet area need”. In addition to identification of HPSAs, an area with a demonstrated shortage of primary care physicians may also be designated as a Medically Underserved Area (MUA). An MUA is defined as “an area, facility, or population group with an Index of Medical Underservice (IMU) less than or equal to 62.0 out of 100”. The IMU is calculated by taking into consideration the ratio of primary medical care physicians per 1,000 population, infant mortality rate, percentage of the population with an income below the poverty level, and the percentage of people age 65 or older. These factors are converted to weighted values and then summed to obtain an IMU score for a particular area. Portions of the Palomar Medical Centers in Escondido and Poway service areas are designated as an MUA, but not HPSA, which indicates that there are an insufficient number of primary care physicians in large regions of the service area and in the surrounding communities. The admitting patterns of physicians within the PSA, HPSA, and MUA are not relevant in determining the adequacy of the physician supply. Therefore, even if physicians in the Palomar Health PSA are aligned with, and admit only to competing health care systems and hospitals rather than Palomar Health, they would nonetheless be included in the physician supply when determining community need for Palomar Health.

PHYSICIAN MANPOWER PALOMAR MEDICAL CENTER ESCONDIDO | CURRENT STATE AND FUTURE NEEDS

Physician Need to Support Population Growth | >65 years old Population in the Palomar Medical Center PSA is projected to have overall population growth of 5.2 percent over the next five years with 1.0 percent year-over- year growth during the period. Within that cohort, the highest rate of growth will be in the group over 65 year olds, which are projected to grow by 19.4 percent over the next five years, with 3.6 percent year-over-year growth. Based on the Medicare Population growth projections, there will be an increased need for chronic disease management, and specialty physician needs that will be in highest demand include:

 Internal Medicine  Cardiology  Gastroenterology  Oncology  Orthopedics  Pulmonary Medicine With the exception of pulmonary medicine, varying community need has been identified for each of the above specialties. Physician Need to Support Population Growth | Women and Children Population growth for women and children are projected to be 3.8 percent for the ages 0 to 14 over the five- year period with 0.8 percent year- over-year growth. The childbearing age cohort of 15 to 44 years is projected to be to grow by 2.7 percent over the five-year period, with 0.5 percent year-over-year growth. Based on the population growth projections for women and children, the specialty physician needs that will be in highest demand and for which there is an identified community need include:

 Obstetrics and Gynecology  Pediatrics Physician Need to Support Population Growth | Ethnic An annual year-over-year decline of (0.3) percent of the Caucasian population is projected for period, which will comprise 48.5 percent of the population of the PSA over the period. The Hispanic population is projected to have an annual growth year-over-year of 2.2 percent over the period and will comprise 35.8 percent of the population over the period. The Asian/ Pacific population is projected to have annual year over year growth of 2.5 percent and will comprise 10.3 percent of the population over the period. The Hispanic population shows a statistically higher prevalence of diabetes, heart disease, and obesity, which indicate a need for disease-specific specialty needs in cardiology and endocrinology. In addition to physician specialties needed to support the aforementioned population cohorts’ growth, quantitative and qualitative assessment of the Palomar Medical Center PSA identified overall community need for the physician specialties in the table below:

Palomar Medical Center Escondido Quantitative and Qualitative Current Needs Cardiac Surgery Neurosurgery Cardiology Obstetrics and Gynecology Endocrinology Oral and Maxillofacial Surgery Family Practice Orthopedics Gastroenterology Otolaryngology General Surgery Pediatrics Hematology and Oncology Physical Medicine and Rehab Infectious Disease Plastic Surgery Internal Medicine Radiation Oncology Neurology Urology Future Needs Allergy and Immunology Ophthalmology

Socioeconomic Profile | Over the projection period 58.8 percent of the service area’s households will earn greater than $50,000 per year. This suggests that a significant number of service area residents are ineligible to receive premium subsidies to purchase health insurance through the exchanges and/or be insured through Medi-Cal. Higher growth is projected in the two categories of population that earn more than $50,000, indicating that the service area will grow in more affluent payer categories. Succession Planning Needs | When assessing succession planning needs, it was assumed that physician retirement from clinical practice would occur at age 70. Based on that assumption, succession planning was recommended in gastroenterology and plastic surgery. 16.8 percent of admitting physicians are more than sixty years old, representing 11.1 percent of all admissions, which is below the industry average range of 14 to 16 percent. Patient Care Access | Perceived access issues were identified. There were not qualitative or quantitative needs identified that would support additional recruitment of physicians in those specialty areas, but there were recommendations for consideration of practice efficiency enhancements, telemedicine and e-health capabilities, and other access solutions to improve perceived access issues. There was perceived restricted access to patient care for specific patient populations by payer cohorts such as Medi-Cal and uninsured. Clinical Service Area Needs | Input received from interviews of community physicians indicated a service gap in gastroenterology specific to the treatment of hepatitis C, hematology and oncology pertaining to gynecologic oncology, and cardiac surgery pertaining to transcatheter aortic valve replacement (TAVR) procedures. The assessment included a recommendation to look for physicians who can provide these services when recruiting, to ensure that the community is provided with these services.

PHYSICIAN MANPOWER PALOMAR MEDICAL CENTER POWAY | CURRENT STATE AND FUTURE NEEDS

Physician Need to Support Population Growth | >65 years old Population in the Palomar Medical Center Poway PSA is projected to have overall population growth of 5.3 percent over the next five years with 1.0 percent year-over- year growth during the period. Within that cohort, the highest rate of growth will be in the group over 65 years old, which are projected to grow by 23.1 percent over the five years, with 4.2 percent year-over-year growth. Based on the Medicare Population growth projections, there will be an increased need for chronic disease management, and specialty physician needs that will be in highest demand include:

 Internal Medicine  Cardiology  Gastroenterology  Oncology  Orthopedics  Pulmonary Medicine With the exception of pulmonary medicine, varying community need has been identified for each of the above specialties. Physician Need to Support Population Growth | Women and Children Population growth for women and children is projected to be 2.6 percent for ages 0 to 14 over the five-year period, with 0.5 percent year-over-year growth. The childbearing age cohort of 15 to 44 years old is projected to grow by 2.0 percent over the five-year period, with 0.4 percent year-over-year growth. Based on the population growth projections for women and children, the specialty physician needs that will be in highest demand and for which there is an identified community need include:

 Obstetrics and Gynecology  Pediatricians Physician Need to Support Population Growth | Ethnic An annual year-over-year decline of (0.5) percent of the Caucasian population is projected for the period, which will comprise 43.4 percent of the population of the PSA over the period. The Hispanic population is projected to have an annual year-over-year growth of 2.2 percent over the period, and will comprise 28.8 percent of the population over the period. Annual year-over -year growth for the Asian - Pacific population is projected to be 2.7 percent and this demographic will be 21.0 percent of the population. The Hispanic population shows a statistically higher prevalence of diabetes, heart disease, and obesity, indicating a need for disease-specific specialty needs in cardiology and endocrinology. Socioeconomic Profile | Over the projection period approximately 66 percent of the service area’s households will earn greater than $50,000 per year. This suggests that a significant number of service area residents are ineligible to receive premium subsidies to purchase health insurance through the exchanges

and/or be insured through Medi-Cal. Higher growth is projected in the two categories of population that earn more than $50,000, indicating that the service area will grow in more affluent payer categories. Overall Community Need by Specialty | In addition to physician specialties needed to support the aforementioned population cohorts’ growth, quantitative and qualitative assessment of the Palomar Medical Center PSA identified overall community need for the physician specialties in the table below:

Palomar Medical Center Poway Quantitative and Qualitative Current Needs Cardiac Surgery Neurosurgery Cardiology Obstetrics and Gynecology Endocrinology Oral and Maxillofacial Surgery Family Practice Orthopedics Gastroenterology Otolaryngology General Surgery Pediatrics Hematology and Oncology Physical Medicine and Rehab Infectious Disease Radiation Oncology Internal Medicine Urology Future Needs Neurology Ophthalmology

Succession Planning Needs | When assessing succession planning needs, it was assumed that physician retirement from clinical practice would occur at age 70. Based on that assumption, succession planning was recommended in cardiovascular and general surgery specialties. 17.2 percent of admitting physicians are over age sixty and represent 21.8 percent of all admissions, which is above the industry average range of 14 to 16 percent. Patient Care Access | Perceived access issues were identified. There were not qualitative or quantitative needs identified that would support additional recruitment of physicians in those specialty areas, but there were recommendations for consideration of practice efficiency enhancements, telemedicine and e-health capabilities, and other access solutions to improve perceived access issues. The survey also indicated perceived restricted patient access for specific payer cohorts such as Medi-Cal and uninsured, and coverage gaps in Emergency Department for specialty call. Clinical Service Area Needs | Input received from interviews of community physicians indicated a service gap in gastroenterology specific to the treatment of hepatitis C, hematology and oncology pertaining to gynecologic oncology, and cardiac surgery pertaining to transcatheter aortic valve replacement (TAVR) procedures. The assessment included a recommendation to look for physicians who can provide these services when recruiting, to ensure that the community is provided with these services. The assessment identified a statistical excess of physicians in neonatology, nephrology, and physical medicine and rehabilitation.

INFORMATION TECHNOLOGY | CURRENT STATE The Healthcare Information and Management Systems Society (HIMSS) gauges adoption of electronic medical records (EMR) by healthcare providers using the EMR Adoption Model (EMRAM). Using EMRAM, HIMSS tracks seven stages of inpatient and ambulatory hospitals’ implementation of EMR solutions and advanced functionalities. Stage 6 | In 2015 Palomar Health achieved a Stage 6 designation. Stage 6 hospitals have achieved a significant advancement in information technology (IT) capabilities that positions them to meet many of the upcoming industry transformations we will be experiencing in the near future. Stage 6 hospitals are also well positioned to provide data to key stakeholders. The path to achieving Stage 6 is not an easy one (Mike Davis, HIMSS Analytics, “Stage 6 Hospitals: The Journey and the Accomplishments”). In addition to applications, the technical infrastructure in Stage 6 is critical to providing the Information Technology portfolio needed to achieve Palomar Health’s strategic goals and is also one of the biggest challenges. Infrastructure | One major challenge is the outdated infrastructure at the Palomar Medical Center Poway campus. While a cellular and wireless remediation project is in progress, it is only the first step required to complete the needed network overhaul and Voice-Over-Internet-Protocol (VoIP) rollout. Additional phases will include data center construction, network closet remediation, and additional power and cabling fit-up activities. Risks include funding, resources both human and other. Data Storage | Palomar Health has experienced a 400 percent growth in data since 2012 and this exponential growth is expected to continue in the future. Data storage capability is another key resource that is required to support critical Palomar Health applications and a phase one refresh is underway. Cybercrime | A high priority for Palomar Health is the exponential rise of cybercrime targeting hospitals and healthcare information. Recent studies suggest that as many as 91 percent of health care organizations have experienced a breach involving the loss or theft of patient data in the past 24 months. To minimize Palomar’s risk to these ongoing threats, Palomar Health has partnered with CynergisTek, Incorporated, a healthcare IT consulting firm that specializes in Cybersecurity. To combat these constantly evolving threats, the Information Technology division must continually advance our security posture through new software, hardware, and ongoing education. Meaningful Use | In addition to ensuring secure systems, the Information Technology division is also required to ensure that all Palomar Health systems and applications meet regulatory compliance. One example of this is Meaningful Use. Thus far, there are three Stages of Meaningful Use.

The Stage 1 final rule established the foundation for the Medicare and Medicaid EHR Incentive Programs by establishing requirements for the electronic capture of clinical data, including providing patients with electronic copies of their health information. The Stage 2 final rule set requirements around the exchange of essential health data among health care providers and patients to improve care coordination. It also finalized a set of clinical quality measures (CQMs) that all providers participating in any stage of the program are required to report to CMS. The Stage 3 Rule was designed to build on the first two stages and the focus on increasing interoperable health data sharing among providers. It focuses on the advanced use of EHR technology to promote improved patient outcomes and health information exchange, and will make changes to reporting requirements. We will meet these requirements through an information technology upgrade in May 2017. Devices and Equipment | Outdated devices and equipment remains a top issue for the Information Technology division. Because of limited capital availability in previous years, investment in new equipment has not pace with demand, resulting in continued use of issue-prone equipment beyond useful life and a large backlog of equipment related requests. Since much of the equipment needed for Palomar Medical Center Escondido was purchased at the time of opening, it is approaching end of life at the same time. Information Technology is essential to implementing and executing strategic initiatives and necessary for Palomar Health to thrive and prosper in healthcare’s rapidly changing and competitive environment. The high proportion of Palomar Health strategic goals that are IT enabled and IT driven have resulted in unsustainable levels of resource utilization and often require additional resources to fill the gaps. The Information Technology division continues to fill these resource constraints through partnerships and contract labor.

INFORMATION TECHNOLOGY | FUTURE STATE The Information Technology (IT) division is charged with building a platform for the future capable of adapting to emerging technologies, while at the same time, focusing on maintaining current technologies to ensure highly available, redundant, and secure systems. Ultimately, these technologies enable our clinicians to better manage patient care, improve outcomes, enhance quality, and reduce overall costs.

INFORMATION TECHNOLOGY | KEY TAKE AWAYS 1. IT benchmarks are difficult to establish 2. IT must be a “team sport” 3. Information Technology is essential to enabling organizational strategies 4. Technology is changing even faster than healthcare 5. Expect Digital disruption in healthcare

PALOMAR HEALTH | FACILITIES

PALOMAR MEDICAL CENTER POWAY | CURRENT STATE Palomar Medical Center Poway is entering ‘mid-life’. Built in the mid-seventies the building is entering a time when mechanical, electrical, and plumbing systems are in need of replacement. The building design is

outdated and no longer supports what is considered “modern patient care”. The experience from entering the campus to the journey of the patient through the current layout is far from ideal. IT Integration | While attempting to provide the latest technology the current state is cobbled together and less than sustainable. The intermediate distribution frame rooms (IDF) are, non-existent, too small, and not equipped with the necessary cooling and space sufficient to support the needs of a fully integrated building. Central Plant | Replaced in 2008, the central plant is a modern and well sized. However, the central plant is creating heating, cooling, and emergency power at today’s standard but delivering these products to mid- seventies equipment. The result is inefficient delivery of heating, cooling, and electric distribution. Patient Care Areas | The patient tower rooms are approximately half the size of a modern patient room. With the exception of the fifth floor Mother Baby Unit, the rooms have mid-seventies head walls and fixtures. The Emergency Department 15 year old re-design is now outdated for staff work flow, technology, and patient throughput. The Operating Room Platform is undersized and not able to provide space for new technologies in the OR suites and support rooms.

PALOMAR MEDICAL CENTER POWAY | FUTURE STATE

The operations and facilities teams are developing plans to address the current and long-term needs of Palomar Medical Center Poway. A collaborative work team is developing a facility plan that supports our community and patients’ access to health care and that provides safe, high quality care in a healing and supportive environment for our staff and patients. In order to provide a wide range of opinions and perspectives, the team includes representatives from operations, medical staff, administration, clinical and non-clinical support and the architectural and construction teams. In order to plan and accomplish the vision for the campus, the team has to design and begin permitting now for larger projects. The facility operations team and engineering firms have identified and created a road map to replace and modernize the utility systems. Several of these plans are already underway beginning with the most critical utilities needs such as cooling and emergency power. The facilities team is working with Information Technology leadership to identify and prioritize space and environmental needs. These efforts will be included in campus projects and will allow for growth as new technologies emerge. Facility Operations will continue to identify and prioritize the mechanical systems replacement plan for Palomar Medical Center Escondido. Much of the cost for these projects is recoverable through rebate programs from the Utility Company and from operational savings. Planning for future patient care and access, preliminary design work has begun on the Emergency Department, Operating Platform, and Critical Care Unit. In addition, a new vision of hospital visitor access is under development. The Palomar Medical Center – Poway campus includes Villa Pomerado, which is also undergoing a redesign process to accommodate a modern Mental Health Unit and upgrades to the infrastructure, including heating and cooling and information technology space needs.

PALOMAR MEDICAL CENTER ESCONDIDO | CURRENT STATE The first four years have been a time of challenges and realizing opportunities. A great example is the parking lot lighting where we have already replaced the high-pressure sodium lights with LED lights, which resulted in a 50% savings on electrical use. In large part, rebates from the local utility company offset the costs of installation. This demonstrates the speed at which technology advances and the need to act on those advances at the right time. Central Plant | Now three floors in the patient tower as well as areas in the shelled areas of the Emergency Department and lobby. The Central Plant is operating at a level that supports the current state and will be able to support the 13th operating room currently under construction. Addition capacity is available with the connecting piping from the central plant. To create additional capacity would require adding more chillers and associated equipment; there is room for the additional equipment in the central plant.

PALOMAR MEDICAL CENTER ESCONDIDO | FUTURE STATE The long range plan (5-10 years) for Palomar Medical Center will include building out the campus site, increasing access for patients and staff, and developing our community presence as a dominant provider of care in North County. Specific projects will include the Emergency Department, Nursing Tower, and lobby areas. Emergency Department | Design visioning has begun for the Emergency Department final “pod 4”. A team is developing a vision and plan for the future of the emergency room. The team includes representation of Palomar Medical Center Escondido leadership, emergency department leadership, front-line staff, physicians, architects, and the construction team. The team’s charge is to look at the entire unit and articulate identified issues encountered over the past four years of operations. The goal of this project is to envision a design that optimizes operations, while anticipating growth (future state). Conference Center | Initial plans developed during the Palomar Medical Center’s construction phase have been reviewed and updated for the build-out of its 10th floor Conference Center. The goal of this project includes designs and plans that add value for a variety of constituents coming from inside and outside our hospital walls. Physicians, staff, and the community at large will avail themselves of this much-needed space, especially after the closure of the Downtown Campus, which will retire the Graybill Auditorium as the health district’s largest meeting space. The direction of the project is like others in the queue as it presents an opportunity to incorporate a state-of-the art learning and education center for physicians and notable speakers, special presentations, as well as provide a much needed event space that offer incomparable views from its cantilevered glass walls and outside garden spaces. Nursing tower | A team has begun design of the approximately 72 new patient rooms that will be located on the final three floors of the nursing tower. The goal of this project includes developing designs and plans that add value for our customers – physicians, patients, and community – as well as our staff and strategic partners. The team has similar representative memberships to the Emergency Department team. This project is of particular value to our strategic partners, Rady Children’s and Kaiser. Palomar Health has included these partners in the high-level discussions of design and visioning to help Palomar Health decide what is best for our organization. The direction is much like the work with the Emergency Department in as

much as this also presents an opportunity to incorporate learning from our four years in the building into both design and operations of the building. Parking Garage |The goal of this project is to design a multi-story parking garage on the Palomar Medical Center Escondido campus. This garage will solve the inadequate parking situation that has plagued the campus since the day it opened, and increase our employees’ safety and satisfaction. The garage size will accommodate growth on the campus and will serve both ends of the site. Additional buildings | There are several buildings in various stages of design, permitting, and construction that will begin to complete the master plan of this campus. The different buildings will house patient care programs and offer relief to the main medical center as those programs move to their final location.

 Crisis Stabilization Unit (CSU) | 7,999 sf two-story standalone building targeted for completion by early CY 2017  Medical Office Building (MOB) | 72,000 sf three-story building that will break ground in Q2 FY17 and targeted for completion mid CY 2017

 Acute Rehabilitation Hospital | 52- bed acute care standalone hospital targeted for completion CY 2019

PALOMAR HEALTH FACILITIES | KEY TAKE AWAYS 1. Strategically optimize space and work with IT to build/plan future movement 2. Balance short-term needs with long- term vision 3. Need to focus on right place for care

PATIENT FIRST CULTURE

CULTURE | CURRENT STATE

There is a popular refrain in the business world, often attributed to Peter Drucker, but not confirmed as his, “Culture eats strategy for breakfast”. It is an acknowledgement that the behavioral norms in the organization will predict the outcomes we are able to achieve. Culture is a reflection of the traditions, values, and beliefs in the organization. Since 2009, Palomar Health has evaluated its culture four times. Consistently, Palomar Health is rated as a collaborative and team oriented culture with high value for relationships and development. The top satisfiers for employees at Palomar Health are the people, helping patients and teamwork. A recent survey of all Palomar Health leaders including the Board of Directors and medical staff identified inconsistent hardwiring, too many priorities, silo thinking, and time management as barriers to change. Additionally, 41% of surveyed staff report “unreasonable” levels of job stress.

CULTURE | FUTURE STATE In healthcare, increased complexity in the environment often creates conflicting demands (working faster with higher quality) and higher rates of job stress and burnout. The Triple Aim—enhancing patient experience, improving population health, and reducing costs—is widely accepted as a compass to optimize health system performance. Yet physicians and other members of the health care workforce report widespread burnout and dissatisfaction. Burnout is associated with lower patient satisfaction, reduced health outcomes, and it may increase costs. Burnout thus imperils the Triple Aim. The Triple Aim needs to expand to include the Quadruple Aim - adding the goal of improving the work life of health care providers, including clinicians and staff (Thomas Bodenheimer, MD and Christine Sinsky, MD, Annals of Family Medicine, November/December 2014, Vol. 12 no. 573-576). Globally, future workplaces must address employee need for meaning and fulfillment and our millennial workforce will seek both more meaning and flexibility in work. The Quadruple Aim recognizes that a meaningful experience in delivering care is foundational to our work. Further, evidence indicates that their leadership shapes 80% of an employee’s experience of their work environment. Therefore, leadership will be our biggest lever for change in the future.

CULTURE | FILLING GAPS AND REDUCING RISK

Palomar Health has partnered with The Studer Group, a Healthcare Outcomes organization to address the organization’s capacity to change and to provide our leadership with the tools and processes needed to hardwire success. The three-year engagement will focus on eliminating leadership variability, standardizing best practices, and raising performance accountability. The progression of the culture work will be phased as follows: Phase 1 | Align goals through the implementation of a new balanced scorecard and performance metrics that are cascaded to all levels of leadership

Phase 2 | Develop leadership skills in meeting performance targets and coaching, leadership tools and development Phase 3 | Eliminate process variability and tools to standardize and improve processes Palomar Health will frame the culture work with re-crafted values and talent systems that include talent review and succession planning for leaders. Outcomes measurements will include improved engagement from staff and physicians, increased success in growing leadership from within, and improvement in our culture of safety.

CULTURE | KEY TAKE AWAYS

Culture and change priorities for Palomar Health are: 1. Raise the engagement of staff and physicians 2. Improve the patient experience 3. Improve the physician experience 4. Improve the community experience 5. Standardize practices and the patient experience across the system 6. Raise and stabilize variable performance outcomes 7. Develop talent and leadership to lead the organization into the future

Summary and Final Remarks

Strategic planning is a visionary process that results in major, long-term strategic goals to help organizations reach their desired future state while developing and growing with the changing environment that surrounds them. For Palomar Health, this plan provides a foundation for understanding where we are now, what will be required to succeed in the industry’s future state, and gaps that we must eliminate to achieve our strategic goals. With this report, we begin to shape our future. We stand together, ready to serve our mission to heal, comfort, and promote health in the communities we serve. While we cannot fully know what the future holds, we are confident that we can only succeed as a united team of providers with our patients as the single foci of why we are here, persistently imagining what we can do to serve their needs, and innovating new ways to do it.