Economic Outlook | Spring 2014 Edition by Premier, Inc.

STRATEGIC LEADERSHIP FOR FINANCIAL AND CLINICAL HEALTHCARE EXECUTIVES • A TWELVE MONTH OUTLOOK • SPRING 2014

ECONOMIC OUTLOOK

FOR FURTHER INFORMATION To learn more about this publication, please visit premierinc.com/economicoutlook, or email economicoutlook@premierinc.com.

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T W E LV E M O N T H O U T LO O K | SPRING 2014

Using Wisely

Championing Total Cost Reduction

Finding Double-Digit Annual PPI Savings

About the cover Though health systems have long worked to create streamlined, efficient and highquality operations, the industry currently has both the imperative of rising costs and healthcare reform, as well as the requisite technology and data necessary to make long-term, significant change. This edition of the Economic Outlook, “Standards that Stick”, is about driving sustainable cost reductions within health systems. Health systems are no longer looking at just the low-hanging fruit or one-off changes to drive expenses down in the short term. Instead, they are combining all the tools they have – supply chain and clinical data, analytics, technology, physician engagement and more – to tackle variation within their systems to drive sustainable cost reduction.

About the publication The Economic Outlook is Premier’s flag-

Due to interest from our membership and

ship publication that highlights emerging

the industry, beginning in 2013 we ex-

economic and industry trends impacting

panded our Outlook series to include two

our membership and shaping the health-

new publications. The Quality Outlook,

care landscape. As an important thought

released annually during the summer, pro-

leadership resource, the publication pro-

vides thought leadership focused on clini-

vides strategic insight to financial, clinical

cal trends, performance improvement, and

and supply chain healthcare executives

best practices in safety and quality of care.

across the country.

The Industry Outlook, released annually during the winter, highlights one specific

A key aspect of the long-term strategy for

macro-level trend impacting healthcare

the Outlook is to collaborate with inter-

stakeholders and examines that trend

nal and external subject matter experts

across the supply chain.

to build consensus from diverse points of view. The publication harnesses the ex-

The content in this edition is intended

pertise of our network of healthcare lead-

to help our readership better understand

ership to illuminate best practices and

the implications of healthcare reform and

strategies needed to drive performance

provide insights into existing and evolving

improvement. We strive to provide our

opportunities for healthcare stakeholders

members and healthcare organizations

to improve connectivity and patient care

with valuable, timely information and

in a newly-shaped marketplace.

business intelligence derived from the industry’s most progressive participants.

We welcome your comments and questions. For additional information, please email economicoutlook@premierinc.com. premierinc.com/economicoutlook outlookmarketplace.hostedbywebstore.com

LETTER 01

EXECUTIVE LETTER

Breaking even on Medicare Mike Alkire, chief operating officer, Premier, Inc.

FEATURES | TACKLING TOTAL COST

04 USING WISELY

PERSPECTIVES 24 Standards that Stick

TRENDS 34 PACER Surgical Mesh Collaborative 37 Standardizing the Use of Surgical Mesh 41 Success Story: Bard Access Systems

OUTLOOK LEADERSHIP

08 CHAMPIONING TOTAL COST REDUCTION

14 MANAGING COST OF CARE

ECONOMICS 44 A Conversation with Ilir Hysa 48 Behind the Numbers 56 An Update on Hospital Performance Metrics 60 Patient Volume Trends 64 Guide to Economic Indicators 67 Premierâ&#x20AC;&#x2122;s Supply Chain Solutions 68 Inflation Summary 69 Success Story: OptifreightTM Logistics

MANAGING DIRECTOR Kayla Sutton

EDITORIAL STAFF

E XECUTIVE SPONSORS Mike Alkire, chief operating officer Durral Gilbert, president, supply chain services Amy Denny, vice president, strategy, supply chain services A special thanks to Ed Drouillard, Tina Harlan, Eric Johnson, Becky Leavitt, Traci McCoy, Rich Westbay, and Laura Yandell for their contributions to this edition of the Outlook.

17 FINDING DOUBLE-DIGIT ANNUAL PPI SAVINGS

20 CUTTING COMMODITY COSTS

COMMODITIES 72 Minimizing Raw Materials Risk 74 2014 Market Expecting Growth 76 Copper Market Overview 78 Cotton Market Overview 80 Energy Market Overview 82 Food Market Overview 86 Plastic Resins Market Overview 88 Natural and Synthetic Rubber Market Overview 90 Steel Market Overview 92 Success Story: US Foods

DESIGN AND PRODUCTION Chris Cardelli, director, creative services Sung Ginader, senior graphics designer, creative services Dave Dixon, associate graphics designer, creative services Bryan Verrone, project manager, creative services EDITORIAL SUPPORT Amanda Forster, vice president, public relations Alven Weil, director, public relations Bryan Alsop, senior manager, corporate communications

EX E C U TI V E LE TTER

Breaking even on Medicare

It explains why Fitch Ratings lowered its outlook on not-forprofit hospitals to negative for the first time in five years.3 And as Moody’s Investors Service points out, not since 2008 have not-for-profit hospital expenses outpaced revenues.4 Looking toward 2014, Standard & Poor’s predicted that “all but the strongest hospitals will see margins shrink.”5 Taking all of this into account makes you wonder if we should be asking ourselves how we can break even on Medicare margins. The truth is, a number of Premier alliance members have already asked themselves that question, and as a result, have embarked on some ambitious initiatives. Cincinnati-based Catholic Health Partners (CHP) is a prime example.

MEMBERS OF THE PREMIER ALLIANCE,

Rebecca Sykes, CHP’s senior vice president of resource management and CIO, summed it up well: “If we can’t make money on the Medicare population – or at least break even –

Can we break even on Medicare?

we don’t have a sustainable business model.”

It’s a question that’s likely on the minds of many health

She and her team decided to face the situation head-on. First,

system executives, from CEOs to physicians and supply

they set a goal of reducing weighted equivalent inpatient

chain managers.

admissions by $25 per discharge. Then they reached out to Premier, a long-time partner. Premier clinical specialists,

Unfortunately, the answer for about one-third of you is “no,”

project managers and analysts worked closely with CHP

according to the American Hospital Association. For others, barely

clinicians and physicians to reduce unjustified variation

breaking even under Medicare, the largest payer to just about every

through appropriate use of the right products and procedures

hospital in the U.S., is equivalent to success these days.

at the right price, place and time.

We referred to this challenge in last fall’s edition of the

The combined team set targets that included a:

Economic Outlook. With sequestration, Affordable Care Act

• Significant decrease in blood transfusions, lowering costs

changes, and other payment cuts, Medicare reimbursements to hospitals have been cut by more than $270 billion since October 2010. That’s in addition to Medicare’s 6 percent average underpayment noted by the Medicare Payment Advisory

without compromising quality and safety; • Reduction in patient days in intensive care settings, such as ICU and telemetry beds; and • Better understanding among CHP physicians of the impact

Commission. And all of this comes at a time when:

their orthopedic and cardiovascular implant choices had on

• Private payers provided only marginal 2014 rate increases,2 and

costs and outcomes.

• Health plans sold on Affordable Care Act exchanges are estimated to pay hospitals 20 to 30 percent less than other

The team designed and helped implement processes to reduce

commercial plans.

unjustified use across CHP’s 23 hospitals. Underlying all decisions was the use of quality and cost data to benchmark

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EX E C U TI V E LE TTER

Breaking even on Medicare

against top performing peers, identify opportunities and

In last fall’s Economic Outlook, Senior Vice President of Premier

improve performance.

Performance Partners Wes Champion called Medicare breakeven “a mindset or rallying cry for hospitals and health systems.”

The result was impressive: more than $22 million in identified clinical variation, a savings of about $9 million in 2013 alone,

A number of Premier members have taken those words to

with the potential for much more in the future.

heart. They’ve stopping asking questions, and are working with physicians, supply chain managers and CEOs to come up with

CHP isn’t the only alliance member making this kind of

system-wide solutions. By doing so they’re making a statement

progress. Upstate in Akron, OH, Summa Health System targeted

around reducing clinical variation across healthcare settings.

just under $7 million in improvements through length of stay,

And they’re seeing the successes first hand.

level of care and resource utilization initiatives in 2013. Summa worked with a Premier team, addressing clinical

– MIKE ALKIRE Chief operating officer

/ Premier, Inc.

variation through process improvements. Now, it’s implementing an expanded performance improvement plan targeting another $25 million in improvements through labor productivity, revenue cycle, length of stay and supply chain opportunities. Its ultimate goal is to align with its three-year strategic targets and streamline processes that improve the patient experience and create value. Fairview Health Services (Minneapolis, MN) is taking its own unique approach to the issue of supply chain costs, partnering with suppliers to go “at risk” on commodity products. “As

Because when it comes to making a statement, results speak louder than words.

the Affordable Care Act gained momentum several years ago, it made us think differently about care delivery in this new environment,” said LeAnn Born, Fairview’s vice president of supply chain. “In turn, I began reaching out to suppliers to identify those who were really ready to try something new.” As a result Fairview’s supply chain team will begin a pilot program with Covidien later this year that changes supplier sales representatives into “utilization managers,” with incentives built around appropriate use of products, not selling more. It is a sort of shared savings from resource utilization improvement. Fairview aims to save $100,000-$200,000 in the first year of the program.

REFERENCES 1. The Fragile State of Hospital Finances, American Hospital Association, http://www.aha.org/ content/00-10/05fragilehosps.pdf. 2. Melanie Evans, “Outlook 2014: Not-for-Profit Hospitals,” Modern Healthcare, January 4, 2014, http://www.modernhealthcare.com/article/20140104/MAGAZINE/301049991/outlook-2014not-for-profit-hospitals. 3. Beth Kutscher, “Fitch Lowers Not-for-Profit Hospital Outlook to Negative,” Modern Healthcare, December 12, 2013, http://www.modernhealthcare.com/article/20131212/ NEWS/312129953. 4. Becker’s Hospital Review, “Moody’s: 132 Statistics on Nonprofit Hospital Medians,” (August 26, 2013) http://www.beckershospitalreview.com/racs-/-icd-9-/-icd-10/moody-s-132-statistics-on-nonprofit-hospital-medians-fiscal-year-2012.html. 5. Melanie Evans, “Outlook 2014: Not-for-Profit Hospitals,” Modern Healthcare, January 4, 2014, http://www.modernhealthcare.com/article/20140104/MAGAZINE/301049991/outlook-2014not-for-profit-hospitals.

FEATURES Using Wisely, 4 Championing total cost reduction in health systems, 8 Managing cost of care with improved use of inpatient beds, 14 Finding double-digit annual PPI savings, 17 Cutting commodity costs at Fairview Health Services, 20

USING

WISELY Premier’s approach to measuring, comparing, and eliminating unnecessary costs

Mike Alkire

Chief operating officer / Premier, Inc.

Richard Bankowitz, MD

Chief medical officer / Premier, Inc.

Tim Lowe

Principal research scientist / Premier Research Institute

Doug Miller

Senior director, data management and clinical standards / Premier, Inc.

stimates of how much of healthcare expenditures are due to waste – the consumption, spending or employment of health services without adequate return – range as high as 30 percent.1 Although

there is growing consensus that reducing waste is one of the keys to cost containment,1,2,3 there is little agreement among stakeholders on how to identify and measure it.4 Published measures focusing on high-level overviews of hospital spending frequently do not provide adequate guidance for development of targeted waste reduction policies and programs.1 While some measures assess specific care areas, there are no comprehensive measurements that cover all hospital departments or provide a means to evaluate the success of targeted initiatives at a structural level. 3,4 Most hospitals simply don’t have the requisite expertise to develop and test measures to monitor quality improvement initiatives. 5 Fewer still have the resources to dedicate to developing and validating waste-specific measures without the guarantee of success. Moreover, the fragmented nature of healthcare often stymies providers’ ability to share

lessons learned, which can result in

such as electronic medical records or

Wisely, a standardized methodology

programs that are either unproductive

electronic prescribing systems, to save

to identify and monitor clinical and

or limited in scale to a single facility or

time and reduce errors. On a more

administrative functions for healthcare

health system.

macro level, an analysis of MedPAR data

waste reduction.

6,7

To tackle the issue, leading hospitals

shows that these combined strategies

and health systems have implemented

resulted in approximately 62 percent

A waste reduction framework

a range of efficiency and cost-

of hospitals improving their overall

Premierâ&#x20AC;&#x2122;s waste framework allows acute

improvement strategies to stem the

efficiency since 2001.

care facilities to benchmark themselves

tide of misuse or overuse of healthcare

While this is commendable, the reality

against peers and/or their own prior

resources. Continuous performance

is that most waste-reduction efforts

waste reduction results.13 Facilities are

improvement programs, for example,

thus far have been limited in scope and

ranked by performance relative to the

work to optimize every aspect of

effectiveness. Little data exists to help

adjusted proportional contribution of

operational efficiency and cut costs

hospital administrators decide which

each waste measure.

per patient. 8

high-impact areas to target first.12 Whatâ&#x20AC;&#x2122;s

Some waste prevention programs

The framework is composed of three

needed is a scalable, national approach

categories: clinical, operational and

leverage standardized care pathways to

that highlights just how much variation

supply chain waste. We define clinical

document the ideal sequence and timing

is truly waste and provides specific

waste as spending on treatments that

of staff actions for achieving quality

opportunities and dollar amounts for

have been shown to be ineffective,

outcomes with optimal efficiency.

hospitals to reclaim. To help with this

including those that may even result

Others rely on technology solutions,

challenge, Premier developed Using

in harm. Operational waste refers to

OUTLOOK

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that which occurs from inefficiency, such as services or interventions that are helpful to ensuring a successful outcome, but which aren’t delivered in an optimal fashion. Lastly, supply chain waste refers to ineffective inventory management and supply ordering

AVERAGE OPPORTUNITIES FOR

CLINICAL WASTE REDUCTION CLINICAL CATEGORIES

AVERAGE OPPORTUNITY

L aboratory testing

$1.7 million

Respiratory therapy

$1.5 million

measures and the means to compare

Diagnostic imaging

$1.4 million

hospital performance in terms of

Overuse of the ICU

$792,000

potential opportunity (revenue that

Safety incidents for surgical patients

$422,000

Anti-infective usage

$373,000

Overuse of blood

$284,000

Intraoperative central nervous system (CNS) drug use

$73,000

processes (see Figure 1). Each category includes general

could be reclaimed if waste was reduced). In developing the measures, we considered three main criteria: •C omprehension: Are the measures and scoring simple to understand? •F airness: Do the measures account for differences in patient populations? •C omparability: Does the scoring allow for both internal benchmarking as well as comparison with peers?

Measuring savings opportunities

AVERAGE OPPORTUNITIES FOR

OPERATIONAL WASTE REDUCTION OPERATIONAL CATEGORIES

AVERAGE OPPORTUNITY

Labor productivity

$5.1 million

data from 261 acute care hospitals

Length of stay

$3.1 million

participating in Premier’s QUEST®

Readmissions

$3.0 million

collaborative. Hospitals were divided

Skill mix

$1.8 million

Use of overtime

$1.8 million

ICU length of stay

$362,316

Measures were validated using

into two groups: 209 facilities for measure development and 52 facilities for validation. The 52 facilities were chosen based on distribution of hospital characteristics and represented a crosssection of members: large and small, teaching and non-teaching, urban or rural population served, and multiple geographic regions. With Using Wisely, Premier was able to calculate the average amount of savings that could be generated each year by a typical 200- to 300-bed hospital in each of the measure domains.

AVERAGE OPPORTUNITY FOR

SUPPLY CHAIN WASTE REDUCTION SUPPLY CHAIN Non-automated purchase orders

AVERAGE OPPORTUNITY $55,000

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Fig.1

Premier’s waste framework

Little to no health benefit Clinical waste Potential for harm

Inefficient processes U.S. healthcare waste

Operational waste Duplication

Poor inventory management Supply chain waste Inefficient ordering

Conclusion

•D escribes the opportunities for waste

them achieve greater efficiency, provide

There is considerable geographic

reduction with greater specificity than

additional value to patients and payers,

variation in the quantity and type

has existed in the past.

and prepare for rapidly declining

of care delivered to patients in the

At long last, hospital and health

reimbursement rates that endanger

United States. Hospitals or health

system leaders have a roadmap to help

future solvency.

systems that spend more than peers without experiencing better health outcomes have obvious cost-reduction opportunities. Waste in the U.S. healthcare system contributes to the high cost of care, drives our growing deficit, and diverts resources from other social needs. Although hospitals have made gains in efficiency and cost reduction over time, major changes have not been possible because providers lacked the knowledge and means to make them in a systematic, evidence-based way. Now, however, Premier offers a standardized, replicable framework that: • Better defines healthcare waste, • Provides a conceptual basis for its classification, and

REFERENCES 1. New England Healthcare Institute, How Many Studies Will It Take? (Cambridge, MA, February 25, 2008). 2. Office of the Actuary, National Health Care Expenditures Data 2012, (Washington, DC, Centers for Medicare and Medicaid Services, 2012. 3. D. M. Berwick and A. D. Hackbarth, “Eliminating Waste in US Health Care,” JAMA. 307, no. 14 (2012): E1-E4. 4. D. Miller, J. Martin, T.J. Lowe, “Developing a Mechanism to Identify Waste in the Acute Care Setting,” (AcademyHealth Annual Research Meeting, Orlando, FL, June 24-26, 2012). 5. J. R. Barro, R. S.Huckman, D. P. Kessler, “The Effects of Cardiac Specialty Hospitals on the Cost and Quality of Medical Care,” J Health Econ. 25 (2006): 702-721. 6. Centers for Medicare & Medicaid Services (CMS), Medicare Program; Hospital Inpatient Value-Based Purchasing Program, USDoHAH Services, 42nd ed., CFR Parts 422 and 480 (Washington, DC, 2011). 7. J. L. Hargraves, R. D. Hays, P. D. Cleary, “Psychometric Properties of the Consumer Assessment of Health Plans Study (CAHPS®) 2.0 Adult Core Survey,” Health Serv Res. 38, no. 6, Part 1 (2003): 1509-1528. 8. Julie Weed, “Factory Efficiency Comes to the Hospital,” New York Times, July 10, 2010, http://www.nytimes.com/2010/07/11/ business/11seattle.html?pagewanted=all (accessed January 13, 2014). 9. S. D. Pearson, D. Goulart-Fisher, T. H. Lee, “Critical Pathways as a Strategy for Improving Care: Problems and Potential,” Annals of Internal Medicine 123, no. 12 (December 1995): 941-948. 10. R. Hillestad, J. Bigelow, A. Bower, et al., “Can Electronic Medical Record Systems Transform Health Care? Potential Health Benefits, Savings, And Costs,” Health Affairs 24, no.5 (September 2005): 1103-1117, 10.1377/hlthaff.24.5.1103 Health Aff. 11. E. Kroch, M. Duan, S. Silow-Carroll, et al., “Hospital Performance Improvement: Trends on Quality and Efficiency: A Quantitative Analysis of Performance Improvement in U.S. Hospitals,” The Commonwealth Fund, April 2007. 12. J. B. Christianson, K. M. Volmar, Alexander J. Scanlon, DP, “A Report Card on Provider Report Cards: Current Status of the Health Care Transparency Movement,” J Gen Intern Med. 25, no.11 (2010): 1235-1241. 13. M. V. Pauly, D. J. Brailer, E. A. Kroch, “The Corporate Hospital Rating Project: Measuring Hospital Outcomes From a Buyer’s Perspective,” Am J Med Qual 11, no. 3 (1996): 112-122.

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CHAMPIONING TOTAL COST REDUCTION IN HEALTH SYSTEMS

Wes Champion

Senior vice president / Premier Performance Partners

In his role with Premier, Wes Champion has responsibility for all of Premierâ&#x20AC;&#x2122;s improvement services to our members, including collaboratives, embedded partners, one-to-one advisory services, and our research and thought leadership. Champion has approximately 22 years of experience in healthcare, primarily concentrating his efforts in leading large-scale organizational change that improves the quality, service, operational and financial performance of Premier members. With his financial and operational background, Champion also focuses on service line and strategic planning as well as financial services areas. Prior to joining Premier, Champion was a partner with Accenture and CapGemini Ernst & Young and led their business transformation services nationally. Champion has also served as chief financial officer of a primary care network, ambulatory service division, and providersponsored health plan for an integrated delivery and financing system.

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DAY 1

PATIENT A

Fig.1

07:30 AM

DAY 2

02:00 PM

10:00 PM

MEDICARE PAYMENT TO HOSPITAL

$600

DAY 1

DAY 2

DAY 3

07:30 AM

02:00 PM

12:30 AM

PATIENT B

MEDICARE PAYMENT TO HOSPITAL

$3,600

PATIENTS A AND B, admitted to the hospital with chest pain, receive the same care from the same doctors and nurses. Medicare pays $3,000 less for Patient A’s care because he was not an inpatient for two midnights.

n the fall 2013 Economic Outlook,

even initiatives are a mindset for health

would be considered inpatients, while all

we showed that 65 percent of

system leaders to look at their overall

others would be deemed outpatients and

MS-DRGs were reimbursed below

cost structure within specific confines.

reimbursed as such (see Figure 1).

cost by Medicare payments.

Costs need to be lowered across the

There is a belief that commercial

That’s a scary reality for hospitals,

board – for all patients and procedures

rates will follow Medicare’s lead, so

especially since Medicare is the largest

– but looking at cost within Medicare’s

decreases to Medicare reimbursements

payer for most of them. The concept of

parameters is a good proxy for all payers.

may signify things to come in the

“Medicare breakeven” is a rallying cry

Sequestration was extended in

commercial payer market. In addition,

for health systems that are looking to

the Budget Control Act of December

new care delivery and payment models

survive and thrive in the future.

2013, and further cuts are possible.

pioneered by CMS – such as readmission

This means that hospitals breaking

penalties, the Medicare Shared Savings

reimbursements decrease with

even under current conditions may

Program, and Bundled Payments for

sequestration, value-based purchasing

have difficulty doing so later on. The

Care Improvement (BCPI) – create

payment cuts, readmission penalties

two-midnight rule proposed by CMS

upside and downside risks for health

and behavior modification adjustments.

could also have an impact on hospital

systems. In the future, these types of

Health systems must maintain or

margins by cutting reimbursement for

payment models are likely to move

improve the quality of care they provide

inpatients who are discharged before

beyond Medicare.

while working within significantly

two midnights have passed. Patients

constrained budgets. Medicare break-

staying longer than two midnights

We’re seeing Medicare

In today’s market, total costreduction programs are all about

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“

Hospitals and health systems have been working diligently over the past several years to identify the low-hanging fruit of cost reduction.

Projects aimed at reducing total costs must pinpoint where variation is unnecessary, adds costs, or reduces quality.

”

decreasing unjustified variability.

Examples of variation throughout the

Hospitals and health systems have been

care delivery environment include:

working diligently over the past several

•C ontract pricing differences for

overuse/misuse of blood products and lab or imaging testing); • P urchasing practices (e.g., differing

years to identify the low-hanging fruit

clinically equivalent products (e.g.,

contracts and terms or conditions for

of cost reduction. Variability exists in

physician preference items);

purchased services);

many different places within health

•C linical care delivery (e.g., protocols

systems. Projects aimed at reducing

for placement of patients in the most

total costs must pinpoint where

appropriate level of care within the

variation is unnecessary, adds cost, or

hospital setting);

reduces quality.

•R esource consumption or use (e.g.,

• Staffing (e.g., each employee performs at the highest level of training); and • Pharmacy medication management (e.g., a standard formulary across a health system). OUTLOOK

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Fig.2

Areas of focus for Medicare break-even efforts

Resource utilization, supplies

Staffing/labor efficiency, nursing

Length of stay Source: Premier online survey for Economic Outlook spring 2014 publication

Resource utilization, purchased services

Level of care

Staffing/labor efficiency, physicians

Staffing/labor efficiency, outsourcing 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Premier is working with our members

identify root causes of variation and the

the variations noted earlier. The

to provide the tools and help implement

largest savings opportunities – and it’s

ability to change and sustain improved

changes that remove waste and reduce

not something health systems have been

processes makes total cost reductions

variations, wherever they exist.

able to do for long.

achievable. PremierConnect™

According to respondents to our

Enterprise, an analytics solution

Why now?

Economic Outlook survey of health

designed in collaboration with Premier

The changing financial landscape

system executives, 38 percent are

members, enables hospitals and health

in the U.S. healthcare system is one

currently engaged in a formal Medicare

systems to easily access, integrate

reason for the current emphasis on total

break-even effort to reduce costs within

and interpret information. It also

cost reduction. In addition, we have

their organizations. An additional 21

allows providers to focus on using

better products and technology than

percent expect to begin an engagement

that knowledge to improve patient

in the past, which allow us to look at

in the near future.

care, instead of struggling to manage

clinical, financial, operational, quality,

Integrated datasets, which are

technology and infrastructure. In terms

supply chain and other types of data

becoming more necessary than ever,

of total cost reduction programs, it gives

in an integrated fashion. This helps us

make it possible to identify and quantify

health systems the data they need and

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allows them to create the standards and

have multidisciplinary committees to

protocols necessary to reduce costs now

protocols for new processes.

support their cost-reduction projects,

in a way that will keep costs low in the

and the people involved range from

future. Most of the low-hanging fruit has

variability reductions is the

supply chain executives to strategy,

already been removed through smaller-

development of clinician-driven care

clinical, nursing, financial, technology

scale resource utilization efforts, so now

pathways or care bundles, which can

and quality officers.

it’s about creating a culture within the

Another necessity for sustaining

be “hardwired” into electronic medical

health system that supports ongoing

records (EMRs). Many health systems

Continuous process improvement

have made significant investments in

According to respondents to our

EMRs over the past five to 10 years,

semiannual Economic Outlook survey,

integrated innovations and strategy at

so creating protocols within that

those who are currently engaged in

Summa Health System (Akron, OH),

technology is a way to realize some of

Medicare break-even initiatives are

says, “Every opportunity you find leads

the return on those investments while

tackling several areas of unnecessary

you to the next opportunity.”

maintaining cost efficiencies.

cost at once, with more than two-thirds

For example, a Premier team helped

process improvement efforts. As Benjamin Sutton, vice president,

Health systems now have access to the

focused on resource utilization in

tools they need to bend the cost curve in

Catholic Health Partners (CHP) develop

supplies, staffing and labor efficiency,

a sustainable, hardwired fashion. This

protocols that set standards for the level

and length of stay (see Figure 2).

is where the rubber meets the road on

of care a patient with specific clinical

Maintaining wins in reducing

EMR and new payment and delivery

indicators should receive. These include

variation means continuous process

models. Most importantly, it’s where

prompts for providers if a patient is ready

improvement. Health systems are

all these things come together to drive

for a step down or transition to a different

working to create the standards and

high-value healthcare.

level of care. As CHP continues to roll out its EMR system across the organization, order sets are revised to reflect current evidence-based standards. This was particularly evident in CHP’s blood conservation initiative, where the inclusion of evidence-based standards

There are a few areas that routinely demonstrate the largest improvement opportunities for most health systems.

and alerts allowed the system to meet and maintain established targets. Unlike previous attempts to drive out healthcare costs, this effort has been

LEVEL OF CARE AND LENGTH OF STAY Variation in step-down or discharge procedures for like-patients result in overuse of critical/intermediate care or longer length of stay compared to benchmarks.

met with greater collaboration and involvement from diverse areas of the hospital. Cost-reduction programs were traditionally driven by administrators. Now almost all of our current projects with Premier members involve a chief clinician who is in a leadership or co-leadership position. In fact, all

RESOURCE USE (INCLUDING PHARMACY) Lack of standard products and procedures compares unfavorably to benchmark levels for high-quality outcomes.

PURCHASED SERVICES Since contracts for purchased services are often negotiated locally, the terms, conditions and rates can vary tremendously and can be difficult to manage.

PHYSICIAN PREFERENCE ITEMS Provider preference for high-cost implants or devices leads to higher spend, despite opportunity for use of clinically equivalent products that are less expensive.

of our participating health systems OUTLOOK

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Susan Dowling-Quarles Vice president, engagement and delivery / Premier Performance Partners

Ms. Dowling-Quarles is a vice president in the Premier Performance Partners consulting practice based in Charlotte, NC and Little Rock, AR. Prior to joining Premier, Ms. Dowling-Quarles held numerous management positions in the healthcare industry including interim management at the CNE level. Her experience spans operational assessments, focused reviews and portfolio development, preparation for regulatory compliance review, and patient care process redesign projects. She has extensive experience in hospital operations. Ms. Dowling-Quarles received her BS in Nursing from Mount Saint Mary College in Newburgh, NY and her master’s degree

MANAGING COST OF CARE WITH IMPROVED USE OF INPATIENT BEDS

ccording to a Moody’s Investors Service report, Medicare’s 0.7 percent inpatient prospective payment system rate increase for 2014 is less than the expected rise in hospital operating costs and is a credit negative for non-profit hospitals.1 A recent analysis conducted by

in Healthcare Management from Central

Premier researchers using 2012 hospital cost reports found the average Medicare

Michigan University.

margin was -8.7 percent, with 68 percent of hospitals nationwide losing money serving Medicare patients. 2

Using evidence-based data to control costs Patients and health systems alike benefit by the use of evidence-based criteria to manage level of care (LOC) and length of stay (LOS). Care plans based on this type of approach keep patients at the center of the care delivery model while simultaneously supporting clinicians as they design a comprehensive, cost-effective plan that delivers quality outcomes. Building an appropriate care plan requires engaged physician champions from all medical staff specialties, as well as development of evidence-based guidelines for admission and discharge from critical care and step-down units.

Catholic Health Partners (CHP), a multi-hospital system based in Cincinnati, asked Premier to help evaluate its resource use related to critical care and intermediate beds, which impacts overall length of stay.

CHP identified a $10-million opportunity and achieved $5 million in savings in the initiative’s first year.

Fig.1

Average costs for varying levels of care

Average daily cost of

$600

$800-$1,200

Average daily cost of

MEDICAL/SURGICAL UNITS Approximately five to six patients per nurse

INTERMEDIATE CARE Approximately four patients per nurse

CRITICAL CARE UNITS Typically have one nurse for every two patients

$1,600

Source: “Reducing ICU length of stay,” Premier, Inc.’s Fall 2013 Economic Outlook

Average daily cost of

Effective care plans also need consistent

Results-driven partnerships

criteria for all levels of care (intensive,

processes for:

Member hospitals have partnered

intermediate or general medical/

• Initial bed placement,

with Premier to highlight areas of

surgical) are applied. An expected

• Patient transfer throughout the care

opportunity and create specific targets

LOS based on the admitting diagnosis

to achieve enhanced performance.

serves as a framework for managing

•D ischarge procedures, and

continuum,

Premier’s QualityAdvisor™ database

the episode of care. Tests, procedures

• Review of outlier cases to identify and

provides comparative information to

and daily review are coordinated by

address areas for improvement.

help hospitals establish targets for

a multidisciplinary team to facilitate

Costs vary between different levels

both level of care and length of stay.

effective care transitions. The team

of care due to the staffing and other

The standard comparison includes

engages physicians, nurses, care

resources necessary to manage patients

Premier’s top-performing hospitals and

managers, social workers and others for

at that care level (see Figure 1). Care

takes into consideration overall cost,

an integrated approach that optimizes

plans assure that patients receive the

LOC, LOS, readmissions, complications

treatment plans, outcomes and resources.

appropriate care throughout their

and mortality.

inpatient stay, have smooth discharge procedures, while also decreasing costs.

Once the need for inpatient services has been determined, admission

The inclusion of pharmacy and ancillary therapies – such as respiratory, physical, occupational and speech – has OUTLOOK

QTR 2.14

FEATURES

T F

Fig.2

Example of critical care usage monitoring

PERFORMANCE

CHANGE

Utilization performance

Change in utilization

ICU: baseline utilization rate

ICU: current utilization rate

STEP-DOWN: baseline utilization rate

STEP-DOWN: current utilization rate

TELEMETRY: baseline utilization rate

TELEMETRY: current utilization rate

MED/SURG: baseline utilization rate

MED/SURG: current utilization rate

ICU utilization

CIC/CCU utilization

STEP-DOWN utilization

17.12%

4.76%

10.62%

19.05%

0.00%

88.36%

90.48%

Positive

No Change

Negative

Cardiovascular

2.16%

0.00%

95.68%

94.44%

0.00%

7.55%

0.00%

Positive

Negative

Positive

General surgery

61.67%

25.00%

73.33%

50.00%

0.00%

101.67%

50.00%

Positive

Negative

Positive

Internal medicine

30.00%

33.33%

35.00%

33.33%

0.00%

80.00%

66.67%

Negative

No Change

Positive

Internal medicine

Note: Numbers in figure are not attributed to a specific health system or hospital; numbers were created for the purpose of an example.

helped facilities identify opportunities

•C ommunication to key stakeholders,

require additional attention (see Figure 2).

to move from IV treatment to oral

including physicians, consultants,

QualityAdvisor also supports

medications, implement and manage

patients and their families.

physician-led reviews of clinical

weaning protocols, and evaluate patient

Some organizations have gone a step

outcomes for specific DRGs. Any patient

mobility. The early identification

further and implemented a shorter,

with a LOS of more than five days is

of potential barriers to a patient’s

early evening update to encourage

reviewed weekly to compare clinical

progression through the various levels

communication and participation with

outcome measures and total cost. Action

of care positively affects length of stay

late-rounding physicians.

plans are developed with assigned

and the rate of complications. QualityAdvisor helps hospitals

Premier consultants conduct detailed

responsibilities for follow-up activities

LOS analyses using QualityAdvisor

(e.g., family intervention, enrollment in

monitor quality metrics, LOC and LOS.

comparative data. They also provide

government programs and placement

Daily reviews have a designated leader

on-site leadership support and

options). Case managers and social

(such as a physician, nurse or case

implementation assistance that includes:

workers play a key role in this process.

manager) who facilitates discussion and

•E valuation of case management,

The physician leader, chief medical

planning. These sessions, whether held

•U nit-based nursing gatherings,

officer or service line chief initiates

at the patient’s bedside or in a central

•R esource reviews, and

communication with physicians who

location, focus on what needs to occur to

•O ther strategies to reduce LOS and

have consistent outliers to understand

update the existing plan of care. Common elements of daily reviews

related costs.

issues and provide appropriate support,

Physician involvement is engaged

education or counseling.

include:

through individual performance

• Patient diagnosis;

reports that provide LOS opportunities,

strategies is an integral component of

• Expected and current length of stay

quality outcomes and improvement

managing the total cost of care, since it

(compared to benchmarks based on

recommendations. Administrators

focuses on meeting patient needs while

similar patient diagnosis and comorbid

and physicians work together to

monitoring clinical and quality outcomes.

conditions);

create action plans that drive future

REFERENCES

• Goals for the day and/or stay; • Barriers to transition to the next level of care; • Assignments for follow-up actions; and

performance enhancements. Regular reporting and ongoing communications alert physicians to areas that have shown improvement and those that

The coordination of LOC/LOS

1. Moody’s: Low Medicare Rate Increase Bad News for Nonprofit Hospitals, August 2013. http://www.beckershospitalreview.com/racs-/-icd-9-/-icd-10/moody-s-low-medicarerate-increase-bad-news-for-nonprofit-hospitals.html. 2. Premier, Inc., “Medicare breakeven: The imbalance of cost and reimbursement,” from Fall 2013 Economic Outlook.

Todd Koca President and CEO / SYMMEDRx Healthcare Solutions

Koca is the founder, president and CEO of SYMMEDRx Healthcare Solutions, a data analytics firm focused on helping hospitals manage the contract cycle and prices for physician preference items. He has 20 years of physician preference item contracting experience, as well as 11 years in sales,

n the quest to provide high-quality, cost-conscious care, physician preference items (PPIs) can easily derail hospital supply budgets. PPIs are typically highcost medical devices, products such as hip and knee implants, pacemakers, defibrillators, coronary and peripheral angioplasty balloons, stents, and

anterior cervical fusion plates and screws. They are so named because, currently and historically, physicians have chosen

the medical devices they want to use for their patients. Hospitals negotiate with

operations and contracting leadership roles

manufacturers, either on their own or through a group purchasing organization

with Boston Scientific.

(GPO), to purchase the devices that physicians, many of whom are independent contractors, have ordered. Negotiations often include confidentiality provisions

FEATURES

T F

Fig.1

Willingness to try non-branded physician preference items

2.7% 0.3%

If clinical outcomes were equal, 67 percent of provider respondents would be 19.3%

willing to try a non-branded PPI. Only 3 percent of clinicians reported that they would be unlikely to try an alternative.

29.7%

48.1%

Definitely would

Probably would

Probably would not

Definitely would not

Might or might not

Source: Premier online survey for Economic Outlook fall 2013 publication

that prevent hospitals from disclosing

incremental pricing increases. In

to what others are paying. Every year,

the price they paid for these products,

addition, there may be limited evidence

price increases of 5-15 percent are

which obstructs transparency in the

as to whether the new products actually

passed on to hospitals by more than 700

marketplace.

offer clinical improvements.

PPI vendors, representing more than

One study found that PPI acquisition

In the fall 2013 Economic Outlook

800,000 PPI stock keeping units.

costs can account for more than

survey of member healthcare

60 percent of total hospital supply

executives, 19 percent of physicians

variation in regional spending in

expenditures. While roughly 80

said they would “definitely” try a non-

vascular care, largely due to device

percent of the supplies purchased by

branded physician preference item

selection. 3 Higher costs were not

most organizations are commodity

if it demonstrated the same or better

associated with better outcomes.

items, 80 percent of the cost is

clinical outcomes. Another 48 percent

Regional, hospital and physician

attributable to PPIs.

“probably” would (see Figure 1).

differences can make PPI contracting

A recent study showed significant

Furthermore, preferences for

While this tendency seems to have

certain devices can develop early

shifted over the past several years, with

and vendor selections and physician-

in a physician’s career and can be

more providers willing to try other

hospital/physician-vendor relationships

influenced by relationships with

products, it still exposes an obstacle to

create a dynamic that is quite different

medical device manufacturers. Lack

controlling costs. Physicians’ variation

from typical medical-surgical supply

of price transparency, coupled with

in preferences leads to less negotiating

purchasing. Since PPI accounts for a

close relationships among physicians

leverage for hospitals that may have

significant portion of a hospital’s supply

and their preferred device sales

doctors using several different medical

spend, it creates a tremendous challenge

representatives, can make it difficult to

devices for the same procedure.

and opportunity for cost savings.

reduce PPI costs.

With the above-mentioned lack of

New technology, purportedly

difficult. The abundance of product

Given that contracting for physician

marketplace transparency, hospitals

preference items is inherently local,

representing significant advances, is

have an even harder time determining

successful management of the PPI

released frequently and usually with

if the price they are quoted is similar

contracting cycle requires accurate

FEATURES

T E

information, a credible contracting plan,

to ensure pricing compliance, monitor

providers are challenged to reduce

proven implementation processes and

implant-selection appropriateness and

costs without compromising quality.

the ability to audit performance.

help maintain savings.

PPIs have been a recognized cost driver

2. A preparedness assessment

for many years; in our semiannual

Creating a solution

Another critical piece of the PPI

executive survey, 27 percent of

Premier, through its business

contracting process is assessing a

respondents said that reducing PPI

partnership with SYMMEDRx

health system’s relationships with its

costs is one of their top two areas of

Healthcare Solutions, recently

physicians. These vary widely and can

resource dedication for supply chain

augmented its national portfolio

significantly influence how a hospital

improvement in the next 12 months.

with a localized PPI contracting

should engage with PPI vendors for

strategy. Unlike traditional, line-

maximum savings.

item benchmarking, SYMMEDRx

Physician-health system dynamics that

PPI benchmarking data and analytics can augment a hospital’s value analysis process and enable administrators

Empower™ cross-references all

can influence PPI purchasing include:

to better negotiate pricing. Without

functionally equivalent (substitutable)

•E mployed versus non-employed

changing physician behavior, this data

PPI codes across vendors within a health system. It also cross-references against an external database. This allows a hospital to compare pricing and usage for all vendors that sell clinically

physicians, •T he use of physician-engagement incentives, •C ompetition from the local hospital market, and

has helped health systems reduce PPI costs by an average of 16 percent. Contracting is a first step in reducing supply expense, especially in PPI. Members of the Premier alliance have

equivalent products. This type of

•C -suite support.

frequently discussed the value of having

benchmarking data uncovers significant

3. Physician and vendor engagement

physician engagement and leadership

price disparities for like items – on

Approaching physicians with actual

in supply chain decision-making. Once

average, a 14.1 percent price disparity.

benchmarks is vital to a successful PPI

physicians are given benchmarks to

Components of effective PPI value

strategy. Physicians must support the

demonstrate their PPI spend compared

analysis include:

proposed contracting strategy, and

to others with similar clinical outcomes,

1. Data analytics

the use of data to show their spend

they are typically willing to change their

The availability of credible, quality,

compared to other physicians doing the

preferences or even become involved in

comparative data is mandatory

same procedures is a prime means of

negotiations with suppliers. It all comes

for the success of any PPI-related

gaining this support. Effective vendor

down to data.

initiative, whether it be developing

engagement is equally important and

new contracts, eliminating unjustified

is driven by contracting options and

clinical variation or other improvement

pricing structures.

projects. Designed by physicians and

4. Monthly contract auditing

clinicians, Empower is an analytics

Traditionally, healthcare providers

engine that assesses historically paid

have had significant challenges in

prices for a database composed of 70

monitoring PPI contract pricing and

million PPI price points. This allows

usage compliance beyond simple

hundreds of thousands of lines of

purchase order or invoice tracking.

data to be categorized, compared and

With automated, cross-referenced data,

benchmarked within hours.

contract auditing can be done monthly

Using these analytics, Premier can perform monthly audits for members

to determine new areas of focus. More than ever before, healthcare

REFERENCES 1. E.S. Schneller, and L. Smeltzer, Strategic Management of the Health Care Supply Chain (San Francisco: Jossey-Bass, 2006). 2. Premier, Inc., “Physician Preference: Balancing Cost and Quality,” from Fall 2011 Economic Outlook. 3. Philip P. Goodney, et al., “Relationship Between Regional Spending on Vascular Care and Amputation Rate,” JAMA Surg. 149, no.1 (2014): 34-42, doi:10.1001/jamasurg.2013.4277.

OUTLOOK

QTR 2.14

FEATURES

T E

any health systems

at the cost to care for the population

preference items (PPIs). “Commodities

are looking for new

and ask ourselves ‘if we meet these

end up being a good test for future

and creative ways to

quality standards, how can we drive

program additions, like PPIs,” he

lower supply costs,

down cost?’ We took that same approach

explained. “With Covidien, we can

when looking at supplier partners.”

expand this to PPIs in the future and

especially with increased financial pressures resulting from sequestration,

Fairview found its first partner in

build off the relationship we have.”

reimbursement cuts and healthcare

Covidien, a company more committed

reform. Since supplies are the second

to helping Fairview’s providers select

benchmarking data also influenced

largest health system expense (after

the right products instead of aiming

Fairview to start with commodities.

labor), it is a prime area for focus.

to sell the most. “One of the most

“We had a lot of the necessary

When Fairview Health Services

Born said the availability of

interesting things about the shared-

information, from our own databases

(Minneapolis, MN) began dealing

savings model is that Covidien’s sales

and from Premier, to determine

with new care delivery and payment

representatives are now utilization

what products are used, how, in what

models, the system’s supply chain

managers,” noted John Carrico,

quantity, and for which procedures.

leaders searched for partners willing to

Fairview’s senior director, supply chain

Then we were able to match that data

go at-risk with them to reduce costs.

operations. “They will be paid based on

with the data the supplier has about us.”

“As the Affordable Care Act gained momentum several years ago, it made

appropriate utilization of products, not on the amount of product they sell.”

us think differently about what kind

Metrics play a major role in the project. Using resource utilization data, Fairview looked at line-byline product use against drivers of

new environment,” said LeAnn Born,

Sharing savings on commodity items

Fairview’s vice president of supply

To pilot the program, Fairview focused

acute discharges, patient days and

chain. “In turn, I began reaching out

on Covidien products already on its

related items – to identify providers,

to suppliers to identify those who were

Premier contracts. That helped supply

nursing departments and services

really ready to try something new.

chain managers from a contract

with the highest use. Pinpointing

“Fairview’s been engaged with

perspective and also limited the

areas of unnecessary variation helped

scope of the program to 220 SKUs.

Fairview determine standards and

of health system we would be in this

Medicare and various payer partners on shared savings and at-risk care delivery

According to Carrico, commodity

models, such as our Pioneer ACO

items are a good starting point, since

(accountable care organization). We look

they are easier to change than physician

activity – surgery volume, adjusted

create best practices for its caregivers.

OUTLOOK

QTR 2.14

FEATURES

T F

“We fail or succeed together, and having that mentality is a huge step in selecting the right partners.”

Keys to success

to drive down costs and improve

with other healthcare stakeholders

Engagement is a vital part of Fairview’s

outcomes and patient experience.”

that are also willing to change how

program, and quite likely, will drive

In addition, Fairview has involved

they’ve done things traditionally.

its ultimate outcome. An initiative

senior leaders, as members of an

that began with collaboration on a

executive steering committee, in both

having that mentality is a huge step

new opportunity continues with the

the commodities program and other

in selecting the right partners.”

increased involvement of physicians

supply chain cost-reduction projects.

and utilization managers.

This has helped to establish the right

Long-term vision

culture for change, both in the supply

Fairview’s commodities program

chain and throughout the organization.

with Covidien is projected to produce

Carrico pointed out that Fairview has clinically integrated project managers embedded in the supply chain who

As Born said, “These changes can’t

“We fail or succeed together, and

$100,000-$200,000 annually in

can educate others about unnecessary

happen quietly, so we’re trying to

hard savings. The supply chain team

variations. “With Covidien’s

bring more visibility to leaders across

expects additional soft savings from

representatives who will now serve

the organization. Engagement across

changing the way providers think

as utilization managers and our great

broad groups helps gain support for

about product utilization while

clinicians, who are very aware of their

our projects and creates a culture

increasing patient and nursing

role in managing product expense, we’ve

that is focused on this type of work.

satisfaction through best practice

really tried to create the right culture

Leadership awareness can lead to

utilization of Covidien products.

to support our cost-reduction efforts.”

success elsewhere in the health system.”

The development of the commodities

Connecting across the continuum

In the long term, Fairview expects to expand its commodities program

program has also spurred discussions

of care and with external partners is

and develop similar risk-sharing

about future opportunities for shared-

critical if projects are to change the way

initiatives with other suppliers

savings programs. “The first step is

things have always been done. “Our

and external partners. The health

to establish a routine for managing

health system needs to be willing to

system is betting that its efforts

use of these products, which means

do things differently to reduce overall

will result in innovative and much

establishing a good relationship with

costs,” said Carrico, “and that’s a

needed supply chain cost savings.

the utilization managers and our

two-way street. It’s important for us

clinicians,” added Carrico. “That

to be engaged with our own providers

gives us a broader understanding

in order for them to be engaged with

of how we’re all working together

us. And it’s important for us to engage

PERSPECTIVES Standards that stick, 24

PERSPECTIVES

Over the past three years, Medicare reimbursement cuts have been the healthcare trend with the greatest impact on health systems, according to results from Premierâ&#x20AC;&#x2122;s spring 2014 Economic Outlook survey of healthcare executives (n=522). Nearly two-thirds (64 percent) of respondents to the semiannual survey cited reimbursement cuts as one of the top two trends impacting their organizations in the next 12 months, down from 76 percent in spring 2012 and the peak at 79 percent in spring 2013 (see Figure 1). The decline is likely a result of greater clarity around actual (rather than proposed) reimbursement cuts and efforts by health systems to reduce costs to meet these lower payment rates.

Fig.1

Healthcare trends with greatest impact on organization in the next 12 months

Spring 2012 Reimbursement cuts

Fall 2012 Spring 2013 Fall 2013

New care delivery models, such as accountable care organizations

Spring 2014

Uncompensated care

Health information technology requirements (meaningful use and EMR) Consolidation among health systems

Source: Premier online survey for Economic Outlook spring 2014 publication

Employer health benefits/ insurance exchanges

Focus on utilization of products and services

Advanced data analytics (excluding EMR)

Comparative effectiveness research

20%

40%

60%

80%

100%

Note: Responses that appear blank were not response options during the applicable survey fielding period.

OUTLOOK

QTR 2.14

PERSPECTIVES

T F

New care delivery models, such as accountable care organizations (ACOs), remain the second largest trend affecting

(IDNs) are more likely to participate in

26, have preexisting conditions, have

an ACO than standalone hospitals.

purchased insurance through the mar-

The American Hospital Association

ketplace exchanges, or qualify for new

survey respondentsâ&#x20AC;&#x2122; health systems.

reported that hospitals provided approx-

expanded public coverage has resulted

Reports estimate that more than 500

imately $41 billion in uncompensated

in fewer no-pay patients. As a potential

ACOs exist nationwide, with ACO

care in 2011, but that number should

result, there was a 46 percent decrease in

participation almost quadrupling since

decline as new healthcare reforms

respondents who chose uncompensated

spring 2012. Non-rural hospitals and

are implemented. Extended coverage

care as a top trend from spring 2012 to

hospitals in integrated delivery networks

through the ACA to those who are under

spring 2014.

Fig.2

Healthcare trends with greatest impact on organization in the next 12 months, by geographic region

Northeast/Mid-Atlantic Reimbursement cuts

Southeast Midwest West

New care delivery models, such as accountable care organizations

Uncompensated care

Health information technology requirements (meaningful use and EMR) Consolidation among health systems

Source: Premier online survey for Economic Outlook spring 2014 publication

Employer health benefits/ insurance exchanges

Focus on utilization of products and services

Advanced data analytics (excluding EMR)

Comparative effectiveness research

10%

20%

30%

40%

50%

60%

70%

80%

PERSPECTIVES

Fig.3

Top healthcare trends impacting supply chain

FALL 2013

SPRING 2013

FALL 2012

Increased physician-health system engagement across clinical and supply chain operations

21.3%

24.8%

29.6%

38.4%

Supply chain integration to align with clinical care, revenue capture, and IT across facility/health system Focus on waste management (e.g., resource utilization, as a means to reduce supply cost)

19.7%

20.1%

10.7%

6.3%

14.5%

13.9%

21.4%

17.3%

Centralized purchasing

13.7%

15.0%

n/a

Comparative effectiveness/value analysis research

11.6%

10.3%

n/a

Use of new supply chain metrics/processes

8.1%

5.0%

n/a

Population health management and care coordination across the continuum

6.9%

5.6%

7.8%

4.8%

Location and product identification standardization (e.g., GLN, and GTIN)

4.3%

5.3%

1.5%

2.7%

Slightly more than one-third of

Source: Premier online survey for Economic Outlook spring 2014 publication

SPRING 2014

broader industry trends impacting health

cite supply chain integration as a top

non-acute facilities (34 percent) said

systems. The percentage of respondents

trend, compared to non-acute facilities.

employer health benefits and insurance

reporting increased physician-health

Centralized purchasing, a trend

exchanges will have the largest impact

system engagement as the top supply

that gained momentum in the past

on their organizations over the next 12

chain trend fell from fall 2012 (38

year, is the top trend impacting non-

months (second only to reimbursement

percent) to spring 2014 (21 percent).

acute supply chains over the next 12

cuts), compared to only 15 percent of

However, it remains the trend with the

months. Nearly half (47 percent) of all

acute-care facilities.

largest impact (see Figure 3). Acute-care

respondents said that they have fully

facilities were more than twice as likely

implemented a centralized purchasing

slightly by geographic region. While

as non-acute facilities to cite physician-

channel across all acute and alternate

reimbursement cuts are the top trend for

health system engagement as the top

sites. Another 39 percent have the

all, more survey respondents in the

trend impacting their supply chains.

capability to centralize purchasing, but

Trends impacting health systems differ

Southeast (72 percent) suggest that

Physician engagement has been useful

have yet to complete implementation.

reimbursement cuts have the biggest

in helping supply chain leaders lower

Centralized purchasing can streamline

effect on their organizations (see Figure

costs in historically challenging areas

and standardize purchasing across

2), compared to the Northeast and

such as physician preference items (PPIs).

facilities, which drives better pricing

Mid-Atlantic (60 percent), Midwest (65

Getting physicians involved in supply

and enables tracking of supply usage

percent), and West (56 percent). While

chain decisions can be advantageous

throughout an organization.

consolidation among health systems is the

to reducing costs while maintaining or

second most cited trend for the Northeast,

improving quality outcomes.

it is the fifth-ranked trend in the Southeast and sixth in the Midwest.

Integration with clinical care, revenue

Health systemsâ&#x20AC;&#x2122; cost-savings goals will remain a major influence over supply chain decisions in the next 12 months,

capture, and IT across health systems

as one-third of respondents named

is the supply chain trend most affecting

it the existing area of focus with the

Tackling cost with supply chain strategies

20 percent of respondents, up from 6

greatest influence on their supply chains.

percent in fall 2012. Acute-care facilities

Reductions in overuse or unnecessary

Trends with the biggest influence on

were more than three times as likely

variation in care will receive the most

supply chains are more varied than

â&#x20AC;&#x201C; 22 percent compared to 7 percent â&#x20AC;&#x201C; to

focus for 18 percent of respondents, OUTLOOK

QTR 2.14

PERSPECTIVES

T F

while another 14 percent selected supply

30 percent of them. Building relationships

in dedicating resources to comparative

chain integration as their top focus (see

with physicians and clinicians is a top focus

effectiveness or value analysis.

Figure 4).

area for another 28 percent (see Figure 5).

Nearly half (47 percent) of all survey

Several areas of resource dedication

Resource dedication to reduce costs in commodity items appears to

respondents cite product standardization

remained fairly static since fall 2012.

be a growing trend, increasing from

as one of the top two areas of resource

The largest changes include a stronger

12 percent of respondents in fall 2012

dedication within their supply chains

focus on product standardization, an

to 21 percent this spring. Fairview

over the next 12 months. EHR-specific IT

increase in emphasis on reducing costs

Health Services (Minneapolis, MN), in

investments are the prime focus for

for commodity items, and a decrease

partnership with Covidien, is targeting

Fig.4

Existing area of focus with the greatest impact on supply chain, next 12 months

Fall 2012 Cost-savings goals of the health system

Spring 2013 Fall 2013 Spring 2014

Reductions in overutilization/ variation in care

Integrating the supply chain across the continuum of care

Implementing healthcare information technology

Drug shortages Source: Premier online survey for Economic Outlook spring 2014 publication

Medical device prices

Comparative effectiveness/ value analysis research

Commodity prices

10%

15%

20%

Note: Responses that appear blank were not response options during the applicable survey fielding period.

25%

30%

35%

40%

PERSPECTIVES

commodity items in a major effort to

outcomes, and reduce supply expense.

drive proper supply utilization. Fairview has moved beyond the

“One of the biggest accomplishments

It’s become foundational to what we’re doing in supply chain,” noted LeAnn

toward being clinically integrated

Born, vice president, supply chain,

traditional materials management and

has been establishing our business

Fairview Health Services.

value analysis process to evolve into a

intelligence team. Utilizing clinical

clinically integrated supply chain. Its

and supply chain tools – like Premier’s

between products and quality outcomes

goals are to use clinical and financial

Supply Mix Index™ – provide the

now, which has helped spur us to begin

data to drive decisions, coordinate care

decision support we need to decrease

our partnership with Covidien. We

through best practices, improve patient

cost and improve quality outcomes.

have the data to look at utilization and

Fig.5

“We’re able to connect the dots

Top two areas of resource dedication for supply chain improvement

Fall 2012 Product standardization

Spring 2013 Fall 2013 Spring 2014

IT investments (EHR-specific)

Building relationships with physicians and clinicians

Reducing costs for physician preference items

Source: Premier online survey for Economic Outlook spring 2014 publication

Reducing costs for commodities

Comparative effectiveness/ value analysis research

Data standardization

IT investments (non-EHR-specific)

10%

20%

30%

40%

50%

OUTLOOK

QTR 2.14

PERSPECTIVES

T F

determine best practices that we can

be important in targeting appropriate

management and chief information

implement through our utilization

utilization with physician preference

officer of the Cincinnati-based Catholic

managers and engaged physicians.”

items later.”

Health Partners (CHP).

Hospitals that are part of an IDN

Paul Minnick, executive vice

were less likely to dedicate a high

Driving sustainable cost reductions

president and chief operating officer at

number of resources to EHR-specific

Pressures from ongoing Medicare

Beebe Healthcare (Lewes, DE) seconded

IT investments, possibly because these

reimbursement cuts, sequestration,

that notion. “As an organization with

investments have already been made.

and large long-term investments to

a very large Medicare patient mix, the

IDNs were more likely than non-IDN

implement new care delivery models

impending changes in healthcare reform

respondents to dedicate resources to

and advanced technology have left

made it imperative that we focus on a

reduce costs in PPI items (see Figure 6).

hospitals feeling a financial squeeze. As

multi-faceted approach of cost reduction

they work to reduce costs across their

and efficiency improvement.”

“Changing physician behavior around commodity items is a lot easier than

organizations, many are looking at

with physician preference items, but

Medicare population data to determine

to the prevalence of reimbursement

it can still move the needle in terms

ways they can decrease unnecessary

and patient population data from

of standardization and reducing costs

variation and standardize their supply

CMS, can be a good proxy for all

in the supply chain,” explained John

chain and clinical operations.

patients. Hospitals can use their

Carrico, senior director, supply chain operations, Fairview Health Services.

Medicare patients in particular, due

“If we can’t make money on the

clinical and supply chain information,

Medicare population – or at least break

along with Medicare reimbursement

even – we don’t have a sustainable

data, to identify areas of waste and

itself, and the learnings we get from

business model,” said Rebecca Sykes,

opportunities for standardization.

going at-risk on commodity items, will

senior vice president of resource

“Both the partnership with Covidien

Fig.6

Top two areas of resource dedication for supply chain improvement, IDN and non-IDN

IDN

Non-IDN

Product standardization (e.g., reducing the number of vendors that supply like products)

24.1%

22.7%

IT investments – EHR-specific

18.7%

24.9%

Reducing costs for physician preference items

16.7%

9.9%

Building relationships with physicians and clinicians

10.8%

12.7%

Comparative effectiveness/value analysis research

8.4%

5.5%

Data standardization (e.g., standardization of item masters and accounting systems across facilities)

8.4%

4.4%

Reducing costs for commodities

6.9%

10.5%

IT investments – non-EHR-specific

5.9%

9.4%

Source: Premier online survey for Economic Outlook spring 2014 publication

According to survey respondents, the

PERSPECTIVES E

T C

top three drivers of waste within their

over the past three years to improve

organizations are:

productivity within their health

if they currently engaged in an MBE

• Inadequate care coordination

system. “Our goal has been to get our

project, 38 percent said yes. Among

(e.g., fragmented transitions,

overall staffing at the 50th percentile

them, 32 percent managed projects

readmissions);

of productivity compared to similar

internally and 6 percent with consulting

organizations,” said Minnick.

initiatives. Of those respondents that

• Inefficient labor costs (e.g., suboptimal staffing mix, excessive overtime); and • Product selection (e.g., product

When survey respondents were asked

“We’ve also partnered with Premier to

do not have an active project, 21 percent

look at non-labor costs, which for us are

expect to begin one in the future (see

conversion and standardization

heavily focused on physician preference

Figure 7).

opportunities).

items and purchased services, length

Central to Medicare break-even

of stay and level of care. We are always

its goal of reducing weighted equivalent

(MBE) or other total cost-reduction

looking at how we can purchase and

inpatient admissions by $25 per discharge.

projects is the use of quality and

provide quality products and services to

A diverse team worked with CHP clinicians

cost data to benchmark against top

create a sustainable culture of quality

and physicians to design and help

performers, identify opportunities,

care at a low cost, and these break-even

implement processes to reduce unjustified

drive efficiencies and monitor improved

efforts have been a great way to identify

variation across CHP’s 23 hospitals.

performance. With data, larger drivers

and implement standards.”

of waste can be narrowed down to

CHP partnered with Premier to meet

The team targeted areas of clinical

Beebe Healthcare surpassed its goal

usage with high variation within CHP,

specific areas of focus that are more

to reduce $3.5 million in non-labor

including:

feasibly managed.

expenses, met its $2 million labor

• Significant decreases in blood

Using Premier’s QualityAdvisor™ app, leaders at Beebe Healthcare worked

Fig.7

expense goal, and has currently saved

transfusions that lowered costs without

$5.1 million.

compromising quality and safety;

Engagement in Medicare break-even (MBE) project

32.0%

Active internal initiative Active consulting initiative

41.4%

Looking to begin an MBE project No current or planned project 6.1% 20.5%

Source: Premier online survey for Economic Outlook spring 2014 publication

OUTLOOK

QTR 2.14

PERSPECTIVES

T F

“Overall, we’re looking for performance improvement through revenue enhancements and

expense reductions of over $1 billion over the next decade. That means driving out waste in our health system, streamlining our supply chain and clinical operations,

”

and maintaining high-quality care. • Reduction in patient days in intensive care settings such as ICU and telemetry beds; and

initiatives in 2013 alone. “We created a 10-year performance improvement plan that addresses

result in an additional $25 million in improvements this year. “The improvements we’re making

• Better understanding among

how we’re going to thrive in this new

now aren’t fixed and final,” said Sutton.

CHP physicians of how their

healthcare environment,” explained

“It’s continuous process improvement

role in choosing orthopedic and

Benjamin Sutton, vice president,

to ensure we’re making the right

cardiovascular implants can improve

integrated innovations and strategy,

choices, maximizing efficiency and

costs and outcomes.

Summa Health System. “Overall, we’re

meeting cost-savings potential. Every

CHP ultimately identified $22 million

looking for performance improvement

opportunity you find leads you to the

in clinical variation and realized $9

through revenue enhancements and

next opportunity.”

million in savings in 2013.

expense reductions of over $1 billion

Most Medicare break-even initiatives

Medicare break-even projects are

over the next decade. That means

part of a major effort to reduce total

do not have a sole area of focus. Instead,

driving out waste in our health system,

costs within health systems. Long-term

the biggest opportunities are identified

streamlining our supply chain and

survival and success as a healthcare

and the internal or consulting team

clinical operations, and maintaining

organization means identifying areas of

determines capacity to begin work. The

high-quality care.”

variation and implementing solutions

most common areas of focus align with

“We noticed the greatest initial

to be more efficient and cost-effective

Wes Champion’s article in this edition:

opportunities for improvement in

while providing high-quality clinical

79 percent of respondents with MBE

labor productivity, revenue-cycle

care. These efforts aren’t about one-

projects are focusing on resource use

management, length of stay, and supply

time savings projects. Rather, it’s about

with supplies; 74 percent on staffing and

chain. Among other things, we’re

creating standards that stick to take cost

labor efficiency in nursing; 70 percent

aiming to create a system that optimizes

out of the system over the long haul.

in length of stay; and 62 percent in

staffing skill mix, so that we can better

resource use of purchased services.

manage normal fluxes in patient

Summa Health System (Akron, OH), now aligned with HealthSpan Partners, an auxiliary organization of CHP, has

admissions while driving down overtime costs and increasing labor efficiency.” Summa has put in place a three-

also been working with a Premier team

year strategic plan that dictates

to target clinical variation through

cost-reduction targets and process

process improvements. Summa

improvement goals. Following on the

targeted just under $7 million in

heels of its initial $7-million cost-

improvements through length of stay,

reduction target, it’s now working to

level of care and resource utilization

implement an expanded plan that will

REFERENCES 1. Premier, Inc. Accountable Care Organization and Population Health Management Trends. (December 2012) https:// www.premierinc.com/wps/wcm/connect/9e3ec8e7-35cf42e3-8406-4a2d77682019/ACO-Survey-White+Paper. pdf?MOD=AJPERES. 2. Ibid. 3. Ann Carrns, “Paying Your Medical Bills Is More Complicated,” The Boston Globe, September 25, 2013, http://www. bostonglobe.com/business/2013/09/24/paying-your-medical-bills-more-complicated-than-past/MnOPKkbIcGFpvKgWWy5lxK/story.html.

TRENDS PACER surgical mesh collaborative, 34 Standardizing the use of surgical mesh , 37 Success Story: Bard Access Systems, 41

PACER surgical mesh collaborative determines clinical best practice

TRENDS

T E

remier’s Partnership

identify opportunities to change existing

member systems’ general surgeons

for Advancement of

mesh practices and, if possible, revise

served as subject matter experts and

Comparative Effectiveness

purchasing patterns to reduce costs

facilitated discussions.

Review (PACER) program

while improving or maintaining quality.

is designed to optimize healthcare

The project, which began with

The surgical mesh project reviewed

a systematic literature review of

delivery by sharing usage, outcomes and

clinical and supply chain data and shared

surgical mesh use in hernia repair, was

spend data across integrated delivery

best practices to eliminate unnecessary

eventually expanded to include breast

networks (IDNs). Multidisciplinary

variation in product use. Each IDN

reconstruction. The group also analyzed

teams discuss benchmarks and best

sent four team members with relevant

integrated data from the MySpend™

practices, while supply chain leaders

expertise; general surgery, clinical

and QualityAdvisor™ performance

collaborate to make informed, evidence-

operations, performance improvement

improvement solutions to evaluate:

based decisions on clinical and

and change management, and supply

• Market share;

physician preference items (PPIs).

chain were represented.

• Product distribution;

The PACER surgical mesh project,

After the project’s launch, biweekly

which began in August 2013, involved

meetings were held in September,

a group of 12 IDNs divided into two

October and November, during which

cohorts (ASCEND® and LIDN) that

the group shared best practices and

met concurrently and interacted

evaluated clinical outcomes and

throughout with Premier staff. The

usage data to support their decision-

ASCEND cohort consisted of Community

making process. At each meeting,

• Per-case spend; • Percent of mesh spend on biologic products; • T he unique biologic and synthetic mesh SKUs purchased; and • T he types of procedures in which mesh was used.

Regional Medical Center (Fresno, CA) Hoag Memorial (Newport Beach, CA), Marshfield Clinic (Marshfield, WI), Presbyterian Healthcare Services (Albuquerque, NM), Thomas Health Mesh

System (Charleston, WV), and the University of Tennessee Medical Center (Knoxville, TN). The LIDN cohort included Adventist Health (Roseville,

Synthetic

CA), Carolinas HealthCare System

Biologic

(Charlotte, NC), Fairview Health Services (Minneapolis, MN), Henry Ford Health System (Detroit, MI), Norton Healthcare (Louisville, KY), and Texas Health Resources (Arlington, TX). Both groups had a common objective: to accelerate implementation of

Polyester

Polypropylene

ePTFE

• Various coatings • Absorbable/Non-absorbable • Average cost ~$200 – $700

Bovine

Porcine

Human

• Absorbable • Storage and rehydration requirements • Average cost ~$3,000 – $6,000

accountable care, bundled payments, clinical integration and shared savings within their systems. Ideally, they would OUTLOOK

QTR 2.14

TRENDS

T F

Member implant logs revealed a high

Health Services. “They had such a

whole identified a savings opportunity

level of biologic mesh use in breast

meaningful conversation and created

of 10-20 percent. Projected annual

reconstructive surgery. This led to an

a great baseline understanding of the

savings for the group is $1.3 million, or

invitation for plastic surgeons from

clinical aspects that the conversation

14.6 percent of total spend.

each of the health systems to review the

then became about sourcing.”

data and contribute their own subject matter expertise.

As part of the project, Premier

Following data examination and

will monitor member conversion,

discussions, the group recommended

compliance, and savings. Ongoing

standardization of synthetic mesh

work includes conversion to the new

Outcomes and recommendations

inventory to one or two suppliers for

dual-source vendors, education for

“The surgical mesh project began

all items that could be clinically cross-

surgeons using biologic mesh in hernia

with clinical data and comparative

referenced. Ten of the 12 IDNs – with

repair, and the creation of a pricing

effectiveness research, and allowed our

total annual surgical mesh spend of

transparency program.

doctor – who performs the most hernia

$8.9 million – chose to participate in

repairs in the state of Minnesota – to

a 90 percent dual-source contract,

across the county is a great catalyst for

meet with peers across the county

with additional value available to

making things happen within our own

to compare how they use mesh, for

members standardizing on a sole

health system,” said Born. “There’s

what, and why,” said LeAnn Born,

source that met the needs outlined in

nothing but benefit to being involved.”

vice president, supply chain, Fairview

the utilization review. The group as a

SUCCESS in

CARDIAC STENTS

“Working with other health systems

PACER recently completed a pilot project examining clinical evidence and outcomes, as well as usage data, to determine best practices and unnecessary variation in cardiac stent use. Five large IDNs, which met biweekly from December 2012 to February 2013, decided on dual-source vendors for drug-eluting stents. George Hersch, vice president of materials management, Norton Healthcare, was quoted about the project in Premier’s inaugural Quality Outlook: “Dialogue and collaboration led us to see the lack of differentiation among manufacturers. This allowed us to make our decision and helped our physicians gain confidence that these products would have positive outcomes for their patients.” The group had a 99.3 percent compliance rate within the first 90 days of the agreement. Within the first seven months of implementation (May through December 2013) of the new contracts, PACER participants saved $2.2 million.

Standardizing the use of surgical mesh

ach year, surgeons worldwide use approximately 20 million mesh devices, predominantly for hernia repair. Even so, manufacturer-sponsored research has yet to identify a preferred – or ideal – mesh, be it synthetic or biologic. Recent studies focused on orthopedic devices have shown physicians are often unaware of

device costs. It’s not a stretch to presume that the same lack of awareness exists in other areas of healthcare. 1

Premier brought together a group of supply chain and clinical professionals to discuss the costs of surgical

mesh in their facilities. That discussion was part of a larger conversation about appropriate mesh usage for hernia procedures, based on exact procedure type and patient needs. Surgeons involved in the discussion agreed they prefer biologic over synthetic mesh under certain conditions, such as in: •A n infected or contaminated environment; •L arge, complex ventral hernia repair cases when a synthetic mesh is otherwise contraindicated; •H iatal/paraesophageal hernia repair (using biologic as buttress to crural closure); and • Situations where patients with multiple prior synthetic mesh infections refuse repeated use of synthetic mesh.

TRENDS

T F

Fig.1

Spread of stock keeping units (SKUs) per overall mesh spend

9.0 8.0

90% of facilities

7.0 SKUs per $10,000 spent

6.0 5.0 50% of facilities

4.0 3.0 2.0 1.0 0.0 < $75,000

$75,000 – $200,000

With these observations in mind,

$200,000 – $400,000

> $400,000

Despite the large number of existing

Source: A database maintained by Premier, Inc.

Start with the data

synthetic mesh appears to be the choice for

choices, the mesh market is still

In a directional analysis of 244 Premier

most primary hernia (non-hiatal) repair.

evolving. As one surgeon put it, “When

facilities, the range of average stock

Surgeons who were aware of the

I first started practicing, I’d go to do a

keeping units (SKUs) of mesh per

disparity in cost between synthetic and

case, and there would be a small basin

$10,000 spend was stratified based on

biologic meshes were less familiar with

of mesh, one of each kind that we held

total mesh spend (see Figure 1). Though

the price variance among synthetic

for hernia surgeries. Now I walk in, and

those facilities with greater overall

products. The average price of synthetic

there’s a large cart.”

spend appear to have fewer SKUs per

mesh ranges from $200 to $700 per

Are all the different products really

$10,000, many of the larger-spend

unit, whereas the average price of

making a difference? In some ways, yes.

facilities (>$400,000) have more than

biologic mesh is from $3,000 to $6,000

Surgeons believe they need varying

50 SKUs. That compares to between two

per unit. On average, Premier facilities

composites, weights or coatings, depending

to nine SKUs for a facility with less than

spend 56 percent of their mesh dollars

on the specific needs of the patient.

$75,000 in spend.

on biologic mesh. The price variation

However, there are times when a

On average, participants in the

is further complicated by the virtually

variety of products only results in

analysis had one biologic SKU per

unlimited number of mesh choices,

larger inventory and little or no clinical

$10,000 in mesh spend and 4.3 synthetic

including:

difference. The differences in shape

mesh SKUs per $10,000 in spend.

• Shapes and types for every type of

alone – oval versus circular – can cost

hernia repair, • Products used for laparoscopic repair versus open repair, and •S izes within each of the different types.

Facilities that want to standardize

a health system hundreds of dollars.

should investigate the amount of line

This fact underscores the importance

items held for mesh. High levels may be

of educating providers about the cost

due to multiple suppliers or variations in

implications of their selections.

physician choice.

TRENDS

T E

Fig.2

Median spend for synthetic and biologic mesh (per $100,000 in total facility mesh spend)

100% Total synthetic spend

90%

Total biologic spend

35%

80% 70%

63%

57%

48%

50%

75%

50% 40% 65%

30% 20%

37%

43%

52%

50%

$300,000 – $400,000

$400,000 – $500,000

25%

10% 0%

< $100,000

$100,000 – $200,000

$200,000 – $300,000

Source: A database maintained by Premier, Inc.

60%

> $500,000

Total facility spend

In an aggregate analysis of

determining the appropriate product for

surgical supply chain changes. It helps

participating Premier facilities in this

high-quality outcomes and considering

to have:

discussion, hernia repair procedures

the variation in supplier pricing for

• A common goal, based on the

accounted for 80 percent of overall mesh

exact matches or those that appear

used. Other areas of use included:

functionally and clinically equivalent.

• Burn programs*,

Among facilities in the analysis,

challenges indicated by the data; • A greed-upon next steps for affected supply chain managers, operational

• Wound management*, and

greater total mesh spend was

• Plastic/reconstructive surgery.

directionally related to the percentage

• Regular stakeholder communications;

staff and physicians;

Individual surgeons know what types of

of biologic mesh used (see Figure 2).

• Consensus on the types of mesh to use

mesh they use, but they may not know how

Extensive use of biologic mesh could

for specific patients or procedures; and

their choices compare with what other

be an opportunity to standardize and

surgeons in their facility are using. Cost

reduce costs.

• Protocols for assessing new mesh products as they become available.

differences among items include potential product preparation requirements that

Education and collaboration

impact overall productivity. For example,

Changing products, especially in

biologic storage and preparation may

surgery, requires buy-in from practicing

affect soft costs.

physicians. That can be accomplished

*Mesh for burn or wound management tends to be thinner than the kind used for hernia repair. However, the thickness of mesh can be hard to differentiate within first-level data.

Purchasers may reduce expenses

by providing current data that shows

by ordering a larger sheet of mesh and

usage in comparison both with other

cutting it in half for bilateral repairs.

facilities and among physicians within

REFERENCE

Some preferred mesh shapes may

the same location. Many health systems

come at a premium. Reduce costs by

use physician champions to encourage

1. Kanu Okike, et al., “Survey Finds Few Orthopedic Surgeons Know The Costs Of The Devices They Implant,” Health Affairs 33, no.1, doi: 10.1377/hlthaff.2013.0453.

OUTLOOK

QTR 2.14

>> MEMBER SNAPSHOT Clovis Community Medical Center (Clovis, CA)

INITIATIVE IDEA

ENGAGE

Consolidate mesh and decrease inventory “Our initiative was a grassroots effort from operating

choices we stocked. Physicians voted directly on the

room nursing leadership,” said Regina Wells,

storyboard regarding the products they wanted to

RN, clinical supervisor, surgical services, Clovis

continue using. I then spoke with the doctors who

Community Medical Center. “We proposed a review

chose mesh that no one else selected. I asked them to

of currently used mesh products to key users to

switch, and most were willing.”

consolidate and streamline our inventory. We made this announcement at our surgical supervisory

and surgeons in general were absolutely critical to

committee with our chair of surgery present.

the success of this outreach,” noted Siew-Ming Lee,

“I created storyboards that featured a photo of each

MD. “In addition, the knowledge that their peers were

physical mesh, the packaging, usage numbers and the

mostly using a particular mesh product did influence

price,” Wells continued. “They were grouped into like-

a surgeon’s decision to at least try, if not change, the

mesh products from the various companies but used

mesh he or she was using. This was particularly true

for the same type of hernia repair. The storyboards

for biologic mesh.”

demonstrated to our physicians the vast number of

“I think the face-to-face discussions with outliers

SUCCESS STORY

Magnet tracking and ECG PICC placement technology helps eliminate radiation exposure and cost associated with confirmatory chest X-ray

n 2013, Adventist Health System (AHS) set out to show that standardization and cost savings across its organization do not have

to compromise the quality of patient care. Through a partnership with Bard Access Systems (BAS), AHS introduced a new technology into its organization that enables the immediate release of peripherally inserted central catheter (PICC) lines for use, thereby improving patient care and reducing cost. AHS is a 45-hospital organization, including its 996-bed flagship Florida Hospital. In an effort to reduce its supply chain costs, AHS began an initiative to standardize PICC placement across the organization. Together, BAS and AHS assessed the current PICC usage across the organization and investigated areas for improvement. Traditionally, in order to ensure proper PICC tip placement, a confirmatory X-ray is required, thus delaying the administration of therapy to the patient. Therapy can be further postponed if multiple X-rays are needed to confirm PICC tip placement. The delays in treatment and multiple imaging tests contribute to increased operational costs.

OUTLOOK

QTR 2.14

TRENDS

T F

“Not only are we saving the time it takes to get the chest X-ray read, but

more importantly, we’re decreasing the amount of radiation exposure to our patients.” existing PICC tray. BAS was able to

the patient’s ECG signal, the technology is

therapy administration and decrease

offer a solution with customized PICC

indicated for use as an alternative method

cost associated with confirmatory X-ray,

kits that specifically met the needs of

to chest X-ray and fluoroscopy for PICC tip

BAS introduced AHS to its technology

AHS. The kits contain the latest BAS

placement confirmation in adult patients

that uses magnetic tracking and

PICC tip confirmation technology and

electrocardiography (ECG) technology

all the additional components nurses

situations for this technique are in patients

to navigate and confirm the PICC tip

previously had to pull separately. After

where alterations of cardiac rhythm

location. This technology allows a

implementation, the number of active

change the presentation of the P wave as

specially-trained nurse to place the

PICC trays across the organization

in atrial fibrillation, atrial flutter, severe

PICC at the patient’s bedside and clear

dropped to eight, resulting in a

tachycardia, and pacemaker driven rhythm.

the line for immediate use without the

91-percent reduction in product codes

In such patients, who are easily identifiable

need for a confirmatory X-ray in patients

needed for PICC placement.

prior to catheter insertion, the use of an

In order to help remedy the delay in

that have a consistent cardiac rhythm.

By implementing BAS’ magnet /

This eliminates both the cost of the

ECG technology for PICC placement

X-ray and the harmful radiation.

and having customized PICC trays,

“The nurses on the floor absolutely

technology to decrease their cost per

Team) now because they can use the

PICC placement procedure, decrease the

PICC lines immediately,” said Debbie

time needed to administer therapy after

McPherson, PICC Charge RN, Florida

PICC placement and decrease radiation

Hospital Orlando.

exposure to patients. This initiative and collaboration between BAS and AHS

takes to get the chest X-ray read, but

demonstrates that quality care can be

more importantly, we’re decreasing the

achieved at lower cost to both patient

amount of radiation exposure to our

and hospital.

patients,” added Eve Ellis, PICC RN, Florida Hospital Orlando. Another area of focus was the

BAS’ magnet tracking & ECG technology of Peripherally Inserted Central Catheters

codes used at the various facilities,

(PICCs). It provides real-time PICC tip

approximately 91 different codes. Nurses

location information by using passive

were also pulling additional procedural

magnet navigation and the patient’s cardiac

components separately to add to the

electrical activity (ECG). When relying on

PICC tip location.

Please consult http://bardaccess.com/imagingsherlock-3cg.php?section=Resources for any indications, contraindications, hazards, warnings, cautions, and instructions for use. The opinions and clinical experiences presented herein are for informational purposes only. The results from this institution may not be predictive for all institutions. Individual results may vary depending on a variety of specific attributes.

is indicated for guidance and positioning

extensive number of different PICC

additional method is required to confirm

Adventist Health System has the

love us (the Venous Access Service

“Not only are we saving the time it

Limiting but not contraindicated

THIS ARTICLE IS A PAID ADVERTISEMENT. This article was not written by Premier and is not an endorsement by Premier.

ECONOMICS A conversation with Ilir Hysa, economist, Moodyâ&#x20AC;&#x2122;s Analytics, 44 Behind the numbers, 48 An update on hospital performance metrics, 56 Patient volume trends, 60 Guide to economic indicators, 64 Premierâ&#x20AC;&#x2122;s supply chain solutions, 67 Inflation summary, 68 Success Story: OptiFreightTM Logistics, 69

ECON OMI CS 2 0 1 4

A CONVERSATION

with ILIR HYSA Economist, Moody’s Analytics

for Moody’s Analytics. He develops housing

What is your estimate for gross domestic product (GDP) growth in the next 12 months? What sectors will have the greatest impact on growth?

models and international forecasts; contributes

We anticipate economic activity to continue picking up pace and the GDP to grow 3

to the company’s Regional Financial Review

percent this year. All ingredients needed for increased growth in 2014 and beyond

publication; and writes blogs and commentaries

are in place, including stronger business confidence, which has otherwise dragged

Ilir Hysa covers U.S. state and regional economies

for Moody’s Analytics’ Dismal Scientist website. He received his PhD in economics from the Graduate Center of the City University of New York.

in the recent economy. Thanks to improving credit quality and lower debt burdens, consumer expenditure, the largest component of the GDP – currently at 68 percent – will grow as well, making it the most significant contributor to GDP growth this year.

What changes do you expect to see over the next 12 months in the U.S. unemployment rate? How will unemployment impact the healthcare industry (if at all)? As economic growth accelerates, more jobs will be created, gradually driving unemployment rates down. But by definition, the unemployment rate doesn’t capture the full range of labor market developments. For instance, an aging population and retiring or discouraged workers who have left the workforce during the recession will play a large role in the bigger picture of labor market dynamics. Now with the economy improving, historical data suggest that some people who were unable to find

ECONOMICS

T E

What role do you think healthcare will play in overall GDP growth?

“

Healthcare will play a central role in overall economic activity, and

healthcare-related spending will make up a large portion of total

consumer expenditures this year, as it normally does. The slowing of healthcare spending we’ve seen in recent years is encouraging. It’s not just a reflection of increased efficiency but also of improved cost-sharing requirements, contraction of federal programs, and a sluggish economy. It’s still unclear whether Affordable Care Act (ACA) provisions played a role in the decline in healthcare spending. Without taking other potential ACA contributions into account, improved economic conditions and expanded coverage will support healthcare, and we’re likely to see a continued impact on GDP growth in the future.

work during the recession will come back into the labor force.

Overall, we’re likely to see moderate growth in commodity

Factors such as the speed at which the aging population retires

prices. Economic growth will accelerate in the U.S. and

and the influx of both new and discouraged workers will largely

internationally, resulting in greater demand for commodities.

impact the total labor market and unemployment rates.

At the same time, the global oil supply will rise as some oil-

As the economy gets stronger, and unemployment falls,

producing countries, mainly the U.S., Iraq and Brazil, continue

more people will be able to get healthcare coverage through

expanding production. Finally, higher interest rates will

their employers or the marketplace exchanges. Because of this,

undermine the appeal for oil-based financial instruments,

hospitals should expect to see fewer cases of charity care and a

keeping prices relatively stable.

stronger bottom line.

Can you describe overall inflation projections for the next 12 months and what they may mean for healthcare? What are your expectations for commodity prices?

The Federal Reserve has stated that it may slow its asset-buying program within the year. How will this and other monetary policies affect the U.S. economy in the next 12 months? It’s important that quantitative easing (QE) doesn’t turn

Inflation rates on personal consumption expenditures are

into quantitative tightening until the Federal Reserve’s

expected to remain at the Fed’s target of 2 percent this year.

balance sheet shrinks – and that it is done in a way that sets

However, we may see slightly higher inflation next year, if

the right expectations.

Dr. Janet Yellen, the new Federal Reserve chair, is willing to tolerate higher inflation to reach full employment levels.

The Federal Reserve has said it has no pre-set course on concluding the asset-buying program, but it seems as though OUTLOOK

QTR 2.14

ECONOMICS

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the $10 billion/month of QE reduction we have seen recently will achieve the goal by this year’s end. So it’s likely that the Fed will maintain the current course if there is no reason to dramatically cut back. It will probably be a very gradual process. Overall, monetary policy will remain very accommodating for the economy. So far, the Federal Reserve has been successful in keeping short- and long-term interest rates steady. The transition from Bernanke to Yellen is anticipated to be fairly smooth, since both have similar views on inflation, unemployment and quantitative easing. Dr. Yellen has been a member of the Federal Open Market Committee, so she’s had a hand in shaping current monetary policy, and we don’t expect many big changes with her appointment. Another point worth emphasizing is that Yellen’s first term will be challenging. The Federal Reserve needs to strengthen its credibility and communications, successfully end its QE program, and begin normalizing interest rates. Should something go wrong in how the QE is concluded, it could lead to a spike in interest rates, hurt the economy and damage the Fed’s reputation.

What do you anticipate the short-term impact of the Affordable Care Act on the U.S. economy will be, if any? What impact will implemented ACA reforms have in 2014 on the healthcare industry, and specifically, on healthcare supply chain stakeholders?

What effect will the global economy (i.e., slowdown in China, Europe’s rebounding) have on the U.S. in the next 12 months? We anticipate stronger global growth this year, but there are downside risks to our forecast. Deceleration in China is a soft landing, so it shouldn’t have much of an impact on the U.S.

healthcare services is inelastic, the decline has been partly due

economy in the coming months. Europe is a different story.

to the weak state of the economy. With an improving economy,

Growth will remain sluggish there, and another slowdown

and a larger share of the population covered by health

isn’t unrealistic. That could hurt the U.S. economy through

insurance, we should see a flat or reversed trend in the next

financial markets and trade.

year. More people entering the marketplace exchanges, coupled with an improving economy, should have a positive impact on

What inpatient or outpatient trends have you been seeing, and how do you expect these trends to continue in the next 12 months? The decline in inpatient services seen in recent years in many areas of the country persists. Though generally demand for

both inpatient and outpatient trends.

In the next 12 months, what is the expected impact of ACA initiatives (for example, ACOs and population health management) on hospital

ECONOMICS

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“

Implementation of the ACA will lead to broader coverage

this year, which bodes well for the industry overall. Enrollment

projections from the Centers for Medicaid & Medicare Services and the Congressional Budget Office, as well as actual numbers reported from the federal government, put the cumulative enrollment at 7 million this year. The actual enrollment falls short of the projections; approximately 75 percent of projected participants have actually enrolled at this point. However, with nearly 4.2 million people enrolled in exchanges in February 2014, and more expected by the March 31 deadline, we’re likely to see the industry grow and hospitals improve their financials this year because of the expanded coverage.

profitability? What factors could affect overall health system profitability?

the investments necessary to move to these new models will

The establishment of nearly 360 ACOs serving 5.3 million

short term.

Americans under Medicare is a promising start in building an

likely leave negligible financial changes for hospitals over the The public knowledge of what these initiatives are all

outcomes-based healthcare system. The steps taken toward

about – what they intend to do and promote – is limited.

ACO development and population health practices have not yet

While the movement to outcomes-based models is a positive

resulted in significant gains for health systems, however. Short

development, it’s going to take time to educate people

term, healthcare providers face costly adjustments needed

about their options. Meanwhile, the healthcare industry is

to comply with reform requirements. On the one hand, these

transforming itself and building new foundations for greater

outcomes-based, fee-for-service models help reduce excessive

growth next year and beyond.

use or waste by patients and physicians that add to costs. But OUTLOOK

QTR 2.14

ECONOMICS ECON OMI CS 2 0 1 4

BEHIND THE NUMBERS Financial and economic trends impacting our members

ECONOMICS

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egislation remains the

(e.g., meeting Meaningful Use

many of these initial investments

top driver of healthcare

requirements, creating more patient-

have already been made.

costs for respondents of

centered infrastructures and tracking

The percentage of respondents who

our semiannual Economic

performance). However, in the past two

cited labor costs as one of their top two

Outlook survey (see Figure 1). Reform

years, the percentage of respondents

drivers jumped from 24 percent in fall

mandates and initiatives required

citing healthcare legislation as the

2013 to 38 percent in spring 2014, and

some initial high-cost investments

top driver has fallen, possibly because

labor remains the second largest

Fig.1

Top two drivers of healthcare costs, combined

Spring 2012

Healthcare legislation

Fall 2012 Spring 2013

Labor costs

Fall 2013 Spring 2014

Health information technology

Misalignment of quality and payment incentives

Pharmaceuticals

Overutilization

Source: Premier online survey for Economic Outlook spring 2014 publication

Unjustified variation in care

Lack of clinical coordination of care

Patient demand

New clinical technology/equipment

Medical devices

10%

20%

30%

40%

50%

60% OUTLOOK

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contributor to healthcare costs. Labor,

were more likely to point to healthcare

respondents are experiencing a

typically the highest actual expense for

legislation or misalignment of quality

shortage of medical professionals

a health system, is likely becoming

and payment incentives. This

within their organization, including

more of an issue due to the acquisition

demonstrates that the size or location

primary care physicians (63 percent),

of physician offices and the move to

of a health system may significantly

specialty physicians (48 percent),

more centralized operations.

influence the challenges it faces.

and nurses (33 percent). A shortage

Consolidation, in fact, may spur a focus

of practitioners may influence rising

The spring survey also brought a

on skill mix and staffing efficiency as

spike in respondents listing health

labor costs â&#x20AC;&#x201C; a market in which there is

cost-reduction factors.

information technology as a leading cost

a shortage means that health systems

contributor, as it rose from 17 percent in

may be paying substantial overtime

the fall to 25 percent currently.

to maintain the appropriate skill mix

Labor costs top healthcare costs for non-acute, rural, and/or non-IDNs, whereas acute, non-rural, and/or IDNs

Fig.2

within their systems.

Approximately four in five

Shortage of medical professionals, regional variation

Primary care physicians Specialty physicians Northeast and Mid-Atlantic

Nurses

Southeast

Source: Premier online survey for Economic Outlook spring 2014 publication

Midwest

West

10%

20%

30%

40%

50%

60%

70%

ECONOMICS

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Fig.3

Percent of operating budget dedicated to capital purchases (C-suite only)

1.7% 0.9%

9.5% 25.0%

0% – 5% 6% – 10%

15.5%

11% – 15% 16% – 20% 21% – 30% 31% or more

47.4%

Source: Premier online survey for Economic Outlook spring 2014 publication

Fig.4

Changes in capital budget since previous year (C-suite only)

30%

Fall 2011 Source: Premier online survey for Economic Outlook spring 2014 publication

25% 20% 15% 10% 5% 0% Increase of ≥ 30%

Increase of 10% – 29%

Increase of 1% – 9%

No change

Decrease of 1% – 9%

Decrease of 10% – 29%

Spring 2012 Fall 2012 Spring 2013 Fall 2013 Spring 2014

Decrease of ≥ 30%

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There is minimal variation in the availability of medical professionals across

least impact.

quarter spend up to 5 percent on capital

There is slightly more variability with

investments, and 47 percent spend

different regions of the country (see Figure

nurses; between 25 and 40 percent of

2). More than 60 percent of respondents in

respondents have a shortage, with the least

each region – Northeast and Mid-Atlantic,

impact in the Northeast/Mid-Atlantic and

rebounded slightly compared to the

Southeast, Midwest, and West – said they

Southeast regions.

fall survey, with 62 percent of C-suite

have a shortage of primary care physicians.

Nearly three-quarters of C-suite

between 6 and 10 percent. Respondents’ capital budgets

respondents forecasting increasing

Between 43 percent and 52 percent noted

respondents reported dedicating up to 10

or flat budgets this year compared to

a shortage of specialty physicians in their

percent of their overall operating budgets

last, up from 58 percent in the fall (see

region, with the West experiencing the

to capital purchases (see Figure 3). One-

Figure 4). However, the percentage

Fig.5

Area of largest capital investment

Fall 2011 Spring 2012

IT and telecommunications

Fall 2012 Spring 2013 Fall 2013

Infrastructure (e.g., construction)

Spring 2014

Note: Zero percent of survey respondents in fall 2012 selected “laboratory equipment” as their largest area of capital investment.

Surgical suites/equipment

Imaging equipment Source: Premier online survey for Economic Outlook spring 2014 publication

Other clinical equipment

Laboratory equipment

Other

10%

20%

30%

40%

50%

ECONOMICS

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expecting increasing or flat budgets is

The IT/telecommunications area,

More care is moving to the outpatient

still lower than 2012 levels, which could

which encompasses EMR systems and

setting this year, as a result of healthcare

be the result of having already made

advanced data analytics, continues to

reform incentives to reduce costs through

large capital investments in line with

drive most of the capital investments

greater efficiency and care coordination,

healthcare reform.

reported in the survey (see Figure 5).

as well as changes to Medicare

C-suite respondents said

The second largest area of capital

designations for some procedures.

approximately 62 percent of their

investment is infrastructure, including

capital budgets would be dedicated to

new construction or expansion. This fell

to increase for 59 percent of survey

acute care, while 38 percent will be

from the fall survey but remains higher

respondents â&#x20AC;&#x201C; 41 percent anticipate

dedicated to the non-acute space.

than 2011 responses.

an increase of up to 5 percent over last

Fig.6

Outpatient admissions are expected

Inpatient and outpatient admissions forecasts

45% Source: Premier online survey for Economic Outlook spring 2014 publication

40% 35% 30% 25% 20% 15% 10% 5% 0% Increase of more than 5%

Increase of up to 5%

No change

Decrease of up to 5%

Inpatient Outpatient

Decrease of more than 5%

OUTLOOK

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ECONOMICS

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year, and 18 percent expect an increase

respondents from rural, non-rural, acute,

responding from other facilities expect

of more than 5 percent (see Figure 6).

IDN, and non-IDN facilities project an

an outpatient increase this year over last.

Only 29 percent anticipate an increase

increase in inpatient admissions within

in inpatient admissions this year; 35

the next 12 months. That compares to 43

About the survey

percent expect flat inpatient admissions,

percent of non-acute facilities.

In winter 2014, Premier, Inc., in

and 36 percent expect a decrease.

The opposite is true for outpatient

Non-acute facilities have the greatest

collaboration with Customer Care

admissions. Only 46 percent of non-acute

Measurement and Consulting LLC,

variation in admissions forecasts.

respondents forecast an increase in outpa-

commissioned an online survey of

Between one-quarter and one-third of

tients, whereas approximately 60 percent

approximately 10,000 healthcare

Fig.7

Role of survey respondents

C-suite

Supply chain or materials management Service line or practice area manager/director Office administrator/manager Source: Premier online survey for Economic Outlook spring 2014 publication

Finance and/or accounting

Physician/clinician

Quality improvement

Other

10%

15%

20%

25%

30%

35%

ECONOMICS

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leaders across our membership,

health management, quality incentives,

delivery network (IDN). Urban and rural

representing both the acute and non-

and financial and economic trends

areas were almost equally represented,

acute healthcare markets. The survey

impacting the industry.

and there were approximately equal

respondents (n=522; response rate=5

The majority (80 percent) of

numbers of respondents from the

percent) included members across

respondents were C-suite, supply chain,

following geographic areas: Northeast

geographical area and organizational

materials management, service line,

and Mid-Atlantic; Southeast; Midwest;

size and type. The survey collected data

or practice area executives. Slightly

West (includes Southwest, Northwest

on membersâ&#x20AC;&#x2122; perspectives about the

more than half (51 percent) came from

and West Coast). An overview of the

healthcare supply chain, population

a multi-hospital system or integrated

respondent profile is shown below.

Fig.8

Types of respondent organizations

Large hospital (501+ beds) Midsized hospital (between 200 and 500 beds) Small hospital (less than 200 beds) Critical access hospital (less than 25 beds) Ambulatory or outpatient center Multi-specialty group practice

Source: Premier online survey for Economic Outlook spring 2014 publication

Surgery center

Senior living facility

Single-specialty group practice Physician-owned specialty hospital

Other

10%

15%

20%

25%

30%

35% OUTLOOK

QTR 2.14

ECON OMI CS 2 0 1 4

Operating margins for acute care

in outpatient discharges in aggregate in

hospitals have consistently improved

FY2013 (July 2012 to June 2013).

year-over-year since 2007, according to

AN UPDATE

ON HOSPITAL PERFORMANCE

METRICS

an analysis from a database maintained

dropped in 2012 for the first quartile and

by Premier, Inc. (see Figure 1). Overall,

median, likely due to implementation

median operating margins increased the

of technology and ACA preparations.

most, at 361 percent, from 2007 to 2012,

The average, median and first quartile

while both average and first quartile (top

saw increases in profit per acute bed in

25 percent) margins rose by more than

service from 2012 to 2013 (see Figure 3).

100 percent over the same time period.

Profit per acute bed ranged from

In aggregate, all of the acute care

$31,106 for the median to $118,099 for

hospitals in the analysis saw an

the first quartile.

increase in margins from 2012 to 2013, in line with the American Hospital hospital margins are strengthening.

patient revenue since 2011, supporting 1

Health systems are involved in a variety

percent in 2013, up from 3.8 percent

of supply chain initiatives designed

in 2012; margins for the first quartile

to reduce overall supply spending,

increased from 9.3 percent to 11.3

including several highlighted in this

percent from 2012 to 2013.

edition of the Economic Outlook (see

a percent of total patient revenue has

Figure 4). Premier’s Using Wisely Index enables

declined following introduction of

acute care facilities to benchmark

the Affordable Care Act (ACA), which

against peers on three main categories

emphasizes better care coordination,

of potential waste: clinical, operational

encourages health systems to prevent

and supply chain. Health systems have

readmissions and emergency treatment,

begun using this waste dashboard, along

and decreases Medicare reimbursement

with other data, to lower costs within

payments. On average, inpatient gross

their own facilities.

patient revenue decreased as a percent of

Bad debt expense as a percentage of

total patient revenue from 61.3 percent in

net patient revenue has fluctuated since

2007 to 47.5 percent in 2013 (see Figure 2).

2010 for the median, average, and first

The median and first quartiles have seen

quartile. While the first quartile saw a

less steady drops in inpatient share of

decrease in bad debt, from 6.3 percent

revenue than the average.

of net patient revenue in 2011 to 4.6

Although inpatient revenue is

the growth in operating margins.

Average hospital margins were 4.0

Inpatient gross patient revenue as

ECONOMICS

Acute care hospitals have seen a decrease in supply expense per net

Association’s recent findings that

Profit per acute bed in service

percent in 2013, the median and average

decreasing due to reduced patient

both increased from 2011 (see Figure 5).

volume, Premier’s member volume

Bad debt should fall for hospitals when

trends indicate a 2.0 percent increase

coverage expansion has been fully

ECONOMICS

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implemented and health systems see fewer uncompensated care patients.

Fig.1

Operating margin of acute care hospitals 2007 – 2013

Total operating expense as a percentage of net patient revenue has also fluctuated over the past three years for the first quartile, where there was a sharp increase in 2012 (see Figure 6). that required large initial investments (e.g., advanced analytics, ACOs, and population health management tools).

10% 8%

Source: A database maintained by Premier, Inc.

That was likely due to new initiatives

12%

6% 4%

The average and median remained fairly steady from 2011 to 2013, with the median showing a small increase and the average a small decrease. Both

2% 0% 2007

2008

2009

2010

2011

2012

2013

groups, however, had lower operating expenses as a percentage of net patient

Average

Median

1st Quartile

revenue in 2013 than in 2008.

Fig.2

Inpatient gross revenue as a percentage of gross patient revenue 2007-2013

70% 60% Source: A database maintained by Premier, Inc.

50% 40% 30% 20% 10% REFERENCE 1. Beth Kutscher, “Hospitals on the Rebound, Show Stronger Operating Margins,” Modern Healthcare, January 3, 2014, http://www.modernhealthcare.com/article/20140103/ NEWS/301039973?AllowView=VDl3UXk1TzRDdmVCbkJiYkY0M3hlMEtwakVVZERlVT0=&utm_source=link20140103-NEWS-301039973&utm_medium=email&utm_ campaign=mh-alert#.

0% 2007

2008

2009

Average

2010

Median

2011

2012

2013

1st Quartile

OUTLOOK

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ECONOMICS

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Fig.3

Profit per acute bed in service 2007-2013

$200,000 $180,000 $160,000 $140,000 Source: A database maintained by Premier, Inc.

$120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 2007

2008

2009

Average

Fig.4

2010

Median

2011

2012

2013

1st Quartile

Supply expense as a percentage of net patient revenue 2007-2013

20% 18% 16% 14% Source: A database maintained by Premier, Inc.

12% 10% 8% 6% 4% 2% 0% 2007

2008

2009

Average

2010

Median

2011

1st Quartile

2012

2013

ECONOMICS

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Fig.5

Bad debt expense as a percentage of net patient revenue 2007-2013

10% 9% 8% 7% Source: A database maintained by Premier, Inc.

6% 5% 4% 3% 2% 1% 0% 2007

2008

2009

Average

Fig.6

2010

Median

2011

2012

2013

2012

2013

1st Quartile

Total operating expense as a percentage of net patient revenue 2007-2013

100%

95%

Source: A database maintained by Premier, Inc.

90%

85%

80%

75% 2007

2008

2009

Average

2010

Median

2011

1st Quartile

OUTLOOK

QTR 2.14

ECON OMI CS 2 0 1 4

PATIENT VOLUME

The metrics reported below are based on a sample of 425 healthcare facilities that submitted three years of inpatient and outpatient data to a database maintained by Premier, Inc. The sample, which accounts for 131.4 million patient discharges, represents a cross-section of our membership that includes variations in geographic area and organizational size and type. This report identifies year-over-year (YOY) percentage changes in volume for key data elements such as inpatient and outpatient discharges, surgery growth, and payer mix from Q3 2011 to Q2 2012 (FY2012) to the same period in 2012 - 2013 (FY2013).

TRENDS

Fig.1

FY2013 quarterly trends

YOY growth

Q4 2012

Q1 2013

Q2 2013

FY2013

Inpatient

-2.49%

-0.56%

-2.46%

-0.71%

-1.57%

Outpatient

1.21%

3.96%

0.47%

2.24%

1.96%

Total discharges

0.81%

3.47%

0.16%

1.93%

1.58%

Inpatient surgeries

-3.20%

-1.57%

-3.40%

-0.74%

-2.24%

Outpatient surgeries

-3.84%

-0.66%

-0.37%

1.79%

-0.79%

Births

-1.20%

0.16%

-1.31%

1.07%

-0.34%

Medicare discharges

2.63%

4.61%

2.23%

5.15%

3.65%

Medicaid discharges

0.16%

5.16%

1.14%

1.32%

1.92%

Self-pay discharges

1.86%

3.03%

-3.83%

-4.22%

-0.83%

-0.43%

2.04%

-0.94%

1.18%

0.46%

Managed care and other payer discharges

Source: A database maintained by Premier, Inc.

Q3 2012

ECONOMICS

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CHANGES OF NOTE 1.6%

INPATIENT VOLUME decreased

2.0%

FY2013

OUTPATIENT VOLUME increased

2.2%

0.8%

INPATIENT SURGERIES decreased

OUTPATIENT SURGERIES decreased

1.6% DISCHARGES OVERALL increased

FY2012

Discharges in all payer categories (except self-pay) were up in FY2013. MEDICARE 3.7% VOLUME increased

1.9%

MEDICAID VOLUME increased

0.8% SELF-PAY decreased

MANAGED CARE AND OTHER PAYER VOLUME 0.5% increased

TRENDS OUTLOOK

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Fig.2

Discharge trends

5% 4% 3% 2% Source: A database maintained by Premier, Inc.

YOY percent change

1% 0% -1% -2% -3% -4% Q3.2011

Q4.2011

Q1.2012

Q2.2012

Fig.3

Q3.2012

Inpatient discharges

Total discharges

Q4.2012

Q1.2013

Q2.2013

Outpatient discharges

Discharges by payer type

8% 6% 4% Source: A database maintained by Premier, Inc.

YOY percent change

2% 0% -2% -4% -6% Q3.2011

Q4.2011

Medicare

Q1.2012

Q2.2012

Medicaid

Q3.2012

Self-pay

Q4.2012

Q1.2013

Q2.2013

Managed care and other payers

ECONOMICS

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Fig.4

Surgery and emergency department visits

10% 8%

Source: A database maintained by Premier, Inc.

YOY percent change

2% 0% -2% -4% -6% Q3.2011

Q4.2011

Q1.2012

Q3.2012

Q4.2012

Q1.2013

Q2.2013

Emergency department visits

Outpatient surgery visits

Inpatient surgery visits

Average length of stay

0.5%

3.54

0.0%

3.50

-0.5%

3.46

-1.0%

3.42

Days

Y0Y percent change

Fig.5

Q2.2012

3.38

-1.5% Q3 2011

Q4 2011

Q1 2012

Q2 2012

Year-over-year percent change

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Average length of stay (days)

Note: Average length of stay includes only inpatient data; outliers have been excluded. Source: A database maintained by Premier, Inc.

OUTLOOK

QTR 2.14

ECON OMI CS 2 0 1 4

GUIDE TO ECONOMIC

What price indexes are important in the healthcare industry?

goods and services purchased for

Industry stakeholders – including

households. While there are many

suppliers, healthcare systems, and

categories within the CPI, the two most

the Centers for Medicare & Medicaid

commonly used for healthcare are the

Services (CMS) – use three key price

CPI for all urban consumers (CPI-U) and

indicators when examining inflationary

the CPI for medical care. Medical care is

pressures in the marketplace:

one of eight major CPI categories, and it

• The consumer price index (CPI);

has two classifications, commodities and

• The producer price index (PPI); and

services, with each containing several

• The CMS marketbaskets.

item categories (strata).2

The CPI and PPI measure the average

INDICATORS

PRICE INDEXES CPI, PPI, AND CMS MARKETBASKETS

personal consumption by urban U.S.

The CPI-U increased 0.1 percent in

change over time in the prices of fixed

January on a seasonally adjusted basis.

goods and services. The CPI is primarily

From December 2012 to December 2013,

used to compare a household’s cost for

the all-items index increased 1.5 percent

a specific basket of finished goods and

before seasonal adjustment, largely as

services with the cost of the same basket

a result of growth in the energy and

during an earlier benchmark period. The

shelter indexes. 3

weight given to each basket item is fixed.

After seasonal adjustment, medical

The PPI uses a similar benchmark

care CPI remained flat from September

approach, but it measures price changes

to December 2013. Medical care

reported by establishments at the

commodities increased 0.5 percent in

wholesale, rather than the retail, level.

January as the prescription drug index

While both indexes measure inflation,

rose. Medical services increased 2.5

they differ in the goods and services

percent overall in 2013, and saw a 0.2

eligible for inclusion.

percent increase in January.4

Economic indicators that are more specific to the healthcare industry are

Producer price index

CMS marketbaskets, which measure how

In contrast to the CPI, the PPI measures

much more or less it would cost at a later

price changes from the perspective of

time to buy the same mix of goods and

the seller and includes the entire output

services. These indicators reflect price

of U.S. producers. Since the PPI captures

inflation facing medical services providers.

price movement prior to the retail level,

Each index is summarized here and is accompanied by recent relevant information that provides additional budgeting resources.

it may foreshadow subsequent price changes for business and consumers. 5 The PPI for finished goods, which is its most commonly used measure, rose 1.2 percent, on an unadjusted basis, from

Consumer price index

December 2012 to December 2013.6 The

The CPI measures price change from

12-month change, from December 2012

the consumer’s perspective and includes

to December 2013, for the net output of

ECONOMICS

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Fig.1

CPI-U, Medical care CPI, and IPPS marketbasket rates

Annual percent change

4% 3% 2% 1% 0% -1% 2007

2008

CPI-U

2009

2010

Medical care CPI

2011

2012

2013

2014

Medicare marketbasket - inpatient hospital Note: Rates are current as of February 2014.

selected industries is (unadjusted):

CMS marketbaskets

outpatient PPS payments, as well as

• Hospitals, 1.5 percent;

The CMS marketbaskets update

cost limits for children’s hospitals,

• Offices of physicians, 0.3 percent;

payments and cost limits in multiple

cancer hospitals, and religious, non-

• Nursing care facilities, 0.9 percent;

CMS systems, while individual

medical healthcare institutions.

and • Medical and diagnostic laboratories, -1.3 percent.7 Additional information is available from the Bureau of Labor Statistics.

marketbaskets provide a more accurate

• Skilled nursing facility marketbasket

measure of their own inflation indexes:

updates payments to skilled nursing

•P rospective Payment System (PPS)

facilities.

hospital marketbasket updates inpatient hospitals’ operating and

• Home health agency marketbasket updates home health PPS payments. OUTLOOK

QTR 2.14

ECONOMICS

T F

• PPS hospital capital marketbasket

The marketbasket of interest to most

• Temporary reduction of 0.8

updates inpatient hospitals’ capital

hospitals is the Inpatient Prospective

percentage points to fulfill

PPS payments.

Payment System (IPPS), which should

requirements of the American

• R PL marketbasket updates inpatient

closely approximate a hospital’s

Taxpayer Relief Act; and

rehabilitation, psychiatric, and long-

projected change in Medicare revenue.

term care PPS payments.

On August 2, 2013, CMS released its

projected spending increases

final rule for FY2014, stating that

associated with changes to admission

the sustainable-growth rate to update

inpatient payments in the aggregate

and medical review criteria for

the physician fee schedule.8

would increase 0.7 percent over FY2013,

hospital inpatient services.12

The marketbaskets are constructed

after accounting for inflation and other

The key cost category in the index is

• Medicare economic index is used with

• 0.2 percentage-point cut to offset

from mutually exclusive spending

adjustments. This included an initial

compensation expense, which includes

categories, which use data collected

update of 2.5 percent for hospitals that

labor and benefits, and is weighted at 60

from hospitals’ Medicare cost reports

submit data on quality measures, with

percent. The index also includes major

and corresponding price indexes. The

a 0.5 percent update for hospital that

purchasing categories, such as food,

overall hospital price index is the sum

do not submit that data. The final rule

pharmaceuticals, blood, and equipment.

of each category’s product weight and

includes a:

relevant price index. The price indexes,

•P roductivity cut of 0.5 percentage

or proxies, which are used to calculate the marketbasket, include data from

points;

Additional information is available from the Centers for Medicare & Medicaid Services.

•0 .3 percentage-point reduction

the Bureau of Labor Statistics (most

mandated by the ACA;

commonly the producer price indexes). The marketbasket levels and percentage changes are updated quarterly, with each new forecast containing an additional quarter of historical data.9 CMS projects payment updates for the coming fiscal year using a marketbasket containing the latest available data at the time of publication. This is based on the CMS fiscal year, which runs from October to September. Once an update has been determined, it is generally not revised to include more recent data. However, because marketbaskets are updated quarterly, the current marketbasket may be different, depending on the variances in the forecast data and data currently available.10

REFERENCES Bureau of Labor Statistics, PPI Program Spotlight, www.bls.gov/ppi/ppivcpi.pdf. Bureau of Labor Statistics, Measuring Price Change for Medical Care in the CPI, www.bls.gov/cpi/cpifact4.htm. Bureau of Labor Statistics, “Consumer Price Index Summary,” March 13, 2014, http://www.bls.gov/news.release/cpi.nr0.htm. Bureau of Labor Statistics, CPI Detailed Report – January 2014, http://www.bls.gov/cpi/cpid1312.pdf. Bureau of Labor Statistics, Producer Price Indexes: Program Overview, www.bls.gov/ppi/ppiover.htm#Link6. Bureau of Labor Statistics, “Producer Price Index News Release,” January 15, 2014, http://www.bls.gov/news.release/ppi.nr0.htm. Bureau of Labor Statistics, “Producer Prices Indexes Output of Selected Industries and Their Products,” January 15, 2014, http:// www.bls.gov/news.release/ppi.t04.htm. 8. Centers for Medicare & Medicaid Services, Medicare Program Rates and Statistics, www.cms.gov/MedicareProgramRatesStats/05_ MarketBasketResearch.asp. 9. Centers for Medicare & Medicaid Services, Medicare Program Rates and Statistics, http://www.cms.gov/MedicareProgramRatesStats/downloads/mktbskt-pps-hospital-2006.pdf. 10. Ibid. 11. “CMS Releases FY2014 IPPS Final Rule,” AHA News Now, August 2, 2013, http://www.ahanews.com/ahanews/jsp/display.jsp?domain=AHANEWS&dcrpath=AHANEWS/AHANewsNowArticle/data/ ann_080213_IPPS. 12. Ibid. 1. 2. 3. 4. 5. 6. 7.

ECON OMI CS 2 0 1 4

• Provides aggregate inflation estimates by line of business; and • Analyzes spend by individual facility or IDN.

PREMIER’S SUPPLY CHAIN

The calculator can be found on Premier’s Supply Chain Advisor ® site. For more information about the Medical-Surgical Inflationary Calculator, please contact the Premier Solution Center at solutioncenter@premierinc.com.

ensure appropriate resource utilization and supply efficiency, while identifying spending waste. The Supply Mix Index methodology combines clinical and supply cost data from more than 497 hospitals. It is designed to: • Enable the calculation of a hospital’s Supply Mix Index based on the unique

Premier’s Drug Budget Tool

SOLUTIONS

A resource for proactive drug expense management The Drug Budget Tool prepopulates profiles for analysis and lets users evaluate their drug purchases. The tool: • A nalyzes 92.4 percent of annual drug purchases; • Examines entire systems and multiple

Premier’s Medical’s-Surgical Inflationary Calculator A resource for proactively managing medical-surgical supply spend The Medical-Surgical Inflationary Calculator is an easy-to-use resource designed to help members estimate medical-surgical supply spend.

hospitals in a single SpendAdvisor report; and • Automatically fills in all of the application’s analytic cells. To learn more about the Drug Budget Tool, please contact Jerry Frazier, director of Premier’s Center for Evidence-based Pharmacy Practice, at jerry_frazier@premierinc.com.

The calculator:

mix of services provided to patients. The Supply Mix Index can also be calculated across systems, within service lines, and at other levels within a system. • Be statistically sound. The MS-DRG Supply Mix Index calculates weights using 4 million patient-level records from Premier’s QualityAdvisor™ database. • Demonstrate a more direct correlation to supply expense-per-patient case than the Case Mix Index. Premier’s Supply Mix Index focuses on the supply cost within a case, while the Case Mix Index incorporates other significant, nonsupply-related expenses. • A llow for cross-hospital comparisons of supply efficiency and intensity. Premier’s new methodology will

•C ompares Premier’s contractual price

initially be found in the executive-level

protection and suppliers’ price inflation

Premier’s Supply Mix Index™

reporting application of SupplyFocus®,

estimates to deliver a detailed estimate

A methodology for calculating supply cost indexes for each Medicare SeverityDiagnosis-Related Group (MS-DRG).

which is used by acute care facilities.

one SpendAdvisor® report and allows

Premier’s newly patented Supply Mix

productivity and benchmarking product.

users to manually adjust for anticipated

Index allows users to calculate supply

spend;

expense per patient procedure. Using the

of projected supply costs; •P repopulates the spend profile from

•C ompensates for off-contract spend

index, hospitals can accurately isolate

with an optional SpendAdvisor report;

supply costs as a percentage of the total

• Alerts members to contract categories that

cost of a clinical procedure and compare

will be renegotiated in the current year;

SupplyFocus is also included with OperationsAdvisor®, Premier’s labor

To learn more about Premier’s Supply Mix Index, please contact Mark Hiller, vice president of innovative solutions, at mark_hiller@premierinc. com, or Richard Westbay, program manager, SupplyFocus, at richard_westbay@premierinc.com.

it with other hospitals nationwide to OUTLOOK

QTR 2.14

ECON OMI CS 2 0 1 4

Range of supplier inflation estimates: This figure shows the range of supplier-reported inflation estimates for products within each service line. The range does not take into account Premier contract price protection or utilization data.

INFLATION SUMMARY

Average of supplier inflation estimates: True average of supplier-reported estimates of inflation on their products.

Projected Premier contract inflation estimates are calculated as follows: Pharmacy – Projections are derived from the Premier Drug Budget Tool. All others (except Foodservice) – Projections reflect the expected weighted average percent change in contract pricing for the existing contract portfolio as of April 1, 2014.

Service line

Range of inflation estimates

Average of inflation estimates

Projected Premier contract inflation estimates

Alternate Site Healthcare

0% - 5%

2.30%

0.45%

Cardiovascular Services

0% -

2.50%

0.15%

Clinical Laboratory Services

2% - 5%

3.30%

0.96%

Facilities

0% - 15%

3.50%

1.49%

Foodservice

- 6%

3.50%

Not Available

Imaging

- 15%

2.60%

0.90%

IT / Telecommmunications

0% - 8%

2.60%

0.09%

Materials Management

0% - 15%

3.70%

1.36%

Nursing

0% - 10%

3.40%

1.02%

Pharmacy

Not Applicable

10.80%

Purchased Services

0% - 15%

3.20%

1.86%

Surgical Services

0% - 10%

3.00%

1.37%

Women & Children’s

3.20%

0.15%

- 8%

Note: Estimated category inflation is subject to change.

SUCCESS STORY

ASCEND® members’ choice for freight management Save more on every shipment with OptiFreight™ Logistics from Cardinal Health

remier’s ASCEND® members have an inside track on cutting costs, increasing efficiency and improving

supply chain performance. And Premier continually adds new value with strategic best practices such as freight management, a strong, yet often overlooked way to lower supply chain costs. For ASCEND members, the solution is OptiFreight™ Logistics from Cardinal Health. And the word is out: OptiFreight™ delivers. The freight program from OptiFreight™ Logistics saves healthcare providers significantly – ASCEND members saved nearly $1 million in the first six months alone.* The savings are not just due to betternegotiated shipping rates; the true difference is OptiFreight™ works with vendors to ensure they use the service for every package shipped to members. The greater vendor compliance, the lower the costs. And that’s where the program excels, according to the numerous ASCEND members who have already made the switch.

Better rates and rebates In addition to increased vendor compliance and the deep shipping

OUTLOOK

QTR 2.14

“We were with another freight management company before and weren’t happy with the service,” said Jacob Adams, director of supply chain for St. John Medical Center in Cleveland, part of University Hospitals.

“OptiFreight™ made the transition simple and handled all the details, including training our staff, so we could hit the ground running and start saving right away, with no hiccups. In the first month alone we cut our freight costs by 25 percent and are well on the way to saving $50,000 in our first year.”

discounts that OptiFreight™ offers

It’s easy to get started

simple and handled all the details,

via the ASCEND contract, members

Freight management solutions from

including training our staff, so we could

are also benefiting from additional

OptiFreight™ Logistics are simple

hit the ground running and start saving

rebates. These rebates are based on

to implement. All of the details for

right away, with no hiccups. In the first

total ASCEND contract compliance and

launching are executed and managed

month alone we cut our freight costs

are triggered once the entire ASCEND

in just a few short weeks, ensuring that

by 25 percent and are well on the way

membership reaches a certain level of

members do not have to wait for savings.

to saving $50,000 in our first year.”

compliance each year. Members are well

Some of the nation’s largest and most

on track to achieving the Year Two goal.

prestigious healthcare organizations

What makes such strong compliance possible? For starters, the culture of ASCEND itself. In addition, the

have already switched, such as University Hospitals in Cleveland, Ohio. “We were with another freight

contract’s advantage is built in:

management company before and

members enjoy lower rates, and by

weren’t happy with the service,”

motivating more vendors to take

said Jacob Adams, director of supply

advantage of those rates, OptiFreight™

chain for St. John Medical Center in

earns further loyalty of members. It’s a

Cleveland, part of University Hospitals.

classic win-win.

“OptiFreight™ made the transition

To save more on every shipment, contact Alex Labosky, Senior Manager of Corporate Accounts for OptiFreight™ Logistics. Call 614-945-5444 or email alex.labosky@cardinalhealth.com.

*Based on aggregate cost per package reduction for ASCEND members shipping through the OptiFreight™ Logistics program between June 1, 2013 and December 31, 2013. THIS ARTICLE IS A PAID ADVERTISEMENT. This article was not written by Premier and is not an endorsement by Premier.

COMMODITIES Minimizing raw materials risk, 72 2014 market expecting growth, 74 Copper market overview, 76 Cotton market overview, 78 Energy market overview, 80 Food market overview, 82 Plastic resins market overview, 86 Natural and synthetic rubber market overview, 88 Steel market overview, 90 Success Story: US Foods, 92

COMMODITIES

T F

MINIMIZING

RAW MATERIALS RISK

sample of Premier’s contracted suppliers identified key raw materials that serve as primary drivers of their products’ pricing. Potential category and market impacts are shown for the raw materials commonly used in healthcare products and supplies.

In order to minimize the risk associated with raw materials’ pricing, healthcare facilities should: • Review categories that may be impacted by fluctuations in raw material costs; • Use the inflation tables in this publication to locate suppliers with firm pricing in a category impacted by raw materials of interest; and • Refer to the contract launch materials in Supply Chain Advisor® to identify a category’s lowest-cost provider.

LABOR PREMIER CONTRACT IMPACT* Intraoperative neurophysiological monitoring services

•

Surgical instrument and scope repair

•

Cardiac rhythm management devices

•

ENERGY PREMIER CONTRACT IMPACT* PC hardware and software resellers

•

Video laryngoscopes

•

Third-party freight management

•

PLASTIC RESINS PREMIER CONTRACT IMPACT* Pain management - local anesthetic

•

Contrast media injectors/disposable

•

Can liners

•

*Refer to contract-specific price protection information in the inflation tables. Price increase risk: Red = High; Yellow = Moderate; Green = Low

COMMODITIES E

Fig.1

T C

This figure illustrates the percent of inflation on medical-surgical supplies attributed to each raw material.

Natural and synthetic rubber, 1.4%

Precious metals, 0.4% Cotton, 1.6%

Paper, 2.7% Base metals, 3.6% Organic and inorganic chemicals, 4.8% Electronic components, 5.2%

Plastic resins, 13.6%

Energy, 33.0%

Labor, 33.9%

Source: Premier online survey for Economic Outlook spring 2014 publication

OUTLOOK

QTR 2.14

2014

MARKET EXPECTING GROWTH

hird quarter 2013 data

billion per month.7 Quantitative easing

to the Thomson Reuters/Jefferies

showed a U.S. economic

is likely to continue such incremental

CRB index, commodity prices were

growth rate of 4.1 percent,

decreases as inflation remains steady

7.0 percent lower in January 2014

with a 3.2 percent annual

and the labor market improves.

than February 2013 (see Figure 1).

increase from the third quarter to

Global growth is expected to rise by

Commodity prices were much

the fourth. Overall, the 2013 gross

3.7 percent in 2014 over the previous

more stable in 2013 than in past

domestic product (GDP) rose 1.9

year, primarily due to recovery in

years. In February 2014, prices were

percent. Growth was largely due to

advanced economies, and is projected

39 percent lower than the July 2008

an uptick in personal expenditures

to hit 3.9 percent in 2015. More stable

spike and 41 percent higher than

and private sector inventory, as well

advanced economies, and resulting

the 2009 low point (see Figure 2).

as lower local government spending. 3

higher demand for exports, should also

Economic activity in the U.S. is expected

drive growth in emerging markets.

to continue on the upswing, resulting in 3 percent GDP growth in 2014.4 According to the Wall Street Journal

China remains a question mark for both commodity markets and the global economy in general. Annual growth in

Dollar Index, the U.S. dollar (USD)

China was flat, at 7.7 percent in 2013, a

gained 4.8 percent in 2013 against other

13-year low.10 Though growth exceeded

major currencies. This is the largest

expectations for the country last year,

annual increase since 2008.5 The

it is unlikely the world’s second largest

dollar should continue to strengthen

economy can maintain that pace.11

as the Federal Reserve slows its

Since China has been one of the

quantitative easing program. The euro

largest consumers of commodities

saw the biggest jump of all currencies

during its double-digit growth phase,

in 2013, increasing 4.1 percent against

a slowdown there means decreased

the USD following stabilization

demand for commodities such as

of the European debt crisis.

cotton, copper and steel.12 Forecasts

The Federal Reserve announced in

are uncertain regarding when or if the

December 2013 that it would reduce

country will decrease its commodity

its bond-buying program from $85

consumption this year, making

billion per month to $75 billion. In

the future of several commodity

January 2014, the Fed said it would

markets questionable. According

again decrease the program, to $65

REFERENCES 1. U.S. Economy at a Glance, Bureau of Economic Analyses, U.S. Department of Commerce, https://www.bea.gov/ newsreleases/glance.htm. 2. Samatha Sharf, “U.S. GDP Grew at 3.2 Percent in the Fourth Quarter 2013,” Forbes, January 30, 2014, http://www.forbes. com/sites/samanthasharf/2014/01/30/u-s-gdp-grew-3-2in-fourth-quarter-2013/. 3. Ibid. 4. Ilir Hysa, Moody’s Analytics, interview with author, January 21, 2014. 5. Nicole Hong, “Dollar Logs Biggest Annual Gain Since 2008,” Wall Street Journal, December 31, 2013, http://online.wsj. com/news/articles/SB100014240527023041373045792914 70056552100. 6. Ibid. 7. Joshua Zumbrun and Jeff Kearns, “Fed Cuts QE to 65 billion Pace as Labor Market Improves Further,” Bloomberg, January 30, 2014, http://www.bloomberg.com/news/201401-29/fed-cuts-qe-to-65-billion-pace-as-labor-market-improves-further.html . 8. Ibid. 9. World Economic Outlook Update: Is the Tide Rising? International Monetary Fund, January 2014, http://www. imf.org/external/pubs/ft/weo/2014/update/01/. 10. Kevin Yao and Aileen Wang, “China’s 2013 Economic Growth Dodges 14-Year Low but Further Slowing Seen,” Reuters, January 20, 2014, http://www.reuters.com/ article/2014/01/20/us-china-economy-gdp-idUSBREA0I0HH20140120 . 11. Ibid. 12. Michael Bleby, “China’s Rebalancing Could Halve Commodity Prices,” BRW, March 26, 2013, http://www.brw.com. au/p/business/china_rebalancing_could_halve_commodity_i7GQ1VEhFjwK0Wnmh6LpAJ.

COMMODITIES E

Fig.1

T C

Thomson Reuters/Jefferies CRB Index, February 2013 – January 2014 310 300 290 280 270 260 250 Feb–Apr 2013

May–July 2013

Aug–Oct 2013

Nov 2013–Jan 2014

Source: www.Jefferies.com Note: The index includes 19 commodities: aluminum, cocoa, coffee, copper, corn, cotton, crude oil, gold, heating oil, lean hogs, live cattle, natural gas, nickel, orange juice, silver, soybeans, sugar, unleaded gas, and wheat.

Fig.2

Thomson Reuters/Jefferies CRB Index, January 2008 – February 2014 500 450 400 350 300 250 200 150 100 50 0 2008

2009

2010

2011

2012

2013

2014

Source: www.Jefferies.com

OUTLOOK

QTR 2.14

COPPER MARKET OVERVIEW

PRODUCT CATEGORIES WITH HIGH COPPER CONTENT AND 12-MONTH PRICE OUTLOOK Construction services

•

Energy efficiency services

•

HVAC equipment, controls, and services

•

Ice machines and dispensers

•

Maintenance, repair, and operations

•

Copper market update Average price forecasts for copper

Monetary policy generally impacts commodity prices, and quantitative

range from $6,650 to $7,200 per

easing has historically put upward

metric ton. Per pound, copper prices

price pressure on copper and other

are estimated to hover around $3.20

commodities. The Federal Reserve’s

to $3.30 in 2014. According to most

monthly $10-billion reduction in its

analysts, copper forecasts for 2014

bond-buying program will likely cause

remain neutral.

some level of downward price pressure

Since China is the world’s top consumer, with 40 percent of global

on most commodity markets, including copper.5

copper use, the country’s weak economic data remains a concern. However, China’s appetite for copper increased 11 percent last year and has not yet shown signs of decreasing.2 While China’s demand remains fairly steady, the predicted surplus is decreasing; London Metal Exchange stockpiles have fallen 50 percent since June 2013. 3 Deutsche Bank expects supply in the global copper market to exceed demand this year by 320,000 metric tons, less than half of the 750,000-ton surplus it expected at this time a year ago.4

REFERENCES 1. “Copper Seen as ‘Not Too Hot and Not Too Cold’ in 2014,” Kitco News, http://www.kitco.com/news/2013-12-17/Copper-Seen-As-Not-To-Hot-And-Not-To-Cold-In-2014.html. 2. “China Lights the Way for Copper,” Wall Street Journal, January 17, 2014, http://online.wsj.com/news/articles/ SB10001424052702304419104579326701752873782?mod=WSJ_Commodities_LEFTTopNews. 3. Ibid. 4. Ibid. 5. HCCE Copper Outlook, Honeywell Cable, January 13, 2014. 6. Ibid. 7. “China Lights the Way for Copper,” Wall Street Journal, January 17, 2014, http://online.wsj.com/news/articles/ SB10001424052702304419104579326701752873782?mod=WSJ_Commodities_LEFTTopNews. 8. Ibid. 9. Ibid.

COMMODITIES E

Fig.1

T C

Average monthly copper prices (London Metal Exchange) 500 450

Cents per pound

400 350 300 250 200 150 100 Sep 2010

Jan 2011

May 2011

Sep 2011

Jan 2012

May 2012

Sep 2012

Jan 2013

May 2013

Sep 2013

Source: U.S. Geological Survey: Copper statistics and information

Fig.2

Projections for 2014

FACTOR

IMPACT ON COPPER PRICES

COMMENTS

Quantitative easing

Quantitative easing drives upward pressure on prices for most commodities, although decisions to decrease bond-buying will provide some downward pressure.6

Uncertain surplus

Deutsche Bank expects supply in the global copper market to exceed demand this year by 320,000 metric tons, less than half of the 750,000-ton surplus it expected at this time a year ago.7 London Metal Exchange stockpiles have fallen 50 percent since June 2013.8

Strong Chinese demand

Chinaâ&#x20AC;&#x2122;s economic downturn has not slowed its desire for copper, as previously predicted. China increased its copper appetite by 11 percent in 2013.9

OUTLOOK

QTR 2.14

COTTON MARKET OVERVIEW

PRODUCT CATEGORIES WITH HIGH COTTON CONTENT AND 12-MONTH PRICE OUTLOOK Bandages, dressings, and gauze

•

Lap sponges or towels and specialty sponges

•

Restraints and fall prevention

•

Reusable textiles and textile services

•

Skin integrity: prevention, healing, and support

•

Cotton market update

World cotton acreage is set to rise in

Cotton prices rose 12 percent in 2013

the 2014-2015 season, contributing to

and were a much stronger commodity

the 3.6 million bales in extra production

market than both previous forecasts

expected this year. The increase in

and other agricultural materials. The

supply will likely result in downward

National Cotton Council’s Cotton “A”

pressure on prices.6

Index showed cotton prices peaked in March 2013 at 94.45 cents per pound and hit their lowest point in November at 84.65 cents per pound.2 Despite higher prices, 2012-2013 inventories hit a record high at 89.1 million bales. 3 Ongoing concerns that China would begin draining its stockpiles kept bearish pressure on price forecasts, but it appears that concern has weakened for the near future.4 Reports out of China suggest that this year’s crop was damaged by an early frost, pushing down the country’s output by more than one million bales.5

REFERENCES 1. “Cotton Prices – Will They Defy Doomsters Again in 2014?” Agrimoney.com, December 30, 2013, http://www.agrimoney. com/feature/cotton-prices---will-they-defy-doomstersagain-in-2014--247.html. 2. Monthly Prices: ‘A’ Index, National Cotton Council of America, http://www.cotton.org/econ/prices/monthly.cfm (accessed February 7, 2014). 3. “Cotton Prices – Will They Defy Doomsters Again in 2014?” Agrimoney.com, December 30, 2013, http://www.agrimoney.com/feature/cotton-prices---will-they-defy-doomstersagain-in-2014--247.html. 4. “Cotton Prices Hit 5-Month High as China Fears Wane,” Agrimoney.com, January 16, 2014, http://www.agrimoney. com/news/cotton-prices-hit-5-month-high-as-china-fearswane--6670.html. 5. “Cotton Finds Open Door to Imports in China Despite Massive Inventories,” FUTURES Magazine, December 19, 2013, http://www.futuresmag.com/2013/12/19/cottonfinds-open-door-to-imports-in-china-despite. 6. “Cotton Prices – Will They Defy Doomsters Again in 2014?” Agrimoney.com, December 30, 2013, http://www.agrimoney. com/feature/cotton-prices---will-they-defy-doomstersagain-in-2014--247.html. 7. “Cotton Prices Hit 5-Month High as China Fears Wane,” Agrimoney.com, January 16, 2014, http://www.agrimoney. com/news/cotton-prices-hit-5-month-high-as-china-fearswane--6670.html. 8. “Cotton Prices – Will They Defy Doomsters Again in 2014?” Agrimoney.com, December 30, 2013, http://www.agrimoney. com/feature/cotton-prices---will-they-defy-doomstersagain-in-2014--247.html.

COMMODITIES E

Fig.1

T C

The Cotton “A” Index The Cotton “A” Index is an estimate of the world price of cotton. It is an average of the five lowest quotations for a sample of 19 cottons traded internationally.

250

Cents per pound

200

150

100

0 2010

2011

2012

2013

Source: National Cotton Council of America Note: Index values were unavailable from June 23, 2010 through Aug. 1, 2010 and again from June 10, 2011 through Aug. 1, 2011 due to insufficient quotes from merchants.

Fig.2

Projections for 2014

FACTOR

IMPACT ON COTTON PRICES

COMMENTS

Uncertain demand

With China as the world’s largest consumer of cotton, the country’s surmounting inventories will limit imports in 2014. However, this concern existed in 2013, and consumption remained strong.7

Increasing supply

Forecasts suggest there will be 3.6 million bales in extra production this year.8

OUTLOOK

QTR 2.14

ENERGY MARKET OVERVIEW

COMMODITY

CHANGE IN LAST 12 MONTHS

CHANGE LAST MONTH

Oil (light crude)

-2%

Heating oil

-3%

Natural gas

20%

-4%

Unleaded gas

-6%

Source: CNNMoney.com. Price change shown is from February 13, 2014 to March 13, 2014 or March 13, 2013 to March 13, 2014.

Oil

U.S. liquid fuels consumption rose by approximately 2.1 percent in 2013, with liquefied petroleum gas contributing the most to the increase. Projected liquid fuels consumption for 2014 is flat.1 Production is expected to be strong through 2015: the U.S. Energy Information Administration (EIA) forecasts production to increase from 7.5 million bbl/d in 2013 to 8.5 million bbl/d in 2014 and 9.3 million bbl/d in 2015.2 The growth in U.S. production of crude oil has led to a significant decline in petroleum imports.

Gasoline

Despite price increases due to demand, the EIA projects that lower crude oil prices, strong export demand for diesel fuel, and high levels of refinery runs will put downward pressure on regular gasoline.3 Gasoline retail prices in January averaged $3.29/gallon.

Natural gas

Cold weather in December and January impacted demand, supply, and prices for natural gas, with some of the largest storage withdrawals seen since 1994 (when recordkeeping of withdrawals began).4 Natural gas production is predicted to grow at an average of 2.1 percent in 2014 and 1.3 percent in 2015. Henry Hub natural gas spot prices averaged $4.24/MMBtu in December and $3.73/MMBtu for 2013 overall. Gas spot prices are expected to average $3.89/MMBtu in 2014 and $4.11/MMBtu in 2015.5

International crude oil market The EIA projects that production

slightly, to 1.4 million bbl/d, in 2015. Growth is primarily outside of OECD

of world liquid fuels from non-OPEC

countries, with China the single

countries will grow year-over-year by a

biggest contributor to growth. OECD

record high of 1.9 million bbl/d in 2014,

consumption is expected to decline

while OPEC production will remain

slightly in 2014.

relatively flat through 2014 and 2015,

Brent crude oil spot prices averaged

compared to 2013 levels. Syria and Yemen

between $108/bbl and $112/bbl for the

are expected to continue to contribute

sixth consecutive month in December

to non-OPEC supply disruptions

2013. The EIA expects the Brent crude

over the next two years. Libyan and

oil price to weaken as non-OPEC supply

Iranian crude oil supplies are currently

exceeds consumption; Brent crude oil

unavailable due to unrest in these

prices are expected to average

countries; the timing for this volume to

$105/bbl in 2014 and $102/bbl in 2015.9

become available is uncertain.7

West Texas Intermediate (WTI) crude

Global consumption exceeded

oil spot prices are forecast to reach

estimates in 2013, reaching

$92/bbl in 2014, an average $12/bbl

approximately 1.2 million bbl/d

lower than Brent prices. WTI crude oil

in 2013. Consumption is likely to

spot prices are projected to average

stay at that level in 2014 and grow

$90/bbl in 2015.10

REFERENCES 1. Short-Term Energy Outlook: U.S. Crude Oil and Liquid Fuels, U.S. Energy Information Administration, January 2014. 2. Ibid. 3. Short-Term Energy Outlook: U.S. Crude Oil and Liquid Fuels, U.S. Energy Information Administration, January 2014. 4. Short-Term Energy Outlook: Natural Gas, U.S. Energy Information Administration, January 2014. 5. Ibid. 6. Short-Term Energy Outlook: Global Crude Oil and Liquid Fuels, U.S. Energy Information Administration, January 2014. 7. “OPEC Guide: An Uncertain Year Ahead for OPEC,” Platts, January 7, 2014, http://www.platts.com/news-feature/2014/oil/opec-guide/index. 8. Short-Term Energy Outlook: Global Crude Oil and Liquid Fuels, U.S. Energy Information Administration, January 2014. 9. Ibid. 10. Ibid. 11. Short-Term Energy Outlook: Global Crude Oil and Liquid Fuels, U.S. Energy Information Administration, January 2014. 12. Ibid. 13. Short-Term Energy Outlook: Natural Gas, U.S. Energy Information Administration, January 2014.

COMMODITIES E

Fig.1

Projections for 2014 FACTOR

Fig.2

IMPACT ON ENERGY PRICES

COMMENTS

Strong crude oil production

Record-high year-over-year production growth is expected from non-OPEC countries.11 Increased supply will put downward pressure on prices.

Consumption in China

Consumption is expected to remain flat this year compared to 2013. China and other non-OECD countries are the only areas for potential unexpected growth in consumption, which is dependent on other political and economic factors.12

Severe winter weather

Severe winter weather, especially in the Midwest and Northeast U.S., has caused natural gas supplies to drain faster than expected. Extended periods or specific instances of severe winter weather could cause heightened demand, while lowering supplies.13

Henry Hub natural gas prices Projections

Dollars per million BTU

10 8 6 4 2 0 2013

2014

Historical spot price

2015

STEO forecast price

95% NYMEX futures upper confidence interval

NYMEX futures price

95% NYMEX futures lower confidence interval

Source: Short-Term Energy Outlook, January 2014. Note: Confidence interval derived from options market information for the 5 trading days ending Jan. 2, 2014. Intervals not calculated for months with sparse trading in near-the-money options contracts.

U.S. gasoline and crude oil prices

Projections

12 10 Dollars per gallon

Fig.3

8 6 4 2 0 2010

2011

2012

Retail regular gasoline

2013

Crude oil

2014

2015

Price difference

Source: Short-Term Energy Outlook, January 2014. Note: Crude oil price is composite refiner acquisition cost. Retail prices include state and federal taxes.

OUTLOOK

QTR 2.14

FOOD

MARKET OVERVIEW

Global food prices

The United States Department of

The United Nations’ FAO Food

Agriculture’s Economic Research

Price Index indicated flat prices from

Service (ERS) notes that prices fell

November to December 2013. December

in 2013 for pork, eggs, vegetables, and

saw sharp increases in dairy and

nonalcoholic beverages. At the same

peaking meat prices but a decline in

time, prices rose for beef and veal,

sugar, cereal, and oil prices. In 2013,

poultry, fruit, and other foods.6 ERS

the Food Price Index averaged 209.9

forecasts that food price inflation will

points, slightly above December’s 206.7,

return to a range closer to the historical

which was down 1.6 percent from 2012.

norm: the food, food-at-home and food-

Nevertheless, it remains the third

away-from-home CPIs are expected

highest annual value on record.

to increase 2.5 to 3.5 percent over

Global production of corn has

2013 levels.7 However, severe weather

increased by approximately 270 million

patterns, as have been seen so far this

metric tons since 2004, which kept

winter, particularly in the Midwest and

cereal supplies high and costs low in

Northeast, have already impacted 2014

2013.4

prices and could drive prices higher.

U.S. food prices The Consumer Price Index (CPI) for all food saw only slight changes from September through November 2013. At the end of that period, the CPI was up 1.2 percent from November 2012. The food-at-home CPI has fallen 0.25 percent since January 2012, while the food-away-from-home CPI increased 2.1 percent from November 2012 to November 2013.5

REFERENCES 1. World Food Situation: FAO Food Price Index, Food and Agricultural Organization, http://www.fao.org/worldfoodsituation/foodpricesindex/en/. 2. Ibid. 3. “Innovation and Investment Pop Commodity Price Bubble,” Wall Street Journal, Dec. 8, 2013, http://online.wsj. com/news/articles/SB100014240527023045794045792341 70771914520. 4. Ibid. 5. Food Price Outlook, 2013-14, USDA Economic Research Service, (updated January 24, 2014), http://www.ers.usda. gov/data-products/food-price-outlook/summary-findings. aspx#.UuFB0hAo7rc. 6. Ibid. 7. Ibid.

COMMODITIES E

Fig.1

T C

The Food Price Index The Food Price Index from the United Nationsâ&#x20AC;&#x2122; Food and Agriculture Organization (FAO) is an average of five commodity groups: meat, dairy, cereals, oils and fats, and sugar.

250 240

2002 â&#x20AC;&#x201C; 2004 = 100

230 220 210 200 190 180 2011

2012

2013

Source: FAO.org Note: The November 2013 release of the FAO Food Price Index (FFPI) introduced a number of revisions to the way the FFPI is calculated, including changes to its commodity coverage. The revised FFPI has been extended to 1961.

Fig.2

Price change by commodity

Commodity

Corn

Soy Beans

Wheat

Lean Hogs

Live Cattle

Sugar

Coffee

Change last 12 months

-34%

-1%

-5%

54%

16%

-7%

45%

Change last month

10%

26%

27%

Source: CNNMoney.com. Price change shown is from Mar. 18, 2013 to Mar. 18, 2014 or Feb. 18, 2014 to Mar. 18, 2014.

OUTLOOK

QTR 2.14

COMMODITIES

T F

Fig.3

Food categories and 12-month price outlook