Economic Outlook: Fall 2012
The future of the healthcare supply chain: connecting data + knowledge + people
outlook economic >>> PROVIDING STRATEGIC LEADERSHIP TO FINANCIAL AND CLINICAL HEALTHCARE EXECUTIVES F A L L � 2 0 1 2 � A T W E LV E M O N T H OUTLOOK DATA: Integration across continuum of care Resource utilization PEOPLE: Collaboration KNOWLEDGE: Best practices THE FUTURE OF THE HEALTHCARE SUPPLY CHAIN CO N N E C T I N G DATA + K N OW L E D G E + P E O P L E INTEGRATING ACROSS THE SUPPLY CHAIN An interview with IBM PUSHING THE HEALTHCARE INDUSTRY TOWARD SUSTAINABILITY DEMAND DRIVEN PURCHASING IN HEALTHCARE: Realignment of buyers and sellers? About the cover The cover design demonstrates the innovation of a product as common as a lightbulb. Hospitals and health systems have seen tremendous savings through retrofitting light emitting diodes (LED) in their facilities and parking garages, in addition to a reduction in carbon emissions. Through greater availability and integration of data, implementation of best practices, and collaboration among stakeholders, we can build a better healthcare supply chain. About the publication The Economic Outlook is Premier's flagship publication that highlights emerging economic and industry trends impacting our membership and shaping the healthcare landscape. As an important thought leadership resource, the publication provides strategic insight to financial, clinical and supply chain healthcare executives across the country. A key aspect of the long-term strategy for the Outlook is to collaborate with internal and external subject matter experts to build consensus from diverse points of view. The publication harnesses the expertise of our network of healthcare leadership to illuminate best practices and strategies needed to drive performance improvement. We strive to provide our members and healthcare organizations with valuable, timely information and business intelligence derived from the industry's most progressive participants. The focus of this edition of the Outlook is the healthcare supply chain and its relationship to corporate strategy. The content is intended to help our readership understand the implications of health IT and the need for data integration for supply chain management in U.S. hospitals and health systems; the role of supply chain managers in leading demand-driven innovation; and how strategic management and positioning of the supply chain can lead to competitive advantages in the healthcare marketplace. We welcome your comments and questions. For additional information, please email email@example.com. premierinc.com/economicoutlook � 2012 By Premier Inc. All rights reserved. letter 04 EXECUTIVE LETTER THE FUNDAMENTALS OF COLLABORATION AND INNOVATION Mike Alkire, chief operating officer, Premier healthcare alliance features 06 THE FUTURE OF THE HEALTHCARE SUPPLY CHAIN INTEGRATING ACROSS THE SUPPLY CHAIN: An interview with IBM Tim Wood, vice president and partner, public sector operations and supply chain management, IBM Karen Parrish, vice president, industry solutions, IBM software group.......................................................................................................06 MEDICAL DEVICE INNOVATION IN AN UNLIKELY PLACE Frank Douglas, PhD, MD, president and CEO, Austen BioInnovation Institute............................................................................10 DEMAND DRIVEN PURCHASING IN HEALTHCARE: Realignment of Buyers and Sellers? Eugene Schneller, PhD, director, health sector supply chain initiatives, W.P. Carey School of Business, Arizona State University...........................13 PHARMACY AUTOMATION AND TECHNOLOGY: Optimizing the medication use process Karen Bertch, PharmD, FCCP, director, Pharmacy Drug Intelligence, Premier healthcare alliance Jay Souza, RPh, director, Pharmacy Consulting, Premier healthcare alliance....................................................................................18 38 ECONOMICS A CONVERSATION WITH Lee Stafford, managing director, economics and research, Ally Financial....................................................................................................... 38 A LOOK AT THE INDUSTRY WITH BARCLAYS Joshua Raskin, CFA, managing director of equity research, managed care and healthcare facilities, Barclays Lawrence Marsh, CFA, managing director of equity research, healthcare distribution and technology, Barclays.................................. 42 BEHIND THE NUMBERS: Financial and economic trends impacting our members..................... 44 AN UPDATE ON HOSPITAL PERFORMANCE METRICS.......................... 52 . PREMIER'S PATIENT VOLUME TRENDS........................................................ 56 Premier's guide to economic indicators....................................................... 60 Premier's supply chain solutions.................................................................... 62 Premier's inflation summary........................................................................... 63 64 COMMODITIES OVERVIEW 2013 COMMODITIES OUTLOOK: A calmer volatility?............................. 64 Minimizing raw materials risk........................................................................... 66 Copper market overview.....................................................................................68 Cotton market overview..................................................................................... 70 Energy market overview.................................................................................... 73 Food market overview....................................................................................... 76 Plastic resins market overview....................................................................... 78 Rubber market overview.................................................................................... 80 Steel market overview .........................................................................................82 22 PERSPECTIVES THE HEALTHCARE SUPPLY CHAIN: Pushing the healthcare industry toward sustainability........................................................................................................22 34 TRENDS IN COST AND UTILIZATION ABSTRACTS OF COST AND UTILIZATION ANALYSES CONDUCTED BY THE PREMIER HEALTHCARE ALLIANCE..........................................................34 OUTLOOK LEADERSHIP Managing director Kayla Sutton Executive sponsors Mike Alkire, chief operating officer Durral Gilbert, president, supply chain services Amy Denny, vice president, contract management A special thanks to Eric Johnson, Rich Westbay, Ray Perigard, Tina Harlan, Laura Yandell and John Hall for their contributions to this edition of the Economic Outlook. EDITORIAL STAFF Design and production Christopher Cardelli, director, creative services Sung Ginader, senior graphics designer, creative services Bryan Verrone, project manager, creative services Arkon Stewart, designer, StewartMarr Creative Editorial support Amanda Forster, senior director, public relations Alven Weil, director, public relations Bryan Alsop, senior manager, corporate communications OUTLO OK � FALL 2 0 1 2 | 3 Strange bedfellows Executive letter The fundamentals of collaboration and innovation In the case of Foldit, UW needed the freedom to reach out to unlikely resources to get past the problem and move the innovation forward. If the scientists hadn't come up with this novel approach, we might not have a new generation of drugs to fight AIDS. Healthcare has also embraced this "strange bedfellows" approach. In Akron, OH, the city's three competing integrated delivery systems � including Premier owner Summa Health System � are collaborating to better serve their individual communities. They've partnered with local academic institutions to form the Austen BioInnovation Institute in Akron (ABIA). This edition of Economic Outlook features a story on ABIA, which is focused on patient-centered innovation that spurs local and national job development and improves community health. In Detroit, another Rust Belt city hit hard by the economy, Premier owners and traditional competitors Henry Ford Health System (HFHS) and Detroit Medical Center (DMC) are partnering with Cardinal Health to revitalize part of the city's midtown landscape. Cardinal is constructing a distribution center that will provide medical products to both HFHS and DMC. The partnership is projected to bring hundreds of jobs to the area while significantly reducing costs for all three healthcare providers. Yet again, we have an example of an uncommon collaboration among organizations that share a common goal � improving the health and welfare of their community. Members of the Premier healthcare alliance, Despite more than a decade spent applying the most advanced technology in existence, scientists at the University of Washington (UW) were unable to decode the structure of a protein that could usher in a new generation of anti-HIV drugs. Desperate for progress, the scientists embarked on what they termed a "last ditch effort." They posted the protein to an online game site called Foldit and asked the site's "gamers" to help them solve the problem. The majority of these gamers had no background in chemistry, yet they were able to decipher the structure in less than three weeks. That success had eluded some of the nation's foremost scientists for years. This is a clear example of the power of collaboration and its role in driving innovation. UW harnessed the collective experience of computer scientists, biochemists and engineers, combining it with the communal energy of completely untrained gamers, to solve a vexing problem that could benefit millions of people. Before this could be accomplished, though, certain fundamentals had to be in place. We have an example of an uncommon collaboration among organizations with a common goal � improving the health and welfare of their community. Further west, hospitals across Hawaii have partnered with Premier and the Hawaii Medical Service Association (a Blue Cross and Blue Shield Association, independent licensee) to improve quality and reduce costs for the islands' residents. The hospitals, participating in a statewide version of Premier's QUEST� program, are making strides toward improving patient safety and satisfaction while reducing costs, readmissions and mortality rates. Free-flowing information Innovation is also furthered by transparent and freely available research and information. While data in isolation can be useful, the power to initiate meaningful change comes from the ability to share openly with others, tinker with the problem, and build upon shared successes. Had the UW researchers kept their protein problem secret, no one would have had the opportunity to contribute to the solution. As an Akron native, I've seen my hometown, like other cities in the Rust Belt, face significant struggles stemming from the decline of manufacturing. There was an overwhelming need to move away from industries such as tire and rubber that previously drove the city's population and economic growth. Plato once said that necessity is the mother of invention. ABIA President and CEO Frank Douglas, MD, a 30-year healthcare industry veteran, takes it a step further. "If necessity is the mother of invention," he says, "then dire necessity is the father of innovation." To address the dire necessity of improving its economic conditions, Akron is reinventing itself through innovative efforts like ABIA, where the underlying foundation is collaboration. Three competing health systems are willing to put aside their competitive differences to further the development of innovative, life-saving medical devices. 4 | EXECUTIVE L ET TE R �2012 by Premier Inc. All rights reserved. Premier is working to bridge this gap through our integrated performance platform, PremierConnectTM. We're linking information in new and exciting ways to create communities of innovation, where data can be used for insights and real-time solutions. PremierConnect is linking information in new and exciting ways to create communities of innovation, where data can be used for insights and real-time solutions. Linking information and creating problemsolving communities enables us to leverage our assets and uncover trends or ideas that may be hidden within individual health systems. And that allows us to bring new insights to you, putting the vital components of information, collaboration and scale at your fingertips in our combined goal of improving both the cost and quality of care. In practical terms, this will help supply chain executives make better purchasing decisions � ones that are based on price and quality and supported by thousands of outcomes and a nationwide peer network. This network will not only provide feedback on potential contracted products, it will also alert participants to new contract launches and best-price opportunities. Premier's QUEST collaborative is another conduit to improve information flow, with all participating hospitals agreeing to share data and best practices with one another. QUEST facilitates this with multiple on-site and online meetings, during which higher-performing participants share best practices to drive improvements collaborative-wide. McLeod Health is a QUEST member that has received significant benefits from this transparent data sharing. In a recent effort to reduce expenses, the Florence, SC- based system analyzed cost data across all QUEST hospitals for different surgical procedures. McLeod found examples where the cost of some orthopedics and cardiac procedures were significantly lower at other QUEST hospitals, yet produced similar clinical outcomes. McLeod executives reached out directly to the higher-performing facilities to learn how they achieved these cost and quality successes. jobs and improve community health. And through vehicles like PremierConnect, research, information and clinical outcomes are flowing freely, allowing the processes necessary for discovering, sharing and spreading great ideas to be operationalized. We all recognize the underlying healthcare problems and their root causes. We also now see bright spots within the system that give us hope. But in the past, few took the time to investigate or provide details as to how problems could be transformed into those elusive bright spots. That's what this issue of Economic Outlook is all about. Our goal is to detail practical strategies that health systems can use to achieve cost, quality and supply chain efficiency. That focus on execution and implementation is what makes our alliance unique. It's what drives clinical results, takes our McLeod found that cost differences were often supply chain-related, which led staff to re-evaluate their use of medical devices and supplies. This analysis played a key role in helping the health system reduce surgical costs for several cardiac and orthopedic procedures by up to 22 percent. Transparent data sharing in QUEST� helped McLeod reduce several cardiac and orthopaedic surgical costs by up to 22 percent. One of the best attributes of QUEST is its two-way street approach. While participating in the collaborative, McLeod developed a program that reduced mortality for all patients by identifying those at highest risk and proactively intervening with a clinical "rover" team. As a highperformer in this area, the system shared this best practice and lessons learned to benefit the rest of the collaborative. Necessity driving innovation The earlier examples are clear illustrations of necessity driving innovation and collaboration. Across healthcare, we're seeing competing health systems put aside differences to develop innovative partnerships that reduce costs, produce "price at the pump" to best-in-the-industry levels (and sometimes to zero), and improves the health of our communities. It's about results, and in the end, that's what separates our alliance from the rest of the industry. Sincerely, Mike Alkire Chief operating officer Premier healthcare alliance OUTLO OK � FAL L 2 0 12 | 5 S U P P LY C H A I N F UT U R E ECONOMIC O U T LO O K Integrating across the supply chain: An interview with IBM > Many might not know that the supply chain was integral in the development of ATMs, floppy disks, and hard drives. That's because in the early 1990s, IBM, the creator of these staples in today's society, was at a crossroads. The technology giant faced the unthinkable: bankruptcy. But a new executive team infused better processes into the company's business culture, and just a few years later, "Big Blue" reached record sales levels. One of the key areas of focus during IBM's reemergence was the streamlining of its supply chain, which now achieves annual savings exceeding $6 billion. We sat down with Tim Wood, vice president and partner, IBM public sector operations and supply chain management practice area leader, and Karen Parrish, vice president, industry solutions, IBM software group, to discuss the role of supply chain integration in IBM's resurgence and continued success. Tim Wood, vice president and partner, IBM public sector operations and supply chain management Karen Parrish, vice president, industry solutions, IBM software group > 6 | S U PPLY C HAI N FUTU R E �2012 by Premier Inc. All rights reserved. One of the key areas of focus during IBM's reemergence was the of its supply chain streamlining OUTLO OK � FALL 2 0 1 2 | 7 > What supply chain techniques and best practices can the healthcare industry glean from other industries? Tim Wood (TW): When it comes to supply chain strategies, healthcare is behind other industries, such as retail. And that's understandable. Unlike retail, which is very much about bottom-line costs, healthcare is focused on so much more than costs, most notably on patient care. In retail, technology and data have played major roles in supporting marketing and launching products. While healthcare has made great strides in this area, technology alone is not the answer. What's needed is technology combined with processes and skills. It's about getting the proper insights from the data � analyzing, learning, and using it for predictive capabilities and, in healthcare, to benefit care delivery. With the advent of advanced technology, information can replace the inventory. We're integrating customer orders with inventory management and then "making what we sell" rather than "selling what we make." Karen Parrish (KP): Supply chain is as much a data problem as a business problem. I liken it to what we saw in retail 15 years ago, when supply chain was a hot item of discussion. One predominant train of thought was that data was a competitive advantage not to be shared. But companies like Wal-Mart realized that sharing data and opening up the supply chain to vendors could help them better manage inventory and overcome silos, and it did just that. On the other hand, some of Wal-Mart's competitors kept their data to themselves, and that ended up hurting their market share. In some cases, Wal-Mart does not even take ownership of the inventory until it is sold. I believe this technique could be used for high-price implants in hospitals. This is a hurdle healthcare is trying to overcome outside of the realm of the supply chain and in particular with payers and providers. We're seeing that both parties realize there's something greater out there than an EMR. As Tim suggested, it's about making the data actionable. Every industry needs a leader out front taking risks to make great strides and enhance supply chain efficiency. Wal-Mart is a perfect example. And so is Premier, with its aggressive data aggregation and sharing strategies. Discuss the role of the supply chain in IBM's resurgence in the early 1990s. TW: Up until the early 1990s, IBM did not use the strength of its size to align the supply chain. Purchasing was largely decentralized, with little coordination across 100 or so business units. So our first step was to scale our contracts. For example, we were using multiple companies for air travel across all 100 business units. We were able to save a substantial amount by choosing a select set of airlines for the entire company. Our next area of focus was around process improvements. We wanted to remove costs, beyond just negotiating with suppliers for lower prices. We introduced processes, such as automated supplier invoicing, to take expenses out of the supply chain. In one example, we examined the cost of packaging among different locations. We found that sometimes a great deal of cost was tied up in packaging at one site, with no value-add to the receiving customer. By standardizing packaging, we achieved additional savings without compromising quality. Similar to the Wal-Mart example, we also enhanced supplier communications and transparency. We're working closely with our key supplier partners to ensure we are properly aligned and headed in the right direction. KP: Outsourcing of non-core competencies played a key role in our resurgence. All companies with large supply chains have had to make decisions on outsourcing, based on what's best for them. For instance, years ago many retailers owned freight trains that were used to transport their goods. But retailers aren't transportation experts. IBM assessed what was core to its business and what non-differentiating functions could be outsourced. IBM assessed what was core to its business and what non-differentiating functions could be outsourced. 8 | S U PPLY C HAI N FUTU R E �2012 by Premier Inc. All rights reserved. S U P P LY C H A I N F UT U R E ECONOMIC O U T LO O K Patient-centeredness is where healthcare starts and should end, whether we're talking about gauze pads or point-of-care services. The industry needs this type of forward-thinking collaboration to deliver better care at a better cost. All of the areas we mentioned help us save about $6 billion annually. They continue to be key to our supply chain successes, and we're constantly looking for other innovative ways to reduce supply chain costs without sacrificing quality. Healthcare has learned quickly that when the patient or consumer gets involved amazing things will happen across the board, including with the supply chain. In the future, we'll also see the use of passive RFID tags to track expensive inventory items such as implants. TW: Over the past decade, the focus has been on data capture. Moving forward, leading companies will target analytics and data use. We are seeing a shift to best-in-class and cloud-based approaches; both provide more flexibility for adjusting to business changes than ERP systems of the past. This gets back to the outsourcing approach Karen mentioned. Some companies don't need to run their own IT function, and outsourcing this can offer additional flexibility. The need for more customized patient care adds another layer of complexity to the supply chain. Likening it back to retail, 10 years ago we had one choice to make when buying toothpaste � the flavor. But today, it's flavor as well as options around whitening and sensitivity. Likewise, patients have more options in how they're treated, both with the regimens and products used. Providers must be prepared to meet new patient demands and needs. As the healthcare supply chain grows more complex, companies must have the information and process architecture to deal with that complexity. How do you think the supply chain will evolve over the next three-to-five years? KP: We will continue to see more overlap and collaboration between the traditional "product" supply chain and the "supply chain of care." The care side is all about keeping the patient at the center, and the supply side is moving toward the same approach. Patient-centeredness is where healthcare starts and should end, whether we're talking about gauze pads or point-of-care services. The industry needs this type of forward-thinking collaboration to deliver better care at a better cost. Consumer requirements have forced a great deal of retail supply chain improvements and advancements. The consumer or patient aspect hasn't yet played a significant role in determining healthcare supply chain processes, but that's changing. < OUTLO OK � FALL 2 0 12 | 9 MEDICAL DEVICE INNOVATION IN AN UNLIKELY PLACE For many, mention of industry in the Rust Belt conjures up visions of what once was in our country. But to Frank Douglas, PhD, MD, it represents what could be. An award-winning industry veteran with almost 30 years of experience as a leader in healthcare, pharmaceutical research and entrepreneurship, Douglas currently serves as president and CEO of the Austen BioInnovation Institute (ABIA) in Akron, OH. ABIA is a partnership forged by the city's three hospital systems, including Premier owner Summa Health System, the University of Akron, and the Northeast Ohio Medical University. The institute is focused on patient-centered innovation and commercialization at the intersection of biomaterials and medicine. It features a cadaver lab and a high-tech simulation center that enables healthcare providers, students and companies from throughout the nation to gain skills or try out new products and procedures. 10 | SU PPLY C HAI N FUTU R E �2012 by Premier Inc. All rights reserved. S U P P LY C H A I N F UT U R E ECONOMIC O U T LO O K ABIA is a partnership forged by the city's three hospital systems, including Premier owner Summa Health System, the University of Akron, and the Northeast Ohio Medical University. Traditionally, Rust Belt cities have not been at the forefront of innovation. But that's not the case in Akron, thanks to a burgeoning, world-class hospital community and the growth of the University of Akron's polymer science program, coupled with a community that is increasingly embracing advancement. "If necessity is the mother of invention, then dire necessity is the father of innovation," Douglas said. "Cities like Akron have been to the pinnacle, so they know what it's like. In Akron's case, it was once the rubber capital of the world, but many tire and rubber companies have left. The city is focused on regenerating and transforming itself." Focus on medical device development ABIA encompasses five interrelated centers designed to accelerate translational research to biomedical commercialization while improving access, education, prevention, treatment and disease management. ABIA's Medical Device Development Center provides a unique resource for companies and researchers to design, test, synthesize, and manufacture new materials and healthcare applications. It also provides entrepreneurs and scientists with flexible and easy access to resources for commercialization of their ideas and products. The Innovative Solutions for Invention Xceleration (ISIX) process is the heart of the Medical Device Development Center. The process was recently recognized by the U.S. Department of Commerce as one of the best ideas for technology commercialization and entrepreneurship in the United States. Douglas says that in five to 10 years, he hopes Akron will be thought of as a place to: � Learn about and achieve acceleration in the biomaterials space; � Find cutting-edge simulation technologies; � Train and develop integrated healthcare teams and young physicians; and � Improve the health of communities. National focus U.S. based companies dominate the global device industry and account for approximately 40 percent of the world market for medical devices and instruments. But the gap between America and the rest of the world is shrinking, even as emerging countries prioritize frugal medical engineering, sometimes at the sacrifice of quality. For that reason, ABIA's goals expand well beyond northeast Ohio, and Douglas says the partnership is "passionate about the United States retaining its lead in medical device development and innovation." THE ISIX PROCESS: > Increases the number and quality of ideas at the head of the institute's innovation pipeline; > Provides early assessment for commercial potential; > Facilitates proof-of-concept prototyping in the Medical Device Development Center and others; > Identifies and resolves design, manufacturing or regulatory issues; and > Develops appropriate commercialization and marketing plans. Value-driven engineering "We believe that ISIX is a highly effective way for an innovation to move to commercialization." Douglas said. Supported by medical and entrepreneurial leadership, desired ISIX outcomes include the creation of new companies and increased jobs associated with the biomedical and polymer science industries in northeast Ohio. stresses ingenuity and innovation that improves clinical utility, reduces complexity to the end user, and increases cost efficiencies across the entire healthcare continuum. OUTLO OK � FALL 2 01 2 | 11 Douglas references NASA when discussing the principle of reducing complexity. "When we put astronauts into space, they are in a resource-constrained environment. All of the devices they take with them have to be useful and have a low level of complexity, because if the astronauts can't use or fix them, nobody else will be there to do so. Although the situation may not be as extreme, we need to think this way with medical devices." As Douglas suggests, value driven engineering has four very clear core, defining principles: � Quality is never sacrificed for the sake of a cheaper or less costly version; � Clinical utility is driven by patient centered demand; � Complexity is reduced for the end user; and � Cost savings and efficiencies are introduced across the health system. "Many other countries are frequently more focused on reverse engineering that leads to lower manufacturing costs but can sacrifice quality. Value driven engineering stresses ingenuity and innovation that improves clinical utility, reduces complexity to the end user, and increases cost efficiencies across the entire healthcare continuum." Collaboration is the key Douglas stresses that ABIA's backbone is the concept of collaboration, citing public private engagement and investment in the nation's biomedical device industry as critical to the quality and viability of the healthcare system and its formidable job creation. "This effort is all about collaboration that will not only benefit the organizations involved, but more importantly, the communities they serve. ABIA partners are all-in on that concept. They understand that patients are waiting, and they're committed to explore all types of collaboration." Summa, ABIA collaborate on pacemaker implant simulator One of ABIA's initial successes is its partnership with Summa Health System to develop a simulation device that allows physicians to practice the procedure of implanting pacemakers through the vein. The device, dubbed PacerMan, was developed and tested at the ABIA and is now in licensing negotiations. PacerMan looks like a neck and torso without arms and legs. It uses an actual monitor and equipment to allow doctors-in-training to practice careful insertion of the pacemaker wire through a vein in the neck or chest. PacerMan most likely will be used to train residents in the fields of emergency medicine, cardiology, and critical care, according to the device's co-creator, Dr. Rami A. Ahmed, an emergency medicine physician and simulation medical director at Summa Health System. 12 | SU PPLY C HAI N FUTU R E �2012 by Premier Inc. All rights reserved. DEMAND DRIVEN PURCHASING IN HEALTHCARE: S U P P LY C H A I N F UT U R E ECONOMIC O U T LO O K Realignment of buyers and sellers? Eugene Schneller, PhD, is a professor and director of health sector supply chain initiatives at the W.P. Carey School of Business at Arizona State University. Demand policies for healthcare practice innovation On June 28, 2012 the Supreme Court voted to uphold the Patient Protection and Affordable Care Act (ACA) (PL111-148), signaling that American healthcare will never again be quite the same. Embedded in the act are a series of policies stimulating demand-based innovations and their diffusion through guidelines and incentives that affect the delivery of healthcare. The policies include the formation of accountable care organizations (ACOs), the Center for Medicare and Medicaid Innovation (the Innovation Center), the Patient-Centered Outcomes Research Institute (PCORI), and new reimbursement initiatives, such as bundled payments.1 All are part of a design to encourage greater collaboration and integration among providers, to enhance quality through evidence-based medicine and to implement innovation projects through the Innovation Center. Goals include linking payments to quality performance and outcomes and developing interdisciplinary teams to support primary care practice and patient-centered care. Early response to these policies, such as the proliferation of ACOs, suggest that the healthcare delivery system may change from a supplier-driven to a demand-driven system, or in the parlance of traditional supply chain management, from a push to a pull system. In the instance of healthcare, demand (pull) is created by the hospital buyer and/or an external force, such as the government, which redesigns the nature and flow of supplies, services, and people. OUTLO OK � FALL 2 0 1 2 | 13 Demand-based innovation is a "set of public measures to increase the demand for innovations, to improve the conditions for the uptake of innovations, and/or to improve the articulation of demand in order to spur innovations and the diffusion of innovations." The current supply chain infrastructure must support the ensuing operational transformation associated with the ACA. (Curiously, the ACA did not suggest how best to leverage the significant existing opportunities for product cost containment and value enhancement.) By default, healthcare supply chain leaders are challenged to become change masters who orchestrate internal responses to demandgenerated innovations and visionary leaders who facilitate collaboration among external suppliers in support of quality, accountability, and value in patient care. While progressive managers are beginning to develop the necessary infrastructure, comprehensive processes that further clinical and business goals through supplier engagement are still in the early stages. Demand signals and the internal environment MANAGING THE TRANSACTIONS. Healthcare supply chain managers have become sophisticated practitioners of the transactional, tactical, and logistical functions associated with the sourcing and moving of products to those who provide care. Stock outs remain relatively rare, the number of electronic orders has increased, and technologies, such as smart cabinets and bar-coding, provide efficient product replenishment at the point of use. As systems become more integrated, both horizontally, through mergers and acquisitions, and vertically, by taking on the full range of services needed to provide patient care, proactive supply chain managers are extending their He althcare Management Se nior Le ade rship Te ams Supply Chain Management Accounting Management Trans ac t ion al Tac t ic al Lo gis t ic al competencies and capabilities to meet operational challenges associated with serving the continuum of care and managing the sourcing of services and materials. They are doing this by extending the supply chain, participating in strategic efforts to redesign systems of care, and working closely with clinicians to understand how they can contribute to the organization's overall mission and goals, including reduction of readmissions and hospital-acquired infections. REPOSITIONING SUPPLY CHAIN MANAGEMENT. Although exact numbers are unavailable, preliminary research at the Health Sector Research Consortium, a research group within Arizona State University (HSRC-ASU), indicates that more than 25 percent of systems have elevated supply chain management to C-suite status, while over 50 percent have supply chain representatives on senior leadership teams. There they orchestrate internal change, ensure that hospital systems are integrated at the operational level of supplies, and successfully engage external stakeholders. These supply chain executives are also developing a greater understanding of the clinical environment and defining a more strategic role for supply chain. Their success has been hindered by non-supply chain colleagues' lack of appreciation for supply chain value and by the absence of information systems that fully integrate business and clinical functions to support strategic decision making. Few solutions appear on the horizon, as C-level meetings and continuing education gatherings rarely emphasize the healthcare supply chain, and few CEOs or CFOs participate in high-level supply chain meetings. In executive education sessions conducted by HSRC-ASU, CEOs fared poorly in supply chain manager assessments of their awareness of and attentiveness to supply chain issues. Although CEOs may be less likely to be the weak link in the healthcare supply chain going forward, many supply chain mangers report that: � Short-term thinking by CEOs continues to sabotage supply chain opportunities, and � CEOs fail to clearly articulate supply chain strategies to the hospital's employees and customers. 14 | SU PPLY C HAI N FUTU R E �2012 by Premier Inc. All rights reserved. Factors impacting the supply chain: Premier survey data S U P P LY C H A I N F UT U R E ECONOMIC O U T LO O K Surveys were sent to staff members with varying roles within hospital and healthcare systems. When asked to identify the areas of supply chain improvement resource utilization they felt were most important or impactful, responses sometimes differed by organizational role (see Figure 1). Figure 1. Areas of supply chain improvement resource dedication, C-suite and supply chain managers compared to all respondents Top areas of supply chain improvement resource dedication Product standardization (e.g., reducing the number of vendors that supply similar products) IT investments (EHR specific ) Building relationships with physicians and clinicians Reducing costs for physician preference products Value analysis Reducing costs for commodities products IT investments (non-EHR specific) Data standardization (e.g., standardization of item masters and accounting systems across facilities) Integrating supply chain and revenue cycle systems Automation Overall 33% 31% 27% 27% 27% 12% 12% 12% 12% 7% C-suite 26% 37% 33% 36%* 29% 6%* 12% 6%* 10% 5% Supply chain or material mgmt. 27% 21%* 27% 29% 35% 14% 13% 14% 11% 10% *Statistically significant difference compared to overall (95 percent confidence). This chart shows C-suite and supply chain or materials management responses compared to all responses. Source: Premier online survey for Economic Outlook Fall 2012 publication. Surveys also addressed factors that have the greatest impact on the supply chain. All respondents ranked cost-savings goals of the organization, the value-analysis process, and integrating the supply chain across the continuum of care as top priorities. Cost-savings goals were the first priority for all organizations, regardless of size. The value-analysis process was ranked a top factor by a significantly higher percentage of multi-hospital systems than other organizational types (see Figure 2). Figure 2. Factors with greatest impact on supply chain, by organizational type Multi-hospital system/IDN 31% 28%* 17% Large hospital (501+ beds) 25% 16% 25% Midsized hospital Small hospital Critical access hospital (fewer Senior-living (less than (between facility than 25 beds) 200 beds) 200 and 500 beds) 32% 19% 13% 26% 21% 11% 20% 10%* 18% 17% 17% 33% Factors Cost-savings goals of the organization Value-analysis process Integrating the supply chain across the continuum of care Medical device prices Drug shortages Healthcare information technology Commodity prices Comparative effectiveness data Other Overall 28% 19% 17% 10% 10% 5% 5% 4% 2% 7% 7% 3% 1%* 3% 4% 9% 9% 9% 5% 2% 0% 17%* 9% 4% 0%* 5% 2% 10% 14% 4% 9% 4% 0% 5% 21%* 10% 10% 7% 0% 0%* 0%* 8% 25% 0% 0% *Statistically significant difference compared to overall (95 percent confidence). Source: Premier online survey for Economic Outlook Fall 2012 publication. OUTLO OK � FALL 20 1 2 | 15 As reported in HSRC-ASU research, IT solutions are also behind improved revenue recovery, especially for items with direct reimbursement, because they improve the linkage of charge and item masters at the hospital and system levels. CLINICAL ENGAGEMENT. Preliminary research at HSRC-ASU indicates that less than a third of systems have formally situated physicians in clinical supply chain leadership positions. Yet these early study results indicate that almost 75 percent of studied systems have physician engagement in the value-analysis process. The continued paucity of evidence regarding the comparative effectiveness of products, however, impedes the impact of these efforts. How ACOs and bundled payments will promote clinical engagement in supply chain, in the absence of clinical evidence pertaining to materials, also remains uncertain. SUPPLY MANAGEMENT PARTNERS WORKING TOGETHER. Distributors, GPOs, and information technology providers recognize the needs and challenges of their customers and appear to be agile in responding appropriately to demand through innovative services and expanded analytic products that support patient care. Spend analytic tools, such as Premier's SpendAdvisor� and distributor analytic tools to manage activity-based fees, are prime examples. As reported in HSRC-ASU research, IT solutions are also behind improved revenue recovery, especially for items with direct reimbursement, because they improve the linkage of charge and item masters at the hospital and system levels.3 Catholic Health East, a Premier member, was recently reported to have increased net revenue by $3 million after standardizing its chargemaster across 10 departments.4 Tools under development in response to the demand signals from CMS assess patient risk for readmission and the need for monitoring performance. It will be some time before the FDA's requirement for unique device identification (UDI) is fully implemented by manufacturers and implemented across healthcare providers, so the effect on innovation in this arena remains to be seen. Demand signals and the external supplier While barriers to full EHR adoption remain, initiation of grant programs, participation in industry-specific bodies, and response to support of standards development by the Office of the National Coordinator for Health Information Technology demonstrate that demand signals are effective in stimulating technology innovation.5 The percentage of U.S. hospitals adopting EHRs has more than doubled (from 16 to 35 percent) between 2009 and 2011.6 Yet there is currently no demand policy, nor are there subsidies targeting medical device innovation to support health reform policies. For the manufacturing community to collaborate in innovation, buyers (hospitals, systems, and their purchasing representatives) must: � Articulate what is needed and how manufacturers' responses will be translated into action (especially with respect to contracts, sales, and utilization); � Work within the hospital and clinical community and with manufacturers to develop standards that reflect needs, promote competition, guide manufacturers' and providers' response to innovation, and make products attractive across the field; � Partner with manufacturers to develop technologies and services that simultaneously meet the needs of manufacturers, the economic customer (i.e., the hospital or IDN), and the clinical customer (especially physicians and nurses); and � Work together to counter the continued lack of trust and the belief by both manufacturers and hospitals that one will not act in the other's best interest. To support patient-centered goals, it is time for purchasers to demand a clear set of materials-focused criteria and provide accompanying incentives and assurances regarding adoption. The predictable outcome will be a new set of devices and services that will mitigate new technology design uncertainties and customer 16 | SU PPLY C HAI N FUTU R E �2012 by Premier Inc. All rights reserved. S U P P LY C H A I N F UT U R E ECONOMIC O U T LO O K acceptance challenges. Additional considerations must be given to co-financing projects between suppliers and providers (including payors) for innovation development, marketing, training, and diffusion. Edler has pointed out that a prerequisite for demand-based innovation is the extent to which "companies are open to customers, oriented towards their real needs, and in fact help to anticipate and define future needs." Studies from other sectors, including manufacturing, electronics, and retail, have recognized that trust is critical to collaborative innovation. Demand-driven innovation is challenged by the lack of trust across the supply chain. Project Trust � a HSRC-ASU board-endorsed initiative to improve collaboration across the healthcare supply chain � has revealed that supply chain participants do not comprehend that trust is the single most important prerequisite for procurement innovation or that it requires understanding one another's pain points. To move forward, a buyer-articulated demand policy must: � Specify which aspects of the $200 billion spent annually on supplies are candidates for innovation; � View materials as assets that promote excellence in patient outcomes and support less-invasive procedures as well as reductions in hospital-acquired infections and length of stay; � Identify how meeting buyer-defined demand can reduce the cost of processes associated with product management and delivery of care; � Improve transparency in productperformance data and research investment in products that support high-quality patient care and value-based contracting; � Instill confidence in payor receptivity to information in support of claims for value-based insurance reimbursement and other forms of revenue recovery; and � Clarify how demand-driven innovation policies and incentives are consistent with acceptable business practices and codes of conduct. Many suppliers are already responding to the changing landscape and trying to better understand the economic customer while continuing to serve the clinical customer. Hospital-based supply chain leaders must ensure that: � Preferences and standards are effectively transmitted to suppliers; and � The marketplace has the necessary support and assurance that the hospital and clinical community will respond appropriately. It is a critical time for those purchasing products, collectively through alliances and individually through their considerable purchasing power, to come together to articulate a clear set of materials-focused demand criteria and accompanying incentives and assurances to support the strategic goals for provider organizations. *This piece draws heavily on research carried out on demand-driven purchasing in the U.S. and throughout other nations and is supported by the Health Sector Supply Chain Research Consortium (HSRC-ASU). 1."Bundled payments for care improvement." CMS Center for Medicare & Medicaid Innovation, http:// innovation.cms.gov/initiatives/bundledpayments/index.html. 2. Edler, Jacob. "Demand policies for innovation." 2009. 3. "Supply chain and revenue cycle integration: asset management in U.S. hospital systems," Health Sector Supply Chain Research Consortium, http://www.stoptheleakage.com/Registered/Docs/ SupplyChainWhitepaper_Nov30.pdf. 4. "Revenue integrity in healthcare: the solution to revenue leakage," Craneware Inc., http://www.stoptheleakage.com/Registered/Docs/Whitepaper1.pdf. 5. "Stage 2 Meaningful Use NPRM moves toward patient-centered care through wider use of EHRs," The CMS Blog, http://blog.cms.gov/2012/02/28/stage-2meaningful-use-nprm-moves-toward-patient-centeredcare-through-wider-use-of-ehrs/. 6. "HHS Secretary Kathleen Sebelius announces major progress in doctors, hospital use of health information technology," U.S. Department of Health & Human Services, http://www.hhs.gov/news/press/2012pres/02/2012021 7a.html. OUTLO OK � FALL 2012 2 | 17 Pharmacy automation and technology: Optimizing the medication use process Karen Bertch, PharmD, FCCP, director, Pharmacy Drug Intelligence, Premier healthcare alliance Jay Souza, RPh, director, Pharmacy Consulting, Premier healthcare alliance In today's healthcare environment, high-quality, efficient and cost-effective services are expected by patients and payors. This type and level of service can be provided by pharmacy departments through successful implementation of pharmacy automation and technology that streamlines and improves the accuracy and efficiency of the medication-use process.1,2 For hospital staff to reduce patient morbidity and mortality rates, it is imperative that they immediately initiate appropriate medication therapy and continue its administration as scheduled. Patients have a right to receive, and hospitals have an obligation to provide, the right medication, for the right reason, at the right time � which, in turn, promotes optimal resource utilization. For this to happen, however, nurses must have access to the correct medications when they need them. Before medications can be dispensed, regulations and professional standards require pharmacists to review patient orders and ensure that medications remain secure yet available when needed. Many factors can complicate this workflow and impact the timeliness of delivery, and the sheer volume of new orders exacerbates the challenge. For example, within a 300-bed hospital, nurses may administer 2,400 to 4,000 doses of medications daily across all patient-care areas. Therefore, the pharmacy, nursing and technological processes must be synchronized to provide the correct level of service for each transaction.3 18 | SU PPLY C HAI N FUTU R E �2012 by Premier Inc. All rights reserved. S U P P LY C H A I N F UT U R E ECONOMIC O U T LO O K Within a 300-bed hospital, nurses may administer 2,400 to 4,000 doses of medications daily across all patient-care areas. Therefore, the pharmacy, nursing and technological processes must be synchronized to provide the correct level of service for each transaction. OUTLO OK � FALL 2 0 1 2 | 19 Current trends in pharmacy automation and technology Changes in the healthcare system and the pharmaceutical profession have dramatically increased the demand for automation over the past 15 years. One major transformation was the profession's move to pharmaceutical care, which emphasizes pharmacists' responsibility for clinical evaluation and monitoring � in conjunction with physicians, other healthcare professionals, and patients themselves.4 Several primary factors are driving this trend, including: � � � � � � Improving operational efficiencies; Enhancing quality and safety; Integrating and managing complex data; Providing outstanding customer service; Reducing costs; and Growing revenues. technologies, previously used for wholesale distribution, are now available for use by pharmacy departments as they seek to improve their own purchasing and inventory management.1 Domains of the medication use process as they relate to pharmacy automation and technology The medication-use process is highly complex and involves five specific areas: � Purchasing and inventory management; � Prescribing/medication determination; � Medication preparation, dispensing, and counseling; � Medication administration; and � Patient monitoring or assessment. The full process can include more than 100 steps and multiple hand-offs. Research has shown that the majority of preventable adverse drug events (ADEs) occur in the medication ordering (prescribing/medication determination) and administration phases. Only a small percentage of ADEs are associated with transcription and dispensing.5 Automation and technology may improve process accuracy and efficiency, contributing to a system approach for reducing medication errors and preventable ADEs. Goals for incorporating automation include improving patient care, customer services and resource utilization.6 Areas with the majority of preventable ADEs MEDICATION ORDERING: Technologies and automated devices applied throughout the prescribing/medication determination or ordering process include clinical decision support software, computerized prescriber-order-entry (CPOE), physician order management/entry systems, and remote order entry. CPOE encompasses the direct entry of clinical orders into a healthcare system's electronic health record (EHR) by licensed independent clinicians or others with ordering privileges. The full benefits of CPOE are only realized when orders are directly entered by the responsible provider, rather than placed by others on the healthcare team.7 There are also many patient safety advantages associated with CPOE, such as: � Improved order legibility; � Allergy and adverse drug reaction warnings noted at the point of ordering; � Identification of drug-drug, drug-food, drug-lab, and drug-diagnosis interaction warnings; and � Prevention of inappropriate dosage forms, routes and schedules. In addition, CPOE can help facilitate productivity by improving workflow and efficiency.8,9,10 MEDICATION ADMINISTRATION: Bar code medication administration (BCMA) technology and clinical decision supportbased infusion pumps, such as smart infusion pumps and patient-controlled analgesia (PCA) pumps, are involved in the medication administration process. One of the most promising technologies in preventing medication errors is bar code scanning of medications at the patient's bedside. This process is commonly Automation can free pharmacists from technical tasks and provide more time for patient care. Technologies that can handle the less complex tasks previously performed by pharmacists and pharmacy technicians are particularly helpful in light of today's staff shortages and shrinking operating budgets.1 It is worth noting that some state pharmacy boards have impeded technology adoption by continuing to require that pharmacists provide manual checks and balances. This may be an obstacle in achieving the true labor efficiencies and cost reductions associated with pharmacy automation. Strategic partnerships between health systems and pharmaceutical wholesalers have increased the rate, availability, and deployment of new automation and technologies. These strong business relationships, coupled with declining wholesaling drug distribution business margins, have been an incentive for wholesalers to develop automationrelated business ventures and services. As a result, wholesalers have been acquiring pharmacy automation and technology companies since the mid-1990s. These mergers with downstream customers have helped drug wholesalers survive and grow. Pharmacy dispensing products and 20 | SU PPLY C HAI N FUTU R E �2012 by Premier Inc. All rights reserved. referred to as bar-coding at the point of care (BPOC), bedside scanning, or BCMA. BPOC also includes the bar-coding and scanning of other applications, such as vital signs and laboratory specimens. BCMA is a clinical decision support system that helps caregivers manage the five rights of medication administration (right patient, right drug, right dose, right route and right time).11 In addition, BCMA systems promote right documentation, which some practitioners consider to be the sixth right of medication administration. One of the major benefits of BCMA is reduction of medication errors for patient safety. Several studies have shown that more than one-third of preventable ADEs occur at the point of administration, yet only 2 percent of these errors are caught at this point of the process. Since medication administration is the last opportunity for an error to be prevented, BCMA provides a significant opportunity to improve quality of care. Additional benefits of BCMA include: � Reduction of liability by ensuring complete and accurate documentation; � Potential for greater charge capture; � Better compliance with billing processes; and � A lower risk of problems if a patient record is audited.5,12 Safety issues surrounding the use of pharmacy automation and technology Critical reviews of the safety benefits of various technologies touted to reduce medication errors are limited. Very little information is available regarding the appropriate use or impact of technology on patient safety and what is available is limited to CPOE with computerized clinical physician decision support.13 Even though automation can reduce medication errors, technology alone is rarely the answer, since it is not a complete substitute for all human safety checks.1 It is imperative that new technology be integrated with the existing medication use system if there is to be positive impacts on patient safety. The effective merging of information technology and automation can prevent medication errors through different modalities. One of these is the use of bar-coded medications, which should be maximized throughout the medication-use process. Some practitioners would argue that bar-coding of medications is the most important technology for ensuring accuracy throughout the medication-use process, with full benefits being realized during the administration and documentation phases. Information technologies, such as the reports from BCMA software, smart infusion pumps and electronic prescribing, can be used to analyze and prevent medication errors. Finally, automated dispensing systems, especially those that use bar code technology, may enrich patient safety through enhanced medication dispensing and administration accuracy.1,14,15 All of these systems working together can ensure the right products get to the right patient in the right dosage form at the right time. Use of automation and technology strategies by Premier member allows greater time savings and clinical activities for pharmacists Brian Ziegler, RPh, MS, the director of pharmacy at Banner Desert Medical Center and Cardon Children's Medical Center in Mesa, AZ, reported that his institution and Banner Health System (23 hospitals) are highly automated. Technologies in place include EHR, CPOE, BPOC, medication automated dispensing cabinets, carousels for stocking medications (with accompanying software for inventory management), table-top packaging systems, and automated compounding devices. The hospitals are also considering intravenous robots for the future. Ziegler noted that implementing automated dispensing cabinet and carousel technology has resulted in more than 40 percent savings in time required to restock medications. Use of automated dispensing cabinets on the hospital floor has also decreased the time needed to start patient therapy, since it allows more timely medication distribution, which correlates to faster admissions and discharges. In addition, various automated processes have allowed pharmacists to spend more time on specific clinical activities, educating physicians and patients, and focusing on valuable reports generated from automated equipment. Ziegler notes that while marketing literature suggests that users can expect a $2 to $7 return on investment for each $1 spent on clinical pharmacist activities, his own ROI is somewhere in the middle of this range. Enhancing patient safety, along with appropriate resource utilization, have been key factors in continuing to expand the automation and technology capabilities in Ziegler's institution and health system. References 1. Rough, Steven, and Joel Melroy, "Pharmacy automation systems," in The Pharmacy Informatics Primer, ed. Doina Dumitru. (Bethesda, MD: American Society of Health-System Pharmacists, 2009), 77-101. 2. Rough, Steven, and Jack Temple, "Automation in practice," in Handbook of Institutional Pharmacy Practice, ed. T.R. Brown. (Bethesda, MD: American Society of Health-System Pharmacists, 2005), 329352. 3. Baker, James, Draves, Marcy, and Amar Ramudhin, Analysis of the medication management system in seven hospitals. San Diego, CA: CareFusion Corporation, 2010. 4. American Society of Hospital Pharmacists. "ASHP statement on pharmaceutical care." American Journal of Hospital Pharmacy (1993) 50:1720-1723. 5. Bates, D.W., Cullen D., Laird N., et al., "Incidence of adverse drug events and potential adverse drug events: Implications for prevention." JAMA (1995) 274:29-34. 6. Smaling, John, and Mary Ann Holt M., "Integration and automation transform medication administration safety: successful eMARs mandate a multifold integration strategy that includes people, process, applications and technology." Health Management Technology (2005) 26:16-19. 7. Hoey, Patricia, Nichol, W. Paul, and Robert Silverman, "Computerized provider order entry," in The Pharmacy Informatics Primer, ed. Doina Dumitru. (Bethesda, MD: American Society of Health-System Pharmacists, 2009), 1-18. 8. Committee on Identifying and Preventing Medication Errors. Preventing Medication Errors: Quality Chasm Series. Washington, DC: National Academy Press, 2007. 9. Kaushal, Rainu et al., "Return on investment for a computerized physician order entry system." Journal of the American Medical Informatics Association (2006) 13:261-266. 10. Eslami, Saeid et al., "Evaluation of outpatient computerized physician medication order entry systems: a systematic review." Journal of the American Medical Informatics Association (2007) 14:400-406. 11. Borcher, Kevin C., "Bar code medication scanning at the point of care," in The Pharmacy Informatics Primer, ed. Doina Dumitru. (Bethesda, MD: American Society of Health-System Pharmacists, 2009), 103-118. 12. Leape, L.L. et al., "Systems analysis of adverse drug events. ADE Prevention Study Group." JAMA (1995) 274:35-43. 13. Oren, E., Shaffer, E.R., and B.J. Guglielmo, "Impact of emerging technologies on medication errors and adverse drug events." American Journal of Health-System Pharmacy (2003) 60:1447-1458. 14. American Society of Health-System Pharmacists. "ASHP guidelines on the safe use of automated dispensing devices." American Journal of HealthSystem Pharmacy (2010) 67:483-490. 15. American Society of Health-System Pharmacists. "ASHP statement on bar-code-enabled medication administration technology." American Journal of Health-System Pharmacy (2009) 66:588-590. S U P P LY C H A I N F UT U R E ECONOMIC O U T LO O K O UTLO O K � FAL L 2 012 | 21 P E R S P E C T I V E S ECONOMIC O U T LO O K The healthcare supply chain: Pushing the healthcare industry toward sustainability Inthe summerof 2012,Premiersurveyedmorethan13,000 healthcare leaders across our membership, representing both the acute and non-acute healthcare markets. The majority of respondents (72 percent) are C-Suite, supplychainormaterialsmanagement,orserviceline or practice area managers/directors. Thepurposeofourmembersurveywastogauge the key external and internal challenges healthcare leaders face, what supply chain efforts they're focusing on to meet those challenges, and which efforts are most critical to their near- and long-term financial stability and success. What follows is a look at the healthcare supply chain through the eyes of more than 600 executives who responded to our survey, coupled with insights from interviews with supply chain experts. Introduction The healthcare supply chain, like the industry it serves, is undergoing massive changes under the specter of unprecedented government reform. Amidst this pressure, there are countless stories showing how healthcare supply chain innovation has become a means to achieve successes far beyond products, cost reduction and improved efficiency. In fact, supply chain innovation is beginning to help hospitals improve their core business of improving the health of patients, a point not lost among the other major part of the supply chain�suppliers. "Key is linking suppliers to patient needs and outcomes," says David Wohler, vice president, Global Sourcing, Covidien, Mansfield, MA, which recently implemented a supplier stratification model centered on linking suppliers to patient needs and outcomes. Through the program, Covidien is focusing on more strategic relationships with fewer suppliers, "really recognizing those who have stressed innovation to ensure they know they're a key part of our success," he adds. "But the ultimate goal is to transform their views to be less about resins or molding or packages and more about patient needs and expectations." Connecting data and people, as Wohler mentions, is a major opportunity for supply chain stakeholders to excel in a time of change. The supply chain's ability to take this opportunity and create efficiencies, connect data with patient outcomes and improve processes is also a leading influence on the future of healthcare. Through its member collaboratives, Premier has identified key metrics for supply chain excellence that serve to benchmark processes against peers to reduce costs and improve outcomes. The vast majority of survey respondents (80 percent) believe their organization has had some success in achieving supply chain excellence, with 62 percent of respondents stating that their supply chain gives them differentiated value and thus, a competitive advantage in the marketplace (Figure 1). 22 | PERS PECTI VES �2012 by Premier Inc. All rights reserved. Figure 1 Supply chain offers a competitive advantage in the marketplace 0.4% 7.8% 14.4% I Strongly agree I Somewhat agree 29.6% 47.7% I Neither agree nor disagree I Somewhat disagree I Strongly disagree Source: Premier online survey for Economic Outlook Fall 2012 publication OUTLO OK � FALL 2 0 1 2 | 23 Major supply chain trends Still, there are key barriers and challenges to overcome in achieving supply chain success. In spite of remarkable progress at hundreds of hospitals and health systems across the country, the healthcare supply chain as a whole lags behind those of other sectors in efficiency. Researchers who explored highly innovative practices at two prominent health systems, for example, declared that Medicare hospital spending could be reduced by up to 43 percent�while still maintaining or improving quality of care�if all providers achieved the same level of efficiency for inpatient spending on supply-sensitive care.1 Those researchers based their conclusion on methods both organizations used to achieve among the industry's best outcomes and highest quality for the lowest utilization and cost. Another supply chain dilemma is waste, particularly in the form of overutilization of products or unnecessarily high supply expenses. Association for Healthcare Resource and Materials Management experts assert that supply costs have escalated year after year and today account for more than one-third of a hospital's expenses on a per case basis. The only thing more costly is labor.2 Top barrier: Product utilization The biggest barrier to achieving supply chain excellence, according to respondents, is an inability to influence product utilization, followed closed by developing partnerships with internal clinical stakeholders (Figure 2). However, the percentage of respondents indicating these as top barriers continues to decrease from previous surveys, demonstrating that the supply chain is becoming more visible to clinicians and is more often influencing clinical decisions. Of seven listed barriers, the majority of respondents (69 percent) state that two or more of the seven barriers are applicable to them. Nearly half of those achieving the highest degree of success in supply chain excellence, however, report facing either none or only one barrier. James P. O'Connor, vice president, Supply Chain Management, Henry Ford Health System, Detroit, MI, believes product utilization "represents the final frontier for supply chain." O'Connor believes opportunities abound, and for that reason, he's focusing utilization efforts on physician preference items and high-cost products. For example, O'Connor has led a successful strategic sourcing initiative in cardiac rhythm management that has trimmed millions in product costs. That initiative also is crossing disciplines. "We're working with cardiology, interventional radiology and vascular surgery together on sourcing products of a similar nature," he says. "Without this initiative, we probably wouldn't have the vascular surgeons talking with the cardiologists talking with the interventional radiologists. Incredible learning is going on as a result of that dialogue. We're not clinicians, but we are facilitating the process that allows for that kind of collaboration. Their learning and sharing experiences with one another is now helping to drive product decisions." Figure 2 Barriers to supply chain excellence Inability to influence product utilization Developing partnerships with clinical stakeholders Lack of resources devoted to improving the supply chain Lack of supply chain information that spans the continuum of care Lack of business intelligence to optimize the supply chain Lack of standardization (e.g., varying item masters and accounting systems across facilities) Challenges associated with managing a large number of vendor relationships 0 0.5 1 1.5 2 2.5 3 3.36 3.28 3.21 3.16 3.08 3.06 2.99 3.5 4 4.5 5 Data above represent mean across all responses; 1=Not a barrier at all; 5=Significant barrier Source: Premier online survey for Economic Outlook Fall 2012 publication 24 | PERSPECTI VES �2012 by Premier Inc. All rights reserved. maintaining positive and strong margins and a healthy bottom line allows us to invest money in leading-edge technologies," he says. "But these academies also allow us to educate our physicians on healthcare reform and the financial models relative to our payors under a healthcare reform world, so they can understand how reimbursement works." P E R S P E C T I V E S ECONOMIC O U T LO O K "Product utilization has the biggest bang in the physician area." Kevin Davis, system vice president, Supply Chain Services, Sharp HealthCare (San Diego, CA) How successful has Davis been? "I have to admit I'm feeling very confident when I start getting phone calls at home on the weekends from physicians telling me they were approached by a vendor, and they want to know what my thoughts are," he says. "That's a good sign. It never happened before but it does now." Among seven potential barriers to achieving supply chain excellence, the challenges associated with managing a large number of vendor relationships came in last (Figure2). Michael McCarry, RN, senior vice president, perioperative services, The Mount Sinai Hospital, New York City, NY, like many involved in frontline vendor relationships today, has been successful in educating vendors about his need to bring costs down. "I tell vendors that I have as much right to save money as they do to make money," he says. And that message is not lost on internal stakeholders. "A lot of our value analysis is based on what product or device a clinician wants to bring in, what will it do, why should I believe it, what is the pricing," he adds. "Healthcare reform has changed the game � cost containment and justification take on greater significance. It requires more buy-in and active participation from the surgical departments and their staff, in justifying expenses in relation to outcomes." Using Henry Ford Health System and Premier data, O'Connor is able to track neurosurgery utilization variation by product. And each month, his office produces a report that benchmarks each institution in the Henry Ford system and sends it to relevant senior leaders within surgery lines. Kevin Davis, system vice president, Supply Chain Services, Sharp HealthCare, San Diego, CA, addresses the product utilization issue where he believes he has the biggest bang: physicians. "When I look at where our high cost drivers are, it's in the surgical procedure areas of the OR and cath lab," he says. "Culturally, as an organization, Sharp is very physiciancentric, and we believe strategically in giving our physicians choices. With healthcare reform front and center, I am focused on helping our physicians understand the value of driving standardization and how we strategically align ourselves with suppliers. If we continue to use every product in a service line that's out in the market, it certainly diminishes our ability to aggregate and leverage our economies of scale for driving costs out." As for the conundrum of developing partnerships with clinical stakeholders, Davis is a firm believer in bringing physicians to the table. "They have to be engaged in decision making, and you have to solicit their opinions on why, clinically, a certain strategy will work or not work." One of the first things Davis did after joining Sharp was getting on the meeting agendas of physician groups. That effort helped him in developing relationships and trust with physicians, while also engaging them in the decision process for product strategies. Another strategic approach that has proved to be beneficial has been the creation of a "physician academy." "Part of that education is helping our physicians understand the focus of Supply Chain Services and the reasoning behind a lot of its product and vendor strategies. To keep our focus on driving costs and savings, we constantly remind them that OUTLO OK � FALL 20 1 2 | 25 Figure 3 Factors with greatest impact on supply chain over coming year Cost-savings goals of the organization Value analysis process Integrating the supply chain across the continuum of care Medical device prices Drug shortages Healthcare information technology Commodity prices Comparative effectiveness data Other 2.1% 5.4% 4.5% 4.3% 10.3% 10.1% 16.5% 19.2% 27.5% Source: Premier online survey for Economic Outlook Fall 2012 publication Figure 4 Marketplace trends with highest expected impact on supply chain in coming year Increased physician-organization engagement and collaboration around clinical value, evidence-based decision making, and cost containment Focus on utilization management (e.g., resource utilization, as a means to reduce supply costs) Involvement in value analysis and use of comparative effectiveness research in purchasing decisions Movement for supply chain integration with clinical care, revenue capture and IT across provider organizations Integration of supply chain in organizational response to healthcare reform regulation Continued consideration of new and innovative supply chain metrics to reflect contribution of supply chain to the overall care process Population health management and coordination across the continuum of care Consideration of supply chain contribution to patient-centered healthcare Location and product identification standardization (e.g., GLN and GTIN) 19.5% 14.8% 14.5% 13.4% 9.2% 6.5% 30.3% 37.8% 53.9% Note: Data represents combined percentage of each trend listed as a choice Source: Premier online survey for Economic Outlook Fall 2012 publication 26 | PERS PECTI VES �2012 by Premier Inc. All rights reserved. Major impacts on the supply chain Internal impacts: Cost-saving goals, value analysis Survey respondents most often name cost-saving goals, followed closely by such factors as the value analysis process and integrating the supply chain across the continuum of care as the factors they believe will have the greatest impact on their organization's supply chain in the next year (Figure 3). The process of value analysis is even more compelling, given the growing importance of physician engagement. When he came on board in 2009, Davis says he started questioning the structure and process of Sharp's value analysis process because "it had no MD visibility." "My goal is to have at least one or two physician champions engaged in every value analysis discussion," he says. "So when I look strategically at what I'm trying to do from a supply chain standpoint, not only am I focusing strategies on cost, but also on quality of products, care and clinical effectiveness. It's imperative we have their engagement to drive those decisions." External impacts: Collaboration, utilization management Respondents were asked to name the marketplace trends that they expect to have the greatest and second greatest impact on their organization's supply chain over the next 12 months. The majority (54 percent) indicates increased physician-organization engagement and collaboration around clinical value, evidence-based decision making, and cost containment as their first or second choice (Figure 4). A focus on utilization management (38 percent) and involvement in value analysis and use of comparative effectiveness research in purchasing decisions (30 percent) are also important trends. Supply chain challenges One thing is clear: The number one general trend affecting every provider in healthcare today is reimbursement and all of its uncertainties. It is the leading trend among nearly half (43 percent) of survey respondents (Figure 5). Moreover, 75 percent of all respondents list reimbursement cuts among the top three trends impacting their organizations in the next year. Health information technology requirements are cited as the second greatest general trend affecting healthcare in the coming year, according to respondents. This is likely due to the pressures of developing and implementing EHR and achieving Meaningful Use standards. Trending higher from our previous surveys are: new care delivery models, such as accountable care organizations; quality improvement initiatives, such as Partnership for Patients, shared savings and bundled payments; consolidation among health industry organizations; and employer health benefits/insurance exchanges. Frank Fernandez, assistant vice president of supply chain services, Baptist Health South Florida, Miami, FL, says healthcare cost pressures are at their highest levels ever. "Cost pressures are in direct response to the perceived uncertainty associated with the Affordable Care Act and the expected changes in reimbursement from Medicaid and other sources," Fernandez says. "I've never experienced such cost pressures in our industry before. Putting it in perspective, I was at Baptist in the early 1980s when we went from fee-for-service to prospective payment, and we thought that was going to be the end of the world, yet we managed to keep our organization financially strong then and will do so again." Fernandez says the pressures permeate not only the supply chain but all aspects of his organization. "As with anything else, you can view this as a curse or a golden opportunity for the healthcare P E R S P E C T I V E S ECONOMIC O U T LO O K Figure 5 1% 5% 5% 7% 7% 10% 8% Trends having the greatest impact on organization over year to come I Reimbursement cuts I Health information technology requirements (Meaningful Use and EHR) I Uncompensated care I New care delivery models, such as accountable care organizations 43% I Quality improvement initiatives, such as Partnership for Patients shared savings and bundled payments I Consolidation among health industry organizations I Focus on utilization of products and services 14% I Employer health benefits/insurance exchanges I Comparative effectiveness research Source: Premier online survey for Economic Outlook Fall 2012 publication OUTLO OK � FALL 20 1 2 | 27 supply chain to pursue some of the things we've always talked about, like standardization and evidence-based decision making around clinical preference type items." O'Connor agrees that plunging reimbursements have ratcheted the pressures up. "We're being asked to reduce the cost of supplies, which leads to reducing the cost of innovation and new technology, and impacts supply utilization," he says. In addition to declining Medicare and Medicaid payments, Henry Ford, like most hospitals, has seen its indigent care burden go up, "which is creating challenges. There's no more room for absorbing new technology or inflation," he says. "Our most significant challenge is finding ways to reduce costs, and there's no one-size-fits-all strategy." Similarly, Mount Sinai's McCarry says in spite of all the success Mount Sinai has had making inroads with physician preference and cost containment through better utilization, outcomes data remains elusive. "We need to be able to justify the expense of a new product with better clinical outcomes, and right now, we don't have the data to do that. As healthcare reform progresses, it will become more essential to tie clinical outcomes data to increased product and device expenditures." Leading cost driver: Healthcare reform It follows, then, that healthcare legislation and mandates are the leading driver of healthcare costs, according to one-third of survey respondents. Overutilization of products and services is the second largest driver of costs. (See the spring 2012 edition of the Economic Outlook for more information about medical waste; refer to the blood product utilization article in this edition for more on overutilization and cost-savings opportunities in blood stewardship). It's difficult to find any function of supply chain management not impacted in some way by healthcare reform, but many supply chain executives view it as an opportunity to move in even more positive directions. "We are putting greater focus now not only on cost but also on the quality and clinical effectiveness side," says Sharp's Davis. "A lot of the incentives from the healthcare legislation are making hospitals and physicians more accountable for quality and clinical effectiveness with regard to how they deliver care. It's making us more accountable to our business model, and helping us better manage cost effectiveness with regard to the quality of care we deliver." Resource-intensive supply chain activities Product standardization consumes massive resources inside hospitals, in time and effort. Approximately one-third of respondents state that product standardization and EHR-specific IT investments are the most resource-intensive areas dedicated to supply chain improvement within their organizations (Figure 6). Figure 6 Most resource-intensive areas dedicated to supply chain improvement Product standardization (e.g., reducing the number of vendors that supply like products) IT investments � EHR-specific Building relationships with physicians and clinicians Value analysis Reducing costs for physician preference products Reducing costs for commodities products IT investments � non-EHR-specific Data standardization (e.g., standardization of item masters and accounting systems across facilities) Integrating supply chain and revenue cycle systems Automation 6.6% 12.4% 12.0% 11.6% 11.6% 27.3% 27.2% 27.2% 32.7% 31.4% Source: Premier online survey for Economic Outlook Fall 2012 publication 28 | PERS PECTI VES �2012 by Premier Inc. All rights reserved. Supply chain executives are now finding the biggest standardization opportunities in specialty procedure areas of their hospitals, where technology proliferation is widespread. When Baptist Health's Fernandez looked at his system's spine program, he discovered 11 different companies supplying a host of similar products. "That doesn't make any sense," he says. "There are maybe three to four companies that have 85 percent of the market, but we're buying from 11." The same thing occurred on a different scale with cardiac rhythm management (CRM), where Fernandez says he sees opportunities to consolidate. "If we can reduce just one large vendor and carve out the business to smaller companies in exchange for price concessions, we're heading in the right direction," he says. Henry Ford's O'Connor says he embarked on similar cost reduction efforts with CRM and achieved a great deal of success working with teams of surgeons and competitively sourcing products across multiple disciplines at once. Reducing the number of vendors, among other strategies, resulted in multi-million-dollar savings for Henry Ford, he says. Opportunity one: Data Against the backdrop of all these challenges and impacts on the healthcare supply chain are opportunities. One of them is what many executives believe to be the next great one: data. Many observers believe the healthcare supply chain as a whole is challenged by the need for broader data access and sharing. In their efforts to collect and manage data, improve supply chain visibility within the organization, reduce inventory and streamline processes, internal supply chain personnel are frustrated by lack of access to and inconsistent quality of data. They view it as a significant barrier to achieving excellence, since it hinders collaboration and makes it difficult to move the industry toward uniform standards. A lack of data-sharing among stakeholders is a problem. Premier's financial and clinical data collection efforts may be the exception. Respondents seem to recognize the next opportunity wave in data; nearly half (43 percent) of them say their largest area of capital investment in the coming years will be information technology and telecommunications, presumably driven by pressures to adopt the electronic health record. Cost savings is the one business priority in which data integration is most critical, according to respondents. When asked about the criticality of data integration for other business priorities, respondents frequently listed quality and safety improvement, revenue management and resource utilization (Figure 7). P E R S P E C T I V E S ECONOMIC O U T LO O K Figure 7 Criticality of data integration for specific business priorities 100% 80% 60% 40% 20% 18.9% 0% Cost savings Revenue Quality & management safety improvement Resource utilization Labor optimization Comparative Service line effectiveness management Population health management 79.6% 70.9% 70.2% 69.0% 57.0% 48.3% 47.5% 37.7% 26.5% 28.1% 29.5% 38.8% 48.3% 47.2% 51.0% I Not critical I Somewhat critical I Very critical Source: Premier online survey for Economic Outlook Fall 2012 publication O UTLO OK � FALL 2 0 1 2 | 29 Mount Sinai's McCarry says in spite of all the success he's had in moving toward better utilization and making inroads with physician preference, clinical data remains elusive. "It's very difficult to get your hands on," he says. Fernandez says he believes the onus to provide data is squarely on supply chain professionals like himself. "The only way to get to that data is through greater and closer collaboration between our supply chain and our physician partners," he says. Another challenge is integrating supply chain data and clinical data to drive evidence-based purchasing solutions. "I think that's the Holy Grail, and our ability to do that is going to be enhanced when we convert our IT systems next year," Fernandez says. O'Connor, meanwhile, says his organization has "a robust process" for using Premier financial data for product sourcing and variations in utilization. And that data can be a powerful tool for engaging physicians. "When I'm able to use data to show them there are 29 different kinds of products we're using that fall into the same classification and then show the opportunity for quality, cost and standardization, that fosters a very cohesive conversation," he says. To observers outside the healthcare supply chain, one of the most critical opportunities in data is a willingness to share it, according to Tim Wood, vice president and partner, IBM Public Sector Operations and Supply Chain Management. "Capturing, integrating and analyzing data allows you to make better decisions," he says. "If you can't match clinical and supply data, collaboration is difficult." Karen Parrish, vice president, Industry Solutions, IBM Software Group, likens the healthcare challenge to the retail sector, in which data was viewed as a competitive edge not to be shared. Parrish believes the healthcare supply chain has an opportunity not unlike that of Wal-Mart, which made the decision to integrate its suppliers into its supply chain through data sharing, something that transformed retail almost overnight. "Data is very important to how we look at the market and how we look at ourselves internally," says Davis, who uses market benchmarking data not only from a pricing standpoint, but also to evaluate clinical utilization across the system. "Hospitals need to understand one of the values of belonging to an IDN is aggregating our spend and using that to leverage our economies of scale. This helps us drive down costs and develop strategic relationships with a variety of business partners, as having the appropriate tools and data in place gives us visibility regarding what products to utilize from which vendors." Opportunity 2: Net patient revenues As more emphasis is placed on hospital margin management, people are starting to see greater synergies between the supply chain and the revenue cycle, observers say. Until now, those two areas have been silos, but that may be changing. Nearly 70 percent of survey respondents list revenue management as a critical data integration factor (see Figure 7) in the coming year. If a hospital's net margin is 2 percent, it would need to generate $50 million in gross patient revenues to gain a $1 million net margin � easy math for Fernandez but telling nonetheless. "South Florida has seen a reduction in inpatient admissions and reimbursements, and since there are not that many more patients to be had, the opportunities to generate additional patient revenues are simply not going to be there," he says. "I think hospitals are going to focus more on reducingcosts,andthey'regoingtobelooking at the supply chain to deliver those savings." Opportunity 3: Physician preference Physician preference is on everyone's radar. It's an area gaining traction and attention at higher levels of the hospital hierarchy, and with cost pressures mounting. In fact, the willingness of clinicians to try non-branded physician preference items appears to be slightly increasing, according to those surveyed over the past year. While the percentage of those respondents who say they "definitely would" try such products remains unchanged (20 percent), the percentage of respondents who would probably trial non-branded items has increased while the percentage who would not trial non-branded products has decreased since fall 2011 (Figure 8). Physician preference is a top supply chainspecific cost containment strategy for O'Connor, and that has meant working closely with cardiology, interventional radiology and vascular surgery on sourcing similar products. For example, that process allowed Henry Ford to standardize on diagnostic catheters, representing a significant cost savings. "Physician engagement is essential," he says. "If you engaged physicians, are talking to them and have their participation in the sourcing process, you're able to drive real change." Effective supply chain strategies Health systems are developing strategies to face current economic challenges. According to respondents, formal cost reduction programs and physician recruitment and employment are the most effective strategies for hospitals in this economic climate (Figure 9). Also considered very effective are expansion of market share and revenue cycle enhancements. For many supply chain executives, cost reduction and other strategies are now imbued in their organizations' core business model. At the end of the day, however, the most effective strategy in the near future may be collaboration � both with internal 30 | PERS PECTI VES �2012 by Premier Inc. All rights reserved. Figure 8 Willingness to try non-branded physician preference items 100% 80% 60% 21.70% 19.60% 19.20% 40% 20% 0% Definitely would Probably would Might or might not Probably would not 49.00% 52.30% 53.70% P E R S P E C T I V E S ECONOMIC O U T LO O K 27.60% 21.70% 24.20% 3.60% 3.60% 2.80% 0.20% 40% 0.70% 50% Definitely would not I Fall 2011 I Spring 2012 I Fall 2012 Source: Premier online survey for Economic Outlook Fall 2012 publication Figure 9 Strategy effectiveness in responding to economic challenges Formal cost-reduction programs 24.1% Physician recruitment and employment Expansion of market share Revenue cycle enhancements Mergers and acquisitions Emphasize high-margin service Debt restructuring Sales of assets to raise cash 0% 23.5% 21.7% 19.9% 11.4% 10.9% 10.0% 3.0% 10% 20% 30% 60% I Neither effective nor ineffective I Somewhat effective I Very effective Source: Premier online survey for Economic Outlook Fall 2012 publication 0.00% OUTLO OK � FALL 20 1 2 | 31 stakeholders such as physicians, and external ones, even competitors. "This is one industry where your competitor would be more than willing to open their doors and provide you with a tour or site visit, because they're so proud of what they've accomplished," Davis says, recalling his days as a Texas hospital CEO when a competing medical center invited him to view its revamped OR. "You'd never see that with Coke� and Pepsi�." One such collaboration is putting Henry Ford Health System and Detroit Medical Center, both storied competitors, in a joint distribution center project with Cardinal Health.3 The project is part of a massive urban renewal project to stimulate Detroit's economy. "A lot of collaboration is going on right now in healthcare," O'Connor says. "Some collaborations are successful and some aren't, for cultural or financial reasons. Collaboration is directional, meaning people take bits and pieces of it and make it their own. But it provides unlimited opportunities." Elevation of supply chain's role physicians, involved in a hospital's supply chain," says Mount Sinai's McCarry. Davis sees the evolution of his role as a strategic imperative, and he is now looked upon as integral to the system's executive leadership. "My predecessors weren't as engaged and visible throughout the organization as I am today," he says, noting the standing invitation he has at Sharp's CEO Council. For Davis, it offers him an invaluable opportunity to educate those at the highest levels about how critical the supply chain is to the system's future. "Supply chain leadership is becoming a strategic role now at practically every IDN in the country," he adds. O'Connor sees the role of supply chain executives taking on added significance that goes far beyond the movement of supplies. "There's a growing acknowledgement and acceptance of the supply chain and what impact it can have not only financially but on the quality, safety and clinical sides as well," he says. O'Connor adds, "In some cases, I think we are the catalyst for collaboration not just between hospitals but also within disciplines. The healthcare supply chain today is being viewed more and more as the facilitator for change. And I think clinicians are beginning to see our value more than ever." Study methodology non-acute care healthcare markets. The survey respondents (n=617) are representative of a cross-section of our membership across geographic area and organizational size and type. The majority of respondents (72 percent) are C-Suite, supply chain or materials management, or service line or practice area managers/directors. Nearly half of the respondents come from multi-hospital system/IDNs and midsized hospitals. Respondents are almost equally represented by hospitals in urban and rural (48 percent) areas. The survey collected data on members' perspectives on the healthcare supply chain, with a selected focus on other related financial and economic industry trends. References 1. Wennberg, et al. An Agenda for Change: Improving Quality and Curbing Health Care Spending: Opportunities for the Congress and the Obama Administration. Dartmouth Health Institute for Health Policy and Clinical Practice: December 2008, 5. 2. W. P. Carey School of Business. Reducing Healthcare Costs through Supply Chain Management. March 17, 2010. http://knowledge.wpcarey.asu.edu/pdf.cfm?aid=1 43. 3. MarketWatch. "Cardinal Health, Detroit Medical Center, Henry Ford Health System announce unique collaboration to promote urban renewal." May 29, 2012. http://ca.finance.yahoo.com/news/cardinalhealth-detroit-medical-center-201300392.html. The healthcare supply chain is evolving, as are the people who are determining supply chain procedures within health systems. "With healthcare reform, managing the bottom line will become even more important, and that means getting more people, including In the summer 2012, Premier, in collaboration with Customer Care Measurement and Consulting LLC, commissioned an online survey of 13,000 healthcare leaders across our membership, representing both the acute and Premier healthcare alliance thanks John Hall, J. Hall Media, for his contributions to this article. 32 | PERS PECTI VES �2012 by Premier Inc. All rights reserved. P E R S P E C T I V E S ECONOMIC O U T LO O K O UTLO OK � FALL 2 0 1 2 | 33 TRENDS IN COST A N D UTI L I Z ATI O N ECONOMIC O U T LO O K Abstracts The following abstracts, developed by the Premier healthcare alliance, provide an overview of studies that analyze trends in cost and utilization. The full articles are available to Premier members. 34 | TR EN D S I N COST AN D UTI LIZATION �2012 by Premier Inc. All rights reserved. Collaborating for cost, utilization and outcomes enhancement in cardiac rhythm management Controlling the cost of cardiac rhythm management (CRM) procedures is challenging and critical to both patient care and bottom-line results. The Premier healthcare alliance launched the CRM Collaborative (the collaborative) in June 2011 to help member health systems better manage CRM-related costs and quality issues. The collaborative gave participants an opportunity to learn from each other and from subject matter experts while obtaining CRM benchmarking data. While the collaborative provided few opportunities for better clinical outcomes, it did offer several areas for cost and utilization enhancement. The data showed that the majority of organizations use more than two contracted vendors as well as line-item pricing that varied substantially. The experts provided insight on physician engagement, pricing strategies, device selection, clinical best practices, utilization review, new technology, and upcoming changes in CRM reimbursement. Premier recommends that leaders use this data to further engage physicians, prioritize improvement opportunities, evaluate internal policies that affect CRM selection, develop a value-analysis process, and analyze potential contracting strategies. OUTLO OK � FALL 2 0 1 2 | 35 Cost savings through better blood utilization Every day in the U.S., approximately 44,000 units of blood are used in hospitals and emergency treatment facilities for patients with cancer and other serious diseases, for organ transplant recipients, and to help save the lives of accident and trauma victims.1 Blood stewardship is an issue impacted not only by an emergency-level donor deficit,2 but also by the complexity of managing inventories and availability within hospitals and health systems. Despite the problem's recognition, there remains a sizable variation in overall use of blood products across care providers. Because surgical guidelines are unclear as to the parameters under which patients benefit from transfusions, overuse of blood products can occur.3 Lack of clarity within guidelines has resulted in poor blood conservation and wide differences in how quickly surgeons and anesthesiologists order blood products.4 Recent research has shown that giving patients more blood than necessary or transfusing blood when it's not needed is not just costly; it can also be harmful, increasing both complication rates and length of stay.5,6 Because of the need to streamline blood stewardship processes and the availability of a proven and effective analysis methodology within Premier databases, we examined blood product usage among our member hospitals to identify opportunities for improvement and cost savings. Using Premier's database, we calculated the variation in blood use across facilities and determined top performers based on lower usage rates coupled with better outcomes. This analysis provided insight � by overall units and dollars spent � into the vast overutilization of blood, blood product, business line, and inpatient diagnoses. 36 | TR EN D S I N COST AN D UTI LIZATION �2012 by Premier Inc. All rights reserved. Identifying opportunities in supply chain cost reduction: An integrated approach In 2011, a group of Premier healthcare alliance members began analyzing supply expense by case mix index (CMI), which focuses on cost drivers rather than the historical macro-level view. CMI is an industry-standard benchmark used to compare overall supply cost. It takes into account a hospital's patient mix relative to diagnosis-related groups and their costs per case compared to the average. Premier designed its own supply mix index (SMIx) to show cost standardization across the entire supply chain. SMIx weights are calculated at the MS-DRG level, using supply costs (for that patient group only) divided by the average for all MS-DRGs. SMIx provides a more-exact benchmark of hospitals' supply expenses, so it can more accurately identify and target gaps in supply-expense performance. This study compares supply expense across facilities using the traditional CMI and Premier's SMIx to show cost-reduction opportunities. TRENDS IN COST A N D UTI L I Z ATI O N ECONOMIC O U T LO O K References 1. "Blood FAQ," AABB, http://www.aabb.org/resources/bct/pages/bloodfaq.aspx. 2. "Red Cross Blood Supply Drops to Emergency Levels," American Red Cross, http://www.redcross.org/portal/site/en/menuitem.94aae335470e233f6cf911df43181aa0/?vgnextoid=d3af074f99218310VgnVCM10000 089f0870aRCRD. 3. "Overusing blood transfusions increases risks, costs," FierceHealthcare, http://www.fiercehealthcare.com/story/overusing-blood-transfusionsincrease-risks-costs/2012-04-30?amp (accessed 8/16/12). 4. "Blood transfusions still overused and may do more harm than good in some patients," ScienceDaily, http://www.sciencedaily.com/releases/2012/04/120424142111.htm?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+ sciencedaily+%28ScienceDaily%3A+Latest+Science+News%29 (accessed 8/16/12). 5. Ibid. 6. "Hospitals try to find savings, cut unnecessary care," USA Today, http://www.usatoday.com/news/health/healthcare/health/healthcare/story/2011-11-20/Hospitals-try-to-find-savings-cut-unnecessarycare/51323456/1. OUTLO OK � FAL L 2 0 1 2 | 37 E C O N O M I C S ECONOMIC O U T LO O K A conversation with managing director, economics and research, Ally Financial Lee Stafford Lee Stafford joined Ally Financial in 2009 as a managing director and established the company's global economics and research function, Ally Economics & Research. In this role, he and his team are responsible for providing economic and industry research support throughout the organization. Before joining Ally Financial, he spent nine years at Bank of America. 1 What is your estimate for GDP growth in the next 12 months? in the latest quarter. Although China is still growing quite markedly, the slowdown from 10 percent to 7.6 percent has been felt globally and has been reflected in the U.S. We are also very cautious about growth predictions for late 2012 and early 2013 because of federal spending cuts and tax changes slated to take effect in January. This "fiscal cliff," as it is called, would mean a much weaker economy in 2013. The Congressional Budget Office estimates a decline of approximately minus 1 percent in early 2013 and a recovery in the second half of 2013. Our expectation is that GDP will average approximately 2 percent over the next 12 months. This pace of growth is slower than average growth rates during past economic expansions but very similar to what we saw in 2011. Looking more broadly at the global economy, much of the eurozone is contracting, and China's growth, which was more than 10 percent in 2010, has slowed to 7.6 percent 82 38 | E CONOM IC ICSI NSIGHTS PROPRIETARY AND Inc. CONFIDENTIAL. �2011 by Premier Inc. All rights reserved. �2012 by Premier All rights reserved. 2 What sector of the economy do you anticipate having the largest impact on growth? The U.S. economy is approximately 70 percent consumption-based, which means that 70 percent of our economy is the result of consumers' actions. We anticipate that consumers will continue to play the largest role in U.S. economic activity. As goes the consumer, so does the broader economy. The automobile market, which is also recovering from the recession and last year's global supply chain disruption, has a large impact on manufacturing. New vehicle sales are up 11 percent over 2011. This is great for manufacturing, because automakers are still trying to rebuild inventories, and they are hiring in order to do that. Another good sign is that Japanese and German automakers have added or announced plans to add plants in the U.S., which is supportive of manufacturing growth. Oil and gas will also drive growth. Oil prices have been held down by the increased supply available from shale rock formations, and the U.S. has become a net exporter of gasoline for the first time in decades. We currently have the highest domestic production of gasoline since the 1990s. Lastly, housing appears to be recovering. Residential investment has been boosting GDP since 2011, and we expect that to continue. Both home prices and listing inventories are signaling improvement for late 2012 and 2013. Housing also provides a number of jobs, so the recovery of this sector is a good indicator for future growth. OUTLO OK � FALL 2 0 1 2 | 39 4 What role do you think healthcare will play in overall GDP growth? Every sector normally realizes some contraction during a recession or economic downtown, but in the case of healthcare, annual spending has not contracted since World War II. Healthcare-related activity will continue to grow and contribute to GDP growth. Healthcare employment has also increased despite the recession. During the last recession, in early 2010, the nation lost approximately 8.8 million jobs, while healthcare created 600,000 jobs over the same period of time. For such a large segment of the labor market, this continued growth is very unusual. Adding to healthcare's solidity is the aging population in the U.S. Since 2011, when baby boomers began to reach age 65, an estimated 10,000 people are retiring or become eligible to retire every day for the next 20 years. This alone should ensure continued growth in healthcare spending. There has been much media coverage over the European economic crisis and slowing growth rates in China. How does economic growth in these regions impact the U.S.? we should see slower demand for goods and services. Other large economies, like India, are also affected by the global slowdown. India's economy, for instance, contracted in Q1 of this year. Brazil saw contraction in late 2011, and industrial production data suggests that weakness in Brazil has likely continued. Slowdowns within the emerging markets contribute to the overall global slowdown. Financial conditions are a transmission mechanism, and some key interest rates used in U.S. financial markets are priced in foreign markets or by foreign banks. This raises the rates off which U.S. products are priced. Credit availability is another issue, since European banks are 5 We live in a global economy, and growth in these regions affects the U.S. China is growing at a slower pace, the eurozone is contracting, and other parts of Europe are moderating. As these economies weaken, 40 | E CONOM ICS �2012 by Premier Inc. All rights reserved. We live in a global E C O N O M I C S ECONOMIC O U T LO O K economy, and growth in these regions affects the U.S. China is growing at a slower pace, the eurozone is contracting, and other parts of Europe are moderating. As these economies weaken, we should see slower demand for goods and services. trying to reduce risks and are pulling back on lending in the U.S. and emerging markets. Investment capital flow matters. We have benefited from global capital flowing to us, as investors have sought the safety of U.S. financial assets. While global economic weakness is expected to continue into 2013, the good news is that global central banks are more aligned in their actions. unemployment and an anticipated 7.8-7.9 percent unemployment rate at this time next year, which is consistent with expectations for 2 percent GDP growth. There are always regional differences, with areas overly dependent on housing seeing above-average persistence in unemployment. States like California, Nevada and Florida, which have higher unemployment rates than the national average, will likely see improvement as the housing market recovers. 6 What changes do you expect to see over the next 12 months in the U.S. unemployment rate? We expect continued slow job creation in the U.S. during that period. In July 2012, 163,000 jobs were created. This should translate to gradual improvement in OUTLO OK � FALL 2 0 1 2 | 41 A look at the industry with Barclays 1 What role do you anticipate healthcare playing in overall GDP growth? Joshua Raskin (JR): Healthcare accounts for 17-18 percent of national GDP, and that's a dramatic number. Healthcare accounted for 5 percent of GDP in the 1960s, and it's been growing steadily since. We don't expect this upward trending to change as the weak economy, combined with the passage of the Affordable Care Act (ACA), will continue to drive healthcare's growth at a faster rate than GDP. also important, because it shapes the unit price side of healthcare and indicates how inflation impacts consumer and managed care initiatives. As more people have to pay out of pocket for medical care, medical utilization trends can suffer. 3 How does the unemployment rate impact the healthcare industry? JR: Medicaid-focused companies benefit from higher unemployment, while commercial health insurers benefit from lower unemployment rates. Likewise, healthcare facilities benefit when unemployment is lower because of the payor mix. LM: Historically, one of the great characteristics of the healthcare supply chain was that demand wasn't influenced by the economy. But that was when unemployment didn't impact hospital admissions. As more buyers of products focus on lowercost alternatives, unemployment has a larger effect on healthcare. Joshua Raskin, CFA, managing director of equity research focusing on managed care and healthcare facilities for Barclays, and Lawrence Marsh, CFA, managing director of equity research in healthcare distribution and technology for Barclays, joined us to discuss the current economy, the impact of healthcare reform, and other trends in the industry. 2 What are some other economic indicators that could provide insight in healthcare's future? Lawrence Marsh (LM): In terms of economic indicators, unemployment is extremely important. Price inflation, as measured by consumer price index (CPI), is 42 | E CONOM ICS �2012 by Premier Inc. All rights reserved. Fewer people can pay out-of-pocket for services in a weak economy, and that has a large impact on hospitals and providers. The patient access model needs to evolve, so that demand is not just based on the type of job you have and whether you have insurance. In healthcare, we've seen acceleration in price inflation in certain categories, particularly in branded drugs. Branded prescription drugs have seen 5-9 percent inflation, some of which is because of patent expirations. Dynamics of the election may moderate prescription drug price inflation. 4 What do you anticipate the short-term (six months to a year) impact of the Affordable Care Act (ACA) will be on the healthcare industry and specifically on healthcare supply chain stakeholders? JR: The ACA is the largest change to the U. S. healthcare industry in history and could have a greater impact than the creation of Medicare and Medicaid. Long term, the number of uninsured will dramatically decrease, and with greater medical coverage available, usage will increase. Overall expenditures in the system will go up at the federal, employer and individual levels. To offset higher costs, the government and employers will likely pass on some of the costs to patients. When Medicaid eligibility expands in 2014, we'll see a major impact on the payor mix. When we set out to fix healthcare, 6 What are some inpatient or outpatient trends that you are seeing? JR: 2011 was a year of low utilization with inpatient trends of minus 1-2 percent. Outpatient trends were flat or up slightly at 1-2 percent. In 2012, the inpatient trend has flattened, but we have yet to see a decrease. The outpatient trend shows an uptick in utilization in the low single digits. 7 What are your thoughts on the continued investment in health information technology after the implementation of electronic medical records (EMRs)? LM: EMR implementation is still in stage one of the threestage process. CMS says $6 billion has been paid for EMR implementation, and they anticipate spending an additional $30-35 billion over the next three years. At the same time, hospitals are reporting that their investment in EMR training for staff is exceeding the amount they are getting back from the government. Additionally, EMR isn't viewed as a capital-generating expense for hospitals. It's just something they need to do. By 2015-2016, when everything is implemented, a remaining question for hospitals is whether EMRs will result in better decision-support analytics. We expect more disruption in the vendor community as hospitals have to evaluate the best way to reach Meaningful Use standards and effectively interact with physicians. the ACA sought to increase quality, decrease costs and provide coverage for more Americans. The short-term results of the ACA will likely only affect the latter goal of increasing coverage. LM: Medical suppliers will be subject to a tax in 2013 as a percentage of qualified product sales volume, so they will immediately feel the ACA's impact. This will be a direct cost to suppliers, and some may attempt to pass it on to customers � specifically to care providers. E C O N O M I C S ECONOMIC O U T LO O K There is the potential for greater demand for products as coverage increases, but we won't see this until 2014 at the earliest. With exchanges, suppliers will face a more concentrated buyer � a more powerful third-party payor � that will exert additional pricing pressure. Suppliers will face their own cost reductions in 2015 and 2016. 8 In the next 12 months, what factors could impact hospital profitability? JR: It's a fixed-cost business where the margin lies in the ability to improve the top line. The biggest factors in this are volume and mix. Greater demand for services, and subsequent expansion and capital expense investments can drive volume and improve profitability. Anything that updates the mix, such as unemployment or increased Medicare use from baby boomers reaching age 65, can affect profitability. 5 Can you describe the overall inflation rates for the last several years in the U.S. economy and how this has looked in healthcare? LM: Barclays' economists project CPI to increase 2 percent in the U.S. in 2012 and 2.2 percent in 2013. This is on the low end of most economies, with eurozone lower and emerging economies higher. OUTLO OK � FALL 20 1 2 | 43 NUMBERS BEHIND THE FINANCIAL AND ECONOMIC TRENDS IMPACTING OUR MEMBERS Premier distributed an online survey to approximately 13,000 leaders at our member organizations across the country to solicit their perspectives on the healthcare supply chain � in particular, the impact of economic and industry trends. The survey (n=617) yielded a wealth of data on the key objectives of the Premier healthcare alliance. The major themes of the survey results were: � The increasing importance of data as organizations prepare to demonstrate performance measures and implement electronic health records (EHRs); � Cost-reduction efforts as a leading strategy for meeting critical economic challenges; � The continued rise of physician employment at hospital-owned entities just as inpatient admission growth is projected to slow; and � The fact that more respondents anticipate either an increase or no change to capital budget forecasts in spring 2012. Leading cost pressures: Regulation and overutilization In several surveys over the past year, we've asked members about the external and internal pressures that are impacting their supply chains and overall operations. When respondents were asked to identify the biggest drivers of healthcare costs, however, the overwhelming answer was something over which they have no control: healthcare legislation and mandates (Figure 1). This area was one of the top two cost drivers for 45 percent of 0123456789012345678901234567890123456789012345678901234567890123456789 44 | E CONOM ICS �2012 by Premier Inc. All rights reserved. Figure 1 50.9% Drivers of healthcare costs 45.0% 22.7% 33.3% 22.0% 19.9% 19.8% 20.9% 17.3% Healthcare legislation and mandates Overutilization of products and services Patient demand for healthcare services and care Lack of clinical coordination of care 17.2% Misalignment of quality and payment incentives 17.3% Labor costs I Spring 2012 I Fall 2012 Note: Data for each category combined from responses for "biggest" and "second-biggest" drivers Source: Premier online survey for Economic Outlook Fall 2012 publication 19.2% E C O N O M I C S ECONOMIC O U T LO O K 0123456789012345678901234567890123 respondents. Similarly, nearly half listed reimbursement cuts as the healthcare trend having the greatest impact over the coming year. (See related "Perspectives" article in this issue.) Respondents cited overutilization of products and services (33 percent, up 11 points in significance from our spring 2012 survey) as a distant second. Survey results that increased in significance from spring include: � Patient demand for healthcare services and care (up five points, to 22 percent); � Lack of clinical coordination of care (up three points, to 20 percent); and � Misalignment of quality and payment incentives (up three points, to 20 percent). Readiness and returns: The electronic health record Information technology (IT), including telecommunications, leads in expected capital investment categories for the coming year. Nearly half of all respondents say they expect their biggest capital investment will be in this area (see the "capital spending" section later in this story). We found a very high degree of confidence among those surveyed concerning their organizations' readiness to meet Meaningful Use criteria (the Centers for Medicare & Medicaid Services' requirements that providers must meet through their use of certified EHR technology) before penalties begin in 2015. Nearly 90 percent say they are at least somewhat confident (Figure 2). This is consistent with another survey question OUTLO OK � FALL 20 1 2 | 45 Figure 2 Confidence in meeting EHR Meaningful Use criteria 100% 80% 60% 40% 20% 0% Very confident Somewhat confident Neither confident nor unconfident 56.5% 32.9% 5.5% 1.9% Somewhat unconfident 3.1% Very unconfident Source: Premier online survey for Economic Outlook Fall 2012 publication Figure 3 Anticipated ROI from EHR implementation 26.0% 14.5% 4.8% ROI is anticipated to be negative 0 More than $0 but less than $2 million $2 million or more, but less than $3 million $3 million or more, but less than $5 million 10.0% 13.0% 16.4% 8.2% $5 million or more, but less than $7 million 7.1% $7 million or more, but less than $10 million More than $10 million Note: Among those respondents who said they know their anticipated ROI from EHR (44 percent) Source: Premier online survey for Economic Outlook Fall 2012 publication 46 | ECONOMICS �2012 by Premier Inc. All rights reserved. that identified health information technology requirements (Meaningful Use and EHR) as the trend expected to have the second-greatest impact on respondent organizations' supply chains. (See related "Perspectives" article in this issue.) In a similarly optimistic vein, the vast majority of respondents (80 percent) indicate they expect to realize a return on investment (ROI) for their EHR systems (Figure 3). The greatest percentage of respondents (26 percent) believe their EHR ROI will be less than $2 million, while nearly 17 percent think it will exceed $10 million. Patient admissions: Stagnant? More respondents forecast that patient admissions will remain unchanged than in previous surveys; 34.4 percent cite no change in patient admissions, compared to 33.5 percent in spring 2012 and 27.5 percent in fall 2011. More than 40 percent of respondents think patient volumes will increase. Premier data shows that inpatient discharges were down a slight 0.3 percent in 2011, compared year-overyear with 2010. Cost-saving goals: Containment When asked to identify their top cost-savings goal (as a percentage of their overall operating budget) for the next 12 Figure 4 49.2% Forecast for 2012 patient admissions 0.5 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 39.2% % Respondents (n = 613) 33.1% 27.5% 33.5% 34.4% 11.0% 10.7% 8.0% 9.9% 14.0% 19.4% E C O N O M I C S ECONOMIC O U T LO O K Increase by more than 5% Increase by up to 5% No change Decrease by up to 5% Decrease by more than 5% I Fall 2011 I Spring 2012 I Fall 2012 Source: Premier online survey for Economic Outlook Fall 2012 publication 2.5% 2.6% 5.1% OUTLO O K � FALL 2 0 1 2 | 47 Figure 5 Percentage of respondents who know their organization's annual cost-savings plan Formal goal for annual savings, by hospital size 58.7% 49.5% 52.5% 41.8% 30.7% 28.8% 26.1% 29.9% 10.9% 11.9% 7.2% 7.9% 7.2% 5.4% 2.2% 2.0% 1.5% 1.0% 1.8% 1% - 5% 6% - 10% 11% - 15% 16% - 20% 21% or higher 0.0% 1.5% My organization does not have a formal goal for annual cost savings I Multi-hospital/IDN I Large (>500) I Midsized (200-500) I Small (<200) Source: Premier online survey for Economic Outlook Fall 2012 publication months, nearly half of respondents (48 percent) indicate 1-5 percent, up almost 10 points from a year ago (Figure 5). The majority (77 percent) indicate their cost-savings goal is between 1 and 10 percent of their overall operating budget. A 1-5 percent goal is most popular among large hospitals (nearly 59 percent), while 6-10 percent goals are most popular among midsized hospitals (31 percent). Capital spending stays viable Our current survey shows capital budgets as stable or increasing among 67.3 percent of respondents, a slight increase over spring 2012 (65 percent) and slightly below fall 2011 responses, when 68.9 percent cited unchanged or rising capital budgets (see Figure 6). Healthcare organizations continue to earmark larger portions of capital budgets for IT and construction. Nearly half of all respondents (43 percent) say they expect their biggest capital investment in the coming year will be in IT and telecommunications � the same percentage as six months ago and up from 34 percent in fall 2011. Infrastructure is the second-leading planned capital expenditure in our most recent survey, up six points in popularity from the 28 percent noted in fall 2011. Slightly smaller percentages of planned capital expenditures are seen in imaging, surgery, and lab areas compared to 2011. Cost reductions lead among effective strategies Market share expansion, revenue-cycle enhancements, mergers and acquisitions, emphasizing high-margin services, debt restructuring, and even asset sales to raise cash are popular strategies employed by healthcare organizations when confronting serious economic challenges. Unfortunately, these strategies appear to be less effective today than even a year ago. When asked to rate a series of strategies from "very ineffective" to "very effective," formal cost-reduction programs and physician recruitment and employment were deemed very effective by the largest share (24 percent each) of respondents, followed closely by expansion of market share (22 percent). MD employment among hospital-owned practices still on the rise Many healthcare organizations are forging closer ties with physicians in an effort to control costs and improve care. One way this trend has manifested itself is with an increase in physician acquisition by or affiliation with hospital-owned practices. Nearly one-fourth of respondents indicate that the majority of their physicians are employed by hospital-owned practices (Figure 9). This appeared to be on the rise as far back as a year ago, when 20 percent of our survey respondents had no physicians employed by hospital-owned practices. That percentage dropped to 13 percent in this fall's survey. Nearly 40 percent of respondents report that more than one-quarter of their physicians are employed by hospital-owned practices today. 48 | ECONOMICS �2012 by Premier Inc. All rights reserved. 2.2% 5.9% 13.4% Figure 6 Change in capital budget since last year Decreased by 30% or more 4.0% 4.3% 3.3% 11.1% 11.9% 9.8% 17.6% 19.1% 18.2% 21.8% 26.3% 28.2% 26.5% 26.4% Decreased by 10% to 29% Decreased by 1% to 9% No change Increased by 1% to 9% 10.8% 12.3% 12.0% 3.7% 4.3% 4.7% 23.7% Increased by 10% to 29% Increased by 30% or more I Fall 2012 I Spring 2012 I Fall 2011 Source: Premier online survey for Economic Outlook Fall 2012 publication Figure 7 Area where largest capital investment will be made next year E C O N O M I C S ECONOMIC O U T LO O K IT and telecommunications 34.1% 43.1% 43.1% 40.0% 30.1% 27.8% 8.5% 11.1% 9.9% 7.0% 7.2% 4.5% 4.2% 7.0% 2.7% 3.1% 3.3% 0.2% 1.2% 1.8% Infrastructure (i.e., construction) Imaging equipment Surgical suites/equipment 10.1% Other clinical equipment Other Laboratory equipment I Fall 2012 Source: Premier online survey for Economic Outlook Fall 2012 publication I Spring 2012 I Fall 2011 OUTLO OK � FALL 2 0 1 2 | 49 Figure 8 Strategies employed in response to current economic challenges Formal cost-reduction programs 24.1% Physician recruitment and employment 23.5% Expansion of market share 21.7% Revenue cycle enhancements 19.9% Mergers and acquisitions 11.4% Emphasize high-margin services 10.9% Debt restructuring 10.0% Sales of assets to raise cash 3.0% 0% 10% 20% 30% 40% I Very effective 50% 60% I Neither effective nor ineffective I Somewhat effective Source: Premier online survey for Economic Outlook Fall 2012 publication Figure 9 Percentage of physicians employed through hospital-owned practices 23.7% 23.0% 20.2% 18.9% 22.6% 13.2% 12.6% 15.5% 11.3% 8.6% 8.9% 11.2% 0% 1-10% 11-25% 26-50% 51-75% 76-99% I Fall 2012 I Fall 2012 Source: Premier online survey for Economic Outlook Fall 2012 publication 50 | E CONOM ICS �2012 by Premier Inc. All rights reserved. 4.5% 100% 5.8% About the survey In summer 2012, Premier, in collaboration with Customer Care Measurement and Consulting LLC, commissioned an online survey of 13,000 healthcare leaders across our membership, representing both the acute and non-acute care healthcare markets. The survey respondents (n=617) included a cross-section of members across geographical area and organizational size and type. The survey collected data on members' perspectives on the healthcare supply chain, with a particular focus on related financial and economic industry trends. More than 90 percent of survey respondents represented acute care providers. The majority of respondents (72 percent) were C-suite or supply chain, materials management, service line, or practice area managers or directors. Nearly half of the respondents came from multi-hospital systems/IDNs and midsized hospitals. Urban and rural areas were almost equally represented. An overview of the respondent profile is as shown below: Figure 10 Roles of survey respondents 28% 22% 22% 7% 5% 3% 2% C-Suite Office Supply chain Service line or or materials practice area administrator/ manager manager/ management director Clinician Quality Finance and/ improvement or accounting Physician 1% Other 9% E C O N O M I C S ECONOMIC O U T LO O K Figure 11 Types of respondents' organizations 24% 23% 16% 13% 10% 3% 2% 1% 1% Multi-hospital system/IDN Small hospital Critical access Large hospital Senior-living Midsized (501 + beds) facility hospital (less than hospital (fewer than 200 beds) (between 200 200 beds) & 500 beds) Academic medical center Ambulatory or outpatient center Multispecialty group practice Singlespecialty group practice 1% Other 4% OUTLO OK � FALL 2 0 1 2 | 51 An update on hospital performance metrics Operating margins for acute care hospitals have improved since 2007 and 2008, when they stood at less than 1 percent. Median operating margin has increased 300 percent from 2007 to 2011, ending at 2.1 percent (Figure 1). Hospitals in the first quartile (top 25 percent) have seen significant improvement in operating margin, rising from 5.2 percent in 2007 to 8.6 percent in 2011. Though operating margin has generally improved among hospitals in the past five years, the gap between the median and the first quartile continues to expand (from 4.5 percent in 2007 to 6.5 percent in 2011). According to Joe Damore, vice president, engagement and delivery, Premier healthcare alliance, "Trends in operating margins demonstrate that scale matters. The gap between the top performers and the median continues to grow. It appears that organizations that are focused on managing cost, spreading overhead over a larger volume of patients, and diversifying into outpatient and similar services, are outperforming other organizations." Operational improvements are most apparent in average profit and loss per acute bed in service. Profit per acute beds in service has improved from $13,336 in 2007 to $33,869 in 2011 (154 percent), with the first quartile clearly outperforming both the median and average (Figure 2). Premier's member survey showed that 58.9 percent of respondents expect no change or a decrease in patient admissions in the next year. The decline in inpatient revenue persists as a percent of overall patient revenue, decreasing from 61 percent in 2007 to 55 percent in 2011. (Figure 3). "Outpatient and home care continue to replace inpatient care for many conditions," says Damore. Declines of approximately 5 percent have been seen in the average, median, and first quartile groups; the first quartile ticked up slightly in 2010 but saw decreases again in 2011. (NPR) in 2011 (Figure 4). The first quartile has continued to see increases here, reaching its highest level in five years in 2011 (at 6.3 percent). The average supply expense peaked in 2007 at 18.1 percent of NPR but has since fallen to its lowest point in five years, at 17.5 percent in 2011. The first quartile has seen even larger decreases of late, going from a slight peak in 2010 of 16.4 percent to 16.1 percent in 2011 (Figure 5). Average total operating expense rose In addition to the shift to to 98.5 percent of outpatient and home NPR in 2007 and The gap between the top performers care, Damore says several has declined to 96.8 and the median continues to grow. It appears that organizations that are organizations have repercent in 2011, still focused on managing cost, spreading ported reductions in slightly off the low overhead over a larger volume of patients, and diversifying into outpatient medical admissions and of 96.3 percent in and similar services, are outperforming ER visits following imple2009. The first quarother organizations." mentation of chronic tile has increased disease management the gap on this perprograms. "To generate formance metric new revenue, many orevery year since ganizations are increasing their efforts in 2007 � it was 10.1 percent lower than the areas such as retail health, which includes median and 11.03 percent lower than the pharmacy, urgent care, and related areas," average in 2007. In 2011, the first quartile he notes, "and we've also seen an increase widened the gap to 11.3 percent over the in the number of provider-sponsored median and 12.8 percent over the average (Figure 6). health plans." Bad debt expense grew in nominal dollars ($6.3 billion in 2011), although it has declined from a peak of 7.2 percent in 2009 to 7.0 percent of net patient revenue -Rich Westbay, program manager, SupplyFocus�, Premier healthcare alliance, contributed to this article. 52 | ECONOMICS �2012 by Premier Inc. All rights reserved. Figure 1 Operating margin of acute care hospitals, 2007-2011 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2007 2008 I Median Source: A database maintained by the Premier healthcare alliance 2009 I 1st quartile 2010 2011 Figure 2 Profit and loss per acute beds in service, 2007-2011 E C O N O M I C S ECONOMIC O U T LO O K $200,000 $180,000 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 2007 2008 I Average 2009 I Median 2010 I 1st quartile 2011 Source: A database maintained by the Premier healthcare alliance OUTLO OK � FALL 2 0 1 2 | 53 Figure 3 Inpatient gross patient revenue as a percent of gross patient revenue, 2007-2011 64.0% 62.0% 60.0% 58.0% 56.0% 54.0% 52.0% 50.0% 2007 2008 I Average 2009 I Median 2010 I 1st quartile 2011 Source: A database maintained by the Premier healthcare alliance Figure 4 Bad debt expense as a percent of net patient revenue, 2007-2011 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 2007 2008 I Average 2009 I Median 2010 I 1st quartile 2011 Source: A database maintained by the Premier healthcare alliance 54 | E CONOM ICS �2012 by Premier Inc. All rights reserved. Figure 5 Supply expense as a percent of net patient revenue, 2007-2011 19.0% 18.5% 18.0% 17.5% 17.0% 16.5% 16.0% 15.5% 15.0% 14.5% 2007 2008 I Average 2009 I Median 2010 I 1st quartile 2011 Source: A database maintained by the Premier healthcare alliance Figure 6 Total operating expense as a percent of net patient revenue, 2007-2011 E C O N O M I C S ECONOMIC O U T LO O K 100.0% 95.0% 90.0% 85.0% 80.0% 75.0% 2007 2008 I Average 2009 I Median 2010 I 1st quartile 2011 Source: A database maintained by the Premier healthcare alliance OUTLO OK � FALL 2 0 1 2 | 55 PREMIER'S PATIENT VOLUMETRENDS The metrics reported below are based on a sample of 443 healthcare facilities that have submitted three years of inpatient and outpatient data to a database maintained by the Premier healthcare alliance. The sample is representative of a cross-section of our membership, including variation in geographic area and organizational size and type. This report includes year-over-year (YOY) percentage changes in historical volumes for key data elements such as inpatient and outpatient growth, surgery growth, and payor mix from Q1 2011 to Q4 2011. Figure 1 Y/Y Growth Inpatient Outpatient Total discharges Inpatient surgeries Outpatient surgeries Births Medicare discharges Medicaid discharges Self-pay discharges Managed care and other payor discharges Q1 2011 3.1% 6.2% 5.7% 3.4% 6.6% -1.4% 8.1% 10.5% 6.3% 2.1% 2011 Quarterly trends Q2 2011 -1.6% 3.8% 3.0% -1.5% 4.0% -1.1% 5.0% 6.0% 1.9% 0.7% Q3 2011 -0.7% 5.5% 4.6% -0.6% 5.8% 1.4% 4.8% 4.5% 1.0% 5.4% Q4 2011 -2.2% 5.3% 4.2% -1.9% 5.8% -2.5% 2.5% 0.8% 1.5% 7.4% 2011 -0.3% 5.2% 4.4% -0.1% 5.5% -0.9% 5.1% 5.4% 2.6% 3.9% Notes: Quarterly numbers show the percent change from the same quarter in 2010. Annual totals represent the percent change overall in 2011 compared to the full year 2010. Source: A database maintained by the Premier healthcare alliance 56 | E CONOM ICS �2012 by Premier Inc. All rights reserved. OF NOTE: � Inpatient volumes for 2011 decreased a slight 0.3 percent as compared to 2010 volumes. � Outpatient volumes for 2011 increased 5.2 percent as compared to 2010 volumes. � Inpatient surgeries decreased 0.1 percent from 2010. � Outpatient surgery volumes increased 5.5 percent in 2011, compared to 2010, which was up 2.4 percent YOY from 2009. � Payor mix: Overall growth in payor discharges is 4.4 percent, driven by the 5.2 percent increase in outpatients. Medicare volume was up 5.1 percent for 2011, as compared to 2010; Medicaid was 5.4 percent higher; self-pay increased 2.6 percent; and managed care and other payors increased 3.9 percent. E C O N O M I C S ECONOMIC O U T LO O K OUTLO OK � FALL 2 0 1 2 | 57 Discharge Trends 10.0% 8.0% Y/Y percent change 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 I Total discharges I Inpatient discharges I Outpatient discharges Source: A database maintained by the Premier healthcare alliance Discharges by payor type 16.0% 14.0% 12.0% Y/Y percent change 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Q1 2010 I Medicare discharges Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 I Medicaid discharges I Self pay discharges I Managed care and other payor discharges Source: A database maintained by the Premier healthcare alliance 58 | ECONOMICS �2012 by Premier Inc. All rights reserved. Surgery and emergency department visits 12.0% 10.0% Y/Y percent change 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 I ED visits Q4 2011 I Inpatient surgeries I Outpatient surgeries Source: A database maintained by the Premier healthcare alliance Average length of stay E C O N O M I C S ECONOMIC O U T LO O K 0.4% 0.2% 0.0% Percent change -0.2% -0.4% -0.6% -0.8% -1.0% -1.2% -1.4% Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 3.78 3.76 3.74 3.72 3.70 3.68 3.66 3.64 3.62 3.60 3.58 I Y/Y percent change I Average length of stay (days) Source: A database maintained by the Premier healthcare alliance OUTLO OK � FALL 20 1 2 | 59 Premier's guide to economic indicators Price indexes: CPI, PPI and CMS marketbaskets What price indexes are important in the healthcare industry? Industry stakeholders � including suppliers, healthcare systems, and the Centers for Medicare & Medicaid Services (CMS) � use three key price indicators when examining inflationary pressures in the marketplace: � The consumer price index (CPI), � The producer price index (PPI), and � The CMS marketbaskets. CPI and PPI measure the average change over time in the prices of fixed goods and services. The CPI is primarily used to compare a household's cost for a specific basket of finished goods and services with the cost of the same basket during an earlier benchmark period. The weight given to each basket item is fixed. The PPI uses a similar benchmark approach, but it measures price changes reported by establishments at the wholesale, rather than the retail, level. While both indexes measure inflation, they differ in the goods and services eligible for inclusion.1 Economic indicators that are more specific to the healthcare industry are CMS marketbaskets, which measure how much more or less it would cost at a later time to buy the same mix of goods and services purchased during a base period. These indicators reflect price inflation facing medical services providers. Each index is summarized below and is accompanied by recent relevant data that provide additional budgeting resources. Consumer price index The CPI measures price change from the consumer's perspective and includes goods and services purchased for personal consumption by urban U.S. households. While there are many categories within the CPI, the two most commonly used for healthcare are the CPI for all urban consumers (CPI-U) and the CPI for medical care. Medical care is one of eight major CPI categories, and it has two classifications, commodities and services, with each containing several item categories (strata).2 The CPI-U decreased 0.16 percent before seasonal adjustment from June 2012 to July 2012 and 1.7 percent before seasonal adjustment for the 12 months from June 2011 to June 2012. The categories of medical care commodities and medical care services increased 2.4 percent and 2.9 percent, respectively, in July 2012 compared to 2011.3 Producer price index In contrast to CPI, the PPI measures price change from the perspective of the seller and includes the entire market output of U.S. producers. Since PPI captures price movement prior to the retail level, it may foreshadow subsequent price changes for business and consumers.4 The PPI for finished goods, which is the most commonly used measure of PPI, rose 0.5 percent, on an unadjusted basis, for the 12 months that ended June 2012. The 12-month change from June 2011 to June 2012 for the net output of selected industries is: � Pharmaceutical and medicine manufacturing, 5.2 percent; � Medical equipment and supplies manufacturing, 0.4 percent; and � Surgical and medical instrument manufacturing, -0.4 percent.5 Additional information is available from the Bureau of Labor Statistics at www.bls.gov/CPI and www.bls.gov/PPI. CMS marketbaskets The CMS marketbaskets update payments and cost limits in multiple CMS payment systems, while individual marketbaskets provide a more accurate measure of their own inflation indexes. 60 | E CONOM ICS �2012 by Premier Inc. All rights reserved. � Prospective Payment System (PPS) hospital marketbasket updates inpatient hospitals' operating and outpatient PPS payments as well as cost limits for children's hospitals, cancer hospitals, and religious, non-medical healthcare institutions. � Skilled nursing facility marketbasket updates payments to skilled nursing facilities. � Home health agency marketbasket updates home health PPS payments. � PPS hospital capital marketbasket updates inpatient hospitals' capital PPS payments. � RPL marketbasket updates inpatientrehabilitation, psychiatric, and long-term care PPS payments. � Medicare economic index is used with the sustainable growth rate to update the physician fee schedule.6 The marketbaskets are constructed from mutually exclusive spending categories, which use data collected from hospitals' Medicare cost reports and corresponding price indexes. The overall hospital price index is the sum of each category's product weight and relevant price index. The price indexes, or proxies, which are used to calculate the marketbasket, include data from the Bureau of Labor Statistics (most 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.7 CMS projects payment updates for the coming fiscal year using a marketbasket containing the latest available data at the time the final regulation is published. Once this update has been determined, it is generally not revised to include more recent data. However, because marketbasket data is updated quarterly, the current marketbasket may be different, depending on the variances in the forecast data and data currently available.8 The marketbasket of interest to most hospitals is the Inpatient Prospective Payment System (IPPS), which should closely approximate a hospital's projected change in Medicare revenue. In FY 2012, CMS revised its estimated marketbasket update for hospitals that report quality data to 3 percent. On August 1, 2012, CMS released its final rule for FY 2013, stating that inpatient payments in the aggregate will increase 2.3 percent to reflect a marketbasket update of 2.6 percent.9 The key cost category in the index is compensation expense, which includes labor and benefits and is weighted at 60 percent. The index also includes major purchasing categories, such as food, pharmaceuticals, blood and equipment. Additional information is available from the Centers for Medicare & Medicaid Services at www.cms.gov/MedicareProgramRatesStats/05_MarketBasketResearch.asp. References: 1. "PPI program spotlight," Bureau of Labor Statistics, www.bls.gov/ppi/ppivcpi.pdf. 2. "Measuring price change for medical care in the CPI," Bureau of Labor Statistics, www.bls.gov/cpi/cpifact4.htm. 3. "Consumer Price Index," Bureau of Labor Statistics, www.bls.gov/cpi/home.htm. 4. "Producer Price Indexes: program overview," Bureau of Labor Statistics, www.bls.gov/ppi/ppiover.htm#Link6. 5. "Producer Prices Indexes," Bureau of Labor Statistics, www.bls.gov/ppi/. 6. "Medicare program rates and statistics," Centers for Medicare & Medicaid Services, www.cms.gov/MedicareProgramRatesStats/05_M arketBasketResearch.asp. 7. Centers for Medicare & Medicaid Services, http://www.cms.gov/MedicareProgramRatesStats/downloads/mktbskt-pps-hospital2006.pdf. 8. Ibid. 9. "FY 2013 IPPS Final Rule includes 2.3 percent hospital payment update," Association of American Medical Colleges, https://www.aamc.org/advocacy/washhigh/highlights2012/300648/fy2013ipp sfinalruleincludes2.3percenthospitalpaymentupdate.html. E C O N O M I C S ECONOMIC O U T LO O K CPI-U, Medical care CPI, and IPPS marketbasket rates (2005-2012) 5% 4% Annual percent change 3% 2% 1% 0% -1% 2005 2006 2007 2008 2009 2010 2011 2012 2013 I M M I M I I M M I M M M I I M I I CPI-U Medical care CPI M Medicare marketbasket - inpatient hospital Note: Rates are current as of August 2012. OUTLO OK � FALL 2 0 1 2 | 61 Premier's supply chain solutions Premier's Medical-Surgical Inflationary Calculator A resource for proactively managing medical-surgical supply spend The Medical-Surgical Inflationary Calculator is a quick and easy-to-use resource designed to help members estimate Premier medicalsurgical supply spend. The calculator: > Compares Premier's contractual price protection and suppliers' price inflation estimates to deliver a detailed estimate of projected supply costs; > Prepopulates the spend profile from one SpendAdvisor� report and enables users to manually adjust for anticipated spend; > Compensates for off-contract spend with an optional SpendAdvisor report; > Alerts members to contract categories that will be renegotiated in the current year; > Provides aggregate inflation estimates by line of business; and > Analyzes spend by individual facility or IDN. The calculator can be found on Premier's Economic Outlook website (premierinc.com/economicoutlook). For more information about the MedicalSurgical Inflationary Calculator, please contact the Premier Solution Center at firstname.lastname@example.org. Premier's Drug Budget Tool A resource for proactive drug expense management The Drug Budget Tool prepopulates profiles for analysis and enables users to evaluate their drug purchases. The tool: > Analyzes 92 percent of annual drug purchases; > Examines entire systems as well as multiple 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 email@example.com. > Enable the calculation of a hospital's Supply Mix Index based on their unique 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 weights are calculated using more than 4.4 million patient-level records from Premier's QualityAdvisorTM database. > Demonstrate a more direct correlation to supply expense-per-patient case than does the Case Mix Index (CMI). Premier's Supply Mix Index focuses on the supply cost within a case, while the Case Mix Index incorporates other significant, non-supply-related expenses. > Allow for cross-hospital comparisons of supply efficiency and intensity. Premier's new methodology will initially be used in the executive-level reporting application of SupplyFocus�, used by acute care facilities. SupplyFocus is also included with OperationsAdvisor�, Premier's labor productivity and benchmarking product. To learn more about Premier's Supply Mix Index, please contact Mark Hiller, vice president of innovative solutions, at firstname.lastname@example.org or Richard Westbay, program manager, SupplyFocus, at email@example.com. Premier's Supply Mix IndexTM A methodology for calculating supply cost indexes for each Medicare Severity - DiagnosisRelated Group (MS-DRG). The Supply Mix Index methodology, which combines clinical and supply cost data from more than 370 hospitals, is designed to: 62 | E CONOM ICS �2012 by Premier Inc. All rights reserved. Inflation summary Range of supplier inflation estimates: These figures show the range of supplierreported inflation estimates for products within a service line. The range does not take into account Premier contract price protection or utilization data. Average of supplier inflation estimates: The supplier's estimate of the average percent increase is based on a true average. Projected Premier contract inflation estimates are calculated as follows: Pharmacy � Projections are derived from the Premier Drug Budget Development Tool. All others (except Foodservice) � Projections reflect the expected weighted average percent change in contract pricing for the existing contract portfolio as of September 1, 2012. Service line Range of inflation estimates Average of inflation estimates Projected Premier contract inflation estimates Alternate Site Healthcare Cardiovascular Services Clinical Laboratory Services Facilities Foodservice Imaging IT / Telecommunications Materials Management Nursing Pharmacy * Surgical Services Women and Children's 0% - 15.0% 0% 0% 4.0% 6.0% 3.83% 2.21% 3.19% 4.60% 7.00% 3.56% 4.22% 4.13% 3.53% Not applicable 2.80% 3.78% 0.52% 0.09% 0.84% 1.80% E C O N O M I C S ECONOMIC O U T LO O K 0% - 15.0% 6.0% 8.0% 4.00% 0.76% 0.14% 0.92% 1.21% 4.33% 0.91% 0.17% 0% - 13.0% 0% - 15.0% 0% - 15.0% 0% - 12.0% Not applicable 0% 10.% 0% - 15.0% *Pharmacy data derived from Premier's Drug Budget Development Tool Estimated inflationary changes are subject to change. OUTLO OK � FALL 20 1 2 | 63 C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K A CALMER VOLATILITY ? 2013 COMMODITIES OUTLOOK: 64 | COMMOD ITI E S OVERVI EW �2012 by Premier Inc. All rights reserved. Months before the Wall Street collapse in 2008, "volatility" had become a term used with increasing frequency in economic circles. Today it has almost become the new normal. When it comes to commodities like food, oil, metals, plastics and rubber, volatility is a double-edged sword. One side is an opportunity, while the other is an uncertainty so vexing that it challenges the most experienced buyers trying to time purchases and stay within budgets. Like volatility, most of the major themes shaping commodities markets are still as relevant. Nearly all market forecasts come with caveats around the European sovereign debt crisis, the possible eurozone exit of a handful of nations, and ongoing tensions in the Middle East, where many observers worry about disruptions in oil supply channels. Enter a new trend no one could have predicted even as recently as our spring 2012 issue: an unprecedented drought that has gripped much of the corn and soybean producing regions of the country. Still, as dire as that has been for production yield forecasts, analysts say the impact on food prices is likely to be minimal in the short term. The impact may be larger on gas prices, since 40 percent of corn production is used for ethanol. 1 In that context, healthcare executives can expect more of the same in the coming year, though price fluctuations in general may not be as broad as they have been in 2012. This is consistent with our most recent survey, in which respondents indicated that commodity prices would be less impactful on supply chains than other factors (see our related "Perspectives" article this issue). A quick overview Buyers aren't likely to see commodity prices as high as they were in July 2008, when the Thomson Reuters/Jefferies CRB Index hit its current four-year high of 473. Still, as one leading market research firm notes in a recent report, "their sting is now felt throughout the supply chain to a greater degree and at a greater speed than previous decades." 2 According to John Mothersole, IHS Inc. senior principal economist, pricing and purchasing service, buyers can expect commodity pricing in general to remain soft, given the major market trends previously mentioned. "We expect to see a very subdued recovery, and the markets will continue favoring hospital buyers in the near term," he said. Mothersole predicts a "managed" Greek exit from the European Economic Community, something that could mitigate any wild price fluctuations and the investor anxiety that has crept into riskier asset classes like commodity markets over the past six months. However, Mothersole predicted the September Federal Reserve approval for another round of quantitative easing, which could lead to a greater risk appetite among investors and a slight bump in some commodity pricing. References 1. Lee Stafford, Ally Financial interview with author, August 3, 2012. 2. "Commodity Price Volatility - What Goes Up Must Come Down," IHS Inc., http://www.ihs.com/en/uk/Images/CommodityPrice-Volatility-What-Goes-Up-Must-ComeDown.pdf. Thompson Reuters/Jefferies CRB Index 500 450 400 350 300 250 200 150 100 50 0 2011 Jan 08 2008 Jan 09 2009 Jan 10 2010 Jan 11 Jan 12 Source: Jefferies.com Note: The index is composed of 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. 2012 OUTLO OK � FALL 201 2 | 65 Minimizing raw materials risk A sample of Premier's contracted suppliers identified key raw materials that serve as primary cost drivers of their products' pricing. Potential category and market impacts are shown for the raw materials featured in this publication. Organic and inorganic chemicals Premier contract impact* Contrast media ionic/non-ionic Surgical hand preps Instrument cleaners and enzymatics Labor Premier contract impact* Reusable textiles and textile services Sterile reprocessing Lap sponges, OR towels and specialty sponges Base Metals 4% Electronic Components 5% Packaging 1% Precious Metals 1% Other 2% Cotton 2% Paper 2% Natural and Synthetic Rubber 2% Labor 32% Organic and Inorganic Chemicals 8% Plastic Resins 18% Energy 23% Price increase risk High Moderate Low Plastic resins Premier contract impact* Respiratory therapy products IV therapy products � sets and tubing Chest drainage products Energy Premier contract impact* Third-party freight management Mobile imaging services Vascular grafts *Refer to contract-specific price protection information in the inflation tables. 66 | COMMODITI ES OVERVI EW �2012 by Premier Inc. All rights reserved. C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K OUTLO OK � FALL 2 0 1 2 | 67 COPPER MARKET OVERVIEW Average Monthly Copper Prices (London Metal Exchange) 500 450 cents/pound 400 350 300 250 2009 200 150 100 Jul 09 Jan 10 Jan 11 Jan 12 Source: U.S. Geological Survey: Copper Statistics and Information Copper market update Copper prices in the second quarter of 2012 fell by more than 9 percent over the previous quarter due to rising concerns over Europe's sovereign debt crisis.1 The continued slowdown in Chinese manufacturing and uncertainty over the U.S. economy also continue to put downward pressure on copper prices.2 Prices are expected to balance in the second half of 2012, as many anticipate an upturn in the global economy, which in turn will drive up copper demand.1 In addition, continued support by global central bankers to provide monetary stimulus to major global economies will likely influence copper prices.3 > The global copper market is expected to end 2012 with a supply deficit of 49,000 tons, while 2013 is expected to have a surplus situation of 24,000 tons.2 > China's copper demand is predicted to grow by 5 percent in the second half of 2012 compared to one year ago.4 > In 2011, the power sector accounted for 46 percent of the global copper real demand.2 > Demand for copper in Asia has increased more than fivefold in less than 30 years.5 > The global copper market continues to see heavy influence from labor unrest in key producing countries, delays in new mines coming on line, and continued decreases in European and U.S. demand. References 1. "2012 copper Q2 market trends and outlook," Copperinvestingnews.com, http://copperinvestingnews.com/11457/20 12-copper-q2-market-trends-outlook-bhpbilliton-rio-tinto-glencore-xstrata-chinaunite-states-eurozone/. 2. "Citibank lowers copper price forecast on weakness in global economy," Platts.com, http://www.platts.com/RSSFeedDetailedNews/RSSFeed/Metals/6472905. 3. "HCCE Copper Outlook," Honeywell Cable, http://www.honeywellcable.com/documents. 4. "Copper extends rally on global stimulus hopes," Reuters.com, http://www.reuters.com/article/2012/07/ 27/us-markets-metalsidUSBRE86N1A320120727. 5. "The World Copper Factbook 2012," International Copper Study Group (ICSG), http://www.ICSG.org. 6. "Copper falters as eyes on China," Copperinvestingnews.com, http://copperinvestingnews.com/11604/copper-falters-as-eyes -on-china-chile-price-fall-codelco-glencoreteck-eurasian-xstrata-india/. 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 Medical gas pipeline equipment, services and accessories Price increase risk: I High I Moderate I Low I I I I I I 68 | COMMOD ITI E S OVERVI EW �2012 by Premier Inc. All rights reserved. 2012 2010 2011 COPPER MARKET OVERVIEW Projections for 2013 Impact on copper prices Factor Supply outpacing demand Comments 2013 is expected to see a slight surplus in global copper supply (24,000 tons).2 Analysts predict the Chinese government will implement further steps to boost the economy, driving up demand.1 The global economic downturn and subsequent erosion in Chinese economic stimulus Impact on emerging markets copper prices have impacted robust emerging markets like Chile and Brazil. Chile lowered its GDP projections for the year, and Brazil has cut interest rates to historic lows.6 C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K OUTLO OK � FALL 2 0 1 2 | 69 COTTON MARKET OVERVIEW The Cotton "A" index is an estimate of the world price of cotton. It averages the five lowest quotations for a sample of 19 cottons traded internationally. Cotton "A" Index 250 200 cents/pound 150 100 2010 2011 50 0 Jan 10 Jan 11 Jan 12 Source: Cotton.org and Bloomberg.com Note: Index values were unavailable from June 23, 2010, through August 1, 2010, and again from June 10, 2011, through August 1, 2011, due to insufficient quotes from merchants. Cotton market update Cotton prices plunge After cotton prices rapidly soared to a record high of nearly $2.30 per pound in March 2011, prices tumbled to $0.84 per pound in July 2012, 52 percent lower than the June 2011 YTD average. Continued price erosion is due to an anticipated increase in global stocks for a second consecutive season, arrival of rains in Texas, and recent strengthening of the U.S. dollar resulting from uncertainties in the European Union (EU) economy. The global economic recovery will continue to impact cotton prices as world supply exceeds global consumption. International demand for cotton has generally declined since the recession.1 One of the reasons for the slowdown in the cotton fiber market is weaker demand for apparel and home textiles in developed countries, like the U.S., Japan, and Western Europe. All of these have seen stagnant growth in recent years.2 The Chinese government has had the most impact on global demand and supply by importing large quantities of cotton to rebuild national strategic reserves.3 Stockpiling in China is expected to continue into 2013, suggesting that the size of the Chinese national cotton reserve may increase further in 2012/2013.4 References 1. Jon Devine, senior economist with Cotton Incorporated, interview with Premier healthcare alliance. 2. Ibid. 3. "China said to buy 1 million tons of U.S. cotton for reserves," Bloomberg.com, http://www.bloomberg.com/news/201206-15/china-said-to-buy-1-million-tons-ofu-s-cotton-for-reserves-1-.html (accessed 6/27/2012). 4. Ibid. 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 Advanced wound care Price increase risk: I High I Moderate 2012 I I I I I I Low 70 | COMMOD ITI E S OVERVI EW �2012 by Premier Inc. All rights reserved. COTTON MARKET OVERVIEW Projections for 2013 Impact on cotton prices Factor Decreasing global production Comments Expected drop in 2012/2013 production, although production is expected to continue to exceed consumption. C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K Higher estimated stocks (inventories) for 2012/2013 Stocks/use ratio expected to be 68 percent, up from 63 percent in 2011/2012.* Consumer demand will be tied to the strength of the global economic recovery. Cotton price levels are now competitive with other fibers, so an eventual increase in cotton demand is likely. Consumer demand * Source: USDA O UTLO OK � FALL 2 0 1 2 | 71 How will the rising cost of corn and soybeans impact the availability and price of cotton worldwide? Recent increases in corn and soybean prices are expected to eventually impact cotton supplies. The relationship among these different crops is driven by acreage, so the current high corn and soybean prices could prompt producers to devote more acreage to these crops and less to cotton. Q&A COTTON MARKET OVERVIEW O&A WITH JON DEVINE Senior economist with Cotton Incorporated from cotton. Even so, since cotton prices have decreased, any price advantage offered by competing fibers has eroded. With consumers seeking value in the goods they purchase, there may be a corresponding shift back to cotton, increasing cotton's market share and potentially lifting cotton consumption. Could biotech cotton play a role in increasing the number of countries able to produce sustainable crops? Over two-thirds (24.7 million hectares or 69 percent) of the acres planted worldwide in 2011/ 2012 were genetically modified. Since 1996, when biotech cotton was first used, more than 150 million hectares have been planted in 13 countries.1 Through increased yield (bales/acre), we estimate that biotechnology was responsible for an additional 57.4 million bales of cotton fiber production between 1996 and 2010. This implies a substantial benefit to both growers and the environment by reducing the amount of land necessary to meet global demand.1 The biggest single benefactor of biotech cotton is India, the largest cotton-producing country in the world. In 2011, the biotech cotton adoption rate was 88 percent, and 2011 marked a decade of successful cultivation of biotech cotton in India. A recent analysis, published in the Journal of the Proceedings of the National Academy of Sciences, shows that yield and profitability increased 24 percent and 50 percent, respectively, in the first six years alone, with most of benefits accruing to small-holder farmers.2 Other countries could also benefit from adopting biotech cotton. Perhaps the largest group is in sub-Saharan Africa, where 15 countries are currently growing about 4 million hectares of non-biotech cotton. Several countries in Latin and Central America, where cotton cultivation was abandoned due to tremendous pest problems, could also benefit. References 1. Brookes, Graham and Peter Barfoot. "GM crops: global socio-economic and environmental impacts 1996-2010." UK: PG Economics Ltd., 2012. Retrieved from www.pgeconomics.co.uk/pdf/2012globalimpactstudyfinal.pdf. 2. Kathage, Jonas and Matin Qaim. "Economic impacts and impact dynamics of Bt (Bacillus thuringiensis) cotton in India."PNAS (2012) 109:11652-11656. profitable for Chinese farmers to sell to the government than on the open market, and this trend helped swell Chinese reserves. In March 2012, China increased the minimum guaranteed price by 3 percent. With the separation between world prices and Chinese prices currently as wide as it has ever been, the Chinese government will probably be a major buyer of the country's 2012/2013 harvest. In addition to domestic purchases, China was also an active buyer internationally, and the volume of Chinese imports likely helped keep cotton prices from falling further than they did in 2011/2012. Since China is the world's largest cotton importer and already has a large volume of reserves, there are major concerns about what China will do in 2012/2013. If China decides to use the reserves it currently holds, instead of importing cotton, there could be downward pressure on global prices. If China continues to actively purchase in the global market, the reserve could continue to support world prices. How could cotton pricing affect the quality of goods produced? The spike in cotton prices during the 2010/2011 crop year has been associated with some decreases in the quality of certain items. Higher prices may have led to substitution of lower grades of cotton or a switch to artificial fibers. Shifts to lower grades can complicate the manufacturing process and reduce durability. Substitution to other fibers can have a similar effect on quality. Cotton Incorporated regularly tracks consumer perceptions of quality through its consumer survey, the Lifestyle MonitorTM. Recent responses indicate heightened concern regarding quality, especially in light of increasing retail prices. Nearly seven of 10 consumers (69 percent) say clothing prices have increased compared to last year, while close to three-fourths (73 percent) say clothing does not last as long as it did previously. The majority of consumers (60 percent) also note that clothing fabrics have gotten thinner, and 41 percent notice a decline in clothing quality. More than half of consumers (54 percent) say they have observed a move away While any significant reduction in global acreage could have an eventual impact on cotton prices, cotton supplies are currently at an alltime high, with both stocks and the ratio of stocks-to-use predicted to reach record levels in the 2012/2013 crop year (August 2012 through July 2013). Although some upward movement could be expected with decreased planting for the 2013/2014 harvest, it may take some time for scarcity to drive cotton prices higher. What international actions or events could cause disruption in the availability of cotton products? A major question facing global cotton markets is the issue of Chinese cotton reserves. The reserve system in China is a mechanism designed to help stabilize the country's cotton prices. When prices are higher, the government will sell from reserves to increase the supply available to Chinese mills; this helps lower prices. Conversely, when prices are low, the Chinese reserve program buys cotton from farmers to increase pricing and demand. During the 2009/2010 and 2010/2011 crop year, when world prices were higher due to tighter global supplies, cotton was sold from reserves. In the 2011/2012 crop year, the combination of a record global harvest and weak demand resulted in record levels of stocks worldwide. The accumulation of supplies put downward pressure on prices and led the Chinese government to aggressively purchase cotton fiber. While the exact figures are unknown, we estimate that more than 20 million bales of cotton (over 15 percent of the global harvest) were purchased by the Chinese government last crop year. Following the collapse in global prices that began in the spring of 2011, it was far more 72 | COMMODITI ES OVERVI EW �2012 by Premier Inc. All rights reserved. ENERGY MARKET OVERVIEW [ OIL ] The U.S. Energy Information Association (EIA) predicts that the West Texas Intermediate (WTI) crude oil spot price will average about $88 per barrel over the second half of 2012, and the U.S. refiner acquisition cost (RAC) of crude oil will average $93 per barrel. EIA expects WTI and RAC crude oil prices to remain roughly at these levels in 2013. These price forecasts assume that world oil-consumption-weighted real gross domestic product (GDP) grows by 2.9 percent in both 2012 and 2013. [ GASOLINE ] Higher crude oil prices, refinery outages and a pipeline disruption contributed to higher gas prices during August. Due to this, EIA has increased the average regular gasoline price forecast for the third quarter of 2012 to $3.66 per gallon, $0.17 higher than predicted in August. EIA expects regular gasoline retail prices, which averaged $3.53 per gallon in 2011, to average $3.58 per gallon in fourth quarter of 2012 and $3.43 per gallon in 2013. [ NATURAL GAS ] Natural gas working inventories ended June 2012 at an estimated 3.1 trillion cubic feet (Tcf), about 23 percent above the same time last year. EIA expects the Henry Hub natural gas spot price, which averaged $4 per million British thermal units (MMBtu) in 2011, to average $2.58 per MMBtu in 2012 and $3.22 per MMBtu in 2013. Source: U.S. Energy Information Administration International crude oil market The projected pace of global oil demand growth reflects lessoptimistic assumptions about the global economy. The forecast for global economic growth was lowered by 0.1 and 0.6 percentage points in 2012 and 2013, respectively, and is now expected to average 2.9 percent in both years. The weaker growth outlook is prompted by increased economic concerns about the debt crisis in Europe and indications of slowing growth in China, both of which could affect other economies. The global liquid fuels consumption growth forecast for 2012 was lowered to 0.7 million barrels per day (bbl/d) from 0.8 million bbl/d. Projected global consumption growth in 2013 was reduced by 0.4 million bbl/d to 0.7 million bbl/d. Oil markets have loosened in the last several months, a trend that is reflected in a sharp decline in crude oil prices and futures market since the end of April. EIA's historical supply and demand balance also shows signs of a looser market, as supply outpaced consumption by an average of 1.1 million bbl/d for the first half of 2012, and stocks built counter-seasonally during the first quarter � a marked contrast to significant stock draws during 2011.1 The EIA's downward price revisions reflect shifts in expectations about oil market balances and the additional downside risks that are currently dominating market sentiments. However, uncertainties abound. C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K O UTLO O K � FALL 20 1 2 | 73 ENERGY MARKET OVERVIEW U.S. Gasoline and Crude Oil Prices 4.50 4.00 dollars per gallon 3.50 3.00 2.50 2.00 1.50 1.00 .50 Crude Oil Retail Regular Gasoline Forecast 2008 2009 2010 2011 2012 2013 0 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Source: U.S. Energy Information Administration, Short-Term Energy Outlook, September 2012 Note: Crude oil price is average refiner acquisition cost. Retail prices include state and federal taxes. West Texas Intermediate (WTI) Crude Oil Price 260 240 220 200 180 160 140 120 100 80 60 40 20 0 Historical spot price STEO price forecast NYMEX futures price 95% NYMEX futures price confidence interval dollars per barrel 2011 2012 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 2013 Jul 13 Source: U.S. Energy Information Administration, Short-Term Energy Outlook, September 2012 Note: Confidence interval derived from options market information for the five trading days ending July 5, 2012. Intervals were not calculated for months with sparse trading in near-the-money options contracts. 74 | COMMODITI ES OVERVI EW �2012 by Premier Inc. All rights reserved. 2014 ENERGY MARKET OVERVIEW The possibility that the economic situation in European Union (EU) countries could deteriorate further poses a downside risk to global oil demand and prices, though the market's positive reaction to recent EU negotiations serves as a reminder that oil prices will fluctuate in both directions as perceptions evolve. Consumption in Europe is expected to fall year-over-year by 0.3 million bbl/d in 2012 and by a further 0.4 million bbl/d in 2013. The prospect of slower growth in China, which has been a key driver of increased oil demand in recent years, could also impact the market. China's weakening exports, particularly to Europe, and slower industrial and domestic growth experienced in the first half of 2012, could continue to place downward pressure on oil prices. The EIA currently projects annual consumption in China of about 0.4 million bbl/d in both 2012 and 2013. On the supply side, oil prices could be higher than projected if recoveries from supply disruptions are slower than forecast, additional disruptions occur, or supply growth is lower than expected. EU sanctions, including an embargo on Iranian crude oil and an insurance ban on tankers carrying Iranian oil, took effect on July 1, shortly after the latest set of U.S. sanctions. The United States exempted all major Iranian oil importers from sanctions that could have been imposed on foreign financial institutions, facilitating oil-related transactions with the Central Bank of Iran. In return for the lifted sanctions, importers pledged to significantly reduce Iranian crude oil purchases. The sanctions' impact is unknown but likely has already been priced into the global oil market. Despite the market's mild reaction to the sanction start dates, upside price risks still persist, particularly if negotiations with Iran fail to progress. References 1. U.S. Energy Information Administration, http://www.eia.gov. Projections for 2013 Factor Less-optimistic assumptions about the global economy Impact on oil prices Comments The forecast for global economic growth was lowered by 0.1 and 0.6 percentage points in 2012 and 2013, respectively, and is now expected to average 2.9 percent in both years. The weaker growth outlook is prompted by increased economic concerns about the debt crisis in Europe and indications of slowing growth in China, both of which could affect other economies. The possibility that the economic situation in European Union (EU) countries could deteriorate further poses a downside risk to global oil demand and prices, though the market's positive reaction to recent EU negotiations serves as a reminder that oil prices will fluctuate in both directions as perceptions evolve. China's weakening exports, particularly to Europe, and slower industrial and domestic growth experienced in the first half of 2012 could continue to place downward pressure on oil prices. The EIA expects that OPEC members will continue to produce about 30 million bbl/d of crude oil over the next two years to accommodate the projected increase in world oil consumption and to counterbalance supply disruptions. Projected OPEC crude oil production increases by about 0.8 million bbl/d in 2012, and then falls by 0.9 million bbl/d in 2013, as non-OPEC supply growth increases and stocks rise slightly. Uncertainties about oil market balances and general market sentiments C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K OPEC production Source: U.S. Energy Information Administration OUTLO OK � FALL 2 0 1 2 | 75 FOOD MARKET OVERVIEW The food price index from the Food and Agriculture Organization of the United Nations is an average of six commodity groups: meat, dairy, cereals, oils, fats and sugar. FAO Food Price Index 180 2002-2004 = 100 160 140 120 2009 2010 2011 100 80 Jan 09 Source: FAO.org Jan 10 Jan 11 Jan 12 Food market update The U.S. drought This summer's severe drought in the U.S. led to rapid increases in prices in the corn and soybeans commodities markets. In July, the USDA said 45 percent of U.S. corn fields were in "poor" or "very poor" condition.1 Weather will likely lead to the lowest yield per acre of corn since 1995.1 Rising corn and soybean prices will also impact markets such as cattle and hogs, where corn is a feed stock. U.S. food prices The USDA projects food prices will increase 2.5 - 3.5 percent in 2012, following inflation of 3.7 percent in 2011.2 The USDA's 2013 inflation forecast is 3 - 4 percent, with the greatest increases expected in beef and dairy.2 While we are currently seeing dramatic increases in food commodity prices, the USDA expects that most drought-related price Corn 14% Soybeans Lean hogs 22% -5% Wheat 26% Live cattle 7% Sugar -24% Coffee -28% Source: CNNMoney.com. Price change shown is from 7/26/2011 � 7/26/2012. inflation will not be passed on to consumers until late 2012 and early 2013.3 According to U.S. Secretary of Agriculture Tom Vilsack, "Because livestock producers will begin the process of potentially reducing their herds in light of higher feed costs, we would anticipate in the short term actually food prices for beef, poultry, and pork may go down a bit, but over time they will rise." 3 In the U.S., a very small percentage of food prices are directly tied to farm- level costs (most of the cost is in packaging, marketing, and distribution). Many economists expect rising corn and soybean prices to minimally impact U.S. consumers. As Mark Doherty, senior economist and policy analyst at the Illinois Farm Bureau explains, "We have found through past years, in products other than meat products, corn and soybeans really have very little impact on the price of food. That's because the cost of raw corn -- even in a bucket of popcorn at the movies -- is tiny, a few cents even if corn were to double in price." 4 References 1. "Report on US corn crop worst since 1988,"FT.com, http://www.ft.com/intl/cms/s/0/42df334cd4e7-11e1-b47600144feabdc0.html#axzz22DjPJBtM (accessed 7/31/12). 2. "Food Price Outlook 2012," USDA, http://www.ers.usda.gov/data-products/foodprice-outlook.aspx (accessed 7/31/12). 3. "Press Briefing by Press Secretary Jay Carney and Secretary of Agriculture Tom Vilsack," USDA, http://www.usda.gov/wps/portal/usda/usdahome?contentid=2012/07/0244.xml&navid=TR ANSCRIPT&navtype=RT&parentnav=TRANSCRIPTS_SPEECHES&edeployment_action=retrievecontent (accessed 7/31/12). 4. "Drought's impact on consumer food prices to be minor," ChicagoTribune.com, http://www.chicagotribune.com/business/ctbiz-0801-bf-drought-prices20120801,0,4749595.story (accessed 8/1/12). 76 | COM MOD ITI ES OVERVI EW �2012 by Premier Inc. All rights reserved. 2012 FOOD MARKET OVERVIEW Food Categories and 12-Month Price Outlook Inflation forecasts Q4 2012 2012 2.6% 6.1% 7.7% 10.0% 36.5% 84.7% -0.5% 5.1% -22.7% -15.7% -21.8% -21.1% -17.7% -11.5% -7.4% -5.4% -16.1% -9.4% -17.2% -8.5% 2.0% -3.5% 6.0% -2.0% -2.0% -10.0% 6.0% 3.0% -5.0% -8.0% 7.0% -3.0% 2.6-4.0% 2.6-4.0% 2.0% 2.0% 2.0% 2.0% 5.0-6.0% 5.0-6.0% 0% -3.0% 0% 5.0% 0% 5.0% 1.5% 2.5% 1.5% 2.5% 2.0-3.0% 2.0% 2.0% 3.0% 1.0% 2.0% 2.0% 2.0% 3.0% 3.0% 3.0% 3.5% 4.0% 5.0% 7.0% 6.0% 5.0% 5.0% 1.0% 3.0% 3.0% 4.0% 8.0% 7.0% -5.0% 0.0% 2.0% 3.0% 3.0-5.0% 4.0-6.0% 3.0-5.0% 5.0% 15.0% 10.0-12.0% 2.0-3.0% 6.0% -1.0% 0.0-1.0% 3.0-5.0% 3.0-5.0% 2.0% 4.0% -1.0% 1.0% 1.5% 1.5% -1.0% -1.0% 2.0% 4.0% 1.5% 3.5% Category Subcategory Impact on contract pricing I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I Poultry Whole Birds Poultry Breasts Poultry Wings Beef Ribeyes Pork Bellies/Bacon Pork Trimmings Pork Hams Pork Loins Pork Butts Pork Spare Ribs Dairy Milk and Creamers Dairy Cheese Dairy Butter Dairy Shell Eggs Dairy Cultured Oils and Shortening Potatoes Frozen Beverages Juice and Juice Bases Beverages Drinks, Drink Bases/Mixes, Other Beverages Soda, RTD and Fountain Syrup Beverages Coffee Beverages Tea Beverages Hot Cocoa Bakery Breads and Rolls Bakery Desserts Grocery Rice (Dry) Produce Vegetables - Lettuce/Salads Produce Vegetables - Potatoes Produce Vegetables - Tomatoes Produce Vegetables - Onions Produce Vegetables - Other Produce Fruits - Citrus Produce Fruits - Melons Produce Fruits - Grapes Produce Fruits - Bananas Produce Fruits - Berries Produce Fruits - Apples Produce Fruits - Avocados Produce Fruits - Other Tomatoes Canned Fruits Canned Apple Products Canned (including sauce) Fruits Frozen Vegetables Canned Vegetables Frozen Seafood Shrimp, Value-Add Seafood Shrimp, Non-Value-Add Seafood Fish, Value-Add Seafood Fish, Non-Value-Add Seafood Other, Value-Add Seafood Other, Non-Value-Add C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K I = > 5% Source: U.S. Foods Commodities Department I = 0.1% - 4.9% I = < 0% OUTLO OK � FALL 20 1 2 | 77 PLASTIC RESINS MARKET OVERVIEW Plastic Resin Prices 250 240 230 220 210 200 190 180 170 160 150 Index - Base Year 1982 = 100 2009 2010 2011 Jan 09 Jan 10 Jan 11 Jan 12 Source: Bureau of Labor Statistics � Producer Price Index � Commodity � Plastic Resins and Materials Plastic resins market update Earlier this year, global petrochemical began a dramatic slide. The Platts Global Petrochemical Index (PGPI), a marketbasket of seven petrochemicals, declined 11 percent in May and 14 percent in June. That is the biggest drop since the beginning of the global economic crisis in November 2008, when there was a 38 percent decline. 1 The Producer Price Index, which is slower to react to market changes, shows that plastic resin prices have increased 6.2 percent between December 2011 and May 2012, followed by a decline of 3.6 percent for the next two months. Overall pricing remains stable, with July 2012 showing only 0.2 percent lower than July 2011. Plastic resin prices have followed a seasonal trend in the past two years, with prices peaking in May or June, followed by declining prices for the Product categories with high plastic resin content and 12-month price outlook Custom procedure trays/packs, gowns and related products Can liners IV therapy products - sets and tubing Contrast media disposable injectors Patient bedside products Price increase risk: I High I Moderate I Low I I I I I remainder of the calendar year. Because plastic resin is derived from crude oil and natural gas, its pricing often aligns with their market swings. Plastic resin will continue to be significantly impacted by such factors as the: > Strength of the global economy; > Transition from crude oil to natural gas for fuel production; > Exchange rates; > Weather patterns; > Geopolitical events; and > Threats of war or political instability. Crude oil prices � In recent months, crude oil prices have declined sharply versus early 2012 price levels. The decline is primarily the result of concerns about the strength of the global economic recovery. The U.S. Energy Information Administration (EIA) projects that crude oil prices will average $87.50 per barrel in the second half of 2012, compared to an average price of $100.27 in the first half of the year. The EIA forecasts continued weakness in 2013, with prices averaging $88.50 per barrel. 78 | COM MOD ITI ES OVERVI EW �2012 by Premier Inc. All rights reserved. 2012 PLASTIC RESINS MARKET OVERVIEW Projections for 2013 Impact on plastic resin prices Factor Feedstock costs Comments Expect crude oil prices to be flat but natural gas prices to rise. Global economic recovery The strength of the global economic recovery will influence consumer demand for plastics products. C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K Natural gas prices � The EIA predicts that natural gas prices will average $2.88 per thousand cubic feet in the second half of 2012, which is 18 percent higher than the average price in the first six months of the year. This is the result of the additional consumption needed to generate electricity as more utilities choose natural gas over coal for power generation. Further increases in prices are expected in 2013, with the EIA projecting an average price of $3.31 per thousand cubic feet. References 1. "Petrochemical prices continue 2Q declines on lower oil prices," Platts.com, http://www.platts.com/newsfeature/2012/ pgpi/index (accessed 7/26/12). OUTLO OK � FALL 2 0 1 2 | 79 NATURAL AND SYNTHETIC RUBBER MARKET OVERVIEW Price Change Percentages Since June 2009 600% Price change percentage 500% 400% 300% 200% Crude Oil Natural Rubber China, SIR-20 Butadiene 2009 2010 2011 100% 0% Aug 09 Source: Propurchaser.com Jan 10 Jan 11 Jan 12 remainder serving other sectors such as transportation, construction, healthcare, mining, etc.2 Healthcare competes for natural and synthetic Natural and synthetic rubbers are rubber raw materials with tire used extensively in the healthcare production as well as with car hoses, industry for exam and surgical seals, and grommets. Scotiabank gloves. Natural rubber comes from Group forecasts that global latex sap extracted from a rubber automotive sales will climb to more tree, while synthetic rubber is than 62 million units in 2012, synthesized from chemicals derived marking a 5 percent increase over 1 from petroleum refining. 2011 sales.3 In its Global Auto Report, released in June, Scotiabank Group Several important trends are states that while the leading indicator expected to impact natural and of U.S. vehicle sales has edged down synthetic rubber pricing in 2012: from its peak in mid-2011, "the index remains at one of the highest > Automotive sector growth: levels on record, pointing to further Almost 60 percent of global rubber improvement ahead." The key driver is used by the world's tire in the U.S. is vehicle replacement, manufacturing industry, with the with the average age of the U.S. fleet at a record Product categories with high rubber 11 years.4 In contrast, content and 12-month price outlook Hyundai Motor Co., I Exam gloves South Korea's largest Surgical gloves I carmaker, cut its global forecast, citing the Price increase risk: I High I Moderate I Low fragile European Natural and synthetic rubber market update economy and worse-than-expected demand from China.5 > Continued synthetic rubber price volatility unknown: Synthetic nitrile butadiene rubber (NBR), a major material used in exam gloves, is composed of more than 65 percent butadience (BD). BD prices reached record highs in 2011 and have now fallen 46 percent since the peak. BD has been the key contributor to NBR price growth, but if there is uncertainty as to whether demand and higher prices for BD will continue, given the global economy. ICIS, the world's largest petrochemical market information provider, predicts NBR prices will have downward pressure due to the poor European economic forecast, a slow U.S. recovery, and weak demand from China and India. NBR is produced in China, Japan, and South Korea, and producers in these countries have lowered their production output due to reduced demand.6 80 | COM MOD ITI ES OVERVI EW �2012 by Premier Inc. All rights reserved. 2012 NATURAL AND SYNTHETIC RUBBER MARKET OVERVIEW > Natural rubber latex prices falling: Thailand, Indonesia, and Malaysia are the world's top natural rubberproducing countries. Natural rubber prices have fallen by 54 percent since peaking in February 2011. High production supplies from rubber tree crops, combined with the world economic crisis and slow growth from emerging nations, have contributed to falling prices. Lower crude oil prices have prompted the automotive industry to substitute synthetic rubber, and the result is diminished demand for natural rubber.7 > Global demand for rubber: Demand is lower after rapid 15 percent growth in 2010. According to the International Rubber Study Group, global rubber consumption (natural and synthetic) reached 25.9 million tons in 2011, 6 percent higher than in 2010. Worldwide rubber demand is forecast to reach 26.8 million tons in 2012, with a moderate 3.5 percent growth rate.8 > Currency exchange rates: The U.S. dollar remains weak against the Chinese yuan and Malaysian ringgit. As a result, healthcare products such as exam and surgical gloves manufactured in Asia are more costly in the U.S. compared to five years ago. Projections for 2013 Impact on rubber prices Factor Automotive sector Comments Healthcare products using natural and synthetic rubber compete with the growing global automotive industry for raw material supplies. Butadiene (BD) prices High prices and demand for BD may not continue based on global economic uncertainty. Natural rubber latex prices falling Currency exchange rates Natural rubber prices have fallen by about 54 percent since February 2011 due to lower demand and high supply. The U.S. dollar remains weak against the Chinese yuan and Malaysian ringgit. Crude oil prices The two monomers used for synthetic nitrile gloves (butadiene and acrylonitrile) are derived from oil. Oil demand and price forecasts are uncertain due to conflicting reports of global manufacturing slowdowns and strong automotive sales. C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K References 1. "Story of Rubber," International Rubber Study Group (IRSG), http://www.rubberstudy.com/storyofrubber.aspx. 2. Ibid. 3. "Global Auto Report," Scotiabank Group, http://www.gbm.scotiabank.com/English/bns_econ/bns_auto.pdf. 4. Ibid. 5. "Hyundai Motor cuts forecast for global automobile demand," Businessweek.com, http://www.businessweek.com/news/2012-07-26/hyundaimotor-cuts-forecast-for-global-automobile-demand (accessed 7/26/12). 6. "Acrylonitrile butadiene rubber-nitrile rubber: markets and analysis," ICIS.com, http://www.icis.com/chemicals/acrylonitrile-butadiene-rubbernitrile-rubber/ (accessed 7/25/12). 7. "The great global rubber crash," Commodityonline.com, http://www.commodityonline.com/news/the-great-global-rubber-crash-49396-349397.html (accessed 7/25/12). 8. "World rubber industry outlook update now available from IRSG," International Rubber Study Group (IRSG), www.rubberstudy.com. OUTLO OK � FALL 20 1 2 | 81 STEEL MARKET OVERVIEW Steel market update > World crude steel production for the first half of 2012 was 766.9 million tons, which was 0.9 percent higher than the same period in 2011. North America and China showed increased production (8.4 percent and 1.8 percent, respectively), while the EU and South America decreased production (to -4.6 percent and -3.5 percent, respectively).1 > Global (the 62 countries reporting to the World Steel Organization) crude steel production was 128 million tons in June 2012, a decrease of minus 0.1 percent compared to June 2011.2 The U.S. produced 7.3 million tons of crude steel in June 2012, an increase of 0.8 percent compared to June 2011, while China's crude steel production for June 2012 was 60.2 million tons, up 0.6 percent compared to June 2011.3, 4 In the European Union, Germany's production decreased 4 percent (to 3.7 million tons) from June 2011 to June 2012. Italy's production decreased 7.9 percent (to 2.4 million tons), while Spain's decreased 8.8 percent (to 1.3 million tons) in June 2012.5 > The world's largest steelmaker by volume, ArcelorMittal, lowered its global steel demand forecast to indicate growth of 3.5 percent to 4 percent, down from an earlier prediction of 4 percent to 4.5 percent. Lower forecasts can be attributed to slower growth in China and contracting demand in the European Union, where the debt crisis Product categories with high steel content and 12-month price outlook Surgical instruments Standard and safety hypodermics Spinal implants and related products Orthopedic total joint implants Steam sterilizers Price increase risk: I High I Moderate I I I I I I Low continues to take its toll on regional economies and consumer sentiment.6 > ArcelorMittal expects China's steel demand to grow 4.5 percent to 5 percent in 2012; previous forecasts predicted 5 percent demand growth. EU steel demand is expected to decrease between 3 percent and 5 percent in 2012 compared to previous forecasts of a 1 percent to 2 percent decline.7 > The World Steel Association (WSA) lowered its 2012 forecast to a 3.6 percent increase (1,422 million tons) from an earlier prediction of 5.4 percent, citing slackening growth in China.8 The WSA expects global demand to accelerate to 4.5 percent in 2013.9 > U.S. steel use is forecast to grow 5.7 percent in 2012 and 5.6 percent in 2013, approximately 92 percent of the 2007 level.10 > Steel prices have risen 13.3 percent from 2010 to 2011 but are expected to have decreased to 5.1 percent in the first half of 2012.11 82 | COMMODITI E S OVE RVI EW �2012 by Premier Inc. All rights reserved. STEEL MARKET OVERVIEW Projections for 2013 Impact on steel prices Factor Demand from China Comments Chinese demand for steel will decrease due to government crackdown on property markets. Increased demand in the U.S. While U.S. demand for steel is predicted to grow based on increased auto demand, limited output may keep prices high. References 1. "June 2012 crude steel production," World Steel Association, http://worldsteel.org/media-centre/press-releases/2012/06-2012-crudesteel.html. 2. Ibid. 3. Ibid. 4. Ibid. 5. Ibid. 6."ArcelorMittal lowers its 2012 global apparent steel demand forecast,"Nasdaq.com, http://www.nasdaq.com/article/arcelormittal-lowersits-2012-global-apparent-steel-demand-forecast-20120725-00057 (accessed 7/25/12). 7. Ibid. 8. "World Steel Association cuts forecast," Financial Times, http://www.ft.com/cms/s/0/b7419748-9063-11e1-8adc00144feab49a.html#axzz21pqQAD8M. 9. Ibid. 10. "World steel short range outlook," World Steel Association, http://worldsteel.org/media-centre/press-releases/2012/april-sro.html. 11. "Producer Price Index news release," Bureau of Labor Statistics, http://www.bls.gov/news.release/ppi.nr0.htm (accessed 7/31/12). C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K O UTLO O K � FALL 2 012 | 83 13034 Ballantyne Corporate Place Charlotte, NC 28277 T 704.357.0022 F 704.357.6611 444 N Capitol Street NW Suite 625 Washington, DC 20001-1511 T 202.393.0860 F 202.393.6499 premierinc.com FOR FURTHER INFORMATION To learn more about this publication, please visit premierinc.com/economicoutlook or email firstname.lastname@example.org.