Economic Outlook | Spring 2015 Edition by Premier, Inc.

STRATEGIC LEADERSHIP FOR FINANCIAL AND CLINICAL HEALTHCARE EXECUTIVES • A TWELVE MONTH OUTLOOK • SPRING 2015

OUTLOOK LEADERSHIP

MANAGING DIRECTOR Kayla Sutton

EDITORIAL STAFF

E XECUTIVE SPONSORS Mike Alkire, chief operating officer Durral Gilbert, president, supply chain services Amy Denny, vice president, strategy, supply chain services A special thanks to Dave Natale, Cheryl Fahlman, Paula Gurz, Tina Harlan, Eric Johnson, Erin Linville, Scott Pope, Matt Shimshock, Rich Westbay, Tracey Worrell, and Laura Yandell for their contributions to this edition of the Outlook.

DESIGN AND PRODUCTION Chris Cardelli, director, creative services Sung Ginader, project manager, creative services Dave Dixon, senior graphic designer, creative services Kimberly Diedrich, associate graphic designer, creative services EDITORIAL SUPPORT Amanda Forster, vice president, public relations Bryan Alsop, senior manager, corporate communications Morgan Bridges-Guthrie, manager, public relations

LETTER 01

EXECUTIVE LETTER

Supply chain buried treasure Mike Alkire, chief operating officer / Premier, Inc.

FEATURES | SUPPLY CHAIN LIFE CYCLES

04 A BREAK ON PHARMACEUTICAL COSTS

PERSPECTIVES 22 Creative ventures in supply chain

TRENDS 32 Redefining risk: Radiology’s new cost imperatives 36 Survival of the cleanest 40 From fragile to fit: Creating healthier markets for vaccines 42 Proven processes for improving care quality

08 PURCHASED SERVICES: REINING IN ROGUE SPEND

13 UNIQUE DEVICE IDENTIFIER IMPLEMENTATION GUIDE

ECONOMICS 46 A conversation with an economist 50 An update on hospital performance metrics 55 Patient volume trends 59 Premier’s supply chain solutions 60 Inflation summary

16 WHAT WORKS: INFLUENTIAL DATA FOR SUPPLY PROCUREMENT

COMMODITIES 62 Minimizing raw materials risk 64 2015 market overview: Indicators for pricing 66 Copper market overview 68 Cotton market overview 70 Energy market overview 72 Food market overview 76 Plastic resins market overview 78 Natural and synthetic rubber market overview 80 Steel market overview 82 References

About the cover As health systems expand as end-to-end care facilities – including home health aides, palliative care, urgent care and physician offices – it’s important that their internal processes follow suit. Similarly, increasingly capable and integrated data systems give health system executives and employees the visibility necessary to drive improvements in cost, quality and outcomes across disparate departments and facilities. This edition of the Economic Outlook highlights the power of coordinating the supply chain life cycle, whether in procurement of supplies or a full-scale change in the way services are contracted and savings monitored.

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

The content in this edition is intended

ship publication that highlights emerging

to help our readership better understand

economic and industry trends impacting

the implications of healthcare reform and

our membership and shaping the health-

provide insights into existing and evolving

care landscape. As an important thought

opportunities for healthcare stakeholders

leadership resource, the publication pro-

to improve connectivity and patient care

vides strategic insight to financial, clinical

in a newly-shaped marketplace.

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.

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

EX E C U TI V E LE TTER

Supply chain buried treasure

No team of experts: A health system’s supply chain team has members who have expertise in different areas, such as surgical products, IT, or imaging equipment. Managers of service contracts may be experts in a particular specialty or function but may have no way of knowing if they are getting a fair price on the services they buy. It’s often not even within the scope of their jobs to monitor or administer an agreement and its terms. No centralized service contract repository: Service contracts often reside in the facility or department using them. The contracts seldom overlap with other facilities or departments that use the same services. Without a central data

MEMBERS OF THE PREMIER ALLIANCE, With the help of a GPO, much of supply chain savings is what we call low-hanging fruit – fairly easy to see, and with the right team, easy to reach. Yet, today’s financial pressures on healthcare providers require much greater effort to find the savings necessary to thrive. For instance, the purchased services category accounts for approximately 20 percent of an average hospital’s total operating spend, but cost reduction opportunities there have largely been ignored. These services encompass anything outsourced to another company and range from laundry to lawn care to staff recruitment. While it is a new wave for many health systems, Premier teams have found ample savings in purchased services. Health systems typically have high-single or double-digit percent savings overall. To supply chain operations, purchased services pose specific challenges that include: No typical contract life cycle: Supplies are sourced by a centralized team that identifies vendors, negotiates terms and pricing, and compares products through value analysis. Not so

hub, different facilities or departments may have no idea that a similar contract already exists. “Purchased services is a future hotbed of activity in terms of reducing costs system wide,” says LeAnn Born, vice president, supply chain, Fairview Health Services (Minneapolis, MN). “But it’s not like supplies; purchased services are messy. Getting our arms around all of this spend is challenging.” Like 45 percent of Economic Outlook survey respondents – who say their organizations’ cost savings goals are the biggest factors in supply chain decisions this year – Born was charged with realizing savings for her organization several years ago, when Fairview first started looking at purchased services as an area of opportunity. Not knowing exactly what her team’s strategy would be, Born decided to assign a $1 million savings marker to the initiative. “Early on, we weren’t sure how we were going to get our arms around purchased services and actually realize savings,” she says, “but we knew the opportunities were plentiful.” A number of health systems, in addition to Fairview, have determined that supply chain teams are best equipped to rein in rogue purchased services spending. The problem lies in how to apply some of the same methodologies that have long existed for supply procurement to services.

for purchased services, where contracts might last for a month or roll over automatically each year. OUTLOOK

QTR 2.15

EX E C U TI V E LE TTER

Supply chain buried treasure

The potential savings opportunities are similar to buried

For that, we need benchmarking.

treasure. It’s easy to have a hunch it exists, but reaping the reward requires a lot of digging.

Just like buried treasure, benchmarking for purchased services is easier to talk about than to realize. While supplies have a unit

This is where the data comes in.

cost that can be compared across vendors, many services are not priced by unit. Or the units themselves may differ among vendors.

Categorization tools like Premier’s can quickly sort purchased services spend into buckets that identifies areas where there are

Using snow removal as an example, one vendor might price

issues, such as:

its service by square footage, while another might use square

• Departments that have large service spend;

footage and inches of snow, while a third might price by hours of

• Multiple vendors providing the same service (e.g., snow

labor. Another example is surgical instrument and scope repair,

removal); and • Nearby facilities using different vendors.

where there are hundreds of different prices for each product that is serviced. With this lack of consistency and no real visibility into pricing, it’s no wonder it’s so hard to determine

Spend categorization, coupled with our knowledge and

the “best price.”

expertise in national and custom service contracts, allows us to first put a number on a health system’s saving opportunities. On

That’s why a regional or national repository of price

average, health systems we’ve looked at could save 10 percent

benchmarks, such as the one Premier is building, can be vitally

overall across its service contracts. For a health system with

important in identifying where a health system’s service pricing

$1.5 billion in purchased services spend, that equates to

is out of line with its peers. As health systems expand their

$150 million in savings.

delivery networks to include acute, physician practices, longterm care, rehabilitation centers, and more, the opportunity

The categorization tool also highlights the number of vendors

to streamline services costs becomes even greater. Once the

being used and the number of disparate facilities within a health

front-end work of collecting disparate contracts across a

system that are contracting for the same services.

health system is done, supply chain managers will be able to easily integrate ongoing procurement of services on life cycle

Typically, fewer than five vendors account for 80 percent of spend

management tools like PremierConnect Supply Chain.

in a category, even if a facility has 20-30 vendors with current service contracts. As we’ve historically done with supplies,

From easy to more complicated service categories, varying

consolidating business to fewer vendors means better volume

levels of data can give hospitals the transparency they need to

pricing. Through custom contracting, we’re able to renegotiate

find that buried treasure of purchased service savings.

existing agreements or identify 2-3 vendors that could assume all or most of the service.

In healthcare, “X” doesn’t mark the spot. The data does.

While collecting this data across a health system can help identify inconsistent pricing or target categories where there are abundant vendors being used, it doesn’t help determine if pricing is fair for the regional market.

– MIKE ALKIRE Chief operating officer

/ Premier, Inc.

Features

A break on pharmaceutical costs: Biosimilars to hit the market, 4 Purchased services: Reining in rogue spend, 8 Unique Device Identifier implementation guide, 13 What works: Influential data for supply procurement, 16

T E K R A M E H T IT H O T S R A IL B IO S IM

FEATURES

T E

Bryant Mangum Chief pharmacy officer / Premier, Inc.

With more than 25 years of experience in pharmacy and materials management services, Bryant Mangum was instrumental in the reorganization of Premier’s pharmacy department. He continues to advance its programs in contracting, medication management, and regulatory issues. Prior to joining Premier, he held senior management positions with NCS

pending on specialty drugs is expected to reach $400 billion in 2020, up from $87 billion in 2012.1,2 Biologics, which account for the vast majority of these drugs, are large, complex molecules produced by living organisms. They are very often high-cost treatment regimens

for chronic illnesses such as cancers, autoimmune diseases, and hepatitis. 3 While the expense of specialty drugs can be a challenge for many patients – the

average prescription costs $1,776 – high utilizers, such as Medicare beneficiaries, have approximately double the spend per person compared to commercial health plan members.4 Currently, only half of the costs are covered by Medicare premiums, taxes,

Healthcare, Tenet, and SunHealth (one

and the interest on those taxes.5 As 10,000 baby boomers become newly eligible for

of Premier’s heritage organizations).

Medicare each day, the cost pressures on Medicare become even less sustainable.

As an authority on clinical and pharmacy

As a result of rising costs and growing demand from the aging population,

operations, procurement, and contract

the ACA included the Biologics Price Competition and Innovation Act

negotiations, he provides Premier’s

(BPCIA), which has largely impacted the specialty pharmaceutical market.

members with unsurpassed quality sourcing

The act provides a way for the FDA to approve non-innovator biologics,

in a rapidly changing marketplace. He

known as biosimilars, when an original biologic’s patent expires.6 As when

received his Pharmacy degree from the

generics first hit the market in the 1980s, biosimilars increase the number

University of North Carolina and currently serves on its Pharmacy School Board.

of options available to patients and typically offer financial savings.7 By 2024, biosimilars are anticipated to eliminate $250 billion in healthcare spending if biosimilars for 11 specific blockbuster biologics are approved (see Figure 1). The Rand Corporation estimates a 4 percent decrease (approximately $44.2 billion) in direct biologic spending from 2014 to 2024, while total savings will be largely determined by the FDA’s final regulation on its biosimilar pathway.8 As with many new FDA approvals, getting products to market has been slower than originally predicted. However, in late 2013, Teva introduced the first “follow-on” biologic, Granix (a similar product to Amgen’s Neupogen). Unlike many biosimilars to come, Teva sought approval through the traditional biologics license application, 351(a), instead of the new biosimilar application, 351(k). The main difference between the two lies in demonstrating interchangeability of the follow-on product to the original. At the time Granix received approval, the FDA had not issued final guidelines on the interchangeability aspect of the biosimilar pathway.9 Unlike generic drugs, which have the same active ingredients, dose, strength, OUTLOOK

QTR 2.15

FEATURES

T F

Fig.1

$250 billion could be saved in the next decade if these 11 biosimilars are approved

$5.7B Potential savings Avastin (bevacizumab)

$120B

Epogen® (epoetin alfa) $100B

® Herceptin (trastuzumab)

Humira® (adalimumab)

$80B

$250B

$60B

Intron A® (interferon alfa-2a) Potential savings

® Neulasta (pegfilgrastim)

2014

$17B

® Neupogen (filgrastim)*

2024 Potential savings

Pegintron (peginterferon alfa-2b) ®

$40B

Procrit® (epoetin alfa) $20B

® Remicade (infiximab)*

Rituxan® (rituximab) $0 2014

2016

2018

2020

Cost WITHOUT Biosimilars

2022

2014

2024

Cost WITH Biosimilars

Source: Express Scripts, “The Need for U.S. Biosimilars,” http://lab.express-scripts.com/~/media/7bc55bb374b545d8841bbda8c5b866f1.ashx

Fig.2

*Awaiting FDA approval.

Biosimilar applications pending FDA review

Sponsor and product

Reference

Date of filing

Estimated user fee date

Sandoz, filgrastim

Amgen’s Neupogen

May 2014

March 2015

Advisory committee Voted unanimously Jan. 7, 2015 to recommend approval (“Sandoz’s Biosimilar Filgrastim Sail Through FDA Panel” – “The Pink Sheet” DAILY, Jan. 7, 2015) *Approved March 6, 2015

Celltrion, infliximab

Johnson & Johnson’s Remicade

August 2014

June 2015

Delayed from March 17, 2015

Apotex, pegfilgrastim

Amgen’s Neulasta

October or November 2014

August or September 2015

No announcement yet

Hospira, epoetin alfa

Amgen’s Epogen and Janssen’s Procrit

December 16, 2014

October 2015

No announcement yet

Apotex, filgrastim

Amgen’s Neupogen

December 2014

October 2015

No announcement yet

Source: Pharma & MedTech Business Intelligence, “The Pink Sheet” Daily, February 18, 2015.

2024

FEATURES

T E

and use guidelines as their branded

The next/first wave of biosimilars

Amgen’s Neulasta, is currently

counterparts, the nature of biologics

The first wave of true biosimilars –

awaiting FDA review. Apotex’s

makes them impossible to identically

those that follow the 351(k) pathway – is

application for filgrastim, a biosimilar

replicate. Since biologics are produced

quickly approaching (see Figure 2). In

of Amgen’s Neupogen, is also waiting

in living systems, biosimilar products

early January 2015, Sandoz’s biosimilar

for the agency’s evaluation, making

are intended to closely approximate

filgrastim, Zarxio, was recommended

Apotex the first company to have

the originator product and have

for approval by the FDA Oncologic

more than one biosimilar under

many of the same characteristics.

Drugs Advisory Committee and was

review.14 Anticipated turnaround

approved March 6, 2015.12 At the front

time from the FDA is 10 months.15

of the FDA’s current biosimilar review

Many other biosimilars are in

Impact on pharmacy formularies

queue is Celltrion’s version of Janssen’s

development and will be joining the

adoption on pharmacy formularies will

Remicade, which will be discussed at

queue for review. Though it’s taken

require greater oversight than generic

the Arthritis Advisory Committee’s

longer than expected, now that the first

introductions. General guidelines

spring meeting. Unlike Sandoz’s

biosimilars – and follow-on biologics

for formulary review include:

product, which already has a large

– have hit the market, a steady stream

number of users in Europe, Celltrion’s

of others are coming. Not only will this

product has a smaller worldwide patient

wave of biosimilars likely drive down

population. The relatively small number

pharmaceutical costs in the area of

of users may delay FDA approval.

greatest growth and expense, it will

Due to their complexity, biosimilar

• The product approval pathway and data package; • Appropriate indications (on and off-label) for use; • Extrapolation considerations; • Therapeutic interchange

The first biosimilar out of Apotex, a pegfilgrastim filing similar to

provide greater access and options for patients with chronic healthcare needs.

and guided use policies; • Transitions of care; and

REFERENCES

• Payer mix.

1. UnitedHealth Center for Health Reform & Modernization, The Growth of Specialty Pharmacy: Current trends and future opportunities, Issue Brief (Minnetonka, MN: United Health Group, 2014), http://www.unitedhealthgroup.com/~/media/UHG/ PDF/2014/UNH-The-Growth-Of-Specialty-Pharmacy.ashx. 2. CVS Health, “New CVS Caremark Report Projects Annual Specialty Drug Spending will Quadruple to $402 Billion by 2020,” news release, November 20, 2013, http://www.cvshealth.com/newsroom/press-releases/pharmacy-services/new-cvs-caremarkreport-projects-annual-specialty-drug. 3. Center for Healthcare Supply Chain Research, 2014 Specialty Pharmaceuticals: Facts, Figures and Trends. 4. UnitedHealth Center for Health Reform & Modernization, The Growth of Specialty Pharmacy: Current trends and future opportunities, Issue Brief (Minnetonka, MN: United Health Group, 2014), http://www.unitedhealthgroup.com/~/media/UHG/ PDF/2014/UNH-The-Growth-Of-Specialty-Pharmacy.ashx. 5. Bryan R. Lawrence, “Why we can’t afford Medicare,” The Washington Post, May 30, 2012, http://www.washingtonpost.com/ opinions/why-we-cant-afford-medicare/2012/05/30/gJQAqIGh2U_story.html. 6. Patient Protection and Affordable Care Act, Public Law 111-148, U.S. Statutes at Large 156 (2010). 7. Center for Healthcare Supply Chain Research, 2014 Specialty Pharmaceuticals: Facts, Figures and Trends. 8. Andrew W. Mulcahy, Zachary Predmore, and Soeren Mattke, Perspective: The Cost Savings Potential of Biosimilar Drugs in the United States, Rand Corporation, 2014, http://www.rand.org/content/dam/rand/pubs/perspectives/PE100/PE127/RAND_PE127.pdf. 9. C. Lee Ventola, “Biosimilars Part 1: Proposed Regulatory Criteria for FDA Approval,” Pharmacy and Therapeutics 38, no. 5 (2013): 270–287, http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3737980/pdf/ptj3805270.pdf. 10. Steven Lucio, “Clinical and Formulary Considerations for Biosimilars,” in Biosimilars 101: The Science, Approval Process, and Implications for your Practice, supplement 1, Hospital Pharmacy 49 (March 2014), http://www.thomasland.com/ hospitalpharmacy.html. 11. Steven D. Lucio, James G. Stevenson, and James M. Hoffman, “Biosimilars: Implications for health-system pharmacists,” Am J Health Syst Pharm 70, no. 22 (November 15, 2013): 2004-2017, doi:10.2146/ajhp130119.L. 12. Novartis, “Sandoz biosimilar filgrastim recommended for approval by FDA Oncologic Drugs Advisory Committee,” media release, January 7, 2015, http://www.novartis.com/newsroom/media-releases/en/2015/1885139.shtml. 13. FDANEWS, “FDA Advisory Committee Will Consider Remicade Biosimilar,” drug daily bulletin, February 17, 2015, http://www. fdanews.com/articles/169965-fda-advisory-committee-will-consider -remicade-biosimilar. 14. Derrick Gingery, “The Leading U.S. Biosimilars Company Is – Apotex!?!,” The Pink Sheet Daily, Pharma & MedTech Business Intelligence, February 18, 2015, https://www.pharmamedtechbi.com/publications/the-pink-sheet-daily/2015/2/18/the-leadingus-biosimilars-company-is--apotex. 15. Derrick Gingery, “Apotex Biosimilar Goes To FDA, But May Enter Crowded Market,” The Pink Sheet Daily, Pharma & MedTech Business Intelligence, December 18, 2014, https://www.pharmamedtechbi.com/publications/the-pink-sheet-daily/2014/12/17/ apotex-biosimilar-goes-to-fda-but-may-enter-crowded-market.

This could mean hospital formularies and pharmacy benefit managers (PBMs) will be able to decrease drug prices by adding biosimilars. For instance, there are several new anti-cholesterol drugs currently in the process of biosimilar approval. Once approved, formularies can choose to offer one of these drugs to more effectively control pharmaceutical costs for their organization and their patients. For the inpatient setting, interchangeability laws likely will not affect the ability to dispense a biosimilar in lieu of the biologic product. However, some states are trying to make therapeutic interchange more difficult for retail and/or specialty pharmacies.

OUTLOOK

QTR 2.15

FEATURES

T E

Where did all these contracts come from?

services, however, doesn’t flow quite

by a set percentage, often without

Even though purchased services

that smoothly. First, contracting for

consideration by the facility as to

accounts for approximately

services is generally decentralized,

whether the pricing is still competitive.

20 percent of a hospital’s total operating

with the process owned by several areas

spend, it has often been overlooked

within a health system. For instance, HR

negotiator or centralized review

in cost-reduction efforts. But that is

managers often find their own service

process, other unfavorable terms

no longer the case. Given the growing

providers for benefits management

and conditions may be overlooked.

pressure on budgets and the work that

or staffing solutions and negotiate

health systems have already done to

their own pricing. Facilities managers

across and within regions is made

reduce supply and labor expenses,

select and contract with their own

more difficult by differing offerings

purchased services is poised to be

construction companies, landscapers,

and service-level expectations.

the next major area of focus.

and laundry service providers.

Other complications include a lack

One of the primary challenges

The contract life cycle for purchased

All of these contracts exist in

result in prices that increase annually

Finally, without an experienced

The inability to compare pricing

of transparency and the absence

associated with purchased services is

disparate departments within an

of standard benchmarks.

that the contracting process doesn’t

organization. Without a central

usually follow the typical contract

manager, it’s difficult to have an

a variety of functional areas can be

life cycle. In supply contracting, a

overall view of the vendors providing

overwhelming without a process that

centralized team identifies the relevant

services or their negotiated prices.

can identify overall purchased services

vendors, negotiates terms and pricing,

There may be significant opportunity

spend and where it is occurring.

and completes an apples-to-apples

for savings simply by consolidating

comparison to other vendors. Based on

agreements held with the same

the findings, an award decision is made.

vendors in different business units

Getting organized and identifying opportunities

The agreement is then managed by

Corralling multiple contracts across

or departments. This is particularly

1. The first place to start is by capturing

supply chain professionals who make

true for consulting firms that serve

all of the facility’s or health system’s

sure the negotiated terms, pricing,

in multiple organizational areas.

spend data in one place, such as in

Further, many of the contracts

an accounts payable file. However,

and value are maintained. During the length of the agreement, that

include evergreen clauses that

while these files usually include a

same supply chain team sees that the

automatically renew unless cancelled

description of the expense, it may be

agreed-upon products are provided at

by one of the parties involved.

inaccurate or not specific enough.

agreed-upon prices and that any rebates

Without a set expiration date, it can

or other offers are issued. Before the

be challenging to monitor agreements

services category list as well. This

contract expires, the team evaluates

and evaluate whether the services

usually encompasses all areas of

satisfaction with the provider and

provided meet the original scope of

service spend in a way that identifies

begins the contracting process again.

the agreement. These clauses can also

where the expense resides. It may

It’s helpful to have a purchased

OUTLOOK

QTR 2.15

FEATURES

T F

Fig.1

Example of health system’s spend subcategorized 1% 1%

Lawn care services Fire, life, safety, security systems and services

6% 29% 6%

General facilities services Parking management equipment and services Construction services Pest elimination services

Property management Floor care equipment and services 10%

Maintenance, repair and operations 27%

Power and electric services

even provide a point of contact. For

These fall into such categories as:

example, knowing that an expense

• Areas where a large number of

Since many purchased services vendors have a regional, rather

is for waste management may not be

vendors are used for the same

than national presence, these

particularly helpful. Hospitals could

service in the same geographic

identified areas of opportunity can

contract for several different types

region. If 80 percent of the total

be combined into local, custom

of waste management services with

category spend is directed to a few

contracts, either for a single health

different price points and terms (e.g.,

vendors, it could be advantageous

system or among several facilities

hazardous waste removal, dumpster

to eliminate at least some of those

within the same geographic region.

rental, or water treatment services).

that are used less frequently.

The example health system’s spend

Many hospitals still struggle

• Areas within a facility that

on facilities services illustrates

to categorize purchased services

purchase similar services

a few easy wins (see Figure 2):

spend manually. Premier offers an

but aren’t using the same

• In lawn care services, the system

automated process that can assign

vendors (e.g., transcription

is using 35 different vendors.

categories (e.g., facilities services) and

or translation services).

Depending on the geographic

subcategories (e.g., lawn care services

• Facilities where like-services are

spread of the system, much

or snow removal) to the vendors in an

not centralized. Centralization

of its lawn care services can

accounts payable file (see Figure 1).

makes it easier to manage

likely be provided by the same

agreements and leverage volume.

two or three vendors. More

2. Once spend has been categorized, the next step is to evaluate the top areas of expense and identify any easy wins.

• Contracts with limited service complexity and clear expectations.

remote or rural facilities may require different vendors. • Pest elimination and floor care

FEATURES

T E

Fig.2

Example of health system’s facilities spend with additional data

Spend

Percent of total

Number of vendors

Number of facilities

Average savings (%)

Potential savings (%)

Difficulty level

Lawn care services

$2,792,235

29%

Fire, life safety, security systems and services

5-15%

10%

$279,224

•

$2,565,783

27%

8-16%

12%

$307,894

•

General facilities services

$962,194

10%

Parking management equipment and services

8-16%

12%

$115,463

•

$753,118

8-16%

12%

$90,374

•

Construction services

$543,974

5-15%

10%

$54,397

•

Pest elimination services

$539,500

5-15%

10%

$53,950

•

Property management

$370,937

5-15%

10%

$37,094

•

Floor care equipment and services

$343,456

8-16%

12%

$41,215

•

Maintenance, repair and operations

$142,797

3-10%

$9,996

•

Power and electric services

$135,645

8-16%

12%

$16,277

•

Subcategories

Savings range (%)

equipment and services are

that won’t necessarily determine

categories in which savings

best pricing in the market. Working

could consider regional opportunities

can often be found with little

with an organization like Premier,

for local custom contracting. The

effort. In this case, the average

which can aggregate benchmarks

custom contracts could then be

return for this health system

from many health systems, can

extended to all facilities within

would be nearly $100,000.

demonstrate where spend is elevated

the system and to the system’s

within an entire system compared to

affiliates, driving standardization

its geographic peers or competitors.

and cost savings. System-wide

3. Services that are moderate or difficult to negotiate can be

Additionally, the healthcare system

coordination of purchased services

targeted for cost reduction with

Long-term wins

will result in increased purchasing

the help of benchmarks.

Longer-term best practices should

leverage and better pricing.

Purchased services present several

include creating a centralized team for

The road to gaining a holistic view

challenges for benchmarking,

negotiating and managing all purchased

of purchased services spend can be a

including geographic differences in

services agreements. This team will

challenging one. But the opportunities

pricing (e.g., snow removal in NY

be the go-to resource for knowing

that are uncovered should make

versus NC), limited transparency

which vendors are used for specific

the journey well worthwhile.

in unit of measure, and lack

services and their pricing, resulting

of standard benchmarks.

in enhanced transparency within the

While larger health systems can

facility. This team should also monitor

try to benchmark by comparing price

the agreements to ensure services are

per unit across their various facilities,

priced at the agreed-upon levels and that the prices remain competitive. OUTLOOK

QTR 2.15

FEATURES

T F

A FEW YEARS AGO, Fairview Health Services (Minneapolis, MN) challenged its leaders to tackle a large cost-savings goal for the entire health system. LeAnn Born, vice president, supply chain, and her team zeroed in on purchased services with what turned out to be a $1 million solution. “Purchased services is a future hotbed of activity in terms of reducing costs system-wide,” Born says. “But it’s not like supplies; purchased services are messy. Getting our arms around all of this spend is challenging.” Born’s team got started by analyzing annual accounts payable data, which they now do on an annual basis. First, they identified areas with high spend and expiring contracts. Next, using an existing tracking application to capture all anticipated cost savings, they optimistically projected $1 million for purchased services. “Early on, we weren’t sure how we were going to actually realize savings,” Born says, “but we knew the opportunities were plentiful. So we just left that $1 million target on paper as our goal, and sure enough, we met it!” Fairview’s cost savings challenges are similar to those facing other health systems, Born says. “Like everyone else, we used to focus heavily on our supply chain’s low-hanging fruit, but that approach just wasn’t applicable to purchased services. There were too many spend categories with relatively small dollar amounts. When combined, though, they added up to significant costs for our system. It can seem like the juice is so little for the squeeze, but we still needed to address all of it.”

In fact, targeting those smaller spend areas has helped to create more long-term benefits for the Fairview system, Born says. “Our team learned that when process improvements stick, then category management is easier going forward.” Though Fairview has decentralized contracting – meaning different sites can enter into their own contracts for services – all contracts are entered into a central enterprise resource planning (ERP) system. Current vendors are available in a drop-down menu, but new vendors need to be entered into the program, prompting requestors to consider whether an existing vendor might fulfill their service needs. This also gives contract managers the visibility necessary to follow up with requestors and connect them with contracts already in place that offer the same or similar services. Recently, Fairview engaged Premier’s custom contracting team to evaluate other complicated areas. For example, Born says, “We’d already reduced our courier vendors and pickups as part of our system-wide sustainability program. We were getting greener while realizing more savings and process improvements. Now, Premier’s custom contracting team is like an extension of our supply chain team. Together, we’ve started a broader logistics project that looks at third-party freight management, inbound and outbound freight, fleet management, and more.” Fairview has also successfully cut spend in waste management and elevator maintenance. In short, system leaders keep digging deeper to mine more cost savings, or as Born likes to say, “We keep squeezing the most juice.”

FEATURES

T E

Cheryl Fahlman, BSP, MBA, PhD Director, program evaluation / Premier Research Institute Principal research scientist / Premier, Inc.

Dr. Fahlman has over 25 years of experience

UDI

as a clinician and researcher in health policy, focusing on a variety of areas including

U NI Q U E D EV I C E I D ENT I F I ER

cost, access and quality of care. She is currently leading the Premier research group, working with the Partnership for Patients (PFP) Hospital Engagement Network funded through CMMI. Within Premier she develops, tests, and conducts surveys and assessments for a variety of programs including PFP, QUEST, and other Premier collaboratives. Previously, while working for NORC as coproject manager, she worked closely with the Division of Hospital and Medication Measures within CMS for Hospital Compare and other hospital-based quality measurement programs to provide public reporting on hospital quality measures. On a companion project, Dr. Fahlman was the task leader working with CMS to develop an implementation plan for the Centers to align physician quality reporting as specified in the Affordable Care Act. Dr.

I M P L EM EN TAT ION G U ID E

he Food and Drug Administrationâ&#x20AC;&#x2122;s new Unique Device Identifier (UDI) system will help healthcare organizations improve supply chain efficiency, enhance patient care, and reduce operating costs. But before it can do any of those things, it must first be incorporated

into the electronic databases used to purchase and track medical devices. Implementation for high-risk devices began in September 2014.1 UDIs for other devices

Fahlman was also a health researcher at

are scheduled to be phased in over seven years, although that may happen more quickly as

Mathematica Policy Research and the Center

manufacturers sell off non-identified devices and install UDIs across their product lines.

for Studying Health System Change, a senior research associate at the Health Research and Education Trust, and a research assistant at the Lamy Center on Drug Therapy and Aging at the University of Maryland, Baltimore.

This innovation, which assigns each medical device with an exclusive code corresponding to its make and model, will replace catalog numbers and other device nomenclature. It will also provide a standard, unambiguous product identifier. For some devices, particularly implanted products, UDI benefits will extend beyond the supply chain and into the clinical suite, electronic health records (EHRs), and claims administration. OUTLOOK

QTR 2.15

FEATURES

T F

That’s because UDIs can:

Fig.1

• Facilitate recalls when devices malfunction; • Encourage comparative research

Benefits of global location number (GLN) implementation12

SUPPLY CHAIN

HEALTHCARE SETTING

Uniquely identify individual delivery points and the final destination of a product

on device performance; • Allow more accurate reporting of failures; • Prevent medical errors; and • Reduce manual, nonstandardized device data entry. All device purchasers will be rewarded with better cash flow, reduced labor costs, simplified supply

Improve traceability and more efficient management of devices Reduce errors and increase quality by more easily identifying missing or damaged devices and equipment

E-Commerce: correct pricing applied so that ordering and delivery processes can become more efficient

Improve sterile equipment management Provide reliable and accurate location identification for devices

Real time tracking of medical equipment within the hospital

chain management, and more efficient payment and reporting processes. As hospitals begin implementing

• Identifies potential safety issues

The FDA permits three UDI formats:

UDIs for lower-risk devices, they

in near real-time from a variety of

those created by GS1, by the Health

should see the results envisioned

privacy-protected data sources;

Industry Business Communications

by the FDA and articulated in the

• Reduces the burden and

Council (HIBCC), and by the

Brookings Institution’s UDI Roadmap

cost of medical device post-

International Council for Commonality

for Effective Implementation, which was

market surveillance; and

in Blood Bank Automation (ICCBBA),

developed by materials management,

• Facilitates the clearance and approval

clinical, and administrative experts

process for both new devices, and

from hospitals and health systems.

new uses of existing products.

This guide provides hands-on advice

All in all, the creation of the

which is used exclusively for blood, tissue, and organ products. UDI numbers do not change based on the organization that is receiving the

from healthcare organizations already

Unique Device Identifier presents

device. However, they can change when

using UDIs. Each section of the guide

an opportunity for healthcare

there is a significant alteration in the

describes key features as well as

systems to improve patient care

device itself, including its specifications,

workflow and technology changes

while reducing expenses.

needed to improve device tracking.

performance, size, composition, package

Each UDI consists of two parts.

quantity/dimensions, or distributor.

The first is a device identifier (DI) that

What is a Unique Device Identifier?

contains the manufacturer name and

Over the last few years, the FDA has

the version or model of the product. The

Why have a Unique Device Identifier?

worked to improve data collection

second is a production identifier (PI)

Hospitals, physicians, patients,

for medical devices. The result is a

that includes current manufacturing

and health plans can benefit from

new surveillance system that:

information for that specific device, such

the UDI system, because:

as the lot, batch, or serial number and

• It is often difficult to locate recalled

2,3

• Communicates timely, accurate, systematic, and prioritized

the expiration date. While every device

devices, whether they are on hospital

device risk/benefit assessments

will have a DI, some may have only

shelves or implanted in patients.

throughout its life cycle;

partial product information (perhaps

The UDI system will allow improved

just an expiration date) or maybe

tracking of devices through searches

structured, electronic

none. All UDIs must be readable both

of inventory databases, health records,

health-related data;

electronically and by the human eye.

and other information sources.

• Uses quality, standardized,

FEATURES

T E

Fig.2

Areas of consideration in calculating return on investment transform healthcare operations and

SUPPLY CHAIN MANAGEMENT

PURCHASING MANAGEMENT

LABOR MANAGEMENT

• Wrong product received due to incorrect purchase order • Right product but - No/incorrect GS1 bar code - Not in organization’s database • Use of non-preferred vendors

• Incorrect product information from vendor

• Hours for tracking product identification numbers

• Incomplete product information from vendor or GPO

• Hours for dealing with product problems and errors

capture product information grows.

• Provider time for monitoring products for patient charges and reordering

taken the lead by creating the system,

• Incomplete/inaccurate supplier information

• Wrong product returned

effectiveness. The next few years should offer unprecedented opportunities to leverage this innovation as more devices receive UDIs and the need to The FDA and manufacturers have and the next step is up to healthcare providers. Currently there is no requirement for implementing UDIs or

• Distribution of wrong product in hospital

a financial penalty for not doing so. But as early adopters have quickly learned,

• The UDI system will standardize how devices are identified, thereby creating operational and clinical efficiencies that allow more time for direct patient care.5 • UDIs are expected to replace nonstandardized catalog numbers and improve procurement and inventory management. That will help hospitals reduce on-hand inventory and ensure that products are used before their expiration dates. • Providers, patients, and

– looking at return across the supply

the benefits far outweigh the costs.

chain and how changes before and after adoption have affected areas that might not be considered part of a standard ROI, including staff time, resource use, and error rate.13

What about the future? Since the UDI system’s introduction last year, medical device tracking has been on the verge of an evolution that is expected to dramatically

This work was supported with funding from The Pew Charitable Trusts. The full implementation guide is available at: https:// www.premierinc.com/download/pew-udiimplementation-guide/?wpdmdl=6286&ind=0.

manufacturers will be better able to evaluate long-term risks and device effectiveness, since outcomes can more easily be tracked. • In addition to the aforementioned cost and efficiency benefits, UDIs may increase patient safety by reducing medical errors and providing more accurate information about the devices, including postmarket surveillance.6,7,8,9,10,11 Since UDI adoption can involve significant changes to the entire supply chain process, it is a good idea to take a holistic view when calculating ROI

REFERENCES 1. FDA, Medical Devices: Unique Device Identification (UDI), 2014, http://www.fda.gov/MedicalDevices/ DeviceRegulationandGuidance/UniqueDeviceIdentification/default.htm (accessed April 25, 2014). 2. FDA, Strengthening our National System for Medical Device Post Market Surveillance, 2012. 3. FDA, Strengthening our National System for Medical Device Post Market Surveillance: Update and Next Steps, 2013. 4. FDA, Medical Devices: Unique Device Identification (UDI), 2014, http://www.fda.gov/MedicalDevices/ DeviceRegulationandGuidance/UniqueDeviceIdentification/default.htm. (accessed April 25, 2014). 5. N. A. Wilson and J. Drozda, “Value of unique device identification in the digital health infrastructure,” JAMA: The Journal of the American Medical Association 309, no. 20(2013): 2107-2108. 6. Ibid. 7. C. Sorenson and M. Drummond, “Improving medical device regulation: the United States and Europe in perspective,” The Milbank Quarterly 92 no.1 (2014): 114-150. 8. S. Normand, et al., “Postmarket surveillance for medical devices: America’s new strategy,” BMJ (Clinical Research Ed.) 345 (2012): e6848-e6848. 9. T. P. Gross and J. Crowley, “Unique device identification in the service of public health,” The New England Journal Of Medicine 367, no. 17(2012): 1583-1585. 10. Unique Device Identifiers: Facilitating the Capture and Transmission of UDI, wedi, 2014, 28. 11. S. Barlas, “New FDA medical device rule imposes minimal burden on hospitals: facilities able to scan unique device identifiers will benefit,” P & T: A Peer-Reviewed Journal For Formulary Management 38, no. 12 (2013): 720-720. 12. GS1, GLN in Healthcare: Implementation Guide, 2012. 13. GS1, Healthcare Provider Tool Kit: Global Trade Item Number (GTIN), http://www.gs1us.org/DesktopModules/Bring2mind/ DMX/Download.aspx?Command=Core_Download&EntryId=920&PortalId=0&TabId=785 (accessed October 10, 2014).

OUTLOOK

QTR 2.15

FEATURES

T E

Fig.1

The PremierConnect ® Supply Chain procurement cycle

NON-ACUTE

ACUTE HOSPITAL

PHYSICIAN OFFICE

LONG-TERM CARE

PREMIERCONNECT® SUPPLY CHAIN

Plan

Source

Contract

Buy

Receive

Pay

Manage

ospitals are under

on total supply expenses. This visibility,

tremendous pressure

while difficult to achieve, is possible

871 acute-care members, Premier

to reduce costs by as

with the help of automated analytics.

recently determined that many

much as 30 percent

In evaluating information from

progressive supply chain organizations

to balance reimbursement cuts and

The procurement cycle

are realigning resources to focus on

increased patient volume created by

Progressive organizations are taking a

product introductions that have the

the Affordable Care Act. To optimize

big picture view and looking at overall

most impact on cost and quality. Our

productivity and profitability, supply

service line management. They evaluate

study revealed that new products and

chain leaders must look beyond

innovative technology offerings,

services accounted for more than $277

routine cost cutting and take a more

not only for costs, but also for their

million in increased expenditures from

holistic approach that focuses on

impact on operations, quality, patient

April – September 2014. While these

heightened visibility into less obvious,

satisfaction, revenue, and outcomes.

costs grew, overall prices decreased by

expense-reduction opportunities. The largest supply spend increases

Supply chain managers who

nearly $36 million. Although that is a

use technology holistically

significant savings, it is nearly eight

come from volume growth of new

are able to (see Figure 1):

times less than the cost of new products.

products and technology inflation,

• View cost changes and trends

rather than from simple price changes. In fact, 83 percent of supply chain savings are generated by improved

across their health systems; • Identify opportunities to control pricing and standardize savings;

Controlling product mix and technology inflation We used PremierConnect Supply

resource use, increased standardization,

• Consolidate contract administration;

Chain to compare purchase orders

and waste elimination.2

• Customize and control item

and invoices from our study group

masters and formularies;

from April – September 2014 to the

Increased visibility into top cost drivers is critical for success. Yet

• Find, buy, manage, receive, and

same period in 2013. These facilities

value analysis teams often struggle

pay for supplies and services

are representative of Premier’s

to keep up with new products and

with a cohesive process; and

membership in terms of size, geographic

technologies, much less their impacts

• Oversee purchases and operations

location, and aggregation group.

across diverse facilities. OUTLOOK

QTR 2.15

FEATURES

T F

The analysis examined three core change metrics for all unique SKUs or

Fig.2

Core metric changes (six-month period in 2013, compared to 2014)

transactions within a facility, including:

Net change

Percent change

($35,763,590)

-0.92%

$7,958,362

0.21%

$277,529,410

7.15%

• Price, or the net impact of average price changes between the periods; • Volume, or the net impact of purchased quantity changes by units; and • Product mix, or the net impact

Price Volume Product mix

of products introduced versus products no longer purchased. Overall pricing was reduced by $36 million, or nearly 1 percent, during the

Fig.3

Changes in core metrics in select contract categories

six-month period (see Figure 2). While volume remained relatively flat (up 0.2 percent), product mix increased by more than 7 percent ($277 million annually). We also separated the expenditures into unique purchasing groups or contract categories (see Figure 3). The categories are a mixture of physician preference items (orthopedic total joints and spinal implants), clinical preference items (pulse oximetry and safety IV catheters), and commodity

Contract category

Price change

Volume change

Product mix change

Orthopedic total joints

-2.82%

7.08%

7.36%

Spinal implants

-3.67%

3.47%

6.37%

Pulse oximetry

-0.36%

7.59%

4.54%

Safety IV catheters

-0.07%

2.90%

3.88%

Paper towels and tissues

-2.09%

4.88%

-4.04%

Tape products

-9.25%

10.20%

0.37%

supplies (paper towels/tissues and tape products). Every contract category except paper towels and tissues had an overall spend increase, primarily due to large product mix changes. The largest product mix increases occurred in the physician preference categories (orthopedic total joints, 7 percent; spinal implants, 6 percent) and the smallest with commodity categories (paper towels/tissues, -4 percent; tape products, < 1 percent). Although every category had an overall expenditure increase, each category also had a net price decrease. The largest total price decrease was

in spinal implants, at $3.3 million,

The data, showing declining prices

and the largest percentage decrease

and mixed volume, point to product mix

was in tape products, at -9 percent.

growth as the primary reason for overall

Not every category trended equally,

expenditure increases. Determining

but the data clearly demonstrated

specifics reasons for product mix

decreasing price trends.

growth at each facility is difficult, but

Among the selected categories, volume trends were mixed. The largest increases occurred in the

nevertheless, some clear indications within the aggregate data emerged. For example, information on one of

commodity (tape products, 10 percent)

the largest new growth items, spinal

and clinical preference (pulse

implants, indicated little use until

oximetry, 8 percent) categories.

December 2013. Then usage quadrupled over the next six months (see Figure 4).

FEATURES

T E

Most products, like the sample, go

categories where margins are still

Common metrics include percentage

through a common cycle of growth,

extremely high. This effect is apparent

of spend on contract and number

maturity, and decline (see Figure

in all non-commodity medical surgical

of file and non-file purchases. More

5). After a new product is launched,

categories, but it is more pronounced in

advanced metrics include total spend by

marketing and sales focus on quick

categories where the margin is higher.

category per a usage denominator (e.g.,

customer adoption, many times

surgical services spend per operating

associated with the cannibalization

Trusted insights

room case). These are important

of an existing product line. This

Providers can reduce these costs by:

metrics but do not clearly explain why

behavior occurs frequently in the

• Measuring the impact of product mix

the true expense increases occur.

medical technology industry.

changes and technology inflation;

Premier has created an advanced

Spinal implants have been available

• Realigning supply chain and

for years, and over time, advancements

service line organizations

Chain that measures the impact of

in technology improved the devices.

to focus on cost, quality, and

product mix and ties it to a standard

outcome improvements; and

financial budget report. By reviewing

However, each small improvement typically introduced with a new device,

metric within PremierConnect Supply

• Communicating results

overall trends in pricing, volume, and

with new branding and a premium

and share best practices to

product mix, supply chain leaders can

price. Pure price benchmarking will

service line leadership.

focus on cost drivers in the most affected

Most supply chain organizations

category (see Figure 6). Financial

never catch up with the impact of device change inflation. In the spinal implant

are consumed with basic procure-to-

managers can also use these metrics to

industry, new technologies are released

pay processes and measures rather

identify impact based on timeframes,

almost quarterly and are consistent

than specific metrics that support

such as FY2013 versus FY2014, and

with other physician preference

monitoring of technology inflation.

change forecasts or budgets accordingly.

Fig.4

Growth in spend of sample product, December 2013 – May 2014

$200,000 $175,000 $150,000 $125,000 $100,000 $75,000 $50,000 $25,000 $0 Dec 2013

Jan 2014

Feb 2014

Mar 2014

Apr 2014

May 2014 OUTLOOK

QTR 2.15

FEATURES

T F

Collective knowledge Historically, supply chain purchasing

Fig.5

Typical product cycle of growth, maturity and decline

professionals have been trained Growth

to manage contracts and supplier relationships. Their focus tends to gravitate to what they can control and where past successes have generated significant savings. Traditional sourcing

Sales

activities include price negotiations, contract analytics, standardization,

A successful extension strategy could increase sales

12345 Launch

price discrepancy management, and

Saturation

price-tier management. Organizations

Maturity

Decline

Time

inherently reward individuals for improvement in these areas and incentivize contracting professionals to achieve better price concessions.

Fig.6

PremierConnect Supply Chain analytics

Supply chain leaders of the future need skillsets that support a broader definition of success, one that encompasses clinical and financial outcomes. They must also: • Measure total expenditures within a contract category over a defined period, rather than focusing on contract savings at one point in time; • Understand technology changes and their effect on quality and budget; and • Review the number and effectiveness of purchasing, contracting, and value analysis employees. They must also realize that many technology changes with increased

Measuring true patient outcomes is

More visibility into supply analytics –

costs can be a net positive for

difficult, but it can be done. Through

including product mix, volume,

healthcare organizations. If the device

Accountable Care Organizations

spend, and related areas of the

or supply truly improves overall

(ACOs), many providers are using

procurement cycle – can make the

care, then marginal cost increases

advanced population health data to

difference in an environment where

may be acceptable. Unfortunately,

support overall cost, quality, outcome,

every dollar matters and every day

many times the benefits of new

and supply chain improvements.

brings a new budgetary challenge.

technologies are measurable only after a patient leaves the hospital.

REFERENCES 1. Health Affairs, “Reducing waste in healthcare,” December 13, 2012, http://www.healthaffairs.org/healthpolicybriefs/brief. php?brief_id=82 2. A database maintained by Premier, Inc.

Perspectives

Creative ventures in supply chain, 22

C R E AT I V E V E N T U R E S IN

S U P P LY C H A I N

PERS PECTIVES

ospital leaders today

business lines to help identify and

struggle to trump

drive out unnecessary expense.

crushing financial pressures that hammer

Results from the spring 2015 survey

IT and telecommunications investments continue to top capital budgets. Almost half (42 percent)

show that, when searching for ways

of respondents say it’s their largest

them from every direction. They look

to reduce total costs, 63 percent of

area of capital expense for the next 12

for different, winning strategies to

supply chain and C-suite respondents

months, primarily due to ongoing EHR

reduce total costs while re-examining

point to supply use as an easy win.

implementations and investments

the tried-and-true methods that

Still, they also report cost-reduction

in advanced data analytics to meet

have served them well in the past.

initiatives in other areas, including:

quality metrics (see Figure 3).

For example, trimming expenses on

• Resource use in purchased

supplies, once an effective means of cost reduction, just isn’t good enough anymore. Leaders understand they

services (43 percent); • Staffing and labor efficiency, nursing (43 percent);

Investments in infrastructure, such as construction costs, are the largest area of capital expense for 30 percent of respondents. Population health efforts

must cast a wider net and dig deeper

• Length of stay (38 percent);

emphasize the necessity of making

to unearth savings, such as efficient

• Staffing and labor efficiency,

healthcare accessible to all. Health

staffing of physicians and physician

outsourcing (30 percent);

extenders, or the improvement of quality outcomes that decrease pay for performance penalties on readmissions. Ultimately though, cost savings goals

• Staffing and labor efficiency, physicians (29 percent); and • Level of care (27 percent). Additionally, many organizations

systems are looking for ways to modify existing facilities to meet increasing demand for outpatient services. They are also building, buying, and renovating ambulatory care centers.

still rule as the top factor impacting the

in recent years have limited their

supply chain, according to respondents

capital expense budgets to align with

management is another way that

to Premier’s surveys since fall 2012.

cost-savings goals and survive in the

health systems are maximizing their

Indeed, 45 percent of supply chain and

face of mounting financial demands.

budgets. In 2014, Allegiance Health

C-suite leaders who replied to the 2015

However, 69 percent of spring 2015

(Jackson, MI) began an initiative to

spring survey continue to cite cost

respondents report flat or increasing

centralize equipment management

savings goals as the number one factor

capital budgets this year over last.

in its main hospital, hoping to

impacting supply chain (see Figure 1).

In fact, compared with the fall 2014

reduce waste in its processes.

The supply chain is an area where

survey, more respondents (18 percent,

Capital equipment planning and

“We were experiencing uncertainty in

health systems have historically

compared to 11 percent) report

equipment availability, loss and waste

reduced costs through standardization,

capital budgets are increasing 10 to

in nursing and support staff time spent

improved resource use, and similar

29 percent, possibly in recognition

hunting and gathering small capital

initiatives. Successful cost savings

of further investments needed in a

equipment. Our process of getting

are then routinely passed on to other

technology infrastructure to support

capital equipment to the right place in

population health (see Figure 2). OUTLOOK

QTR 2.15

PERSPECTIVES

T F

the hospital was decentralized rather

Association for Healthcare Resource &

central sterile processing, surgical

than proactive. In addition, we had

Materials Management (AHRMM)

services, biomedical services, and

redundancy in equipment inventory

and made a site visit to the Detroit

patient transport – we documented

stored in multiple locations across

Medical Center, which already had

both current and future state process

the hospital where storage is tight,”

a centralized process in place.

flows using an assumption that we

says Dan Bissot, director, supply chain

“Seeing others’ best practices helped

management, Allegiance Health. To get started, Bissot and his team

would provide 24/7/365 service

us put a plan in place that we could

with defined service level targets

bring to our executive team. With a

to monitor and ensure process

used the power of collaboration.

cross-functional team – consisting of

reliability,” Bissot continues.

They researched capital equipment

representatives from supply chain,

management best practices through the

nursing, environmental services,

Fig.1

The initiative required a central storage space, designated people to

Factors with the greatest impact on supply chain in the next 12 months

Spring 2015 Cost savings goals of the health system

Fall 2014 Spring 2014 Fall 2013

Reductions in overutilization

Spring 2013 Fall 2012

Commodity prices

Implementing HIT

Drug shortages

Integrating the supply chain across the continuum of care

Medical device prices

Comparative effectiveness/ value analysis

10%

15%

20%

Source: Premier online survey for Economic Outlook spring 2015 publication

25%

30%

35%

40%

45%

50%

PERS PECTIVES

deliver and manage the equipment,

technology for equipment ordering

Lastly, we gained support to hire two

and a method for ordering equipment

and tracking,” says Bissot.

equipment coordinators who manage

and tracking its availability and use. “I think most hospitals find

“Our plant operations group helped

the central equipment room and deliver

us locate and build a suitable space for

the equipment to those who need it.”

space limited, so one of the initial

equipment storage. And it turned out

Bissot and his team knew that

challenges was finding a central

that our TeleTracking patient transport

success required building trust with

space in the hospital. Also, with

system and Premier’s Materials

stakeholders, especially the nurses and

industry-wide financial pressures,

Management Information System

support staff who wanted reassurance

the team had to think creatively

(MMIS), both systems that Allegiance

that they could get the equipment

on how to utilize current software

already had, could fulfill the equipment

they needed when they needed it.

ordering and tracking component.

Fig.2

Changes in capital budgets since previous year

30%

Spring 2015 Fall 2014 Spring 2014 Fall 2013

25%

Spring 2013 Fall 2012 Spring 2012

20%

Fall 2011

15%

10%

0% Increased by 30% or more

Increased by 10% to 29%

Increased by 1% to 9%

No change

Decreased by 1% to 9%

Decreased by 10% to 29%

Decreased by 30% or more

Source: Premier online survey for Economic Outlook spring 2015 publication

OUTLOOK

QTR 2.15

PERSPECTIVES

T F

“We set a service level promise to deliver all equipment in 30 minutes or less from time of order. In 2014, we

buy-in to the supply chain process helps mitigate those issues. Supply chain integration with clinical

“Our review team comprises several physicians, four or five nurses, and supply chain leadership from across

achieved that goal on 94 percent of

care, IT, and revenue capture is the

Banner’s facilities,” Allison-Greene

incoming orders,” says Bissot. “There

second most-cited area for supply

explains. “We’re not willing to sacrifice

were also soft efficiencies: we averaged

chain improvement, climbing in the

quality for price, so value analysis

500 equipment orders per month last

spring 2015 survey to 34 percent of

plays a big role in our review. We

year, meaning we are now proactively

respondents, compared with 20 percent

originally expected 30 to 100 new

managing this equipment, rather

in the fall 2012 survey (see Figure 4).

approvals each month across the

In recent years, Premier member

system, but only have about 15.”

than time spent reactively amongst many stakeholders, time potentially

Banner Health (Phoenix, AZ) has

taken away from patient care.”

The initiative was piloted in Banner’s

conducted ongoing supply chain

Arizona region, rolled out to the whole

The new process also helped the

integration processes across all of its

system in four phases, and completed

supply chain team manage equipment

non-acute facilities, starting with the

in December 2014. In the first year,

usage rates. As Bissot says, “Since we

200 physician offices and clinics in

Banner saved $115,000 and reduced the

utilized our MMIS inventory system,

its system. As Banner expanded its

total number of SKUs by 40 percent.

we can track usage by equipment type,

footprint over time by buying non-

time period and department. This

acute facilities, it created a great deal of

physician office and clinic budgets,”

provides us with visibility into how

purchasing variation. Close attention

Allison-Greene says, “Plus, integration

much equipment we really need, and

to physician buy-in and integration

has provided us with a number of

for future purchases, we will know how

helped smooth the way for transition.

other efficiencies. Every site orders

much to buy based on usage statistics.”

“We needed buy-in from Banner’s

its own products through the same

Lastly, central equipment

“That savings is significant for

management team as well as the

central warehouse, and our ordering

management provides a more

physician groups,” recalls Samantha

technology makes recall management

streamlined process for preventative

Allison-Greene, interim supply chain

easier. If a recall is issued, I know

maintenance checks, since equipment

director, Banner Gateway Medical

exactly who ordered it at which facility.

can be found in the main storage

Center and Banner MD Anderson

area, rather than hunting around

Cancer Center (Gilbert, AZ). “Basically,

formulary consistent across acute and

the hospital for specific pieces.

we looked at 18 months of ordering

non-acute facilities as much as possible,

history across Banner and locked

which will further streamline processes

Physician buy-in, integration influence savings

it in as our formulary. Naturally, as

and eliminate unnecessary costs.”

Supply chain executives are using

items that were original to one entity

the best foundation for integration is to

various strategies to improve efficiency

or another didn’t make the cut.”

set up clear processes and goals at the

and reduce costs, but physician

with any integration process, some

Allison-Greene said supplies that

“We’re also working to make the

Allison-Greene says she learned that

outset. “You need to make sure you have a

engagement is the one they cite most

were on that original formulary

definitive line in the sand regarding your

often as instrumental in changing

were placed in Banner’s electronic

starting point,” she says. “For instance,

clinical and physician preference

purchasing system for non-acute

we built our formulary from that

(see Figure 4). Physician preference

facilities. Supplies that weren’t on

18-month ordering cycle and created a

items, such as high-cost implants or

the original list now require approval

process checklist to ensure consistency.”

devices, can inflate supply costs when

from the site budget owner and the

value analysis does not align with

central supply chain services team.

product choice. Getting physician

In addition to supply chain integration and physician engagement, spring 2015 survey respondents

PERS PECTIVES

Fig.3

Area of largest capital investment

Spring 2015 Fall 2014 Spring 2014

IT & telecommunications

Fall 2013 Spring 2013 Fall 2012 Spring 2012 Infrastructure (e.g., construction)

Fall 2011

Imaging equipment

Surgical suites/equipment

Other clinical equipment

Laboratory equipment

Other

10%

15%

20%

25%

30%

35%

40%

45%

Source: Premier online survey for Economic Outlook spring 2015 publication

OUTLOOK

QTR 2.15

PERSPECTIVES

T F

Fig.4

Tactics to improve supply chain

Spring 2015

Increased physician-health system engagement

Fall 2014 Spring 2014

Supply chain integration with clinical care, revenue capture and IT across health system

Fall 2013 Spring 2013

Comparative effectiveness/ value analysis

Fall 2012

Focus on waste management

Centralized purchasing Population health management and care coordination Use of new supply chain metrics/processes Location and product identification standardization 0%

10%

20%

30%

40%

50%

60%

Source: Premier online survey for Economic Outlook spring 2015 publication

also cited these other top areas

across acute and alternate sites within

for supply chain improvement:

their health systems; 35 percent

physicians is an important aspect of

• Comparative effectiveness or value

have the capability but have not

supply chain successes (30 percent), as

fully implemented it; and 19 percent

supply chain managers try to reduce

do not yet have the capability.

overuse of products or standardize on

analysis research (31 percent); • Waste management (31 percent); • Centralized purchasing (24 percent);

Again, building relationships with

clinical or physician preference items. Similarly, respondents say reducing

and care coordination across

Unearthing savings through resource dedication

the continuum (16 percent);

Much of the work has already been

is the number three area receiving

• Use of new supply chain metrics

done to standardize commodity

the most resources for supply chain

and processes (11 percent); and

products, although supply chain

improvement (28 percent).

• Population health management

• Location and product identification

remains a key source for reducing

costs for physician preference items

Supply chain improvement strategies

standardization (11 percent).

overall health system costs.

took an original route in 2009 at

Implementation of centralized

Meanwhile, product standardization

Fairview Health Services (Minneapolis,

purchasing, a top-two area of interest

remains one of the top-two areas of

MN) when leaders decided to “green”

noted by 24 percent of respondents,

resource dedication for supply chain

their system as a whole by dovetailing

has been flat since 2013. Almost half

improvement, according to 39 percent

environmental and community health.

(46 percent) of respondents have fully

of respondents, down from a high of

An executive green team implemented

implemented centralized purchasing

47 percent last year (see Figure 5).

PERS PECTIVES

Fig.5

Areas of resource dedication for supply chain improvement

Spring 2015 Product standardization

Fall 2014 Spring 2014

Building relationships with clinical staff

Fall 2013 Spring 2013

Reducing costs for physician preference products

Fall 2012

IT investments – EHR-specific Reducing costs for commodities products Comparative effectiveness/ value analysis Data standardization

IT investments – non-EHR-specific 0%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Source: Premier online survey for Economic Outlook spring 2015 publication

a system-wide program to target

composting facility, which actually

increased sustainability in these areas:

saves money on waste disposal costs.”

• Supply chain and the environmentally preferable purchasing program;

Waters says Styrofoam™, previously

Waters’ colleague, David Dixon, central regional manager, supply chain operations at Fairview, also works

used at Fairview facilities, was another

with the green team on sustainability

• Waste;

big item of concern, since it went

projects that divert waste, including

• Energy;

straight to a landfill. “Our pharmacy

centrally recycling surgical and plastic

• Healthy food systems;

used to ship Styrofoam coolers to

wraps and reprocessing numerous

• Water; and

patients with their medications with

disposable products on site.

• Facility design.

cold chain requirements. We wanted

Fairview, over time, developed several

“Fairview’s University of Minnesota

to stop that usage, so we trialed several

Medical Center has a high population

different initiatives in supply chain

biodegradable coolers and settled

of isolation patients,” Dixon says.

and purchased services, many of them

on a compostable and biodegradable

“We previously used a disposable

designed to remove landfill waste, says

container made from corn starch.”

stethoscope that was thrown out after

Wesli Waters, sustainability program

Thanks to that initiative, Fairview

a single use. We found a different

manager for the health system. “We

Pharmacy Services eliminated some

disposable stethoscope that could

wanted to reduce our waste footprint,”

70,000 Styrofoam coolers annually.

be reprocessed and reused. Though

Waters explains. “For example, we

Despite a bit more expense with

the unit price is higher, we’re able

now collect all of our food scraps on

the new coolers, Waters says the

to reduce total costs and waste.”

site and send them to a commercial

environmental pay-off is worth it, and patients are more satisfied. OUTLOOK

QTR 2.15

PERSPECTIVES

T F

up Reuse Stores, where employees

Mapping the way forward

some changes to purchased services, one

drop off unused furniture, desk

Whether it’s green projects at Fairview,

that involved moving custom laundry

materials, office supplies, and more

equipment management at Allegiance, or

services from an offsite location.

for other employees who need them.

creative integration and consolidation at

“We use a cooperative in the Twin

The health system saves $1 million in

Banner, healthcare leaders everywhere

Cities area that manages most of our

office supply expense annually, and

are searching for pockets of undiscovered

laundry needs,” Dixon recalls. “But

donates unused items to charity.

savings. With a tip of their hats to the

Fairview’s green team also made

we had washers at both our University

Dixon and his team typically find

tried-and-true ways of the past, they

and Riverside campuses that could

a return on investment within 12 to

stretch their analytics, hitch up their

reduce wait time and transportation.

18 months, even though some of their

backpacks of cost-saving tools, and

Our return time for custom laundry

initiatives, like the Styrofoam coolers,

move forward into the unknown.

went from four days to eight hours.”

may initially cost more money. “Doing

In the same vein, Fairview

the right thing may have upfront costs,”

consolidated courier services to

he says, “but thanks to the successes

two vendors that streamlined daily

we’ve had so far, we’ve gained a lot

pick-ups, eliminating 286,000 miles

of trust from our leadership. A ‘no’

annually and $50,000 in courier costs.

today can be a ‘yes’ tomorrow.”

Fairview also reduced unnecessary internal supply expenses when it set

Fig.6

Role of survey respondents

C-suite and president Supply chain or materials management Service line or practice area manager/director Non-C-suite administrator

Finance and/or accounting

Physician/clinician

Quality improvement

Other 0%

10%

15%

20%

25%

30%

35%

40%

Trends

Redefining risk: Radiologyâ&#x20AC;&#x2122;s new cost imperatives, 32 Survival of the cleanest, 36 From fragile to fit: Creating healthier markets for vaccines, 40 Proven processes for improving care quality, 42

TRENDS

T F

REDEFINING RISK: Radiology’s new cost imperatives

TRENDS

T E

Dave Natale Director, contract management / Premier, Inc.

tarting in the 1970s, radiology

patient exposure to ionizing radiation

gave the issue of CT radiation national

began a steady transition from

at medical facilities nationwide.

prominence by establishing a CT Dose

an analog to a digital medical imaging specialty. Along the

Interest was further heightened by

Differential Payment Policy. 2 This

incidents such as one in California,

requires Medicare providers to meet

way, new modalities, such as computed

where more than 300 patients in four

the NEMA XR-29 Smart Dose Standard

tomography and magnetic resonance

hospitals received excessive radiation

for dose optimization on CT exams or

imaging (MRI), were introduced

from CT scans. These incidents

suffer the consequences. Beginning

that have undeniably improved our

prompted a flurry of regulatory

January 1, 2016, freestanding imaging

ability to diagnose and treat disease.

activity at the state level and resulted

centers and hospital outpatient

in laws that mandated patient

providers that accept Medicare

dose monitoring and reporting.

patients and do not meet this standard

Yet the transition has not always been a smooth one. The associated costs have dominated hospital

In 2010, California passed SB

will be subjected to a five percent

capital budgets for decades. More

1237, which required all state

reimbursement penalty for CT scans

recently, the treatments themselves

facilities offering CT scanning to:

performed with non-compliant

have triggered a series of regulatory

• Record the radiation dose

actions designed to ensure meaningful use and limit potential overuse. During the past five years, in the

for every CT exam; • Include dose information in the radiology report;

equipment. In 2017 and beyond, the charge will increase to 15 percent. The Joint Commission has also addressed the need for radiation

aftermath of the 2008 recession and

• Establish dose thresholds; and

management improvements by

the Affordable Care Act’s emphasis

• Notify state authorities if

incorporating new standards for

on cost containment, we’ve seen a gradual change in focus, from

thresholds are exceeded. Shortly thereafter, the Texas

accredited hospitals, critical access facilities, and ambulatory care

concern about imaging cost to worry

Department of State Health Services

centers that provide diagnostic

over radiation dose management.

enacted regulations pertaining

imaging services. These standards,

Although radiology professionals

to fluoroscopy and CT exposure.

which include elements of the

have been preaching radiation safety

Connecticut is also considering

Smart Dose Standard, minimum

for years, the major turning point in

a bill similar to California’s.

competency criteria for radiology

public awareness was likely a 2010 New York Times report on excessive

Most recently, the April 2014 passage of the Protecting Access to Medicare Act

technologists, and annual performance evaluations of imaging equipment

OUTLOOK

QTR 2.15

The Smart Dose Standard includes four major provisions: 1

Digital Imaging and Communications in Medicine (DICOM) Dose Structured Reporting, which provides recording of post-exam dose information in a standardized electronic format;

Pediatric and adult reference protocols, which are preloaded on CT systems and serve as a baseline for a variety of clinical tasks;

A CT Dose Check, which incorporates dose notifications and alerts to warn operators and physicians when dosage exceeds established thresholds; and

Automatic Exposure Control (AEC), which automatically adjusts the amount of radiation based on patient size, shape, and other factors.

by a medical physicist, become

(Mo-99) was first exposed in 2009,

thereby giving manufacturers little

effective in July 2015.

when repairs necessitated the

incentives to keep prices in check.

Despite attempts by some to

prolonged shutdown of the largest

In 2014, we’ve seen three-to-four

decrease capital spending and delay

of six nuclear reactors used in its

digit price increases, as manufacturers

the replacement of imaging equipment,

production. This led to a shortage of

try to “right size” their pricing,

health systems will likely need to

Technetium-99 (Tc-99m), a byproduct

leading practitioners to reduce

upgrade aging CT scanners within

of Mo-99 and the most common

usage or find alternative treatments.

the next year or so if they are to

radioisotope in nuclear medicine.

Unlike most areas of radiology,

comply with these new guidelines. Unfortunately, cost and compliance

As a consequence, nuclear medicine

which have seen prices decline for

providers began conserving Tc-99,

imaging equipment and contrast

aren’t the only issues facing radiology

leading to a reduction in procedures

media, radiopharmaceutical prices

providers. Nuclear medicine, a

using the element and a decrease in its

have driven up the cost of providing

radiation subspecialty that uses

demand – a slowdown that continues

nuclear medicine to a point that some

radiopharmaceuticals to trace and

today. Meanwhile, manufacturers

now question its sustainability.

access organ function, has gained

invested in more nuclear reactor space

increasing favor of late. This is

to create back-up sources of supply.

enriched uranium-235 in the

reflected in the introduction of hybrid

The age of the reactors (all outside

production of Mo-99 stem from its role

scanners that provide both metabolic

of the United States) used in

in the production of weapons of mass

and anatomical information in a

production is also worrisome, as

destruction. Recognition of the need

single exam. The proliferation of these

is the process for creating Mo-99,

to limit commercial use of HEU was

scanners, along with the promise of

one that involves the use of highly

formalized in 2004, when the National

new biologic tracers and breakthroughs

enriched uranium (HEU)-235.

Nuclear Security Administration

in genetic research, guarantee

The combination of declining

Concerns over the use of highly

launched the Global Threat Reduction

that molecular imaging will have a

demand, higher supply chain

Act, aimed at converting all nuclear

prominent place in radiology’s future.

costs, and increasing regulatory

reactors from a reliance on HEU to a

scrutiny has made it more difficult

safer, low-enriched uranium (LEU). 3

Even so, recent events suggest that the future path will not be without its

for manufacturers to maintain

problems, primarily due to uncertainty

profitability and caused some to exit

Medical Isotope Production Act was

driven by changes in the industry.

the field. As a result, today’s market

signed into law. The act supports

The fragility of the worldwide

offers limited options for accessing

the production of Mo-99 for medical

supply chain for Molybdenum-99

key radiopharmaceutical products,

use in the United States to reduce

Nine years later, the American

TRENDS

T E

dependency on foreign sources of

cost. Nuclear medicine budgets are

supply. It also calls for the U.S. to

expected to increase accordingly.

phase out the export of HEU for the

Given all of this regulatory activity,

production of medical isotopes. As a

healthcare providers have been forced

nominal first step in support of this

to evaluate their internal policies

transition, CMS is now reimbursing

and protocols to determine whether

qualified nuclear pharmacies an

they align with the transitioning

extra $10 per dose on products

imaging landscape. Dollars once used

sourced from non-HEU generators.

to acquire the latest technologies are

Early returns on the industry’s

now reserved to address government-

attempts to convert to LEU-derived

mandated minimum standards

Mo-99 suggest the costs will exceed

and patient safety concerns. The

that of HEU. As much as five times

historical idea of radiology providers

more LEU than HEU material is

as frivolous big spenders is changing,

necessary to produce equivalent

as they are now seen as more

amounts of Mo-99, and nearly five

practical consumer advocates.

times more waste is produced. Some 4

reactors (all located in Europe, Africa, and Australia) have already started converting, but production capacity is a long way from meeting global demand. In the U.S., a number of start-up companies are competing to become the first domestic supplier of Mo99, using manufacturing techniques that eliminate the need for a nuclear reactor. Several have targeted 2016 as their go-to-market date, which coincides with the year that the only medical isotope nuclear reactor in North America (Ontario, Canada) is scheduled to shut down permanently. Regardless of the outcome, 2016 promises to usher in a new era for nuclear medicine, with potentially more convenient access to critical supplies, although at an unknown

REFERENCES 1. Walt Bogdanich and Rebecca Ruiz, “F.D.A. to Increase Oversight of Medical Radiation,” New York Times, February 9, 2010, http://www.nytimes.com/2010/02/10/health/policy/10radiation.html?_r=0. 2. Elaine Sanchez Wilson, “The Dose Debate,” Axis Imaging News, Oct. 9, 2014. 3. Triad Isotopes Inc. (PowerPoint presentation). 4. Ibid.

OUTLOOK

QTR 2.15

S U R V I VA L O F T H E

C LEA NES T Continued evolution in basic hand hygiene and disinfection of high-touch patient environments

TRENDS

T E

Tracey Worrell Contract manager / Premier, Inc.

uthorities agree that

Ebola. It is not a magic bullet, but it is

compliance is often due to issues within

proper hand hygiene

a means of additional defense, which

facilities, operations, and management.

is the most important

is cheap and readily available.” 2

strategy in preventing

According to Pugliese, reasons

Of course, within the healthcare

that are frequently self-reported by

healthcare-associated infections

system, HAIs and readmissions have

staff or observed in studies include:

(HAIs). According to The Centers

never been acceptable patient outcomes.

• Accessibility of supplies

for Disease Control and Prevention

But the government’s increased scrutiny

(products and sinks);

(CDC), “Healthcare providers should

of HAI occurrence, as part of the

practice hand hygiene at key points

Affordable Care Act, has the healthcare

in time to disrupt the transmission of

industry on high alert. Recent goals

microorganisms to patients, including:

set by the Centers for Medicare and

of accountability or just-in-time

before patient contact; after contact

Medicaid Services (CMS) to decrease

coaching, of sanctions for not

with blood, body fluids, or contaminated

HAIs have not been met, and hospitals

complying, of an institutional safety

surfaces (even if gloves are worn);

face penalties that will result in

climate or institutional priority

before invasive procedures; and after

decreased federal reimbursements. 3

stressing hand hygiene by all staff;

removing gloves (wearing gloves is not

Hand hygiene

pathogens in healthcare settings).”

Clinicians and other healthcare

Clinicians agree that inadequate

poor staffing; • Lack of role models for hand hygiene,

• Belief that hand hygiene is not

enough to prevent the transmission of 1

• Too busy/high work load/

personnel know the importance of

necessary if gloves are worn; • Perception that patient needs take priority;

hand hygiene brings negative

hand hygiene to prevent the spread

• Forgetting or being distracted; and

health consequences, and each new

of infection, but the frequency and

• Hand hygiene data not reported

presentation of resistant illness

length of time required for proper

accurately or frequently.

heightens sensitivity to hygiene and

hand hygiene can sometimes be lost

As containment of disease becomes

cleaning policies and procedures.

in busy environments. “Because it

increasingly complex, the basic global

Globally, hand washing is fundamental

is very complex to change behavior

recommendations for hand washing

in the containment of disease.

and get staff to wash their hands in

and surface cleaning are frequently

“Hand washing with soap is one of

all situations requiring hand hygiene

revisited by the Joint Commission

the cheapest, most effective ‘vaccines’

for both patient and worker safety, it

Center for Transforming Healthcare®

against viral diseases, from the

is important to have a multi-modal

and other organizations. Pugliese

seasonal flu to the common cold,”

strategy to promote hand hygiene,”

said newer published materials offer

said Sanjay Wijesekera, UNICEF

said Gina Pugliese, vice president

the latest in guidance for today’s

chief of water, sanitation, and hygiene

of the Premier Safety Institute.®

health practitioners. Also, a major

programs. “Our teams on the ground

Unfortunately, this fundamental

emphasis by the Joint Commission is

in Sierra Leone, Liberia, and Guinea

expectation of healthcare workers

to monitor hand hygiene compliance

are stressing the importance of hand

is continually unfulfilled, and hand

and promote recent media, such as the

washing as part of a raft of measures

hygiene compliance remains poor,

Implementation Guide for the Joint

that are needed to halt the spread of

Pugliese noted, adding that low

Commission Center for Transforming OUTLOOK

QTR 2.15

TRENDS

T F

Healthcare’s Hand Hygiene Targeted

good start. In addition, various visual

the word and recommended that

Solutions Tool® or TST. Access and

and audio prompts have been shown to

other patients watch the video.13

use of the TST system is free of charge.

increase compliance – with reminders

Automation within the online

“Research has shown that hand

from patients being one of the latest.

hygiene adherence among medical

TST assists healthcare providers

Recent efforts have demonstrated that

professionals is less than optimal,

with planning, implementing, and

patient communication to healthcare

despite long-standing evidence

maintaining hand hygiene initiatives.

workers can result in behavior change.

showing that it helps prevent

The application uses dashboards

Patients have come to recognize

healthcare-associated infections,”

to track where hospitals fall within

their need to be proactive in their

said Dr. John Jernigan of the CDC.

current hand hygiene compliance

caregivers’ hand hygiene practices.

“This video is a tool hospitals can use

requirements. Hospital staff also

Twice as many patients asked their

to empower patients to participate in

have access to benchmark data,

caregivers to wash their hands after

their own care and reduce their risk of

and administrators can enter their

viewing the CDC video “Hand Hygiene

acquiring an infection by reminding

facilities’ baseline information.

Saves Lives,” according to initial results

caregivers to perform hand hygiene.”14

Another TST dashboard view

from a research study by the CDC,

Increased hand hygiene vigilance

shows the impact of targeted

Catholic Healthcare Partners (CHP),

takes many forms, from staff-focused

solutions implemented at a facility.

and the Premier healthcare alliance.10

initiatives, to patient inclusion

For sites challenged by low hand

The research, which was conducted

programs, to implementation of

hygiene compliance and limited

in 17 CHP hospitals, tested the

compliance-tracking systems. Hand

resources for assistance with process

effectiveness of a CDC video in

hygiene monitoring systems employ

improvement, the TST system provides

encouraging patients, family members,

various technologies to measure

confidential instructional guidance.

and other visitors to play a role in

soap and hand sanitizer product use,

their own care by helping healthcare

track compliance levels in physical

(WHO) has also designed a toolkit for

professionals remember to clean

areas (such as patient rooms), or even

healthcare environments that includes

their hands before and after touching

analyze hand hygiene compliance at the

research findings, instructional

patients. After watching the video,

individual healthcare worker level.15

The World Health Organization

videos, materials for evaluation, and

the majority of patients reported

signage and leaflets for workers.

that it was useful and increased

Surface cleanliness

their knowledge of hand hygiene.11

While hand hygiene focus is very much

The WHO package focuses on the organization’s defined “5 Moments

“Preventing HAIs is a high priority

for Hand Hygiene,” which include:

goal at all CHP hospitals, and we believe

contact with objects and surfaces in and

• Before touching a patient;

that patients can partner with us to

near patient rooms makes a clean room

• Before clean/aseptic procedures;

assure safe and high-quality care,”

environment an obvious extension of

• After body fluid exposure risk;

said Carolyn Weiging, RN, BSN, CIC,

hand hygiene. After all, hands are only

• After touching a patient; and

and infection prevention and control

as clean as the surfaces they touch.

• After touching patient surroundings.

manager, St. Rita’s Medical Center

Healthcare leaders say that

on the healthcare worker, constant

Rigorous development of surface

(Lima, OH). “This video encourages

cleaners and convenient delivery

improvement in hand washing is greatly

that partnership by making it clear

systems give healthcare workers

dependent upon culture, leadership,

that it is perfectly acceptable to ask

multiple options for thorough, full

and organizational commitment.

caregivers to wash their hands to

room environmental cleaning, as well

reduce their risk of infection.”12

as methods for continual disinfection.

Facility changes and upgrades, along with increased education, monitoring, and intervention are important for a

Those who viewed the video were also in favor of spreading

Pathogen “kill times” continue to improve, and sprays and dry wipes

TRENDS

T E

have given way to pre-moistened wipe

reimbursement, are much greater.

products, saving time and ensuring

Many facilities even make additional

access to support for managing hand

sufficient delivery of disinfectant liquid

investments in advanced room

hygiene and cleaning compliance.

solutions to surfaces and devices.

cleaning equipment to reduce risks.

Ensuring the cleanliness of healthcare

By law, users must follow label

Room environment infection

Healthcare management has ample

workers and patient environments,

instructions on EPA-registered

prevention systems typically include

however, requires dedication to

products. Disinfectant manufacturers

portable devices that are placed in

thorough analysis of work practices,

benefit from gaining EPA approval

empty rooms and activated for a

constant reminders of proper

for shortened contact times in high-

period of time. Systems use either

procedure, and a plan to immediately

traffic, high-touch areas. Some EPA-

ultraviolet germicidal irradiation

address facility issues and improve

registered disinfectants have contact

(UVGI) or hydrogen peroxide vapor

compliance to proper technique.

times of as low as one minute, which

(HPV) to fully disinfect the space.

When financial repercussions of poor

is preferable in busy environments.17

Recent research has found that various

healthcare hygiene and cleaning include

multidrug-resistant organisms were

both the tremendous costs for patient

transmission of healthcare-acquired

decreased among patients after adding

readmissions and loss of government

pathogens (HAPs) to equipment and

ultraviolet environmental disinfection

reimbursement, conscientious efforts

surfaces near the patient, the CDC

(UVD) to the cleaning regimen.23

toward cleanliness can absolutely

Since evidence has connected

has created two levels of specific

be an important key to survival.

guidelines to implement objective monitoring systems and ensure optimal and consistent cleanliness.18 Equipment and surface checklists are provided by the CDC, but cleaning and cleanliness measurements for certain surfaces are not well-defined.19,10 The Level I and Level II guidelines contain the same basic elements from a cleaning procedure standpoint; however, Level II incorporates the objective monitoring methods (including direct observation of cleaning, periodic swab culture testing, and fluorescent markers) to track and improve cleaning.20 CDC experts recommend Level II implementation from the start, particularly in facilities that have experienced high levels of HAPs, such as Clostridium difficile (C. diff).21 Of course, there are costs for implementing these new programs. But the true cost of treatment and loss of credibility involved in HAI incidents, paired with potential loss of government

REFERENCES 1. Centers for Disease Control and Prevention, “Hand Hygiene in Healthcare Settings,” 2015, http://www.cdc.gov/handhygiene/ Basics.html. 2. UNICEF, “Handwashing one important tool in the Ebola fight – UNICEF,” 2014, http://www.unicef.org/media/media_76267. html. 3. Edward Prewitt, “Roundtable: To Arrest HAIs, Culture Trumps Campaigns,” HealthLeaders Media, 2014, http://www. healthleadersmedia.com/content/LED-306789/Roundtable-To-Arrest-HAIs-Culture-Trumps-Campaigns.html##. 4. Joint Commission Center for Transforming Healthcare, “The Improved TST Hand Hygiene Targeted Solutions Tool,” 2015, http://www.centerfortransforminghealthcare.org/multimedia/new-and-improved-hand-hygiene-tst/. 5. Ibid. 6. World Health Organization, “Clean Care is Safer Care: Tools and resources,” 2015, http://www.who.int/gpsc/5may/tools/en/. 7. World Health Organization, “Hand Hygiene: Why, How & When?,” 2015, http://www.who.int/gpsc/5may/tools/training_ education/en/. 8. Edward Prewitt, “Roundtable: To Arrest HAIs, Culture Trumps Campaigns,” HealthLeaders Media, 2014, http://www. healthleadersmedia.com/content/LED-306789/Roundtable-To-Arrest-HAIs-Culture-Trumps-Campaigns.html##. 9. Premier, Inc., “Hand hygiene for healthcare,” 2015, http://www.premiersafetyinstitute.org/safety-topics-az/hand-hygiene/handhygiene/. 10. Premier, Inc., “CDC Hand Hygiene Saves Lives video found to empower patients to remind caregivers to wash their hands,” December 27, 2013, https://premierconnect.premierinc.com/wps/myportal/mypremier/!ut/p/b0/NYu7DgIhEEW_xWJKwgCGN XbbmFiYWOp2AwxK3AWC6Pf7it095-TKSZ7klOmZLtRTyTS_-VwbL4mb8CV3zn1bqV9BGQLcj6C0O_76Z-7KI4fvFfCv8cCL43 YHHFtPfmZAZG81xyjCoJ1YWxsEcQyCjdVorFIbO8h6G1cvJbmZYA!!/. 11. Ibid. 12. Ibid. 13. Ibid. 14. Ibid. 15. Premier, Inc., “Value Analysis Toolkit: Hand Hygiene Monitoring Systems,” Premier Member Documentation, 2014. 16. Centers for Disease Control and Prevention, “Options for Evaluating Environmental Cleaning,” 2014, http://www.cdc.gov/HAI/ toolkits/Evaluating-Environmental-Cleaning.html. 17. Ibid. 18. Ibid. 19. Ibid. 20. Ibid. 21. Joint Commission on Accreditation of Healthcare Organizations, “This Patient Room Looks Clean. But Is It?” Environment of Care News, 14, no. 7 (July 2011): 8-11. 22. Premier, Inc., “Value Analysis Toolkit: Room Environment Infection Prevention Products,” Premier Member Documentation, 2014. 23. Association for Professionals in Infection Control, “Ultraviolet cleaning reduces hospital superbugs by 20 percent: Study,” 2014, http://www.apic.org/For-Media/News-Releases/Article?id=cb839210-8082-4aa0-8675-1cb140660da2.

OUTLOOK

QTR 2.15

Michael J. Alkire Chief operating officer / Premier, Inc.

from fragile to fit :

CREATING HEALTHIER MARKETS FOR VACCINES

hile recent headlines provided frequent updates on the progress

of an effective Ebola vaccine from a number of manufacturers, many question why one does not already exist. Given that the disease first appeared in 1976, scientists have had a seemingly ample amount of time to understand the virus and develop a solution. At least part of the problem is financial. Each new vaccine costs approximately $1.5 billion and has a 13-year development cycle.1 The return on investment can take years to recoup, if it is realized at all. In addition, manufacturers face business risks, since it’s almost impossible to accurately predict when an outbreak will occur or the number of people who will be affected. Moreover, the viruses themselves are difficult to pinpoint. Some mutate as they are transmitted, which can render an entire ©2015 LARRY JOST C/O THEISPOT.COM

stock of vaccines obsolete. We’ve seen

TRENDS

T E

this happen with the flu, resulting in

them on contract with our members.

supply chains. Industry participants

manufacturers reformulating vaccines

This can give health systems access to

must do more to ensure the health

to accommodate evolving strains.2

drugs their patients need when they

and stability of these markets.

There is also the unpredictability

need them. At the same time, suppliers

Furthermore, the FDA and other

of supply and demand. If there is

that commit to manufacturing drugs

government organizations have an

little demand for a vaccine in a given

in short supply are rewarded with a

opportunity to provide additional

year, manufacturers may end up

more predictable market share.

support and funding for necessary

with unused inventory – waste that

GPOs and other industry

infectious disease vaccine or drug

directly impacts the bottom line. But if

stakeholders also help by alerting

development and to make the

there’s a particularly strong demand,

hospitals to potential shortages,

regulatory environment easier

shortages can ensue and put drug

allowing them to more proactively

to manage.

companies at risk for potential liability.

manage their inventories.

These financial and legal threats have caused many vaccine makers to leave the market. 3

For their part, manufacturers that produce drugs within healthy supply

Supporting the supply chain This type of industry collaboration

chains could leverage their scale to assume more risk in the vaccine

could be used for other market

space. And, as in the example with

A fragile environment

absences or fragile supply chains.

Heritage Pharmaceuticals, Premier

What we’re seeing in the vaccine supply

Some organizations, including

and other industry stakeholders can

chain mirrors some of the issues we

PATH and the Bill & Melinda Gates

help eliminate risks for manufacturers

have experienced with other drugs in

Foundation, support emerging vaccine

trying to enter a fragile supply chain

short supply. When there are shortages,

manufacturers with technology

by securing the market for their

costs for replacements rise, and both

and regulatory guidance. The FDA

products with our health systems.

providers and manufacturers experience

also offers expedited review and

complications with inventory

approvals for high-priority infectious

development and production of

management and safe sourcing.

disease drugs and vaccines.

necessary drugs and vaccines that

A recent Premier, Inc. survey of

But are we doing enough? And if

By collaborating to promote

might otherwise be a hard sell

more expensive generic alternatives

not, who should step up? Disaster

financially, we can help spur

for drugs in shortage among a

and public health preparedness are

innovation that takes these supply

subset of U.S. hospitals showed the

critical if we are to minimize the

chains from fragile to fit.

annualized financial impact averaged

burden of healthcare emergencies

approximately $61 million in 2013.

and rapidly quell outbreaks. Even so,

From a national standpoint, the analysis

these events can stress already fragile

Note: A version of this article was initially published in Becker’s Infection Control & Clinical Quality.

suggests that total additional incurred costs were $209 million last year.4 What can private or public industry do to incentivize and promote the creation of vaccines and other necessary drugs? Premier has been helping smaller or emerging manufacturers, such as Heritage Pharmaceuticals Inc., reach the generic injectable market by putting

REFERENCES 1. Yasmeen Abutale, “Speeding up the fight against Ebola, other diseases,” The Boston Globe, August 22, 2014, http://www.bostonglobe.com/metro/2014/08/21/faster-development-vaccines-and-drugs-targeting-diseases-such-ebolahorizon/yrkrN56VgehrSzCtETPzzH/story.html. 2. Scott Hensley and Bernard Wysocki Jr., “As Industry Profits Elsewhere, U.S. Lacks Vaccines, Antibiotics,” The Wall Street Journal, November 8, 2005, http://online.wsj.com/articles/SB113141787830190837. 3. Martin Friede, interview, “Regional vaccine production: The chicken and egg situation,” Angle Magazine, November 2012, http:// www.nnepharmaplan.com/insights/angle-magazine/injecting-new-hope/articles/the-chicken-and-egg-situation-with-regionalvaccine-production/. 4. Premier, Inc., “Drug shortages continue to pose patient safety risks and challenge providers, according to Premier, Inc. survey,” news release, February 27, 2014, https://www.premierinc.com/drug-shortages-continue-pose-patient-safety-risks-challengeproviders-according-premier-inc-survey/.

OUTLOOK

QTR 2.15

TRENDS

T E

Richard Bankowitz, MD, MBA Chief medical officer / Premier, Inc.

Scott Pope, PharmD Vice president, quality and safety solutions management / Premier, Inc.

he performance of hospitals and healthcare systems is

Fig.1

Collaborative methodology

the focus of ever-increasing scrutiny today. There are

currently several separate federal

Advisory Panel External

public reporting programs that often reward or penalize facilities based on

the associated low-performance/noncompliance penalties. As an industry, we are at risk of losing critical focus. The result, says author Patrick Lencioni, is a culture where “if everything

IO UT

IMPLEMENT PROGRAMS TO SUSTAIN GAINS

EVALUATE PERFORMANCE RESULTS

1 8

RESULTS

DEFINE MEASURES

list of measures grows every year, as do

ESTABLISH MISSION AND GOALS

SIG

or even conflict with the others. The

EXEC

own set of measures, which may overlap

performance outcomes. Each has its

COLLECT ACTIONABLE DATA

is important, then nothing is.” At Premier, we believe health systems need to focus on measures that matter and that no one is better qualified to determine what matters than providers, patients and family members. We

SHARE BEST PRACTICES AND INNOVATIONS

4 5

TRANSPARENTLY SHARE DATA

ANALYZE AND DRIVE CHANGE THROUGH THROUG COLLABORATIVES LLABORATIVES

also think measurement alone is not enough. Change comes through focused action. Because of this, Premier and its members launched a national

I N N O VAT I O N

improvement collaborative several years ago. It is led by representatives of health systems who jointly decide what to measure and how to define top performance. This approach allows change to come from within.

OUTLOOK

QTR 2.15

TRENDS

T F

Premier has led this work involving

Premier’s experience in managing this

• Internal quality improvement

hundreds of U.S. hospitals and

type of collaborative and in holding

and related efforts.

health systems working in concert

hospitals accountable for improving

Quality cycle management is

over more than a dozen years in

outcomes (see Figure 1). Not unlike

rooted in scientifically validated

programs such as the Hospital Quality

revenue cycle management, QCM

methodology, aligned with cross-

Incentive Demonstration (HQID)

in healthcare requires a clearly

functional best practices of revenue

project; our Quality, Efficiency,

determined cadence; targeted, well-

cycle management, and focuses firmly

Safety, and Transparency (QUEST®)

defined metrics; a firm culture of

on the specific elements of performance

collaborative; and the Partnership

accountability; and deep executive

improvement that generate meaningful

for Care Transformation (PACT™)

engagement. QCM not only demands the

quality of care advancements. It is

collaborative. The methodology used

presence of these essential elements,

also a clear path to improving quality

in these collaboratives has delivered

but actively incorporates them into

and reducing costs in healthcare.

measurable improvements.

the culture of an institution.

We have known for some time

While in the past, efforts have tended

The need for such methodology could not be more urgent. Recently,

that QUEST hospitals outperform

to focus either on quality improvement

the Department of Health and Human

a matched set of non-participating

or revenue growth, the line is blurring,

Services announced that it plans

facilities in reducing mortality and

and the two areas are increasingly

to tie 30 percent of fee-for-service

lowering costs. Recently, Premier has

intertwined within healthcare. As many

Medicare payments to quality through

documented this “QUEST effect” in

in the quality movement have known for

accountable care organizations or

a peer-reviewed scientific journal.

some time, and as QUEST has recently

other alternative payment models

demonstrated, quality care costs less.

by the end of 2016, and 50 percent

As described in the article, QUEST outcomes rely on

Quality cycle management processes

by the end of 2018. 3 Healthcare

methodology that involves:2

are essential for success in many

systems cannot delay in finding ways

• Commitment of senior leadership,

common scenarios, including:

to provide care that is safe, effective,

• Federal reimbursement programs

efficient and patient-centered.

including the CEO; • Use of standard data analytic resources;

(e.g., value-based purchasing,

Yes, measures matter. But so

hospital-acquired conditions,

does process. No competent health

• Transparency in sharing outcomes;

readmissions reduction

system leader would leave hospital

• Collaborative execution; and

programs, and Medicare

revenue management to chance and

spending per beneficiary);

proceed without a clear means of

• Communication of best practices. In a multivariate analysis that

• Hospital accreditation programs

measurement and accountability. It

controlled for both secular trends in

such as The Joint Commission,

has become increasingly evident that

mortality reduction and for site-specific

Healthcare Facilities Accreditation

the same can be said of managing

factors, QUEST hospitals outperformed

Program, and Det Norske

the healthcare quality cycle.

non-participants by 10 percent. This

Veritas Healthcare, Inc.; and

difference could not be explained by secular trends or favorable selection bias. Rather, it isolated a specific effect unique to the collaborative. The process of quality cycle management (QCM) has evolved from

REFERENCES 1. E. Kroch, M. Duan, J. Martin, et al., “The effectiveness of a multicenter quality improvement collaborative in reducing inpatient mortality,” J Pat Saf, 2015 (forthcoming). 2. Ibid. 3. U. S. Department of Health and Human Services, “Better, Smarter, Healthier: In historic announcement, HHS sets clear goals and timeline for shifting Medicare reimbursements from volume to value,” news release, January 26, 2015, http://www.hhs.gov/news/ press/2015pres/01/20150126a.html.

Economics

A conversation with an economist, 46 An update on hospital performance metrics, 50 Patient volume trends, 55 Premierâ&#x20AC;&#x2122;s supply chain solutions, 59 Inflation summary, 60

ECON OMI CS 2 0 1 5

A CONVERSATION

with ILIR HYSA Economist, Moody’s Analytics

Ilir Hysa is an economist with Moody’s Analytics, covering U.S. healthcare as well as state and regional economies. He also participates in housing modeling and international forecasting; contributes to the company’s Regional Financial Review publication; and develops blogs and commentaries for the Moody’s Analytics’ Dismal Scientist website. Hysa received

What is your estimate for gross domestic product (GDP) growth in the next 12 months? What sectors will have the greatest impact on growth? The U.S. economy is on a roll now. Real GDP is expanding at a 3 percent pace, which is producing nearly three million jobs per year. All ingredients are in place for growth to further accelerate and reach more than 3.5 percent annually by the end of 2015. In all likelihood, household spending will continue to pick up and be the key driver in powering growth. In the next 12 months, we will see more and better

his PhD in economics from the Graduate

quality jobs, less labor market slack, low debt service burdens, record high stock

Center of the City University of New York.

prices, and rising housing values. All are key ingredients for stronger growth. The plunge in gasoline prices has provided a significant additional push. With stronger wage growth – signs of which we’re seeing – consumer spending will take off. A large portion of such spending is linked to the housing market. Demand will steadily build, despite tight mortgage lending standards. Mortgage rates are back close to record lows and are set to fall further as the Federal Housing Administration plans to cut its insurance premiums. This should provide more incentives for cautious first-time homebuyers to enter the market. Fannie Mae and Freddie Mac have also made some changes that should encourage lenders to extend more mortgage loans.

ECONOMICS

T E

Obviously, there are constraints on growth, the most

Meanwhile, monthly Medicaid enrollment is now about 18

notable being the deteriorating trade balance and cutbacks

percent higher on average than in the pre-ACA era, as some

in investment in the previously booming energy industry.

states expanded Medicaid for low-income households, while

The Federal Reserve must also gracefully begin to raise

others were approved waivers to customize the program.

interest rates as the economy closes in on full employment.

The augmented demand via both the exchanges and the

Regardless, these constraints wonâ&#x20AC;&#x2122;t be binding.

Medicaid program will propel healthcare growth by more than 4 percent in 2015, well above the overall growth rate.

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

implementation of the Affordable Care Act is successful.

Recent reports have shown that U.S. labor rates are not growing as steadily as international labor rates. Will domestic labor costs impact onshoring of jobs? What types of jobs and how significant?

The industry is in the process of absorbing significant

We can confirm that wage growth in the course of this

reform-induced demand, and despite an array of reform-

recovery has been disappointing and has helped keep

related regulations, will benefit immensely from it.

labor costs in check. As per onshoring, manufacturing

The performance of the healthcare industry has become almost synonymous with the extent to which the

The second open enrollment period for health

would be the industry to look into. One would expect that

insurance exchanges has brought more people onboard,

with sluggish growth in U.S. wages, U.S. manufacturing

resulting in broadened coverage and a reduction in

would be the first segment to see growth.

the number of uninsured nationwide. Combining the

Manufacturing is strengthening and employment grew

number of first- and second-year enrollees, there will

7.2 percent in the last five years, though payroll growth

be more than 11 million Americans signed up through

was uneven. Hiring has been strongest in transportation

both federally facilitated and state-based exchanges.

equipment, machinery, fabricated metals, primary metals,

What changes do you expect to see over the next 12 months in the U.S. unemployment rate? How will unemployment impact the healthcare industry? The unemployment rate is falling rapidly, at more than a percentage point per year. If current growth is sustained, the economy will be back to full employment by mid-2016. Lower unemployment and a stronger pace of wage increases bode well for income growth. With more employed Americans and both the individual and employer mandates in effect, the healthcare industry should have less to worry about in terms of health insurance affordability and uncompensated care. The impact of an improving economy will be more significant in states that have not expanded the Medicaid program and where coverage gaps ensue, exacerbating the uncompensated care problem for many hospital emergency departments.

OUTLOOK

QTR 2.15

ECONOMICS

T F

and beverages and tobacco products. Despite overall sluggish wage growth, these sectors have high hourly earnings. The onshoring hypothesis implies, however, that the growth would be in the subsectors where wages and skills of production workers are lowest, since they are the most directly affected by low-skilled global manufacturing competition. To the contrary, the growing subsectors have wages that are average or better. Meanwhile, the apparel and textile industries, with the lowest wages, have continued to decline. Since strong hiring has taken place mostly in energy-intensive industries, this suggests that lower energy costs –not labor– are the main driver of recent U.S. manufacturing growth. U.S. manufacturers in some parts of the country are reportedly taking advantage of the shale boom and are switching from more expensive sources of energy to cheap natural gas. Further, with evidence that U.S. wage growth is starting to pick up, any onshoring would be primarily driven by relatively lower U.S. energy prices, not more favorable labor costs.

The recent port strike in California and other geopolitical issues have raised some concerns regarding imports and exports. Can you discuss any effects geopolitical issues may have on raw material imports and overall prices?

Can you describe overall inflation and interest rate projections for the next 12 months and what they may mean for healthcare? Inflation will remain low in the first six months, but that

Central Bank’s own quantitative easing program will weigh

should change toward the end of the year and beyond. Inflation

on long-term yields. While lower long-term interest rates, if

dynamics will depend on the timing of the Federal Reserve’s

they do not rise in step with the federal funds rate, will boost

monetary policy stabilization, namely interest rate hikes. After

consumer spending and business investment, smaller financial

six years of near-zero interest rates, the question of when and

institutions that rely primarily on deposits could see profit

how fast the Fed will raise the federal funds rate lends a good

margins squeezed. On the other hand, sudden rate hikes would

deal of uncertainty to the outlook.

add friction to the ongoing recovery and significantly damage

Fed Chair Janet Yellen communicated in January that the Fed’s first rate hike will not come before the institution’s

the already-sluggish housing market. Following the recent unexpected decline in oil prices, some

June policy meeting, although slow wage growth and below-

companies have started curtailing their production, but there

target inflation could delay a final decision until fall. The

is always a lag between the timing of investment decisions

stronger demand for health services will contribute to a faster

and actual production adjustments. With the energy sector’s

rise in personal healthcare consumption expenditures and

partial recovery, the prices of other commodities will, on

related inflation.

average, see a mild increase in the next 12 months. Geopolitical

Uncertainty over the Fed’s next move has clouded the picture for longer-term rates. Despite the end of quantitative easing, the Fed’s $4 trillion balance sheet and the European

tensions and resulting supply chain disruptions remain a downside risk, however.

ECONOMICS

T E

“

Global geopolitical tensions present a downside risk to our forecast of the U.S. economy, but the strike alone should have a negligible impact. Further, the strike is an indication of a tightening labor market, discussed earlier, in which workers have increased bargaining power. The strike disrupted the flow of resources to their intended destinations, and some businesses instead shipped goods by rail, by air, or through other ports. Those alternatives can be costlier and lead to higher prices. In addition, if the strike had persisted, we could have seen higher raw materials’ prices. Inconvenience and increased costs will be priced into imported materials if such extra costs amount to serious headaches for importers.

There have been mixed reports regarding whether healthcare spending is rising or falling. What are your forecasts, both short- and long-term, for healthcare and what are the major factors impacting those forecasts? Healthcare spending on a per-person basis has slowed significantly in recent years due to a sluggish economic

That said, the long-term path of healthcare spending growth remains uncertain and will depend on the success of the ACA’s ongoing work and its cost-curbing provisions. But while the long-term outlook is uncertain, some ACA provisions – especially those related to the Medicare program – are producing encouraging results. The most measurable gains stem from a strict enforcement of

recovery, the ACA’s crackdown on excessive services,

the law, not from changing incentives through more wellness-

and a shift toward higher deductibles. It’s difficult

related education. While long-term gains are less clear at this

to quantify the contribution of each to the decline.

point, healthcare spending growth is already picking up and

However, with the post-recession effects fading,

will continue to grow in the short run as more Americans

ACA-related factors will carry more weight in the future.

make use of the services provided through their health plans.

OUTLOOK

QTR 2.15

ECON OMI CS 2 0 1 5

AN UPDATE

ON HOSPITAL PERFORMANCE

anuary through September of

remained approximately one-fourth

2014 proved to be positive for

of that shown by the top quartile. The

operating margins (see Figure

average also saw huge gains, with profit

1), despite recent reports of

per acute bed rising from $25,567 in 2009

shrinking margins across hospitals.

METRICS

Premierâ&#x20AC;&#x2122;s analysis of 455 facilities from

for the first nine months of 2014, a 35

2009 to 2014 (2014 data included 310

percent year-over-year increase.

facilities with full data from the cohort)

volume since ACA initiatives

highest within this time frame.

incentivized care moving out of the Volume Trends article), gross inpatient

margins compared to 2013. Among the

revenue as a percentage of total patient

top quartile, operating margins were

revenue remained flat in 2014 (see

nearly 10 percent, while average margins

Figure 3). Across the median, average,

doubled, from approximately 2 percent

and top quartile, inpatient revenue as a

(2009 through 2013) to 4 percent in 2014

percentage of total patient revenue was

(through September 30). The median

at its highest since 2009. This was likely

operating margin was 2.65 percent, up

due to the increase in total covered lives;

from 1.63 percent in 2013.

patients who were previously uninsured

bed in service was one explanation

are now using the healthcare system. As health systems try to reduce

for growing operating margins, along

expenses throughout their

with a myriad of supply chain and

organizations, minimizing unnecessary

other cost-reduction efforts health

supply costs that do not result in better

systems have implemented. Again, the

clinical outcomes becomes increasingly

median, average, and top quartiles all

important. Supply expense per CMI-

had increases in profit per acute bed in

adjusted acute discharge (SEpCAAD)

service in 2014 compared to 2013 (see

for both the average and the median

Figure 2). The top quartile saw a 53

have fallen sharply since 2007 (see

percent increase in profit per bed since

Figure 4). Adjusting for inflation,

2009 (from $68,859 to $105,441).

the average supply expense per CMI-

Similarly, profit per acute bed for the median has increased 100 percent since 2009 (from $12,438 to $24,920) but still

acute/emergency setting (see Patient

facilities all saw an uptick in operating

A steady increase in profit per acute

ECONOMICS

Despite the growth in outpatient

showed operating margins at their Median, average, and top quartile

to $32,753 in 2013. It was at $44,349

adjusted acute discharge was $229 lower than the 2006 rate.

ECONOMICS

T E

Fig.1

Operating margin of acute care hospitals

12%

10%

Source: A database maintained by Premier, Inc.

0% 2009

2010

2011

2012

Top quartile

Median

2013

2014

Average

*CY 2014 data is for nine months ending September 30, 2014.

Fig.2

Profit per acute bed in service

$120,000 $100,000 $80,000 $60,000

$20,000 $0 2009

2010

2011

Top quartile

2012

Median

2013

2014

Average

Source: A database maintained by Premier, Inc.

$40,000

*CY 2014 data is for nine months ending September 30, 2014.

OUTLOOK

QTR 2.15

ECONOMICS

T F

Fig.3

Gross inpatient revenue as a percentage of gross patient revenue

70%

65% 60%

55% 50% Source: A database maintained by Premier, Inc.

45% 40%

35% 30% 2009

2010

2011

2012

Top quartile

Median

2013

2014

Average

*CY 2014 data is for nine months ending September 30, 2014.

Fig.4

Supply expense per CMI-adjusted acute discharge (SEpCAAD)

$1,300

$1,200

$1,100

$900

$800 2007

2008

2009

2006 median Note: Dollars are adjusted to inflation using medical care CPI.

2010

2011

Average

2012

Median

2013

2014 (Q1â&#x20AC;&#x201C;Q2)

Source: A database maintained by Premier, Inc.

$1,000

ECONOMICS

T E

Fig.5

Bad debt expense as a percentage of net patient revenue

12%

10%

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

0% 2009

2010

2011

Top quartile

2012

Median

2013

2014

Average

*CY 2014 data is for nine months ending September 30, 2014.

Fig.6

Total operating expense as a percentage of net patient revenue

100% 98% 96% 94% 92% Source: A database maintained by Premier, Inc.

90% 88% 86% 2009

2010

2011

Top quartile

2012

Median

2013

2014

Average

*CY 2014 data is for nine months ending September 30, 2014.

OUTLOOK

QTR 2.15

ECONOMICS

T F

SEpCAAD for the median fell from

Operating expense accounted

a high of $1,174 in Q4 2007 to $924

for approximately 90 percent of net

in Q2 2014.

patient revenue among top quartile

While bad debt expense as a

hospitals, down from 91 percent in 2013.

percentage of net patient revenue has

The median operating expense had

remained flat for the median and top

remained at or above 98 percent from

quartile since 2009, the average saw

2009-2013 but dropped to 97 percent in

an increase in 2014. In 2013, bad debt

2014. Lastly, average operating expense

accounted for, on average, 8.7 percent

had the biggest dip in 2014 – from 98

of net patient revenue. For the first

percent of net patient revenue in 2013

nine months of 2014, bad debt was

to 96 percent in 2014.

at 10 percent of net patient revenue (see Figure 5).

Notes

Payer mix played a large role in

The cohort used for this analysis

bad debt, as did location. Changes to

included 455 acute care facilities

insurance coverage have influenced

within Premier’s membership that

bad debt in several ways:

submitted data from 2009-2013. For

• Coverage expansion efforts (e.g.,

2014, 310 facilities submitted full data

Medicaid expansion, individual

for the nine months through September

mandate and coverage inclusion

of that year. If comparing to previous

for preexisting conditions) largely

editions, please note that the cohort

decrease charity care and bad debt.

is updated to include all facilities with

• The popularity of high-deductible insurance plans can increase bad debt

full data within the database for the timeframe evaluated.

in cases where the copayment is too

Bad debt calculations were achieved

high to be affordable in the instance

by deducting bad debt from gross patient

of acute or emergency care.

revenue to arrive at net patient revenue.

• Health systems in states that expanded Medicaid coverage have seen earlier, more rapid decreases in charity care than those that chose not to expand.2 Profit per acute bed impacts total operating margin, as does a reduction in operating expense. Total operating expense as a percentage of net patient revenue decreased for the median, average, and top quartile in 2014,

REFERENCES

compared to the previous six years

1. Beth Kutscher, “Fewer hospitals have positive margins as they face financial squeeze,” Modern Healthcare, June 21, 2014, http://www.modernhealthcare.com/article/20140621/MAGAZINE/306219968. 2. “Medicaid Expansion Cutting Bad Debt, Charity Care,” RevCare, June 6, 2014, http://www.revcare.com/archives/5067.

(see Figure 6).

ECON OMI CS 2 0 1 5

PATIENT VOLUME

hese metrics are based on a sample of 508 healthcare facilities that submitted three years of inpatient and outpatient data to a database maintained by Premier. The sample represents 181 million patient discharges and reflects a cross section of our membership that includes

variations in geographic area as well as in organizational size and type. This report identifies year-over-year (YOY) percentage changes in volume for

key data elements such as inpatient and outpatient discharges, surgery growth, and payer mix from FY2013 (July 2012 through June 2013) to FY2014 (July 2013 through June 2014).

TRENDS

Fig.1

FY2014 quarterly trends

YOY growth

Q4 2013

Q1 2014

Q2 2014

FY2014

Inpatient

-1.12%

-2.98%

-3.22%

-3.00%

-2.58%

Outpatient

3.71%

1.78%

-1.06%

-0.49%

0.98%

Total discharges

3.22%

1.31%

-1.27%

-0.73%

0.62%

Inpatient surgeries

-1.49%

-1.94%

-2.38%

-3.72%

-2.37%

Outpatient surgeries

4.41%

4.61%

2.38%

4.23%

3.92%

Births

-1.11%

0.18%

1.24%

-1.39%

-0.30%

Medicare discharges

5.88%

4.37%

0.79%

1.15%

3.02%

Medicaid discharges

2.03%

-1.74%

2.84%

10.54%

3.41%

Self-pay discharges

-2.54%

0.31%

-5.64%

-15.17%

-5.68%

3.04%

0.67%

-3.82%

-4.34%

-1.11%

Managed care and other payer discharges

Source: A database maintained by Premier, Inc.

Q3 2013

Notes: Quarterly numbers show the percentage of change from the same quarter in the previous fiscal year. Annual totals represent the percentage of change overall in FY2014 compared to FY2013.

OUTLOOK

QTR 2.15

CHANGES OF NOTE 2.6%

INPATIENT VOLUME

FY2013

1.0%

decreased

0.6%

FY2014

OUTPATIENT VOLUME increased

OUTPATIENT SURGERIES increased in 2014 compared to 2013 by 3.9%

TRENDS

DISCHARGES OVERALL

Discharges in public payer categories (Medicare and Medicaid) were up in 2014

1.7%

SELF-PAY DISCHARGES 2012

2.3%

SELF-PAY DISCHARGES 2013

SELF-PAY 5.7% DISCHARGES 2014

ECONOMICS

T E

Fig.2

Discharge trends

5% 4% 3%

YOY percent change

2% 1% 0% Source: A database maintained by Premier, Inc.

-1% -2% -3% -4% -5% Q3.2012

Q4.2012

Q1.2013

Q2.2013

Inpatient discharges

Total discharges

Fig.3

Q3.2013

Q4.2013

Q1.2014

Q2.2014

Outpatient discharges

Discharges by payer type

20% 15%

5% 0% -5%

Source: A database maintained by Premier, Inc.

YOY percent change

10%

-10% -15% -20% Q3.2012

Q4.2012

Q1.2013

Q2.2013

Medicare patients Self-pay discharges

Q3.2013

Q4.2013

Q1.2014

Q2.2014

Medicaid patients Managed care and other discharges

OUTLOOK

QTR 2.15

ECONOMICS

T C

Fig.4

Surgery and emergency department visits

8% 6% 4% YOY percent change

2% 0% -2% Source: A database maintained by Premier, Inc.

-4% -6% -8% Q3.2012

Q4.2012

Q1.2013

Q2.2013

Q4.2013

Outpatient surgery visits

Inpatient surgery visits

Fig.5

Q3.2013

Q1.2014

Emergency room visits

Average length of stay (ALOS)

3.600

1.0%

3.575

0.8%

3.550

0.6%

3.525

0.4%

3.500

0.2%

3.475

3.450

-0.2%

3.425

-0.4%

3.400

-0.6%

3.375 3.350 Q3.2012

Q4.2012

Q1.2013

Q2.2013

YOY percent change Note: Average length of stay includes only inpatient data; outliers have been excluded.

Q3.2013

Q4.2013

ALOS (days)

Q1.2014

Q2.2014

Source: A database maintained by Premier, Inc.

1.2%

-0.8%

Q2.2014

Days

YOY percent change

ECON OMI CS 2 0 1 5

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

PREMIER’S SUPPLY CHAIN

or IDN. The calculator is available to member health systems and can be found on PremierConnect.

A resource for proactive drug expense management This application prepopulates profiles for analysis and evaluates drug expenditures. It also: • Analyzes 93 percent of annual drug purchases; • Examines entire systems and multiple

Medical-Surgical Inflationary Calculator A resource for proactively managing medical-surgical supply spend The Medical-Surgical Inflationary Calculator is an easy-to-use resource designed to estimate applicable supply spend. The calculator:

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

• 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 allows users to manually adjust for anticipated spend; • Compensates for off-contract purchases with an optional SpendAdvisor report; • Alerts members to contract categories that will be renegotiated in the current year;

from more than 497 hospitals. It is designed to: • Calculate a hospital’s supply mix index based on the services provided to patients. This can be calculated across systems, within service lines,

Drug Budget Tool

SOLUTIONS

The Supply Mix Index methodology combines clinical and supply cost data

and at other levels within a system. • Be statistically sound. The MSDRG Supply Mix Index determines weights using 4 million patientlevel records from Premier’s QualityAdvisor™ database. • Demonstrate a more direct correlation to supply expense-per-patient case than the Case Mix Index. Premier’s Supply Mix Index focuses on the supply cost within a case, while the Case Mix Index incorporates other significant, non-supply expenses. • Allow cross-hospital comparisons of supply efficiency. Premier’s new methodology will initially be found in the executive-level reporting application of SupplyFocus® used by acute-care facilities.

Supply Mix Index™ A methodology for calculating supply cost indexes for each Medicare Severity DiagnosisRelated Group (MS-DRG) Premier’s newly patented Supply Mix Index calculates supply expense per patient procedure. The index can also compare the cost with other hospitals nationwide to ensure appropriate

SupplyFocus is also included with OperationsAdvisor,® Premier’s labor productivity and benchmarking offering. To learn more about Premier’s Supply Mix Index, please contact Mark Hiller, vice president of innovative solutions, at mark_hiller@premierinc. com or Richard Westbay, director, supply chain research and analytics, at richard_westbay@ premierinc.com.

resource use, improve supply efficiency, and identify waste-reduction opportunities.

OUTLOOK

QTR 2.15

ECON OMI CS 2 0 1 5

INFLATION SUMMARY

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

Average of supplier inflation estimates: This 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 Tool. All others (except Foodservice) – Projections reflect the expected weighted average percent change in contract pricing for the existing contract portfolio as of April 1, 2015.

Service line

Average of inflation estimates

Projected Premier contract inflation estimates

Cardiovascular Services

3% – 5%

3.70%

0.00%

Clinical Laboratory Services

0% – 6%

3.30%

0.75%

Continuum of Care

0% – 2%

1.30%

1.38%

Facilities

0% – 10%

3.70%

0.85%

Foodservice

0% – 10%

0.00%

Not available

Imaging

0% – 10%

3.90%

0.38%

IT /Telecommunications

3% – 9%

4.30%

0.00%

Materials Management

0% – 5%

3.00%

0.99%

Nursing

0% – 13%

3.40%

1.10%

Pharmacy*

Not applicable

7.90%

Purchased Services

0% – 0%

0.00%

Surgical Services

0% – 10%

3.50%

0.90%

Women & Children’s

0% – 4%

2.50%

0.04%

*Pharmacy data derived from Premier’s Drug Budget Tool Note: Estimated inflationary changes are subject to change.

Range of inflation estimates

Commodities

Minimizing raw materials risk, 62 2015 market overview: Indicators for pricing, 64 Copper market overview, 66 Cotton market overview, 68 Energy market overview, 70 Food market overview, 72 Plastic resins market overview, 76 Natural and synthetic rubber market overview, 78 Steel market overview, 80 References, 82

COMMODITIES

T F

MINIMIZING

RAW MATERIALS RISK

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

In order to minimize the risk associated with raw materials’ pricing, healthcare

facilities should: • Review categories that may be impacted by fluctuations in raw material costs; • Use the inflation tables in this publication to locate suppliers with firm pricing in a category impacted by raw materials of interest; • Refer to the contract launch materials in Supply Chain Advisor® to identify a category’s lowest-cost provider; and • Reference the inflation tables to find suppliers that offer utilization review programs.

LABOR PREMIER CONTRACT IMPACT* Hand hygiene monitoring system

•

Surgical instrument and scope repair

•

Clinical engineering

•

ENERGY PREMIER CONTRACT IMPACT* PC hardware and software resellers

•

Video laryngoscopes

•

Third-party freight management

•

PLASTIC RESINS PREMIER CONTRACT IMPACT* Pain management – local anesthetic

•

Contrast media injector disposables

•

Can liners

•

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

COMMODITIES E

Fig.1

T C

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

Precious metals, 0.4% Natural and synthetic rubber, 1%

Cotton, 1% Paper, 3%

Base metals, 3% Electronic components, 7%

Plastic resins, 11%

Energy, 32%

Labor, 42%

Source: Premier online supplier survey for Economic Outlook spring 2015 publication

OUTLOOK

QTR 2.15

COMMODITIES

T F

2015

MARKET OVERVIEW INDICATORS FOR PRICING

CPI, PPI, and CMS marketbaskets 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. They include the: • Consumer price index (CPI); • Producer price index (PPI); and • CMS marketbaskets. The 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 CPI measures price change from the consumer’s perspective and encompasses 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

basis, PPI for finished goods fell

several item categories (strata).

2.1 percent from December 2014 to

The CPI-U increased 1.4 percent

January 2015, seasonally adjusted.5

from 2013 to 2014, not seasonally

The 12-month net output of selected

adjusted. The consumer price index

industries (unadjusted) is:6

for all urban consumers (CPI-U)

• Hospitals, -0.1 percent;

declined 0.7 percent in January, on a

• Home health care

seasonally adjusted basis, largely due to a continued decline in the energy index.

services, 1.2 percent; 2

In January 2015, the gasoline index had its largest decrease, following a six-

• Physician offices, 0.1 percent; and • Medical laboratories, 0.0 percent. Economic indicators that are more

month downward spiral, of 18.7 percent.

specific to the healthcare industry

The overall energy index dropped 9.7

are CMS marketbaskets, which

percent because of gasoline prices.

measure how much more or less it

In 2014, the medical care CPI grew

would cost at a later time to buy the

3 percent, up from 2 percent in 2013.

same mix of goods and services. These

On a monthly basis, medical care CPI

indicators reflect price inflation

was flat in January 2015, as medical

facing medical services providers.

services saw a slight increase while medical care commodities decreased.

The marketbaskets are constructed 3

In contrast to the CPI, the PPI

from mutually exclusive spending categories that use data collected

measures price changes from the

from hospitals’ Medicare cost reports

perspective of the seller and includes

and corresponding price indexes. The

the entire output of U.S. producers.

overall hospital price index is the sum

Since the PPI captures price movement

of each category’s product weight and

prior to the retail level, it may

relevant price index. The price indexes,

foreshadow subsequent price changes

or proxies, which are used to calculate

for businesses and consumers.

the marketbaskets, include data from

The PPI for finished goods, which is its most commonly used measure, declined 3.1 percent from January 2014 to January 2015. On a monthly

the Bureau of Labor Statistics (most commonly the producer price indexes). The marketbasket levels and percentage changes are updated

COMMODITIES

quarterly, with each new forecast containing an additional quarter of

Fig.1

historical data.7 CMS projects payment

CPI-U, medical care CPI, and IPPS marketbasket rates 6%

updates for the coming fiscal year the latest information available at the time of publication. This is based on the CMS fiscal year, which runs from October to September. Once an update has been determined, it is generally not revised to include

Annual percentage change

using a marketbasket containing 4%

more recent data. However, because marketbaskets are updated quarterly,

-2% 2008

the current marketbasket may

2009

2010

variances in the forecast data and Total Inpatient Prospective Payment System (IPPS) payments are projected to decrease by $756 million in FY2015. Under CMS’ final rule on IPPS, announced August 2014, the operating payment rates for inpatient stays at hospitals that participate in the Hospital Inpatient Quality Reporting (IQR) Program, and are meaningful electronic health record (EHR) users, will be increased by 1.4 percent.

In FY2015, those hospitals that do not successfully participate in the IQR program and do not submit the

2012

2013

2014

2015

CPI-U Medical care CPI Medicare marketbasket, inpatient hospital

be different, depending on the information currently available.8

2011

China’s economic slowdown has put a

drops, since energy is a large factor

strain on demand for many commodity

in transportation of goods and is the

markets, especially cotton, copper, and

basis for other commodity markets.

rubber. In 2014, the political tensions in

Weather patterns, as always, play

Russia also affected several markets, and

a role in commodity prices. In 2014,

this may continue into 2015. Further

long-term inclement winter weather,

geopolitical strife or shifting economies

followed by severe drought in much of

could also contribute to commodity

California, elevated the cost of many

price fluctuations for the rest of the year.

commodities, especially food and

Prices for oil, gasoline, plastic

energy. So far in 2015, oil prices have

resins, and related items were down

been at such low levels that winter

significantly for the seventh month

weather across much of the Midwest and

in a row in February 2015. Many

Northeast has not had the same effect.

commodities have seen resulting price

required quality data will be subject to a one-quarter reduction of the market basket update. Any hospital that is not a meaningful EHR user will also be reduced by one-quarter of the market basket update in FY2015.

Commodity overview Major factors impacting most commodity markets this year include: • China’s slowing growth; • Falling oil prices; and • Weather patterns.

REFERENCES 1. U. S. Department of Labor Bureau of Labor Statistics, Measuring Price Change for Medical Care in the CPI, www.bls.gov/cpi/cpifact4.htm. 2. U. S. Department of Labor Bureau of Labor Statistics, “Consumer Price Index Summary,” economic news release, February 26, 2015, http://www.bls.gov/news.release/cpi.nr0.htm. 3. U. S. Department of Labor Bureau of Labor Statistics, “Consumer Price Index – December 2014,” news release, January 16, 2015, http://www.bls.gov/news.release/archives/cpi_01162015.pdf. 4. U. S. Department of Labor Bureau of Labor Statistics, Producer Price Indexes: Program Overview, www.bls.gov/ppi/ppiover. htm#Link6. 5. U. S. Department of Labor Bureau of Labor Statistics, “Producer Price Indexes – January 2015,” news release, February 18, 2015, http://www.bls.gov/news.release/pdf/ppi.pdf. 6. U. S. Department of Labor Bureau of Labor Statistics, “Table 11. Producer price indexes for the net output of selected industries and their products, not seasonally adjusted,” PPI Detailed Report – January 2015, http://www.bls.gov/web/ppi/ppitable11.pdf. 7. Centers for Medicare and Medicaid Services, Medicare Program Rates and Statistics, http://www.cms.gov/ MedicareProgramRatesStats/downloads/mktbskt-pps-hospital-2006.pdf. 8. Ibid. 9. Centers for Medicare and Medicaid Services, “Fiscal Year 2015 Policy and Payment Changes for Inpatient Stays in Acute-Care Hospitals and Long-Term Care Hospitals,” media release fact sheets, August 4, 2014, http://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2014-Fact-sheets-items/2014-08-04.html.

OUTLOOK

QTR 2.15

COPPER MARKET OVERVIEW

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

•

HVAC equipment, controls and services

•

Ice machines and dispensers

•

Maintenance, repair and operations

•

Copper market update Copper prices reached a five-year low in January 2015, though they have slightly rebounded since. The International Copper Study Group estimates copper demand will grow by 1.1 percent this year, while production will rise 4.3 percent, resulting in a surplus of 393,000 tons by the end of 2015.1 Copper prices are forecast at $3 per pound in 2015, down from an average $3.11 per pound in 2014.2 Because China is the world’s largest buyer of industrial metals, including copper, variations in the copper market tend to be in sync with fluctuations in the Chinese economy. Demand from China is expected to remain strong, holding copper prices firm in 2015. Concerns over the growth of China’s economy helped drive copper prices down by 7 percent as of mid-2014. 3 From 2005 to 2015, average global copper consumption has grown by 2.5 percent per year, despite the growth in Chinese demand over much of that time.4

The outlook for copper has also been affected by production constraints. While global usage increased 14 percent in 2014, production only grew 3 percent.5 Last year’s lower production was largely the result of mine closings and export bans in Australia, Indonesia, and Zambia. Predictions of 7 percent production growth through 2017 are primarily due to increased mining in Central and South America.6

COMMODITIES E

Fig.1

T C

Average monthly copper prices (London Metal Exchange) 400

350

Cents per pound

300

250

200

150

100 2012

2013

2014 (through Oct)

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

Fig.2

Projections for 2015

FACTOR

IMPACT ON COPPER PRICES

COMMENTS

Production interruptions

Slow production was due to mine closures, operational failures, and export bans in many copper-producing countries.

Chinese demand

China’s demand continues to fall as the country’s economy slows.

OUTLOOK

QTR 2.15

COTTON MARKET OVERVIEW

PRODUCT CATEGORIES WITH HIGH COTTON CONTENT AND 12-MONTH PRICE OUTLOOK Lap sponges or towels and specialty sponges

•

Restraints and fall prevention

•

Reusable textiles and textile services

•

Skin integrity: prevention, healing and support

•

Cotton market update After hitting a 5 ½-year low of 57.30 cents per pound in January, cotton prices increased 13 percent in February 2015.1 Farmers, especially in the U.S. and South America, have reduced planting this season as a result of plunging prices. India, meanwhile, remains the largest producer. Global stockpiles are predicted to reach a record 109.84 million bales at the end of this growing season, according to the USDA.2 China’s stockpile (50 million bales) and slower economic growth have resulted in estimates of demand that are approximately 1 million bales less than China’s imports last year. 3 Limited demand from China will continue to diminish U.S. export potential.

There is an upside, though, as lower prices have made cotton more competitive with synthetic fibers.4 In addition, demand for quality cotton, which typically comes from the U.S., Brazil, and Australia, is still high, especially as these countries reduce plantings and harvesting this year.5

COMMODITIES E

Fig.1

T C

The Cotton “A” Index The Cotton “A” Index is an estimate of the world price of cotton. It is an average of the five lowest quotations for a sample of 19 cottons traded internationally. 250

Cents per pound

200

150

100

0 2010

2011

2012

2013

2014

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

Fig.2

Projections for 2015

FACTOR

IMPACT ON COTTON PRICES

COMMENTS

Large reductions in planting

Price may return to an average 70 cents per pound from record lows, due to a large reduction in planting in the U.S. and South America.

Limited demand

Chinese demand for cotton has slowed as a result of the country’s economic downturn and its large cotton inventory.

OUTLOOK

QTR 2.15

ENERGY MARKET OVERVIEW

COMMODITY

CHANGE IN LAST 12 MONTHS

CHANGE LAST MONTH

Oil (light crude)

-52.27%

8.90%

Heating oil

-35.30%

22.26%

Natural gas

-46.98%

0.31%

Unleaded gas

-43.29%

22.36%

Source: CNNMoney.com. Price change shown is from February 24, 2014 to February 24, 2015 or January 24, 2015 to February 24, 2015.

Global liquid fuels supply and consumption

percent higher at the end of January

Global petroleum and other liquid fuels

2015 compared to the same time in

consumption grew by 0.9 million barrels

2014, but 1 percent lower than the

per day (bbl/d) in 2014 and is expected

average from 2010-2014. Supply remains

to increase by 1 million bbl/d in 2015 and

adequate to head off current winter

2016.1 Consumption is largely driven

weather patterns, and prices should

by non-members of the Organization

remain low.

for Economic Co-operation and

Natural gas inventories were 24

Henry Hub natural gas spot prices are

Development (OECD), with China still

forecast to average $3.34/million British

the main source of growth – although

thermal units (MMBtu) this winter

2015 consumption is projected to be

compared to $4.53/MMBtu last winter.6

below 2014 levels.

Natural gas consumption growth is due

The Energy Information Administration (EIA) reports that OPEC crude oil production averaged

to increased demand from the industrial and electric power industries.7 Average gasoline retail prices are

9.2 million bbl/d in January, with

expected to average $2.33 per gallon

average monthly production remaining

in 2015, down from the average $3.36

at 9.3 million bbl/d throughout 2015.2

per gallon in 2014. In January 2015, the

Production in 2016 should reach its

average monthly gasoline retail price

near-highest levels. Russia’s economic

was the lowest since April 2009, at

hardship led to lower-than-expected

$2.12/gallon.

consumption in 2014 and is expected to stay flat in 2015 and 2016. 3 Brent crude oil prices will average $58/bbl in 2015 and $75/bbl in 2016, both down significantly from 2014 prices of more than $100/bbl.4 Price declines reflect growth in U.S. production, as well as global supply, and weaker demand.5

COMMODITIES E

Fig.1

Projections for 2015 FACTOR

Fig.2

IMPACT ON ENERGY PRICES

COMMENTS

Strong crude oil production

Near record-high production, especially driven by non-OECD countries, will be maintained through 2016.

Consumption wavering

Growth is largely from non-OECD consumption, though Chinese/ Russian demand has faltered due to the countriesâ&#x20AC;&#x2122; economic downturns.

Natural gas inventories

Inventories were 24 percent higher at the end of January 2015 compared to last year at that time. Supply remains able to deter sudden cost spikes.

Henry Hub natural gas prices Projections $12

Dollars per million BTU

$10 $8 $6 $4 $2 $0 2014

2015

Historical spot price

2016

STEO forecast price

95% NYMEX futures upper confidence interval

NYMEX futures price

95% NYMEX futures lower confidence interval

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, February 2015 Note: Confidence interval derived from options market information from the 5 trading days ending Feb. 5, 2015. Intervals not calculated for months with sparse trading in near-the-money options contracts.

U.S. gasoline and crude oil prices Projections $5 $4 Dollars per gallon

Fig.3

$3 $2 $1 $0 2011

2012

2013

Retail regular gasoline

2014

Crude oil

2015

2016

Price difference

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, February 2015 Note: Crude oil price is composite refiner acquisition cost. Retail prices include state and federal taxes.

OUTLOOK

QTR 2.15

FOOD

MARKET OVERVIEW

Global food prices

U.S. food prices

According to the United Nations’ Food

Despite the 2014 U.S. weather patterns,

and Agriculture Organization (FAO),

retail food price inflation remained near

the international Food Price Index

the average 2.6 percent for the year. In

(see Figure 1) averaged 182.7 points in

December 2014, the Consumer Price

January 2015, down 1.9 percent from

Index (CPI) for all food was 0.8 percent

December 2014. The FAO Food Price

higher than in December 2013. 3

Index has steadily fallen every month

Food-at-home CPI, or supermarket

since April 2014, with the exception of

prices, increased 2.4 percent in 2014

October. The steepest declines have

and was up 3.7 percent in December,

been in cereals and oils.

compared to the same time in 2013.

The FAO announced in November

Food-away-from-home CPI was 3

2014 that global food supplies of corn,

percent higher in December 2014

soybeans, wheat, and other grains were

compared to the previous year.4

expected to reach their highest levels

The United States Department of

ever, although that is unlikely to impact

Agriculture’s Economic Research

high food prices in some international

Service (ERS) forecasts 2015 food price

markets. Weather-related incidents

inflation of between 2 and 3 percent.

largely impacted the supply and price

This could be affected by severe weather,

of food in 2014, as many countries,

such as continued drought in California,

including the U.S., faced droughts and

as well as oil prices. If oil prices remain

severe conditions.

low, the decrease in transportation costs

could trickle down to retail prices.5

COMMODITIES E

Fig.1

T C

The Food Price Index The Food Price Index from the United Nations’ Food and Agriculture Organization (FAO) is an average of five commodity groups: meat, dairy, cereals, oils and fats, and sugar. 220

210

2002–2004 = 100

200

190

180

170

160 2013

2014

Source: FAO.org

Fig.2

Price change by commodity

Commodity

Corn

Soy Beans

Wheat

Lean Hogs

Live Cattle

Sugar

Coffee

Change last 12 months

-16%

-28%

-18%

-32%

18%

-17%

Change last month

-1%

-2%

-3%

-5%

-7%

-10%

Source: CNNMoney.com. Price change shown is from February 24, 2014 to February 24, 2015 or January 24, 2015 to February 24, 2015.

OUTLOOK

QTR 2.15

COMMODITIES

T F

Fig.3

Food categories and 12-month price outlook