Trends in Hospital Cost Management Health Care Industry Committee Trends in Hospital Cost Management Ready-to-Use Presentation Slides

Median Hospital Operating Expense Growth and Revenue Growth Cost Control Fundamental to Future Profits Cost Growth Nearly on Par with Revenue Growth Median Hospital Operating Expense Growth and Revenue Growth 2008 to 2011 Source: “2011 Not-for-Profit Hospital Medians, Final Report,” Moody’s Investor Services, August 2012 Advisory Board interviews and analysis.

Labor Costs Compose Majority of Total Costs An Imperative, But An Opportunity Cost Growth a Large Portion of Pleasantville’s Gap-to-Goal Success Largely Contingent Upon Managing Labor Costs Pleasantville’s 10-Year Total Cost Projections 4.0% Other Capital Labor $12.8M Supply $25.2M in cost savings across 10 years Source: Advisory Board research and analysis.

Soaring Benefits Key Labor Expense Driver Premiums Spending Increasing at Rapid Pace Employers Shouldering Most of the Burden 2002-2012 Average Annual Health Insurance Premiums and Worker Contributions, 2002-2012 92% total premium increase 102% employer contribution increase Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2002-2012; Advisory Board research and analysis.

Urgent Need to Bend Supply Cost Growth Curve Unchecked Supply Growth Average three-year CAGR1 Price Pressure Unabated Suppliers facing 2.3% medical device excise tax, begins December 2012 Flattening clinical innovation curve fails to drive down prices in maturing markets Market demand for new device-dependent procedures, without proven benefit Compound annual growth rate. Source: Lichtenberger Scott, et al, “How Sourcing Excellence Can Lower Hospital Costs,” Health International, 2010, 10: 18-29; Advisory Board research and analysis.

Leveraging Scale to Extract Price Concessions Utilizing National GPO Purchasing Power Eliminating the Middle-Man GPO Spend as Percentage of Total Supply Spend Intent to Pursue Self-Contracting 2010 Already self-contracting No plans Looking into self-contracting Plans to self-contract 2010 Less than 40% More than 60% 40-60% 58 percent of respondents anticipated an increase over the next year 98% Hospitals purchasing products through GPOs1 51% Hospitals belonging to at least one regional GPO Hospitals use an average of two to four GPOs per facility. Source: Heath Industry Group Purchasing Association, “A Primer on Group Purchasing Organizations,” available at: www.higpa.org, accessed Oct 10, 2012; United States Government Accountability Office, “Group Purchasing Organizations: Services Provided to Customers and Initiatives Regarding their Business Practices,” available at www.gao.gov, accessed Oct 4, 2012; Advisory Board research and analysis.

Scale Providing Limited Benefits The Diminishing Returns to Scale Narrow Negotiating Focus Misses Greater Opportunity Limited Influence of GPOs Failing to Consider Factors Beyond Price 7% Average price reduction by incumbent GPO supplier when hospital engaged in aftermarket competition1 Procedure Time Support Personnel LOS3 Reduction Improved Quality Logistical Costs Supplier Services 10-14% Average savings hospital achieved from lowered bids2 100% Of interviewed PPI suppliers stated they do not give GPOs the best price n=8,100 aftermarket transactions, 2001-2010. In 2010, average savings to the hospital was 15%. Length of stay. Source: Litan R, Singer H, “Do Group Purchasing Organizations Achieve the Best Prices for Member Hospitals? An Empirical Analysis of Aftermarket Transactions,” 2010; Advisory Board research and analysis.