Economic Outlook Fall 2012 The future of the healthcare supply chain: Connecting data, knowledge and people Kayla Sutton Amy Denny

Premier’s Economic Outlook publication Premier’s semiannual flagship publication Features in-depth coverage of issues facing health system executives, including: Resource utilization best practices Premier’s comprehensive healthcare leadership survey results Economic and inflationary guidance 1

Trends having the greatest impact on organization Source: Premier healthcare alliance fall 2012 member survey

Marketplace trends with highest impact on supply chain Source: Premier healthcare alliance fall 2012 member survey

Factors with greatest impact, by organizational type

Cost savings goals have greatest influence on organizations’ supply chain Source: Premier healthcare alliance fall 2012 member survey

Cardiac rhythm management (CRM) whitepaper Device purchases from multiple vendors Reliance on line-item versus system pricing Substantial price difference for devices Tiered pricing Little association between volume ordered and pricing of devices

Targeting cost opportunity with clinical data 4 Premier member hospitals identified over $17m in savings opportunities in 4 high cost / high volume MS-DRGs

Leveraging data to identify blood utilization opportunities Current national blood supply at its lowest in 15 years Blood transfusions Most commonly coded hospital procedure - 15 million/year at annual cost of up to $15 billion Safety issues - cardiac arrest, infection, longer length of stay No industry-wide standard for appropriate blood use Premier waste dashboard identified blood use among categories for highest potential savings

Variation in use of blood products

Premier blood utilization analysis (April ‘11 – March ‘12) 7.4 million discharges/464 hospitals in Premier database Benchmark on appropriate utilization with positive outcomes Results: $165 million/year in savings while maintaining positive patient outcomes Reduced use by 802,000 units across five blood types Drove savings through reduced testing, storage, transportation

Cost savings by blood product

Quarterly patient volume trends Y/Y Growth Q1 2011 Q2 2011 Q3 2011 Q4 2011 2011 Inpatient 3.10% -1.60% -0.70% -2.20% -0.30% Outpatient 6.20% 3.80% 5.50% 5.30% 5.20% Total discharges 5.70% 3.00% 4.60% 4.20% 4.40% Inpatient surgeries 3.40% -1.50% -0.60% -1.90% -0.10% Outpatient surgeries 6.60% 4.00% 5.80% Births -1.40% -1.10% 1.40% -2.50% -0.90% Medicare discharges 8.10% 5.00% 4.80% 2.50% 5.10% Medicaid discharges 10.50% 6.00% 4.50% 0.80% 5.40% Self-pay discharges 6.30% 1.90% 1.00% 1.50% 2.60% Managed care and other payor discharges 2.10% 0.70% 7.40% 3.90%

Average length of stay

Change in capital budgets since last year Source: Premier healthcare alliance fall 2012 member survey

TRJ/CRB index 2008-2012 Current level is 4.4% higher than 2011, 9.0% higher than 2010

Commodities index 2012 YTD Change = 0.7%

Quantitative easing (QE)

QE and commodities prices “Investors bid up the price of commodities in recent months as expectations rose that the Federal Reserve would soon step in once again to stimulate the wobbly U.S. economy. But the rally has stalled since the package was unveiled in September, raising concerns about whether widespread gains will continue in months ahead, as they did after an earlier Fed initiative in 2010.” Source: Wall Street Journal 9/30/12

Commodities highlights “China's seemingly insatiable appetite for raw materials was a crucial driver behind the commodities boom of the past decade, propelling enormous price gains for everything from crude oil to cotton. Now, investors have to figure out which commodities are most vulnerable as the world's second-largest economy shifts down a gear.” Source: Wall Street Journal 10/3/12

Factors impacting commodities prices Impact on Commodities Prices Weak US Dollar No new rules on bank speculation in commodities markets Weakness in Europe leads to rally in the US Dollar Continued slower growth in China

Premier commodities highlights Commodity Last Month Change Last 12 Month Change What to Watch Copper 9% 22% 2013 supply expected to outpace demand; growth in China, Chile and Brazil Oil -7% 12% Global economic recovery, OPEC production Food 1% 0% USDA predicting food inflation of 3%-4% in 2013 Plastic Resins -4% 6% Oil and natural gas prices, global economic recovery Rubber Butadiene - -5% Rubber – 12% Butadiene - -38% Rubber - -31% Auto demand in US, crude oil prices Steel -3% -23% Auto demand in US, growth in China

Price Increases 900 Med/Surg Contracts 225 Allow Escalation 959 firm for term of agreement (75%) 262 firm for at least 12 months (20%) 52 potential increases in 2013 900 Med/Surg Contracts 225 Allow Escalation 76 with Potential Increase in 2009 11 Inc. to Date

Price Increase Process All increases, even those allowed by contract, are negotiated. Increases not allowed in the contract or greater than what is allowed in the contract must be approved by line of business member committee. Review documentation of supplier cost increases to support the increase (e.g., PO’s, third party indices, etc.). If the company is publically traded, review earnings release data to determine if cost increase claims are supported. Discuss with supplier: Are all members on the correct tier? Is the increase is being passed on to all GPO’s? Will the increase change Premier’s relative position vs. other GPO’s? Will the supplier provide any value adds to offset the price increase impact? Analyze member level impacts – which members are most impacted by the increase? Price increases are reported to members in the following ways: Contract amendment and change notice report The Connector Any increase > 3% is reported to SAC.

Inflation estimates

Inflation summary table Service line Range of inflation estimates Average of inflation estimates Projected Premier contract inflation estimates Alternate Site Healthcare 0% - 15% 3.83% 0.52% Cardiovascular Services 0% - 4% 2.21% 0.09% Clinical Laboratory Services 0% - 6% 3.19% 0.84% Facilities 4.60% 1.80% Foodservice 6%-8% 7.00% 4.00% Imaging 0% - 13% 3.56% 0.76% IT / Telecommmunications 4.22% 0.14% Materials Management 4.13% 0.92% Nursing 0% - 12% 3.53% 1.21% Pharmacy * Not Applicable 4.33% Surgical Services 0% - 10% 2.80% 0.91% Women & Children's 3.78% 0.17%   *Pharmacy data derived from Premier’s Drug Budget Development Tool Source: Premier healthcare alliance fall 2012 member survey

Understanding the Inflation Tables Firm Pricing Based on the contract T&C’s Indicates whether the contract allows for a price increase during the specified time period Contractual Price Increase Cap Specifies if the price increase is capped at a certain percentage 0%: Listed as the cap for contracts that DO NOT allow for a price increase No Cap: Indicates that a maximum percentage is not specified in the contract language

Understanding the Inflation Tables Index or Raw Material Dependent Based on the contract T&C’s Indicates the index or raw material that a price increase is dependent upon N: For contracts where a price increase is either not allowed or is not tied to a specific index or raw material In all other instances, the index or material is listed

Understanding the Inflation Tables Supplier Inflation Estimate Based on supplier provided estimates No Response: Supplier did not respond to the survey Not Provided: Supplier responded to the survey but did not provide a response to this question Inflation Cost Drivers Based on supplier provided information Identifies the cost drivers that have the greatest impact on product pricing

Questions to Consider Which contracts in the category offer firm pricing? If there isn’t firm pricing, do any contracts offer a price increase cap? Is the potential increase dependent upon an index or raw material? Are any of the cost drivers expected to increase in the next year? What inflation, if any, does the supplier anticipate?

Med/Surg inflation calculator Once populated with your spend history, the calculator will deliver customized inflation estimates by line of business. Contact your Client Services Executive to get a customized calculator for your organization.