outlookeconomic
S P R I N G
• 2 0 1 3 •
A TWE LV E
M O N T H
OUT LO O K
>>> PROVIDING STRATEGIC LEADERSHIP TO FINANCIAL AND CLINICAL HEALTHCARE EXECUTIVES
BEY NDTHE HOSPITALWALLS
FACE TIME WITHDR. DAVID CUTLER
RE-INVENTING THEAMERICAN HOSPITALPayment reformand the impacton the continuumof care
CONNECTING CARE ACROSSTHE CONTINUUM:The crucial role of IT
04 EXECUTIVE LETTERTHE RIDETOCONNECTEDCAREMike Alkire, chief operating officer, Premier healthcare alliance
22 PERSPECTIVESTHE IMPERATIVE FOR CONNECTIVITY:Working toward accountable care .....................................................……22
32 TRENDS IN COST AND UTILIZATIONCLINICAL INNOVATION IN PERCUTANEOUS CORONARY INTERVENTION........................................................…..32PCI INTHEOUTPATIENT SETTING: Spotlight on Premiermember data............................................................…..36THE COSTOFNON-ADHERENCE: A look at Commcare pharmacy.....…...................................................................38RESOURCEUTILIZATIONBEST PRACTICES: Diagnostic imaging................................................................................42
48 ECONOMICSACONVERSATIONWITH -SarahWatt, economic analyst,Wells Fargo Securities...........................................48BEHINDTHENUMBERS: Economic and supply chain trends impacting ourmembers................................52AN UPDATE ON HOSPITAL PERFORMANCEMETRICS.................................................................................................59PREMIER’S PATIENT VOLUME TRENDS...............................................................................................................................62Premier’s guide to economic indicators……………..........................………........................………...........................................66Premier’s supply chain solutions……………....................................……...………........................………......................................68Premier’s inflation summary………..………………………….................…....….………........................………...........................….....69
70 COMMODITIES OVERVIEW2013 COMMODITIES OUTLOOK: Looking at the global economy....………........................……….............................70Minimizing rawmaterials risk.......................................................……...…....………........................………...............................72Coppermarket overview……..……………...........................................…...…….………........................……….................................74Cottonmarket overview……………………………....................................……......………........................………...............................76Energymarket overview……………………………………………..................…….....………........................………...............................78Foodmarket overview……………………………………………………………..............………........................………............................... 82Plastic resinsmarket overview…………………………………………….......…......………........................………............................... 84Rubbermarket overview………....................……………………….....................….………........................……….............................. 86Steelmarket overview..………...………….....….....................................…….......………........................………................................ 88
letter
OUTLOOK • SPRING 2013 | 3
Design and productionChristopher Cardelli, director, creative servicesSung Ginader, senior graphics designer, creative servicesBryanVerrone, project manager, creative servicesArkon Stewart, designer, StewartMarr Creative
Editorial supportAmanda Forster, senior director, public relationsAlvenWeil, director, public relationsBryan Alsop, senior manager, corporate communications
Managing directorKayla Sutton
Executive sponsorsMike Alkire, chief operating officerDurral Gilbert, president, supply chain servicesAmy Denny, vice president, contract management
A special thanks to Eric Johnson, RichWestbay, JeffWillink, Tina Harlan, Laura Yandelland Ed Drouillard for their contributions to this edition of the Economic Outlook.
OUTLOOK LEADERSHIP EDITORIAL STAFF
RE-INVENTINGTHEAMERICANHOSPITALPayment reformandthe impactonthecontinuumofcare
FACETIMEWITHDR. DAVID CUTLER
CONNECTING CAREACROSSTHECONTINUUMThecrucial roleof IT
SUPPLYCHAINTECHNOLOGYFORSMALLERFACILITIESCasestudiesineProcurement
THEMOVETOWARDPOPULATIONHEALTHMANAGEMENT:O&AWITHJOSEPHDAMORE
06 11 15 18 20
features06 BEYOND THE HOSPITALWALLS
About the publication
The Economic Outlook is Premier’s flagship publication that highlights emerging economic and industry trends impacting ourmembership and shaping the healthcare landscape. As an important thought leadership resource, the publication providesstrategic insight to financial, clinical and supply chain healthcare executives across the country.
A key aspect of the long-term strategy for theOutlook is to collaboratewith internal and external subject matter experts tobuild consensus from diverse points of view. The publication harnesses the expertise of our network of healthcare leadershipto illuminate best practices and strategies needed to drive performance improvement.We strive to provide ourmembersand healthcare organizationswith valuable, timely information and business intelligence derived from the industry’smostprogressive participants.
This edition of theOutlook is focused on connecting care across the continuum. In the shift away from fee-for-service andtoward accountable care and population healthmanagement, there is a need to redesign theway healthcare is delivered toprovide greater connectivity between health systems, providers and patients. The content in this edition is intended to helpour readership better understand the implications of healthcare reform and provide insights into existing and evolvingopportunities for healthcare stakeholders to improve connectivity and patient care in a newly-shapedmarketplace.
Wewelcome your comments and questions. For additional information, please email [email protected].
premierinc.com/economicoutlook
©2013 By Premier Inc. All rights reserved.
About the cover
The cover design demonstrates the period of great opportunity and innovation that the U.S. healthcare system is entering.Recent discussions surrounding healthcare have been primarily negative, focusing on the costs that need cutting and thechanges that need to bemade. Inmoving beyond the hospital walls to amore integrated continuumof care, there is an openfield of potential for healthcare stakeholders to reinvent and improve theway that patients receive care.
04 EXECUTIVE LETTERTHE RIDETOCONNECTEDCAREMike Alkire, chief operating officer, Premier healthcare alliance
22 PERSPECTIVESTHE IMPERATIVE FOR CONNECTIVITY:Working toward accountable care .....................................................……22
32 TRENDS IN COST AND UTILIZATIONCLINICAL INNOVATION IN PERCUTANEOUS CORONARY INTERVENTION........................................................…..32PCI INTHEOUTPATIENT SETTING: Spotlight on Premiermember data............................................................…..36THE COSTOFNON-ADHERENCE: A look at Commcare pharmacy.....…...................................................................38ABSTRACT: Resource utilization best practices in diagnostic imaging...................................................................42
44 ECONOMICSACONVERSATIONWITH SarahWatt, economic analyst,Wells Fargo Securities ............................................44BEHINDTHENUMBERS: Economic and supply chain trends impacting ourmembers................................48AN UPDATE ON HOSPITAL PERFORMANCEMETRICS.................................................................................................55PREMIER’S PATIENT VOLUME TRENDS...............................................................................................................................58Premier’s guide to economic indicators……………..........................………........................………...........................................62Premier’s supply chain solutions……………....................................……...………........................………......................................64Premier’s inflation summary………..………………………….................…....….………........................………...........................….....65
66 COMMODITIES OVERVIEW2013 COMMODITIES OUTLOOK: Looking at the global economy....………........................……….............................66Minimizing rawmaterials risk.......................................................……...…....………........................………...............................68Coppermarket overview……..……………...........................................…...…….………........................……….................................70Cottonmarket overview……………………………....................................……......………........................………...............................72Energymarket overview……………………………………………..................…….....………........................………...............................74Foodmarket overview……………………………………………………………..............………........................………............................... 78Plastic resinsmarket overview…………………………………………….......…......………........................………............................... 80Rubbermarket overview………....................……………………….....................….………........................……….............................. 82Steelmarket overview..………...………….....….....................................…….......………........................………................................ 84
letter
OUTLOOK • SPRING 2013 | 3
Design and productionChristopher Cardelli, director, creative servicesSung Ginader, senior graphics designer, creative servicesBryanVerrone, project manager, creative servicesArkon Stewart, designer, StewartMarr Creative
Editorial supportAmanda Forster, senior director, public relationsAlvenWeil, director, public relationsBryan Alsop, senior manager, corporate communications
Managing directorKayla Sutton
Executive sponsorsMike Alkire, chief operating officerDurral Gilbert, president, supply chain servicesAmy Denny, vice president, contract management
A special thanks to Eric Johnson, RichWestbay, JeffWillink, Tina Harlan, Laura Yandelland Ed Drouillard for their contributions to this edition of the Economic Outlook.
OUTLOOK LEADERSHIP EDITORIAL STAFF
RE-INVENTINGTHEAMERICANHOSPITALPayment reformandthe impactonthecontinuumofcare
FACETIMEWITHDR. DAVID CUTLER
CONNECTINGCAREACROSSTHECONTINUUMThecrucial roleof IT
SUPPLYCHAINTECHNOLOGYFORSMALLERFACILITIESCasestudiesineProcurement
THEMOVETOWARDPOPULATIONHEALTHMANAGEMENT:O&AWITHJOSEPHDAMORE
06 11 15 18 20
features06 BEYOND THE HOSPITAL WALLS
in Premier’s PfPHospital Engagement
Network (HEN). For example:
• Since recently hospitalized patients
are often temporarily or permanently
impaired, participating providers have
adopted “teach back”strategies. They ask
patients or caregivers to demonstrate
their understanding of post-discharge
instructions by explaining them in
their ownwords.
• With approximately two-thirds of
preventable readmissions caused by
medication-related adverse events,
PremierHENmembers have begun
conducting comprehensivemedication
reviewsprior to discharge. This ensures
patients understand their drugs,why they
aremedically necessary, how to take them
andpotential side effects.
All of these efforts are paying off. QUEST
hospitals have savedmore than 90,000
lives and $9.1 billion in 4½years. And in
just ninemonths, PremierHENhospitals
haveavoidedmore than51,000preventable
readmissions, and approximately
$870million in unnecessary costs.
Life-care providers
Whether it’s amotorcycle/lifestyle
manufacturer or a healthcare/life-care
provider, a person-centric approach that
connects to different parts of someone’s
life creates a brand loyalty that can only
improve customer satisfaction.More
importantly, it lends itself to significant
costs savings and abetter quality of life.
As healthcare becomesmore andmore
complex, therewill alwaysbeopportunities
tobetter connect careacross thecontinuum,
even formost integrateddeliverynetworks.
Andthat’sbecausewhencare is trulypatient-
centric, it focusesonsomuchmore than
what’sprovidedwithin the fourwallsofa
care setting. Instead, it extendswell into the
communityandintopeople’shomesandlives.
Sincerely,
Mike AlkireChief operating officerPremier healthcare alliance
OUTLOOK • SPRING 2013 | 5
Members of the Premier healthcare alliance,
The thrill of receiving the 2009Malcolm
BaldrigeNational QualityAward left
HeartlandHealth, a St. Joseph,MO,
integratedhealthcare system,wondering:
What now?
“If Harley is a lifestyle company,we
wonderedwhywe couldn’t be a life-care
company,”saidHeartland President and
CEOMark Laney,MD. “That’swhenwe
shifted focus to our patient experience.”
What emerged is a new, patient-centered
healthcaremodel,Mosaic Life Care,which
views aperson’s health in terms of life’s
components – health, lifestyle, career,
finances, creativity, relationships and
spirituality – and takes a holistic, less-
expensive approach to helping people
become thehealthiest they canbe.
Newly builtMosaic Life Care clinicswere
created toprovide anatural, calming effect.
Patients are greeted at the doorwith an
iPadwith readingmaterials and games
already downloaded based onpersonal
preferences. A fountain gurgles quietly in
the background. “People actuallyWANT to
comehere,”Dr. Laney said.
Not long ago, a gentlemanvisitedMosaic
complaining that hewasn’t feelingwell.
He said hiswife of 35 years had recently
passed away. She always did the cooking,
and since her death, his diet had suffered.
His newlyunemployed sonmovedback in,
and their relationshipwas strained. Anon-
clinical caregiver, called a Life Coach, took
theman to the grocery store, taught him
howtochoosehealthymeals andsuggested
topics for conversationwithhis son.
“Instead of givinghimananti-depressant,”
Dr. Laney explained, “we treated the root
cause of his problems, his diet andhis
relationshipwithhis son.”Both theman
andhis son continue their relationships
with the caregivers atMosaic.
Connecting care
Care providers can’t simply
bemanufacturers of
healthcare or sick care.
Whether it’s a 43-year-old
accountant draped in
leather andproudly
riding aHarley, or a
widower unsure of his
present and scared for
his future, providers need
to link the care people
receive to the lives they lead.
Healthcare reformhas placed an added
emphasis on connecting care. In fact,
according to results fromour semiannual
EconomicOutlook survey, the number of
respondents citing clinical coordination of
care as a top driver of healthcare costs
jumped23percent fromayear ago.
Among respondents:
• 97percent consider connecting care
across the continuum important for
quality improvement initiatives to be
effective; and
• 61percent say their health systemshave
the capabilities to do so, and 80percent of
those feel they’re doing it effectively.
Albuquerque,NM-based Presbyterian
Healthcare Services is driving coordinated
care through itsHospital atHomeprogram
andhas seen a 19percent reduction in
costs for participating patients. Its success
is attributed to shorter stays and fewer lab
anddiagnostic tests, particularly for
patientswith congestive heart failure,
pneumonia andurinary tract infections.
Patient satisfaction scores have also
increased significantly,with patients
receivingmultiple daily visits from
caregivers, someofwhich lastmore than
anhour. According to the program’s lead
physician,MelanieVanAmsterdam,
“Patientswhohave been in the hospital
multiple times realize it is not always the
healthiest place for them, and they are
thrilled to be at home instead.”
Patient empowerment
Patient-centric programsultimately
empower patients and their familieswith
knowledge about their care, something
that is essential to quality and efficiency.
A recentHealth Affairs study1 suggests
that themedical expenses of highly
engagedpatientswere up to 21 percent
lower on average, highlighting the
important role that patients play in
determining outcomes.
Patient empowerment and education are
central to performance improvement
programs such as Premier’s QUEST®
collaborative, aswell as the Center for
Medicare&Medicaid Innovation’s
Partnership for Patients (PfP) initiative.
QUESTtopperformerSSMSt.Mary’sHospital
(Centralia, IL) usesnursehealth coaches to
identifywhat’s important topatients so
that together they canset goals that
encourageappropriate lifestyle changes.
Patients and families nationwide are also
being engaged byhospitals participating
4 | EXECUTIVE LETTER©2013 by Premier Inc. All rights reserved.
ExecutiveletterThe ride to connected care
IfHarleyisalifestylecompany,
wewonderedwhywecouldn’tbealife-carecompany,”
saidHeartlandPresidentandCEOMarkLaney,MD.
That’swhenweshiftedfocustoourpatientexperience.”
“
“
Asa first step,Heartland’s leadership teamstudied innovative companies, andHarley-Davidsonwas one that stoodout. Its success camenot frombuildingmotorcycles but fromcreatinglifestyles.AsoneHarleyexecutiveput it, “Whatwesell is theabilityfor a 43-year-old accountant todress in black leather, ride throughsmall towns andhave people be afraid.”
Reference 1. “Patient involvement lowers health costs, study says”,MedlinePlus, http://www.nlm.nih.gov/medlineplus/news/fullstory_133729.html
in Premier’s PfPHospital Engagement
Network (HEN). For example:
• Since recently hospitalized patients
are often temporarily or permanently
impaired, participating providers have
adopted “teach back”strategies. They ask
patients or caregivers to demonstrate
their understanding of post-discharge
instructions by explaining them in
their ownwords.
• With approximately two-thirds of
preventable readmissions caused by
medication-related adverse events,
PremierHENmembers have begun
conducting comprehensivemedication
reviewsprior to discharge. This ensures
patients understand their drugs,why they
aremedically necessary, how to take them
andpotential side effects.
All of these efforts are paying off. QUEST
hospitals have savedmore than 90,000
lives and $9.1 billion in 4½years. And in
just ninemonths, PremierHENhospitals
haveavoidedmore than51,000preventable
readmissions, and approximately
$870million in unnecessary costs.
Life-care providers
Whether it’s amotorcycle/lifestyle
manufacturer or a healthcare/life-care
provider, a person-centric approach that
connects to different parts of someone’s
life creates a brand loyalty that can only
improve customer satisfaction.More
importantly, it lends itself to significant
costs savings and abetter quality of life.
As healthcare becomesmore andmore
complex, therewill alwaysbeopportunities
tobetter connect careacross thecontinuum,
even formost integrateddeliverynetworks.
Andthat’sbecausewhencare is trulypatient-
centric, it focusesonsomuchmore than
what’sprovidedwithin the fourwallsofa
care setting. Instead, it extendswell into the
communityandintopeople’shomesandlives.
Sincerely,
Mike AlkireChief operating officerPremier healthcare alliance
OUTLOOK • SPRING 2013 | 5
Members of the Premier healthcare alliance,
The thrill of receiving the 2009Malcolm
BaldrigeNational QualityAward left
HeartlandHealth, a St. Joseph,MO,
integratedhealthcare system,wondering:
What now?
“If Harley is a lifestyle company,we
wonderedwhywe couldn’t be a life-care
company,”saidHeartland President and
CEOMark Laney,MD. “That’swhenwe
shifted focus to our patient experience.”
What emerged is a new, patient-centered
healthcaremodel,Mosaic Life Care,which
views aperson’s health in terms of life’s
components – health, lifestyle, career,
finances, creativity, relationships and
spirituality – and takes a holistic, less-
expensive approach to helping people
become thehealthiest they canbe.
Newly builtMosaic Life Care clinicswere
created toprovide anatural, calming effect.
Patients are greeted at the doorwith an
iPadwith readingmaterials and games
already downloaded based onpersonal
preferences. A fountain gurgles quietly in
the background. “People actuallyWANT to
comehere,”Dr. Laney said.
Not long ago, a gentlemanvisitedMosaic
complaining that hewasn’t feelingwell.
He said hiswife of 35 years had recently
passed away. She always did the cooking,
and since her death, his diet had suffered.
His newlyunemployed sonmovedback in,
and their relationshipwas strained. Anon-
clinical caregiver, called a Life Coach, took
theman to the grocery store, taught him
howtochoosehealthymeals andsuggested
topics for conversationwithhis son.
“Instead of givinghimananti-depressant,”
Dr. Laney explained, “we treated the root
cause of his problems, his diet andhis
relationshipwithhis son.”Both theman
andhis son continue their relationships
with the caregivers atMosaic.
Connecting care
Care providers can’t simply
bemanufacturers of
healthcare or sick care.
Whether it’s a 43-year-old
accountant draped in
leather andproudly
riding aHarley, or a
widower unsure of his
present and scared for
his future, providers need
to link the care people
receive to the lives they lead.
Healthcare reformhas placed an added
emphasis on connecting care. In fact,
according to results fromour semiannual
EconomicOutlook survey, the number of
respondents citing clinical coordination of
care as a top driver of healthcare costs
jumped23percent fromayear ago.
Among respondents:
• 97percent consider connecting care
across the continuum important for
quality improvement initiatives to be
effective; and
• 61percent say their health systemshave
the capabilities to do so, and 80percent of
those feel they’re doing it effectively.
Albuquerque,NM-based Presbyterian
Healthcare Services is driving coordinated
care through itsHospital atHomeprogram
andhas seen a 19percent reduction in
costs for participating patients. Its success
is attributed to shorter stays and fewer lab
anddiagnostic tests, particularly for
patientswith congestive heart failure,
pneumonia andurinary tract infections.
Patient satisfaction scores have also
increased significantly,with patients
receivingmultiple daily visits from
caregivers, someofwhich lastmore than
anhour. According to the program’s lead
physician,MelanieVanAmsterdam,
“Patientswhohave been in the hospital
multiple times realize it is not always the
healthiest place for them, and they are
thrilled to be at home instead.”
Patient empowerment
Patient-centric programsultimately
empower patients and their familieswith
knowledge about their care, something
that is essential to quality and efficiency.
A recentHealth Affairs study1 suggests
that themedical expenses of highly
engagedpatientswere up to 21 percent
lower on average, highlighting the
important role that patients play in
determining outcomes.
Patient empowerment and education are
central to performance improvement
programs such as Premier’s QUEST®
collaborative, aswell as the Center for
Medicare&Medicaid Innovation’s
Partnership for Patients (PfP) initiative.
QUESTtopperformerSSMSt.Mary’sHospital
(Centralia, IL) usesnursehealth coaches to
identifywhat’s important topatients so
that together they canset goals that
encourageappropriate lifestyle changes.
Patients and families nationwide are also
being engaged byhospitals participating
4 | EXECUTIVE LETTER©2013 by Premier Inc. All rights reserved.
ExecutiveletterThe ride to connected care
IfHarleyisalifestylecompany,
wewonderedwhywecouldn’tbealife-carecompany,”
saidHeartlandPresidentandCEOMarkLaney,MD.
That’swhenweshiftedfocustoourpatientexperience.”
“
“
Asa first step,Heartland’s leadership teamstudied innovative companies, andHarley-Davidsonwas one that stoodout. Its success camenot frombuildingmotorcycles but fromcreatinglifestyles.AsoneHarleyexecutiveput it, “Whatwesell is theabilityfor a 43-year-old accountant todress in black leather, ride throughsmall towns andhave people be afraid.”
Reference 1. “Patient involvement lowers health costs, study says”,MedlinePlus, http://www.nlm.nih.gov/medlineplus/news/fullstory_133729.html
6 | BEYOND THE HOSPITAL WALLS©2013 by Premier Inc. All rights reserved.
B E Y O N D T H EH O S P I T A L W A L L S
ECONOMIC OUT LOOK
Dan Mendelson is CEOofAvalereHealth,a strategic advisory company providingproduct and data solutions that helphealthcare organizations improve theiroperational effectiveness. Prior tofoundingAvalere in 2000, he directed thehealthcare portfolio at theWhiteHouseOffice ofManagement andBudget (OMB).He is on the Board of CoventryHealthcare,is Adjunct Professor atDukeUniversity’sFuqua School of Business, speaks frequentlyon provider strategy, and can be followed@dnmendelson.
Mary Coppage is amanagerwithAvalereHealth, where she provides strategicsupport toAvalere clients, includinghospitals andhealth systems, on paymentand delivery reform, care transitions, andhealth information technology policy.Before joiningAvalere, she held operations,compliance, andmember advocacy roles atPresbyterianHealth Plan inNewMexico.
Erik Johnson is a senior vice presidentwithAvalereHealth. Using rigorous analyticsand practical experience, he providesstrategic guidance to hospital andhealthsystem clients onhealthcare technology,operations, and financial issues. Beforecoming toAvalere, hewas amanagingdirectorwithManattHealth Solutions andtheAdvisory Board Company.
While leaders inWashingtonfretoverdeficit reduction,Medicarereform,andthefutureofObamacare,aquietre-inventionoftheAmericanhospital isproceeding.Paymentreformaimstorewardvalueovervolumebyholdingprovidersexplicitlyaccountableforoutcomeswhilecreatingclearincentivesforcostcontainment.Emergingpaymentmodelsaretakingtheinitialstepsbyfocusingonspecific,high-profilemetrics towhichpaymentwillbetied, includingtherateofunnecessaryreadmissions.Hospitalsthatdon’t figureouthowtocareforpatientsacrossthecontinuumofcarewillberenderedobsolete.
>
>
HOSPITALAMERICANAMERICANAMERICAN
Payment reform and the impact on the continuum of care�
RE-INVENTING THE
OUTLOOK • SPRING 2013 | 7
Emergingpaymentmodels are taking the initial steps by focusingon specific, high-profilemetrics towhichpaymentwill be tied,including the rate of unnecessary readmissions.
8 | BEYOND THE HOSPITAL WALLS©2013 by Premier Inc. All rights reserved.
An estimated 20 percent ofMedicare beneficiarieswith a hospital stay in any
given year are readmittedwithin amonth of discharge,1 and in 2008, preventable
readmissions cost an estimated $25 billion.2 Just as important, 10 percent
of beneficiaries account for 58 percent ofMedicare spending.3
>
Our current fee-for-service payment systemoftenworks
against true improvements in cost reduction andquality
improvement. It implicitly encourages excess volumewhile
discouraging coordination of care across sequential sites.
The Centers forMedicare&Medicaid Services (CMS) has been
incrementallymodifying payment systems for years to
encourage provider accountability throughvarious programs
anddemonstrations.More recently, private payors have also
followed suit and started tomove their ownquality incentives
to the provider level. TheAffordable CareAct accelerated this
process by enhancingCMS’authority and experimental reach.
Newpaymentsystemsare forcingafocusoncarecoordination
Payment penalties for hospitals demonstrating above-average
rates of readmissionswere introduced into theMedicare
program lastOctober in an attempt to addressmajor gaps in
quality. An estimated 20percent ofMedicare beneficiarieswith
ahospital stay inanygivenyearare readmittedwithinamonth
ofdischarge,1 and in 2008, preventable readmissions cost an
estimated $25 billion.2 Just as important, 10 percent of
beneficiaries account for 58 percent ofMedicare spending.3
The penalties are small in terms of their dollar impact, but they
representa fundamental shift inahospital’s scopeofaccountability
by factoring in post-discharge activities that hospitals can’t
necessarily control or have traditionally not paid for. The goal is
to foster coordination amonghospitals andpost-acute and
long-termcare providers to prevent such readmissions.
Presentpaymentsystemsdonotalwayscreate incentives for
healthcare systemsto think thisway.Quality-relatedchallenges–
suchas the lackof standardizeddischargeplanningprocesses, poor
follow-up, failure to reconcilemedications, insufficientormissing
data transferpost-discharge, andproblemswithpatient/family
engagement–canalsocomplicateeffectivecare transitions.
CMS is tackling the care coordination problem fromanumber of
angles. Itsmost comprehensive attempt to date is through two
accountable care organization (ACO) programs, theMedicare
Shared Savings Programand themore sophisticated PioneerACO
model runby the Center forMedicare&Medicaid Innovation.
Both programs are based on the concept of shared savings,with
Pioneeroffering theoptionofpartial capitation in later years of the
program.CMS is alsodeveloping theBundledPayments forCare
Improvement Initiative,which includes care episodes that span
acuteandpost-acute care settings.ACOsandbundling represent
the futureof caredelivery, yetmuch remains tobe learned, and, as
OUTLOOK • SPRING 2013 | 9
<
BE
YO
ND
TH
EH
OS
PI
TA
LW
AL
LS
ECONOM
ICOUTLOOK
a result, themodels continue tobevoluntaryunderMedicare.
CMS’ implementation of theHospital InpatientValued-Based
Purchasing Program (VBP) reinforces the longitudinal nature of
the new focus hospitalsmust develop. TheVBPprogramwill
include anewspending-per-beneficiarymeasure that is another
exampleofhowhospitals arebeingheld responsible for apatient’s
full episode of care. Thismeasure compares expenditures for a
Medicare beneficiary based on Part A and Part B spending from
three days before to 30 days after the inpatient stay.
ACOs, bundling, readmission penalties, and the spending-per-
beneficiarymeasure all have something in common.All extend
provider responsibility for patient care beyond a single inpatient
stay andwell beyond a facility’s fourwalls.
Hospitalsneed toprepare to takeonhealth-systemrisk
Tomeet standards associatedwith these and other programs,
providerswill be forced to leave their silos and collaboratewith
a range of other providers across the care continuum. Success
depends on identifying the right providerswithwhich to
collaborate. Payment reformwill inevitably drive providers to seek
greater visibility into bothupstreamanddownstreampatient
flow in order to identify preferred partners in the care continuum.
Under current public andprivate programs, hospitals bearmost
of the burden for reducing readmissions and addressing
inefficient care, and there are no signs that payorswill let up.
In fact, themetrics againstwhich payments are assessedwill
only becomemore stringent over time. As a result, hospitals
must take the lead in identifying opportunities that support
alignment of their newbusiness imperatives for improving
quality of care, riskmanagement, and financial performance.
Hospitals have anumber of options to identify andbettermanage
their patients across the care continuum. Perhaps twoof themost
important approaches are identifying at-risk populations and the
collaborations that can bestmitigate risks.
In addition to finding appropriate collaborators along the care
continuum, hospitalsmust understand the local populations
they serve and their health needs. Specifically, hospitals should
analyze patientswith select diseases andbenchmark utilization
relative to other facilities in their localmarket area and region,
aswell as to thenational average. Including socioeconomic
indicators, such as homelessness, financial status, family/
caregiver support, drug dependence, or other community
variables,would elevate such techniques tomore precisely stratify
patient readmission risk.
10 | BEYOND THE HOSPITAL WALLS©2013 by Premier Inc. All rights reserved.
Hospitals, aswell, should utilize risk-
assessment tools at admission and
discharge to identify specific patientsmost
likely to be readmittedwithin 30 days.
Knowingwheredischargesgo iskey to improvingcarecoordination
Discharges to home
For the 64 percent of patientswhogo
homeafter ahospitalization,4 partnerships
among those in the community referral
network—consisting of primary care
physicians and specialists, pharmacies,
retail or outpatient clinics, and other com-
munity-based organizations—contribute
to keeping patients “safe and sound.”Yet,
these partnerships are not always fully
leveraged. In fact, only 44 percent of
Medicare beneficiaries discharged to home
have a primary care visitwithin two
weeks of discharge,5 and 60percent of
frail elderly patients fail to follow their
full prescribedmedication therapy after
leaving the hospital.6
The Center forMedicare&Medicaid
Innovation is supportingnewpost-
discharge collaborations through the
Community-BasedCare Transitions
Program. Suchprograms canprovide
important lessons aboutwhichhome
discharge services and collaborations are
most effective in reducing readmissions.
Discharges to post-acute care (PAC) or
long-term care (LTC)
Knowing PACprovider-level readmission
rates is critical to a hospital’s discharge
strategy. Over 20 percent of patients are
discharged from thehospital to a PAC/LTC
facility, yet that patient population returns
to the hospital at higher rates than those
discharged to home,most likely due to the
more-complexnature of the patient
population. Understanding the PAC/LTC
facilities in a hospital’s service area by
examining discharges and readmissions
will allowhospitals to identify themost
clinically appropriate and cost-effective
PAC settings.
For example, an analysis usingAvalere’s
Vantage Care Positioning SystemTM, found
that onehospital in Indiana
discharged patients to 112 different skilled
nursing facilities (SNFs) for post-acute care
in 2010.Not surprisingly, SNF readmission
rateswere 22 percent. For this hospital, less
concernwith finding any empty PACbed
andmore focus on a strategic discharge
approach and care-transition partnerships
holds the potential to improve patient
readmission rates and lower spending.
Operators of PAC facilities are beginning
to recognize their new role in helping
hospitals bettermanage patient care. In
the past, the twohad little incentive to
work together. Nowpayment reform is
spurringamutuallybeneficial collaboration.
Somehospitals engagewith PACpartners
by sending practitioners to the PAC facility
to facilitate communication and
collaboration among PAC staff and
hospitalists, casemanagers, andphysicians.
Further,many SNFs andhomehealth
agencies run care transitions programs
to ease the burden onhospital case
management resources.
These newcollaborations, alongwith a
better understanding of data and amore
robustapproach topatient risk stratification,
canhelp shift an otherwise catch-all
discharge process to one that is strategic,
targeted, and efficient.
Discharges to assisted living facilities (ALFs)
ALFs have emerged as additional potential
downstreamcollaborators for hospitals.
Not traditionally considered care providers,
manyALFshavesteadilybuilt theirown
care-givingcapabilitiesover the last few
years. Inparticular, given thevulnerabilities
that their residents exhibit, ALFs represent
significant potential for reducingunneces-
sary readmissions and emergency room
visits.With focus areas surrounding fall
prevention andmemory care, ALFs have
targeted the health needs of their own
residents andmade significant clinical
investments to address them.Hospitals,
in turn, have begun to address these
populations and residencies creatively,
with investments of their ownexpertise
andpersonnel to augmentALF efforts.
Managingcare transitionscreateshospitalvalue
The re-invention ofAmericanhospitals
underway today is, in part, about how to
effectivelymanage care transitions across
the care continuum. Inmeeting this
challenge, hospitals have the opportunity
to thrive in anypayment reformenviron-
ment –whether value-based purchasing,
shared savings, bundled payment, or
global payment. Understanding patient
populations and the capabilities of
providers beyond ahospital’s fourwalls
will ultimately be a key factor in defining
the value ofAmericanhospitals in the
context of integrated care.
References1. Jencks S, et al. "Rehospitalizations Among Pa-tients in the Medicare Fee-for-service Program," NEngl J Med 2009; 360: 1418-28.2. “Preventing Hospital Readmissions: A $25 BillionOpportunity,”National Priorities Partnership, 2010.3. Jacobson, G., et al. “Medicare Spending and Use ofMedical Services for Beneficiaries in NursingHomes and Other Long Term Care Facilities: A Po-tential for Achieving Medicare Savings and Improv-ing the Quality of Care,”The Henry J. Kaiser FamilyFoundation, October 2010.4. Analysis from Avalere’s Vantage Care PositioningSystem.5. Goodman, DC, Fisher ES, Chang C. “After Hospital-ization: A Dartmouth Atlas Report on Post-AcuteCare for Medicare Beneficiaries,”Dartmouth Atlaswebsite, 2011.6. Wright, R.M., et al. “Effect of Central NervousSystem Medication Use on Decline in Cognition inCommunity-dwelling Older Adults: Findings fromthe Health, Aging and Body Composition Study,”J Am Geriatr Soc 2011. 57: 243-250.
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FACETIMEwith DR. DAVID CUTLER, Harvard University
David Cutler, PhD, is theOtto EcksteinProfessor of Applied Economics atHarvardUniversity. Cutler served onthe Council of EconomicAdvisers andtheNational Economic Council duringthe Clinton administration andhasadvised the presidential campaigns ofBill Bradley, JohnKerry andBarackObama.Hewas also senior healthcareadvisor for theObamapresidentialcampaign. Currently, Cutler is aresearch associate at theNationalBureau of EconomicResearch,amemberof the Institute ofMedicine, and a Fellowof the Employee Benefit ResearchInstitute. Cutler is the author of YourMoney or Your Life: StrongMedicinefor America’s Healthcare System.
The InstituteofMedicine(IOM)recentlysuggestedthat 30 percent of
healthcare spending is related towaste or inefficiencies.1 Whatdo you think are the areaswiththe biggest opportunities forremovingwaste, and how canhealthcare providers go aboutdoing so?
David Cutler:Anumber of reports have
said this, so I’d say it’s a consensus
estimate. I thinkwaste falls into a few
different categories,with the first being
care that’s not delivered appropriately.
This includes overuse (surgery that is not
needed); underuse for chronic disease
(patientswhodon’t takemedication as
prescribed andhave an acute event);
and genuinemistakes (infections or
operating on thewrongbodypart). If
totalwaste is 30 percent of healthcare
spending, then care that’s not delivered
properly is probably about half of that.
Another big problem is very high admin-
istrative costs.2 A third issue is excessive
pricing, aswhenpeople use a $3,000
]1
12 | BEYOND THE HOSPITAL WALLS©2013 by Premier Inc. All rights reserved.
scan that is available nearby for $1,000.
And then there’s fraud and abuse.
To addresswaste, I think providers should
think about the efficiencywithwhich they
operate. Theway they cando that is by
asking themselves how they canprovide
the right care for the right patient. That
will eliminate guesswork aswell as the
issue of doing toomuchor too little.
In addition towaste, youmentionunderuseof careas amainproblemour
healthcare systemfaces. Approxi-mately 10percent of patientsdonot fill their initial oral oncolyticprescription,3 andestimates statesomewherebetween20and30percent of chronic diseasepatientsdonot stickwith their treatmentplans.4 In response to this, somepharmacybenefitmanagement(PBM)programsaredevelopingvalue-basedbenefits (co-payreduction for compliant patients)to incent compliancewithmedicationprotocols.What doyou thinkabout theseprograms?Are thereotherways to tackle“underuseof care?”
David Cutler: I think underuse of care is a
significant issue, and one of itsmajor
components is underuse of prescriptions.
AMerck study5 identified several reasons
whypeople don’t take theirmedications
appropriately. Some can’t afford them.
Somedon’t understandwhat their
physicians prescribed. Somebelieve all
medications are evil and that they’re being
ripped off. And then there are the people
who just forget.
Knowing that people don’t take their
medications still doesn’t provide an easy
solution for theproblem.Byaskingpatients
aseriesofquestions, youcandetermine
where theirweaknessesareandthen finda
means toaddress specific issues.
Value-based benefits are really designed
for the situationswhere price is a big deal.
If you’re taking a drug that’s clearly appro-
priate foryou, thenwe (thePBM)willwaive
the copay. It’s a very good start and a great
mediator for patientswith an affordability
problem. But it’s not the total cure.
Otherways tomanage adherence are
increasing engagementwith the patient –
having someone followupwith themor
havingmore in-depth discussions in the
office. Databases providing prescription
refill information, like Commcare uses, can
identify patientswhoneed additional help
and alert the clinicians or staff as needed.
People are inherently bad at doing things
that they know theyneed to do, especially
when those things are complex. Provider
organizationsneedtoofferintensiveassistance
tohelpsomepatientsremainadherent.
Ashealthcaremovestowardvalue-basedpurchasing/pay-for-
performance,what roledoesorwill technologyplay in improvingquality outcomesand reducingwaste in thehealthcare system?
David Cutler: I think technologywill play a
big, big role, andwe should distinguish the
multiple types of technology. Diagnostic
and therapeutic technologies, like new
imaging,will tell you exactlywhoyou
should treat andhow.
Organizational technology is entirely
different.MarcusWelby, from the 1970s
television program,was a physicianwho
was a “bring-the-bag-to-your-home”kind
of doctor. There are very fewprocedures in
healthcare today thatMarcusWelby
would recognize. But hewould totally
understand the system inwhich it
operates – primary care doctorswho refer
to specialists, specialistswhohave
]3
]2
arm’s-length relationshipswithhospitals,
and so forth. The system looksmuch the
way it did in the 1950s, and there are few
things thatwe're glad still operate the
sameas they did in the 1950s.
By taking advantage of technologies and
organizational changes that healthcare has
been extremely slow to adopt,we’ll be able
to improve quality and reducewaste.
You’ve longbeenapropo-nentof improvedquality astheemphasis ofhealthcare
reform, asopposed to reducedcost. Canyouexplainbrieflywhythat is andwhat you think theimpact of theAffordableCareActwill beon the continuumof care?
David Cutler: It’s essential thatwedon’t
definewhatwe’re doing strictly as
lowering cost, but rather as improving the
value of care. Some things have price tags
that are too high, andwe’re unwilling to
pay for them.Other things areworth the
cost, butwehave tomake sure they’re
right for the patient.
Quality is output for dollar input. Howdo
we increase return on investment in the
healthcare system? I hope theACAwill
pushus toward that. It’s telling providers
and insurers that if they find away to
providemore value,we’ll find away to pay
for it.We’ll transformhealthcare from
do-more/earn-more to a do-better/
earn-more system.Myhope is that the
ACAwill lead to that.
Goback toMarcusWelby.Hewasaprimary
care doctor. Hehad a set of things he took
care of, andhe sent patients to specialists if
they didn’t fit in his skill set. But patients
don’t careabout that. Theyhaveaproblem,
and they don’t carewho takes care of it or
how they do it; they justwant to feel
better.Who can look across the continuum
ofwhat’s needed for a patient andprovide
the appropriate care?
Whenyou frame it thatway, you can see
how the systemcan improve. Peoplewant
to feel like someone’smanaging their
problems.Wehope theACAwill positively
affect that change. ACOs and other
programs are setting up integrated care
models, and the organization that can
provide the best integrated carewillwork
more and get paidmore. TheACA isn’t just
a series of programs. It is a philosophy that
says people need someone to take care of
their issues.
TheCDCestimates thatnearly one in twoadults intheU.S. livewitha chronic
disease, accounting formore than75percent ofhealthcare costs.6
Howdoyou thinkhealthcarereformswill impact those133millionAmericans?
David Cutler:What healthcare reformwill
domostmaterially is provide coverage. It’s
very hard to get carewithout coverage. In
addition, the reformswill incentivize
providers to think of the patient as awhole
person and ask themselveswhat they
need to do to care for that person.
Only some3percent of doctors can be
emailed right now.At Kaiser, doctors aren’t
paid for emailing, but they are paid to take
care of their patients. Kaiser invested $4
billion in a consumer-oriented technology
system. It’saverygoodwayforpatientswith
chronicdiseases toreceive integratedcare.
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OUTLOOK • SPRING 2013 | 13
We’ll transform healthcarefrom do-more/earn-more
to a do-betterearn-more system.
]5
]4
TheACOmodel isencouraging integrationacross the continuumof
care.What does integration looklike to youandhow important is itfor different typesof careproviders(e.g., hospitals, physicians,long-termcare centers) tohave integrated systems?
David Cutler: I think integrationwill
take several forms. Itmaybe a single
organization employing doctors in the
samephysical settingwhowork as a team
because a single doctor can’tmanage all
patients all the time. Then there’smore
virtual integration,where youhave big
physician organizations linked to a
hospital system. They’re not necessarily
down thehall, but they’reworking very
closely to share patient information.
Given thenature of patients’problems,
we’ll by necessity have someof both
types of integration.
It’s important that the information is there,
and that incentives and ethics are right.
The providers are all doingwhat is best for
the patient, and themoney justworks out.
But themoney isn’t driving them tomake
different decisions.
Howwell do you thinkorganizationsaredoing inintegratingor sharing the
data fromtheir EHR investments?
David Cutler: I think they probably have
aways togo. It’snot thebuyingof thecom-
puter systemthat’s the issue; it’s theuseof
that systemthatmatters.Anyorganization
thathas lookedat its internaldatawill
realize that there isa largevariation inhow
physiciansprescribecare.While theEHR
systemallowsyoutorecordthosevariations,
youstill have to take thenext stepand
decidewhichdoctor isdoing the right thing.
Youneed to get the physicians to set up a
process so that the right thing gets done in
each type of case. That’s a different thing
than just gathering the information.My
sense is that organizations have taken the
first step in having the technology, but
theyhaven’tmade enoughprogress in
really using the data.
Doyouhaveany responseto the fiscal cliff cutsandwhat thatwillmean
for providers?
David Cutler:On the onehand, the cuts
are just ugly.Whenwedon’t knowwhat to
do,we cut payments, andno onewakes up
thenextmorning and says, “Boy, I’mglad
wedid that.”Anotherway to look at it is as
an opportunity. I recently served on a
panelwith theCEOofabigphysiciangroup
inmyarea, andhis sentimentwas that the
medical community hadbeenput into
receivership.Theyweren’tdoingthejobthey
should’vedone for thecommunity in terms
ofmaking people healthy andproviding
better value. Themore the provider
community demonstrates that it can
deliver savings, the less pressure therewill
be for cuts. It’s really an opportunity for the
provider community to do better.
The pace of spending is unsustainable
fiscally, and it’s important to change the
industryfromtheinsideout. It’dbeonething
ifwewerespendingalotandeverypenny
wasworth it. Butwith 30percent of care
beingwasteful,weneed to provide proof
thatwhatwe’re doing is right.
Closing sentiments?
David Cutler:As far as the eye can see, our
nation’s fiscal picture is in trouble. I think
thenext five years are going to be really
crucial here. The focus onhealthcare is not
going to relent, regardless of the fiscal cliff
or anyparticular deal this year. I don’t see
us cruising along for the next five years –
weneed tomake it better, or itwill get
muchworse.Wehave a very challenging
couple of years comingup, but it’s
something thatdoesn’thave tobenegative.
It could be a very positive change.
References1. “How the U.S. Health-care System Wastes $750Billion Annually,”http://resources.iom.edu/wid-gets/vsrt/healthcare-waste.html.2. The Atlantic,http://www.theatlantic.com/health/archive/2012/09/how-the-us-health-care-system-wastes-750-bil-lion-annually/262106/.3. “One-tenth of cancer patients fail to fill initial oraloncolytic prescription,”Specialtypharmajournal.com, http://www.special-typharmajournal.com/index.php?view=article&catid=344%3Aoncology&id=2664%3Aone-tenth-of-can-cer-patients-fail-to-fill-initial-oral-oncolytic-prescrip-tion&format=pdf&option=com_content&Itemid=556.4. “2011SpecialtyPharmaceuticals: Facts, FiguresandTrends,”Center forHealthcareSupplyChainResearch.5. “Tackling a different kind of health problem,”Merck, http://www.merck.com/about/featured-stories/adherence.html.6. “Chronicdiseasepreventionandhealthpromotion,”CDC, http://www.cdc.gov/chronicdisease/resources/publications/aag/chronic.htm.
14 | BEYOND THE HOSPITAL WALLS©2013 by Premier Inc. All rights reserved.
]6
]7
]8
]9
Themore the provider communitydemonstrates that it can deliver savings,the less pressure therewill be for cuts.
It’s really an opportunity for the providercommunity to do better.
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Atatimeofunprecedentedchange, if there’sonethingthat industry leaders
across theU.S.healthcare systemagreeon, it's thatnowis the timewhen
innovationisneeded.Trueinnovationwillbenecessarytoeffectivelyleverage
information technology inorder to
connect careacross thecontinuum,
holistically improvecaredelivery for
patients, andenhance thehealthof
entire communities.
CAREACROSS THE CONTINUUM:
CONN
EC
T ING
THE CRUCIAL ROLE OFIT
MarkHagland is editor-in-chief ofHealthcare Informaticsmagazine.He has spent nearly 25 years as ahealthcare journalist and editor.He haswritten two books aboutquality in healthcare, aswell asthousands ofmagazine articlesin the field. He has alsowonnumerous national and regionaljournalismawards.
Fortunately, pioneering patient care
organizations are showing theway, just
as the need for innovation is exception-
ally urgent, given the pressures on
providers from federal healthcare
reformmandates and other purchaser
demands. Consider the following:
InNewOrleans, leaders at the
Louisiana PublicHealth Institute
have been collaborating, through the
Crescent City BeaconCommunity they
established,with primary care physi-
cians across themetro area, in order to
move forward in a community-wide,
patient-centeredmedical homemodel.
Inwestern Colorado, leaders at
the ColoradoBeaconConsortium,
a regional consortium that includes an
independent physician association (IPA),
a community hospital, a health plan,
and ahealth information exchange,
have partneredwith a business
intelligence and analytics software
vendor to help physicians across the
region leverage their electronic health
record and clinical decision support
capabilities to bettermanage the health
of their patient populations.
In Beaumont, Texas, the leaders
of Southeast TexasMedical
Associates, amid-sized,multi-specialty
medical group, have transformed the
hospital discharge summary into a
care-managementmap. Thismap, cou-
pledwith performance dashboards that
give all physicians in the group an
up-to-date viewof their patient panels,
is facilitating caremanagement that
improves patient outcomes and reduces
hospital readmissions.
At the Bon Secours
Richmond (VA)Health
System, clinical leaders have been
leveraging the electronic health records
of the system’s primary caremedical
group, alongwith caremanagement
software, to proactively classify patients
by clinical risk level and identify those
at greatest clinical risk orwhoare non-
compliantwith physician instructions
andmedications.
In theDenver area, leaders at the
Colorado Foundation forMedical
Care, the state’s quality improvement
organization (QIO), have beenworking
with providers in themetro area to
improve transitions in care and reduce
readmissions. One of the key learnings:
there is a strongneed formechanisms
that informprimary care physicians in
real timeof thedischargeof theirpatients.
All of these examples andmore have
a common thread: there is a need to
eliminate thesilosof information that
continue to keeppractitioners from
effectivelyworking together.Without
that, itwill be difficult or nearly
impossible to create a truly connected
continuumof care.
Matchingavailabletoolswithpressingneeds:A fit?Oneof the underlying challenges is that
the tools available to bridge gaps in the
continuumof care don’t necessarily
match the actual functional needs
pressing in onhealthcare providers. It’s a
bit akin to trying to paint awall-sized
frescowith twoor three Crayola crayons.
Yet the needs are so vast, and the time
pressures so intense, that the idea that
healthcare IT developers could create
entirely newclasses of technologies in
thewhite heat of this time of change
seemspatently absurd.
So let’s look at the toolswehave at hand.
They fall into a fewdifferent categories.
The first group includes electronic
health/medical records (EMRs/EHRs),
clinician documentation, clinical
decision support, continuity of care
documents, andassociated technologies,
such as natural language processing,
speechrecognition, electronicprescribing,
and so on. All of these technologies are
connected to creating, storing, andusing
clinical information.
Thentherearethetechnologiesassociated
with sharing clinical information,
primarily the various flavors of health
information exchange.
Thenext category includes business
intelligence, data analytics, and all the
other types of technologies and
applications designed to help clinicians,
administrators, andhealthcare
organizations better understand and
use data and information.
And of course, there are technologies
such as datawarehouses, datamarts,
picture archiving and communications
system (PACS) solutions, and others,
designed to store data and information.
Finally, there is a separate group of
technologies, this time on thehardware
side,which includes all themobile
devices clinicians and other healthcare
providersmight use, such as
smartphones and tablets, but also
medical devices that automatically
streamvital signs and similar current
patient data into EHRs and other clinical
information systems.
16 | BEYOND THE HOSPITAL WALLS©2013 by Premier Inc. All rights reserved.
What is particularly challenging is the
overlay of available technology types, as
mentioned above, across the balkanized
reality of healthcare organizations,with
cliniciansworking in organizations
ranging fromsolo-practitioner settings
to the largestmedical groups andmassive
integrated health systemswith dozens of
hospitals and thousands of physicians
under the same corporate umbrella.
What’smore, the various points along the
care continuum, fromurgentmedical care
to inpatient hospital care to rehabilitative
care to long-termcare andbeyond, are
themselves operationally, functionally, and
organizationallyfragmented,underdifferent
ownershipandgovernance,not tomention
using disparate information systems.
So the “IT challenge” is really a farmore
fundamental healthcare systemchallenge,
involvingmatching existing and gradually
evolving tools and technologies to a
patchwork quilt of care sites andproviders,
in a healthcare system that is fragmented
in everywaypossible – by organization
type, professional category, reimburse-
mentmodel, organizational structure, and
of course, presence of technology.
RacingintothefutureWith thepublic andprivate purchasers and
payors of healthcare demanding lower
costs andgreater transparencyandac-
countability fromproviders, rapid advances
in leveraging IT to achieve all those goals
will be essential to the future of healthcare.
Fortunately,with
pioneering organizations
leading theway–often in
partnershipwith innovative
vendor companies–solutions to
this fundamental problemare emerg-
ing every day, acrossmanydimensions.
Ten years fromnow, I believewewill look
back on this current period as a time of
great innovation and exploration, one
thatwill have seen the active birthing of
the new,more effective healthcare in
America.Most of all, this newhealthcare
will be all about leveraging technology,
including information technology, to
continuously improve care. There’s simply
no turning backnow.
OUTLOOK • SPRING 2013 | 17
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So the “IT challenge”is really a far
more fundamental healthcare system
challenge, involvingmatching existing
and gradually evolving tools and technologies to a
patchwork quilt of care sites and providers, in a
healthcare system that is fragmented in everyway
possible – by organization type, professional category,
reimbursementmodel, organizational structure, and
of course, presence of technology.
18 | BEYOND THE HOSPITAL WALLS©2013 by Premier Inc. All rights reserved.
It can be challenging for non-acute and smaller acute-care
providers to realize the samebenefits fromsupply chain
efficiencies as their larger peers. Premier’s eProcurement
programcombines proprietary toolswith third-party
technology to deliver cost-effective, high-performance
supply chain technology to smaller facilities. The result is
enhanced pricemanagement, operational efficiency, and
supply-related revenue capture and reporting.
Two senior living facilities, in cooperationwith Premier and
their Premier-affiliatedGPO sponsors, implemented the
eProcurement program in September 2011. The following
results are from their 14-monthparticipation in the
program. Both facilities experienced improvements in
operational efficiency and supply-related revenue capture,
aswell as decreasedmedical-surgical supply expenses.
Premier’s eProcurement technology allows supply chain
managers to purchase fromanyvendor (note that this study
did not include food andpharmacy items). It also provides
increasedvisibility intoPremier’scontractportfolioandenables
cost reduction through increased contract utilization.
To identify supply savings, prices for itemspurchased prior
to program initiationwere compared to prices paid for
identical items over the 14months. Results include items
thatmatched onvendor, vendor catalog reorder number,
andunit ofmeasure.
[ O V E R V I E W ]
Casestudies ineProcurement
Supplychaintechnology
forsmallerfacilities
A30-bedskillednursing facility, Facility1experiencedpricedecreaseson32percent
ofmatched items.Annual supplyexpensesavings totaled$6,583, a3.27percent
reductionontotal supplyexpense. Facility1alsodocumentedsavingsof$10,800on
chargeable supply items. Increasedoperational
efficiencycontributedanother$21,200 insavings,
drivenby improvements in inventoryprocessing
andemployeeproductivity.
A75-bedskillednursing facility, Facility2experienced
pricedecreaseson29percentofmatched items.
Annualizedsupplyexpensedecreases totaled$11,923,
a4.89percent reductionontotal supplyexpense. The
facility’s increasedcontractparticipationhadadirect,
positive influenceonsupplyexpense.
Facility2alsodocumented improvementsofmore
than$25,000 tosupply-relatedpatient revenueand
realized$16,480insavingsfromreductions inelectronic
data interchange (EDI) costsandemployee time
associatedwithsupplycharge reportingandresearch.
OUTLOOK • SPRING 2013 | 19
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The Premier eProcurement programenables
smaller healthcare facilities to drive
operational improvements and cost savings
through:
• Electronic purchasing fromanyvendor,
• Supply-related capture of patient revenue,
• Overallmanagement of perpetual
inventory locations, and
• The efficientmatching of invoices to
purchase documentation.
Implementing comprehensive supply chain
management technology improved
purchasing processes, streamlined inventory
management, and automated patient-
charge capture. These operational changes
resulted in documented annual savings of
$38,583 and $53,403, respectively, for these
twomember institutions. Continued
improvements in operational efficiency and
contract purchasingwill yield greater
benefits in the future for these locations.
Formore information about the Premier
eProcurement programplease contact us at
Brian Townsend, director, eProcurement
program, and Richard Schall, vice president,
continuumof care, Premier healthcare
alliance, contributed to this article.
[ S U M M A R Y ]
Facility1
Facility2
20 | SUPPLY CHAIN FUTUREPROPRIETARY AND CONFIDENTIAL. ©2013 by Premier Inc. All rights reserved.
QA&>>> The move toward population health management:O&A with Joseph Damore
20 | BEYOND THE HOSPITAL WALLS©2013 by Premier Inc. All rights reserved.
last year. There has been similar legislation
introduced in Tennessee and a recommenda-
tion in Alabama to reform Medicaid in that
direction. In Arizona, Banner Health is part-
nering with Blue Cross of Arizona to form an
ACO venture for their Medicaid population.
2.What do health systems need to be
thinking about strategically, in terms of
integrating across the continuum of care?
Joseph Damore:More and more organiza-
tions are trying to create vehicles that
integrate care both electronically and in ac-
tual physical delivery across the continuum.
We’re seeing organizations improve care by:
• Developing clinically integrated physician-
hospital organizations that work
collaboratively and share savings with
independent physicians;
• Implementing integrated, evidence-based
care plans so that patient treatment protocols
are the same, whether in a hospital, skilled
nursing facility or other location; and
• Increasing EHR connectivity across the
continuum.
3.What is the role of prevention and
patient engagement in having a successful
population health initiative?
Joseph Damore:Patient engagement is of
the utmost importance in terms of working
Joseph F. Damore, FACHE, vice president, Premier Performance Partners, Premier healthcare alliance,is responsible for assisting physician groups, not-for-profit hospitals and health systems in developing integrated health systems and implementing accountable care organizations, including responsibility for Premier’s Partnership for Care Transformation collaborative. Prior to joining Premier, Damore served as CEO of Mission Health System in Asheville, NC and Sparrow Health System in Lansing, MI.
1.What’s going on in population health? Have you seen any acceleration in activity
since the election or the Supreme Court decision? What are some specific examples of
work being done by health systems to integrate population health in their practices?
Joseph Damore:We’re seeing acceleration in the journey to population health around the
country. The Supreme Court decision and the results of the November election have
pushed this concept more in the forefront, and that’s a good thing for healthcare, because
it’s really a critical piece in bending the cost curve.
The other factor influencing the trend toward population health is some early results that
show that it’s working. For decades, Medicare expenditures have far outpaced inflation
rates, but for the first time in more than 40 years, the growth in Medicare per capita
expenditures approximated the inflation rate in 2012. Also, several studies have shown
that accountable care is beginning to have an impact on slowing healthcare costs.
For example, Dignity Health, and Blue Shield of California conducted a study of the
California Public Employees’ Retirement System (CalPERS) that indicates a fairly significant
slowdown in the pace of healthcare expenditures. In the first year, the average cost per
CalPERS member outside the program increased 10 percent, while the cost per person in
the program decreased 1.6 percent.
There’s also been increased interest, as noted by the number of new Medicare Shared
Savings Program (MSSP) participants. In January 2013, 106 providers joined MSSP, which
brings total participants to 252. We’re seeing a similar growth rate on the private side.
Organizations are applying accountable care principles to population health management
in all facets of payor relations. For example, several states are moving ahead with Medicaid
reform that mimics the federal accountable care model. Oregon was one of the first to do that
OUTLOOK • SPRING 2013 | 21
with physicians and in changes to
employee health plans or commercial
arrangements. We’re seeing employee
premiums tied to health metrics, such as
body mass index. Lower-cost premiums are
offered to employees who meet healthy
criteria or to those whose metrics are better
than the previous year.
There’s also the use of a waiver for generic
pharmaceutical copays for employees who
participate in chronic disease management
or coaching programs in collaboration with
their primary care doctors. A patient with
asthma signs up for an asthma manage-
ment program, and the health plan waives
the copay for generic drugs to treat the
condition. These programs are creating
economic incentives that encourage
employees to improve their own health.
Similar efforts to engage patients and their
families in their care are part of Medicare’s
Partnership for Patients (PFP) program.
Hospitals collaborating with Premier on
PFP have substantially improved their
adherence to evidence-based readmission
best practices.
As an example, PFP participants ensure
medical information and treatment plans
are understood by patients and their
caregivers prior to discharge. At discharge,
patients receive clearly worded instructions
regarding what to do if their conditions
change and when changes should be con-
sidered emergencies. And post-discharge,
providers follow up with patients to ensure
that they know where to go for care.
4.Are there particular capabilities that
a health system needs to effectively
manage population care?
Joseph Damore:Premier has a set of core
capabilities that we suggest for health systems.
The first is a robust primary care foundation
that provides team-based, patient-centered
medical home care. We really believe that
this provides more cost-effective and higher
quality care. On average, cost of healthcare
per capita declines 7-8 percent with a robust
medical home approach.
The second core capability is in care man-
agement. This is especially true for high-risk
patients who suffer from multiple chronic
diseases. We’ve seen several systems emu-
lating AtlantiCare’s “special care center,”
which is a team-based approach that pro-
vides high-risk, chronic disease patients
with access to licensed social workers, nurse
practitioners and physicians. AltantiCare
has about four years of data that indicate
the program has reduced costs, enhanced
patient and staff satisfaction, and improved
quality and health status.
Additionally, care management is impor-
tant in treating diseases tied to the big six
chronic diseases – asthma, diabetes, conges-
tive heart failure, COPD, hypertension, and
chronic depression. Organizations that de-
velop those programs have seen a reduction
in hospitalizations and readmissions, as
well as generally healthier patients. Care
management is also important in manag-
ing care transitions. Case managers help
guide a patient from one setting to another,
such as from the primary care doctor’s office
to hospital or home.
The third core capability is information.
Health systems must be able to analyze
claim data so that they can identify
high-risk patients and intervene in their
care. Premier, in partnership with Verisk
Health, has created a new application called
PopulationAdvisor™, which allows us to
offer that type of support to our members.
Finally, we believe that it’s very important
to have a good payor partner that is willing
to share claim data on a real-time basis.
That’s really the only way to have the
information necessary to determine which
patients are high-risk and need to be on
advanced protocols.
5.What are some barriers or challenges
to health systems in moving toward
population health management?
Joseph Damore: I think the major challenge
is changing the culture of your organization.
The first step in that direction is creating a
vision and realizing what you want to
accomplish. That process isn’t going to
happen overnight. It’s a journey that takes
years. The most advanced population health
organizations have been doing it for decades.
Then you have to build all of those core capa-
bilities to successfully move forward with
the vision, and that can bring with it some
resource barriers in building the care man-
agement program and related IT investment.
Alignment is an important part of culture
transformation. We’re talking about chang-
ing how healthcare is delivered, so having
physician leaders is an important part of
gaining alignment within your organization.
6.Can you describe some of the work that’s
being done in Premier’s Partnership for Care
Transformation (PACT™) collaborative?
Joseph Damore:The PACT collaborative
helps our members meet the challenge of
improving the health status and care
experience for their patient populations.
We help organizations analyze their current
situations by identifying gaps in the core
components, and we help them develop
an action plan to move forward. We also
provide education for health system
leadership about the concepts and what
we’re learning across the country from
the early adopters. Then we assist in
filling the gaps, for instance with data
analytics or implementation of a care
management program.
Our newest PACT endeavor provides data
analytics and benchmarking to our mem-
bers. Starting in 2013, MSSP members will
receive quarterly information on at least 15
key metrics related to utilization, quality
and cost. That will enable them to see how
well they’re doing compared with other
organizations. PACT participants have the
benefit of learning best practices from early
adopters, which makes them able to learn
and implement changes more rapidly.
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The imperative for connectivity:
WORKINGTOWARDACCOUNTABLE CARE
P E R S P E C T I V E S
E C O N O M I C OUT LOOK
OUTLOOK • SPRING 2013 | 23
Introduction
Due to rising healthcare costs, growingpatient populations, and healthcarereform, there is an ongoing imperativeto transform theway that patients receivecare. Rather than the traditional acutecare-focused structure, health systemsare going beyond the hospital walls,breaking down silos, and buildingconnectivity to improve quality,reduce costs, and address the largerneeds of their patient populations.
This article features survey data andinterviewswithmember executivesdetailing how their health systems arebuilding connectivity and integratingcare across the continuum.
The supply chain as anasset
A major underpinning of accountable care
and efforts to provide population-based
healthcare is theneed forbroadcollaboration.
In our fall 2012 Economic Outlook,
member executives discussed physician
involvement in supply-chain decision
making as a means to bend the cost curve,
a sentiment that has often been echoed.
According to 29 percent of survey
respondents, lack of willingness on the
part of physicians and other providers is
the greatest barrier to clinical integration
for their organization (see Figure 1). That
is followed distantly by difficulty in
implementing cross-continuum electronic
health records (EHRs) for 21 percent and a
need for greater incentives (16 percent).
“Manyof thebarriers to clinical integration
that we’re seeing are a matter of getting
out of our comfort zones,” says Tim Kirby,
executivevicepresidentofsystemalignment
and integration, Methodist Health System
(Dallas, TX). “Physicians have traditionally
beentrained tobe independent.We’renow
asking our physicians and clinicians to
work as a team to manage patient health.”
St. Joseph, MO-based Heartland Health is
also focusing on enhancing physician
engagement. “We paired physicians with
other leaders in the organization, so that
physicians are at the table for all major
organizational decisions. It has really
helped us gain physician alignment,” says
Mark Laney, MD and president and CEO.
“In addition to adopting advanced
technology products and moving toward
more of a population-health, accountable-
care payment model, dyad leadership is
part of an ongoing process of helping our
physicians, andoursystemasawhole,be
moresuccessful.”
Willingness from physicians to try new
supplies is an indicator of successful
collaboration among practitioners and
supply chainmanagement tomeet system-
wide goals. Many member health systems
are undertaking larger-scale projects to
reduce costs by targeting physicianprefer-
ence items (PPIs), including participation in
various PPI-focused Premier collaboratives.
Figure 1 Barriers to achieving clinical integration
� Top barrier � Second biggest barrier
Lack ofwillingness on
part of physiciansand providers
Need for greaterincentives toencourageparticipation
Difficulties inimplementation ofcross-continuumelectronic health
Lack of budgetto createintegration
among providers
Lack of system-wide education onthe benefits of
clinical integration
Lack of providersto collaboratewith (e.g., rural
markets)
Other0.0%5.0%
10.0%15.0%20.0%25.0%
30.0%
Source: Premier online survey for Economic Outlook Spring 2013 publication
24 | PERSPECTIVES©2013 by Premier Inc. All rights reserved.
Providers’willingness to evaluate cost-
reductionoptionsappearstobeincreasing:
the percent of survey respondents who
would “definitely” try a non-branded PPI
increased 24 percent over the past three
surveys to 26 percent in spring 2013 (see
Figure 2).
Methodist’sKirbyparticipatedinPremier’s
cardiac rhythm management (CRM) col-
laborative, a group of 65 health systems
and hospitals that shared supply expense
data to identify opportunities in resource
optimization. In addition, he took part in
another collaborative to reduce PPI costs
in spinal care. Since then, Kirby’s team
developed a “hold the gain”committee
that meets monthly to ensure they are
maintaining or improving costs in
those areas.
“We also have a value analysis committee
of clinical and materials managers that
evaluate PPI changes and selection,”Kirby
said. “If clinicians want to make any
change that has a cost impact of $50,000
or greater, they have to go before this
committee to get approval.
“Through our ACO, we’re focusing on
improving PPI outcomes while lowering
costs, andwe’re sharing those savingswith
ourphysicians. We’re also participating in
Premier’s Partnership for theAdvancement
of Comparative Effectiveness Research
(PACER), a collaborative of large, integrated
delivery networks that evaluates clinical
and resource utilization datatooptimize
carepathsandstandardize the supply.
We’re working to reduce costs by
consolidatingcontractstoachievebetter
purchasing dynamics.”
According to Dr. Laney from Heartland
Health, “To survive and thrive in this
environment, you really need to optimize
each and every opportunity. Each dollar is
important.We’ve lookedatallofourexternal
contracts, all consulting dollars, even
down to what paper cups we use.”
Many health systems’supply chains are
reducing costs by streamlining purchasing
across all facilities through a centralized
channel. Survey respondents report that
35 percent have centralized purchasing for
all of their owned, leased, or managed and
affiliate facilities (see Figure 3).
Focusing on the supply chain and gaining
physician buy-in are important steps in
cost reduction and standardization.
Clinical integration isn’t just about work-
ing with doctors, though, says Methodist’s
Kirby. “Today, it’s about integrating across
the entire continuum of care. It’s not just
clinical but also social, because managing
thehealthofthepopulationissoessential.”
“Through our ACO,we’re focusing onimproving PPIoutcomes whilelowering costs,and we’re sharingthose savings withour physicians.”
TimKirby,executive vice president of system alignment
and integration, Methodist Health System
OUTLOOK • SPRING 2013 | 25
Figure 2 Willingness to trial non-branded physician preference items
� Fall 2011
� Spring 2012
� Fall 2012
� Spring 2013
Definitelywould
Probablywould
Might ormight not
Probablywould not
Definitelywould not
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
49.0%
19.6%
21.7%
19.2%
26.0%
27.6% 21.7%
24.2% 19.4%
3.6%
3.6%
2.8%
2.4%
0.2%
0.7%
0.0%
0.7%
52.3%
53.7%
51.5%
Source: Premier online survey for Economic Outlook Spring 2013 publication
Figure 3 Does your health systemhave centralized purchasing across the continuumof care?
� Yes, all OLM facilitiesand affiliates purchasingis done through onecentralized channel
� Yes, all OLM facilitiespurchasing isdonethroughone centralized channel
� No, alternate sitesmanage their ownpurchasing
Source: Premier online survey for Economic Outlook Spring 2013 publication
25.8%
34.8%
39.4%
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Figure 4 Incentives encouraging clinical integration
Source: Premier online survey for Economic Outlook Spring 2013 publication
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0%
73.7%Outcomes-based measurement for physicians
Bonuses contingent on achievement of quality
Penalties for readmissions and infections
Bundled payments
Common ownership of facilities
Capitated payments
Antitrust waivers
Other
68.3%
32.7%
29.8%
21.6%
18.0%
13.2%
0.5%
Incentives, progress toward integration
According to Michelle Darnell, vice presi-
dent of systems improvement, SSM St.
Mary’s Good Samaritan Inc. (Mt. Vernon/
Centralia, IL), “Similar to many providers,
the underpinning of our move toward
greater clinical integration is our mission.
We want to make sure we’re taking care of
ourpatients inthebest,mostcomprehensive
way possible. That’s really the altruistic
aspect of our incentive for clinical integra-
tion. It’s primarily mission-driven to
improve care, but cost-avoidance is also a
factor. Really, everyone’s trying to do the
best they can for patients in the most
economical way.”
In Premier’s member survey, 74 percent
of respondents cite outcomes-based meas-
urements and 68 percent cite bonuses for
achieving quality outcomes as top incen-
tives to clinical integration (see Figure 4).
“The overall need to improve the care of
the communities we serve is always our
mainincentiveto improvingcaredelivery,”
says Kirby, “but we also see the writing on
the wall and know payment will be based
on what we accomplish and not just on
what we do.”
Similarly, one-third of survey respondents
cite readmissions and infection penalties
as incentives to createbetter integration.
The majority of survey respondents (77
percent) believe their health systems are
effective at providing care across the con-
tinuum (see Figure 5).
Eric Bieber, MD and chief medical officer at
University Hospitals (UH) in Cleveland, OH
corroborates the need to look beyond
acute care. “Healthcare providers have not
been trained in patient-centered care
environments; instead, we have lived in
an acute, episodic environment and have
been incentivized accordingly. We need to
break down that mindset by driving out
care variation, redundancy, and waste to
best treat the patients we serve. ACOs help
to bring into the crosshairs this need for an
absolute focus on integrated care.”
Clinical integration is a work in progress.
Health systems are striving to implement
advanced technology and build new
collaborations and partnerships to create
a more patient-focused health system.
“I’veneverheardapatientsay, ‘Mycarewas
too good’or ‘My surgery went too well.’
That’s because care simply can’t be too
good. And that’s what makes healthcare
today so exciting,”UH’s Bieber says. “It has
been and will be a work in progress for a
long time. People can’t work too closely
together; the continuum of care can’t be
too connected. And as healthcare becomes
more and more complex, there will always
be opportunities to enhance clinical inte-
gration, even for the delivery networks
that are highly integrated.”
Ferdinand Velasco, MD and chief health
informationofficeratTexasHealthResources,
Premier’s 2013 Richard A. Norling Excel-
lence Award winner, agrees that a more
integrated health system will ultimately
benefit all patients. “A more integrated
healthsystemmeansthatthecaredelivery
OUTLOOK • SPRING 2013 | 27
Figure 5 Howeffective do you believe your health system is in providing care across the continuum?
Source: Premier online survey for Economic Outlook Spring 2013 publication
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
18.8%
58.6%
15.2%
6.1%1.4%
Veryeffective
Somewhateffective
Neither effectivenor
ineffective
Somewhateffective
Veryineffective
Figure 6How important is shared access to patient information between facilities for qualityimprovement initiatives to be effective?
Source: Premier online survey for Economic Outlook Spring 2013 publication
60.0%
70.0%
80.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
76.9%
20.2%
2.5% 0.2% 0.2%
Veryimportant
Somewhatimportant
Neither importantnor unimportant
Somewhatunimportant
Veryunimportant
organization will be more intelligent in
understanding the needs of patients. We’ll
be able to better understand the factors
that lead to poor health, why patients get
readmitted to the hospital, and more. It
helps us be more proactive in our outreach
to the community, so that we can provide
better care at a lower cost.”
One moving target for clinical integration
is developing the technology and relation-
ships to connect care among facilities and
among the community. Almost all of the
survey respondents (97 percent) believe
shared access to patient information
among facilities is essential to successful
quality improvementinitiatives (seeFigure6).
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28 | PERSPECTIVES©2013 by Premier Inc. All rights reserved.
� Yes
� No
� Unsure
Source: Premier online survey for Economic Outlook Spring 2013 publication
31.7%
7.5%
60.8%
Figure 7Does your health systemhave capabilities to share dataacross facilities in the continuumof care (e.g., amonghospitals and long-term care facilities)?
OUTLOOK • SPRING 2013 | 29
Dr. Bieber reiterates the imperative health
systems face. “Everyone needs to work to
better connect the dots. And we need to
think about extended-care facilities that
we don’t even own or operate – how do
we get to appropriate data transfer and
accountability among them?”
Data sharing andHIT
“If you don’t have the data, or if it isn’t
timely, then your response is not timely,
and you’ll end up duplicating services and
efforts. And even when providers are on
the same EHR, there can be a lack of con-
sistency in inputting and sharing data
among doctors and providers. All of this
compromises the validity and value of
the data,” says Methodist Health’s Kirby.
EHRs, in addition to other advanced data-
sharing technologies, create the means for
health systems to monitor and manage
their patient populations. Of our spring
respondents, 61 percent currently have the
capabilities to share data across facilities
in their continuum of care (see Figure 7).
TexasHealth’sDr.Velascobelievesadvanced
technology has been an integral part of his
system’sachievements, includingrecognition
by Hospitals & Health Networks as a 2012
Most Wired Innovator and by U.S. News
and World Report for being among the
“most connected”systems in the U.S.
“In terms of our intent to move toward
clinical integration, Texas Health has a
mission to improve the health of the peo-
ple in the community we serve. Shifting
our focus from acute care to population-
health management has helped us under-
stand and use technology to achieve
clinical integration,”says Dr. Velasco.
“We’ve been very aggressive and progres-
sive in implementing a health information
exchange (HIE) within our organization.
Even before the HITECH ACT (legislation to
expand adoption of health information
technology), we were involved with many
regional programs. One of the things that
we’ve found is that if a facilitydoesn’thave
a good EHR, it really can’t move forward.”
Dr. Bieber from UH agrees that health
information technology (HIT) leads clinical
integration. “Information is king, but it has
to be usable in a way that impacts clinical
function. HIT infrastructure is really the
glue thatholds clinical integration together.”
Having the technology in place allows for
further advancements in understanding a
patient population.
“We need to know everything we can
about a patient’s care – what has gone on
before and what’s coming up,”Dr. Bieber
continues. “Otherwise, we have variation
and redundancies that may degrade care
quality and efficiency. The closer we can
get to real-time information and get it in
the hands of providers, the more likely the
right things will be done and we won’t
miss opportunities.”
Diverse technologies are imperative in
achieving true clinical integration. “Having
a strong EHR program is foundational.
Stage 1 of meaningful use – though it’s
certainly not perfect – does set a floor from
which we can build the full infrastructure
needed to connect care across the contin-
uum,” says Texas Health’s Dr. Velasco. The
systemachievedHIMSSStage7, thehighest
level of EHRadoption, at itsnewesthospital
a few months ago and anticipates that all
of its facilities will reach that designation
by the end of the year.
Though the discussion surrounding
healthcare technology has largely been
about meeting meaningful use criteria,
the technology necessary to thrive in this
landscape goes far beyond EHRs.
Heartland Health has piloted and imple-
mented several technologies to advance
patient care. “We have a robust patient call
center that’s run by nurses who can direct
patients to the right type of care,” said
Heartland’s Dr. Laney. “We’re advancing
our use of telemedicine, especially with
our rural and critical-access hospitals
(CAH), where we’re experimenting with
robots that we can place with an emer-
gency patient. We’re also really gearing up
with electronic visits.”
Innovation in collaboration
In addition to new technologies, health
systems are engaging in programs with
outside facilities, as well as advancing
partnerships and collaborations within
their communities, and on a broader land-
scape, ones that meet the challenges of
population-health management.
Keith Suedmeyer, director of social
services, SSM St. Mary’s Good Samaritan,
spoke of two of his organization’s non-
traditional partnerships. “We’ve been
having monthly meetings for a few years
now with mental health professionals
and other stakeholder providers in the
community, including the public health
department, to identify gaps in care. It’s
also a great opportunity to network and
better understand what services are being
offered, and where.”
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“Courageousleadershipisneededtoovercometheinertia.Youneedleadershiponallsidesoftheorganizationwhoknowthathealthcareneedstochange.EHRsarefoundationalforthattransitionfromacutecaretopopulationhealth.Tome,that’s thelogicbehindinteroperability.”FerdinandVelasco, MD, CHIO,
TexasHealth Resources
30 | PERSPECTIVES©2013 by Premier Inc. All rights reserved.
SSM St. Mary’s is also working with the
variousnursinghomes in its community to
reduce readmissionsbygiving thenursing
homes access to hospital data, such as
radiology and other reports, and stream-
lining community-wide end-of-life care.
“The hospital usually has an end-of-life
discussionwithpatients and their families,
and then the nursing home will have a
separate conversation with them. This can
lead to confusion over next steps, and pa-
tients can receive conflicting information.
We’ve started having just one conversa-
tion that includes hospital and nursing
home staff,” says Suedmeyer. “The various
nursing homes compete for patients, but
the benefits of collaboration far outweigh
the risk of sharing information.”
Traditional competitors Methodist Health
System and Texas Health Resources are
also engaging in a non-traditional
collaboration to better meet the needs of
their Dallas-Fort Worth community.
“Post-acute care in Dallas-Fort Worth costs
$2,000 more per Medicare enrollee per
year than the national average,” says
Methodist’s Kirby. “Through community
groups, we’re facilitating discussions on
how to standardize post-acute care quality
metrics so that all the local providers use
thesamemetrics to trackandreportpatient
data. We’re serving the same populations
– why duplicate our efforts? The key to
being successful in improving patient care
and lowering costs is finding a way to be
closer and more aligned with other
providers in the area.”
According to Heartland Health’s Dr. Laney,
“There are approximately six CAHs in our
area–we representavery largegeographic
area – and about four or five years ago we
started working on patient records
through our Lewis and Clark Information
Exchange (LACIE). It’s been invaluable for
us, from both a safety and cost standpoint,
toknowifpatientshavehadrecentCTscans
orwhatmedications they’reallergic to.
Figure 8 Time until joining or creating ACO (C-Suite respondents only)
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
21.0%
14.5%
20.3%
14.5%
10.9%
18.8%
1.4%
Wealready havean ACO in place
By the endof 2013
By the endof 2014
By the endof 2015
After 2015 My health systemwill not be joiningor creating anACO in the
foreseeable future
Source: Premier online survey for Economic Outlook Spring 2013 publication
OUTLOOK • SPRING 2013 | 31
Earlier this year we shifted management
of LACIE from Heartland to an open, inde-
pendent collaborative of Kansas City-area
healthcare providers. It’s a ‘cooperative
competition’model, where data will pass
more easily, and systems will compete
based on service rather than data silos.
This will improve care, lower costs, and
improve patient satisfaction.”
The current healthcare landscape necessi-
tates adaptation. “We’re living in unique
and interesting times where complex
health systems are looking more broadly
at synergies, so organizations that
wouldn’t normally work together are
doing just that,” says UH’s Dr. Bieber. “And
as legislation continues, we’re going to
have to be even more creative with these
partnerships. Some of them would never
have happened five or 10 years ago. But
today they make much more sense and
are beneficial for care providers, and more
importantly, the patients we serve.”
Imperative for connectivity
Health systems are building technology
infrastructure, leveraging their supply
chains, and improving alignment within
their organizations, as well as with other
stakeholders and their communities, to
meet the demands of a quickly changing
healthcare landscape. More than half of
C-suite survey respondents (56 percent) re-
port that their organizations will belong to
an ACO of some kind by the end of 2014;
21 percent of respondents are already part
of one. Fewer than 20 percent of C-suite
respondents do not anticipate their organ-
ization will create or join an ACO in the
foreseeable future (see Figure 8).
Health systems are evolving to better
meet the needs of their patients and their
communities as a whole. Dr. Laney from
Heartland Health offers a great example of
this through the system’s Mosaic Life Care.
“We looked internally at how we might
improve ourselves for the future, and
Mosaic’s what we came up with. It’s a
more comprehensive, experience-based
relationship with patients. It’s a health-
based model that encompasses the holistic
needs of our patients and works toward
optimal health and wellness.”
After winning the 2009 Malcolm Baldrige
National Quality Award, Dr. Laney and his
team were deciding what to do next.
“Healthcare reform was being discussed,
healthcare costs were going through the
roof, and we thought we could dramati-
cally change the way we do healthcare.
We realized we could develop a more ‘daily
patient approach,’based on our being a
trusted friend and advisor to our patients.
If we’re going to be an ACO, and they’re
going to be responsible, accountable pa-
tients, then we need a real, personal rela-
tionship with them. And if we can do that
in western Missouri, then that could be a
model others could use across the country.
“It’s a holistic, less expensive approach,
meetingpeoplewhere theyareandhelping
them improve,”continued Dr. Laney, “We
now have five clinics, and you won’t find
waiting rooms at any of them. Instead,
there’s a chef preparing healthy snacks,
and we give patients a customized iPad
with reading materials or games that are
basedon theirpreferences. It’s likewalking
intoacoffee shoporbookstore,notanurgent
care facility – people want to come here.”
Heartland’s Mosaic Life Care program is an
example of the major transformation
going on in healthcare, and a response to
the call to action of healthcare reform.
Health systems are engaging all of their
leaders – from technology, supply chain,
practitioners, C-suite, and more – to create
new models that elevate care delivery to
provide more streamlined, coordinated
and high quality care to their patient
populations.
StudyMethodology
During winter 2013, Premier, in
collaboration with Customer Care
Measurement and Consulting LLC,
commissioned an online survey of
approximately 9,000 healthcare leaders
across our membership, representing
both acute and non-acute healthcare
markets. The survey respondents (n=535)
are representative of a cross-section of
our membership across geographic area
and organizational size and type.
The majority of respondents fall within
three title categories: C-suite (29 percent),
service line or practice area manager (26
percent), and supply chain or materials
managers (20 percent). Nearly one-third
of respondents are part of multi-hospital
systems or IDNs, and respondent
organizations are equally representative
of urban and rural areas.
Premier healthcare alliance thanks these
people for their contributions to this article:
Eric Bieber, MDand chiefmedical officer,
UniversityHospitals
Michelle Darnell, vice president of systems
improvement, SSMSt.Mary’s Good
Samaritan Inc.
Tim Kirby, executive vice president of
systemalignment and integration,
MethodistHealth System
Mark Laney, MDandpresident andCEO,
HeartlandHealth
Keith Suedmeyer, director of social services,
SSMSt.Mary’s Good Samaritan Inc.
Ferdinand Velasco, MDand chief health
information officer, TexasHealth Resources
PE
RS
PE
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“We’re living in uniqueand interesting timeswhere complex healthsystems are lookingmorebroadlyat synergies,so organizations thatwouldn’t normally worktogether are doingjust that”Eric Bieber, MDand chiefmedical officer at
UniversityHospitals (UH) in Cleveland, OH
32 | TRENDS IN COST AND UTILIZATION©2013 by Premier Inc. All rights reserved.
CLINICAL INNOVATION INPERCUTANEOUS coronaryintervention
T R E N D S I N C O S TA N D U T I L I Z A T I O NE CO N O M I C OUT LOOK
Introduced in 1977, percutaneous coronary intervention (PCI),
more commonly knownas angioplasty, is a procedure oftenused
to treat heart attacks andprevent symptomsof coronary artery
disease.3 While thenumber of PCIprocedureshasdeclined in
thepast fewyears, approximately 600,000 cases are performed
annually in theU.S.4
SteveMarso,MD, a physician at St. Luke’sHospitalMid-America
Heart&Vascular Institute andprofessor ofmedicine at the
University ofMissouri-Kansas City (MO), and JohnHouse,
manager, interventional cardiology and imaging research, St.
Luke’sHospitalMid-AmericaHeart&Vascular Institute, Kansas
City, discuss clinical innovation in PCI in theQ&Abelow.
With cardiac disease ranking as the leading cause of death in theUnited States,1 it comesas no surprise that cardiovascular centers remain amajor contributor to the profitmargins ofmost health systems,accountingforupto40percentofahospital’s total revenue.2
OUTLOOK • SPRING 2013 |33
Using acute care data fromadatabase
maintainedbythePremierhealthcare
alliance,Dr.Marsoandhis teamconducted
researchcomparingcostandqualityindicators
oftransradial (TRI)andtransfemoral (TFI)
approachesforpercutaneouscoronary
interventionintheinpatientsetting.Their
analysisshowsthatatransradialapproach
canbemorecosteffective,providebetter
patientoutcomesinspecificPCIprocedures,
andmakeasame-daydischargemore
appropriatethanthetraditionaltransfemoral
method.Their findingswerepresentedinthe
AmericanHeart Journal inNovember2012.5
EO:Howhave coronary intervention
methodschangedinthepastfiveyears?
Steve Marso and John House: That’s
definitely amoving target. The greatest
change in the last fewyears has been in
the vascular access approach, shifting
toward transradial versus transfemoral
interventions. The rate of change is high in
Europe,with transradial interventions in
about 50-70 percent of cases. There’s been
much slower acceptance in theU.S. In
2010-2011, the frequency of transradial
interventionherewas about 7 percent
and is currently 10-11 percent.
Development in the stentmarket has been
an interesting one towatch.We’re now in
the third generation of drug-eluting stents
(DES),which are safer andmarkedly less
expensivethanthefirstandsecondgenerations.
Additionally, there has been remarkable
innovation in advanced techniques in the
last several years. For example, there are
more procedures being performed to open
chronic total occlusions (CTOs). CTOs are
identified in approximately 10 percent of
diagnostic coronary angiograms. As these
techniques to improve CTObecomemore
widely accepted,we could see growth
in thenumber of PCI procedures being
performed in theU.S.
Of course, the other significant advance
in the field is in treating structural heart
disease. Percutaneous valve replacement
hasbeenapprovedforuseandis increasingly
common in aortic valve replacement
procedures done by interventional
cardiologists.
EO:YoumentionthatEuropehasseena
muchfasteruptakeoftransradial inter-
vention.Canyouexplainwhythatis?
Steve Marso and John House: It really
comes down to physicianpreference. In
Europe, pioneers in the interventional
cardiology field have implemented the
transradial approach in their practices and
disseminated that knowledge. It’s clear
that physician leaders have influenced the
field in an effectiveway. The transradial in-
tervention data demonstrates efficacy and
now,with emerging cost considerations,
there is another impetus to adopt TRI. In
Europe, there’s also a genuineneed
to discharge patients on the sameday, and
transradial interventions really facilitate
that by lowering bleeding risk, increasing
patient comfort, andproviding early am-
bulation. Physicians aremuchmore com-
fortable sending patients home the same
day, because of these lower risks.
TheU.S. is a littlemore varied in its teach-
ing approach, and there’s a steep learning
curve.Muchof the trial data comes from
Europe, so there’s a need formore cardiolo-
gists to implement the transradial ap-
proach in theU.S.,whichwill spur further
adoption. Sufficient evidence exists for
physicians in theU.S. to bemotivated to
change theway they treat at least someof
their PCI patients.
EO: In practice today,what factors lead
physicians to choose transradial inter-
ventionsvs. transfemoral interventions?
Steve Marso and John House: Physician
preference is responsible for the slower
SteveMarso,MD,
physician at St. Luke’s
Hospital Mid-America
Heart &Vascular Institute
and professor of medicine
at the University of
Missouri-Kansas City, MO
JohnHouse,manager,
interventional cardiology
and imaging research, St.
Luke’s Hospital
Mid-America Heart &
Vascular Institute,
Kansas City, MO
34 | TRENDS IN COST AND UTILIZATION©2013 by Premier Inc. All rights reserved.
growth of transradial intervention in the
U.S., as doctors feelmore comfortable and
havemoreexperiencewiththetransfemoral
procedure. The benefits of transradial
intervention includehigher patient
satisfaction, increased comfort, and early
ambulation. Although comfort and
satisfaction are difficult tomeasure,
patients really valuemore rapid recovery
times and shorter hospital stays.
EO: Canyoudiscuss the shift from the
inpatient to outpatient setting for PCI
over the last fewyears?
Steve Marso and John House: The shift to
outpatient care certainly hasn’t been
without controversy. The greatest driver
has been the Centers forMedicare&
Medicaid Services (CMS) RecoveryAudit
Contractor (RAC) auditswhere itwas
expected that PCI, for the vastmajority
of patients,would be categorized as an
outpatient procedure. Reimbursement is
substantially less for outpatient care,
compared to inpatient, so in order to
compete financially, hospitals need to
adjust to PCI outpatient care by reducing
the length of stay.
Until now,health systemshavebeencoding
PCI cases as outpatientwhile providing
roughly the same care aswhen itwas
coded as an inpatient procedure. Going
forward, health systemsneed tomodify
their staffing and other operations to
transition PCI to a same-day discharge,
so that they can recoup the dollars lost
due to the shift in reimbursement.
EO:What are thekeydrivers and
considerations inmovingPCI to an
outpatient setting?
Steve Marso and John House: Themajor
consideration inmoving patients froman
inpatient to an outpatient setting is safety.
While both TRI and TFI are suitable for the
outpatient setting, transradial vascular
access offers a number of advantages.
These include patient safety, given that
transradial access is associatedwith a
lower access-site bleeding complication
rate, and early ambulation. One of the
inherent challenges of choosing an
outpatient PCI-care pathway is accurately
assessing patients’procedural risk for
important complications. Patients at very
lowor low risk for post-procedure compli-
cations are truly the cohort of individuals
we should be targeting for same-day
discharge. In our institution,we employ
anumber of risk-predictionmodels to
assess the suitability of inpatient-versus-
outpatient status for our PCI patients.
Approximately 75 percent of our patients
are not high-risk. If a patient is at lowor
moderate risk of bleeding, and youuse
treatments associatedwith low risk, then
youputmore patients in the position to
be same-day discharged. Since transradial
interventions lower the risk of bleeding, it
makes the decision to same-day discharge
easier for physicians, and the ability to
same-day discharge iswhat saves costs
whenyou’re shifting PCI to the outpatient
setting. Of course, it has to be balanced
with providing the best quality care and
the lowest risks.
EO:What is theoverall outlook forPCI?
Steve Marso: I am truly optimistic about
the future of interventional cardiology.
PCI is amature procedurewith proven
efficacy for a variety of clinical scenarios.
Important advances continue in the field
related to device technology and advanced
techniques.Wemust strive to improve the
PCI operational efficiency to retain its
profitability forhealth systemswhile
continuing to ensurewemaintain or
improve patient safety.
References
1. CDC, Faststats,
http://www.cdc.gov/nchs/fastats/lcod.htm.
2. Becker’sHospital Review,October 10, 2012,
http://www.beckershospitalreview.com/hospital-
key-specialties/the-state-of-hospital-service-lines-
current-challenges-future-directions.html.
3. “Angioplasty’s golden eramaybe fading,”USA
Today,March 27, 2008. http://usatoday30.usato-
day.com/news/health/2008-03-26-angioplasty-de-
cline_N.htm.
4. Ibid.
5. Safley, DM,Amin, AP,House, JA, Baklanov, D,
Mills, R, Giersiefen,H, Bremer, A, andMarso, SP.
“Comparison of costs between transradial and
transfemoral percutaneous coronary intervention:
A cohort analysis from the Premier research data-
base,” AmericanHeart Journal,
http://dx.doi.org/10.1016/j.ahj.2012.10.004.
OUTLOOK • SPRING 2013 |35
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Going forward, health systems need to
modify their staffing andother operations to transition
PCI to a same-day discharge so they can
recoup the dollars lost.”– Steve Marso, M.D., physician at St. Luke's Hospital Mid-America Heart & Vascular Instituteand professor of medicine at the University of Missouri-Kansas City
“
36 | TRENDS IN COST AND UTILIZATION©2013 by Premier Inc. All rights reserved.
>
Opportunity for PCI savings:SPOTLIGHT ON PREMIER DATA
Figure 1 Percent of PCI procedures coded as inpatient or outpatient
Source: A databasemaintained by the Premier healthcare allianceNote: From2009-2012, database containedbetween195,000-230,000 inpatient PCI casesperyearandbetween65,000-84,000outpatient PCI casesperyear.
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
2009 2010 2011 2012
Inpatient Outpatient
Historically, PCIhasbeenperformed
asan inpatientprocedure, butdue to
innovations in cardiovascular inter-
ventions, aswell as improvements
indeterminingapatient’s risk level
prior to intervention, theCenters for
Medicare&MedicaidServices (CMS)
designationof PCIwas changed to
outpatient for themajorityof
patients. Since reimbursement is
significantly less for outpatient care
compared to inpatient care, the
re-codingof aprocedurebyCMS is
an impetus forhospitals to review,
whenclinically appropriate, the level
of careprovided for PCIpatients, so
that thehospital canoperateas
efficientlyaspossible.
Oneof the inherent challengesof
choosinganoutpatient PCI-care
pathway is accuratelyassessinga
patient’s procedural risk for
significant complications. Research
showspatients at a lowormoderate
risk forpost-procedurecomplications
suchasbleeding canbe targeted for
same-daydischarge, allowing for
cost savingsby shifting resources,
suchas staffingandother
operations, to theoutpatient level.1
Becauseeachsituation isdifferent,
providers should reviewtheir own
practices andprotocols to identify
potential opportunitieswhile
maintaining carequality.
Data from351Premiermember
health systems from2009-2012
showan increase inPCI cases coded
asoutpatient,meaning that
hospitalswereable toprovide
outpatient-level care for these
patients (inparticular, same-day
discharge) (Figure1).Outpatient
PCI cases currently represent30
percentof all PCI caseswithin
hospitals in the cohort, up from
23percent in2009.
Among the cohort of 351hospitals,
the total cost associatedwithPCI
was$3.5 - $4billionannually,with
approximately $3billionperyear
codedas inpatient. Theunadjusted
mean totalhospital cost forpatients
undergoingPCI (2009-2012)was
approximately $14,000per case
when theprocedurewas coded
as inpatient, compared tounder
$10,000whencodedasoutpatient
(Figure2).
OUTLOOK • SPRING 2013 |37
Anoutside analysis of 1.5million patients
undergoing PCI procedures published in
the June 2010 edition of the Journal of the
AmericanMedical Association (JAMA),
suggests 75 percent ormore of the
patients in the studyhad a lowor
moderate risk of bleeding complications,
and could be safelymanagedwith
outpatient-level resources.2
Below is anestimationof the savings to the
cohortof351hospitals if75percentofallPCI
cases at lowormoderate risk of bleeding
were appropriatelymanagedwith
outpatient-levelresources,andcodedassuch.
Bymaintaining the samenumber of total
cases, the JAMAstudy implies that an
average of 130,000 PCI cases per year
would be potentially eligible for use of
outpatient-level resources and same-day
discharge in this cohort. In our dataset,
we observed that approximately 59
percent of PCI inpatient costwas variable
compared to approximately 55 percent for
outpatient. For cases requiring inpatient-
level resources, added and thus variable
cost included labor, additional use of
supplies and other overhead associated
with length-of-stay.
By shifting eligible, lower-risk patients to
less resource-intensive outpatient care,
there is a potential opportunity to impact
$1.58billion incostover fouryears (Figure3).
References
1.Marso SP, AminAP,House JA, et al. “Association
BetweenUse of BleedingAvoidance Strategies and
Risk of Periprocedural BleedingAmong Patients
Undergoing Percutaneous Coronary Intervention,”
JAMA, doi:10.1001/jama.2010.708.
2. Ibid.
Figure 2 Average PCI cost per case, inpatient and outpatient
Source: A databasemaintained by the Premier healthcare allianceNote: Cost per case is shown in constant dollars.
2010 2011 20122009
$13,983
$9,730
$14,194
$9,800
$14,060
$9,381
$14,248
$9,339
$-
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
� Inpatient � Outpatient
Source: A databasemaintained by the Premier healthcare allianceNote: Database did not break downPCI by transradial or transfemoral intervention. Facilitiesmaynot be able to transition 75percent of PCIcases to outpatient setting, depending onpopulation, risk of bleeding, or other factors.
Figure 3 Potential savings associatedwith treating additional PCI patientswith outpatient-level resources
2009-2012Actual Potential
# of cases Cost # of cases CostInpatient 791,082 $6,586,164,182 272,539 $2,269,469,226Outpatient 299,073 $1,573,699,082 817,616 $4,308,570,885 Cost savingsTOTALS 1,090,155 $8,159,863,264 1,090,155 $6,578,040,111 $1,581,823,153
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38 | TRENDS IN COST AND UTILIZATION©2013 by Premier Inc. All rights reserved.
The cost of non-adherence:
ALOOKATCOMMCAREPHARMACY
Anestimated one-third to one-half ofall patients in theU.S. donot take theirmedication as it is prescribed.1 Non-adherencehas been shown to result in$100 billion eachyear in excesshospitalizations alone,2 ignoringoutpatient, rehabilitative, orpharmaceutical costs. It can lead toworse outcomes, higher healthcarecosts, andhigher utilization, especiallyfor patientswith chronic diseases.3
>
OUTLOOK • SPRING 2013 | 39
Adherenceratesdeclinethelongerapatient
must take a prescription and are consis-
tently lower for chronic-disease patients,
compared to those receiving acute care.
Approximately 75 percent of current
healthcare spending is now directed to-
ward chronic-disease care, making poor or
non-adherence a significant impediment
to improved health outcomes.4
Especially in the move toward accountable
care and population health management,
finding ways to reduce non-adherence to
medication and treatment protocols will
be fundamental in helping health systems
meet healthcare reform measures. In fact,
a focus on adherence improvement could
play a vital role in achieving many of the
main objectives of healthcare reform,
including improving care coordination,
reducing readmissions, and moving
toward outcomes-based payments.
Commcare, a Premier-owned specialty
pharmacy, has found a means to signifi-
cantly increase medication adherence
by enrolling patients in robust disease/
patient management programs. While the
programs provide additional patient touch
points and counseling, Commcare’s initia-
tives revolve heavily around:
•Disease state progression and lab value
monitoring,
•Patient understanding of injection and
administration methods,
•Proactive management of adverse
reactions and side effects,
•Amplified patient/pharmacist/doctor
communication and follow-up, and
•Dedicated disease management service
representatives and clinical personnel
on-call 24/7.
Hepatitis C case study
An estimated 3.2 million people in the
United States have hepatitis C, though
most of them do not know they are in-
fected and are not receiving treatment.5
The infection is associated with significant
morbidity and mortality with traditional
therapies; sustained virological response is
achieved in less than 50 percent of cases.6
It is also a heavy economic burden, as new
oral therapies comeatahighcost.However,
triple therapy, which includes one of two
new oral drugs, is thought to improve out-
comes in hepatitis C patients.7
Commcare has 203 patients who
received treatment for hepatitis C in
2012. Approximately 16 percent are on
dual therapy, while the remaining 84
percent receive triple therapy (Figure 1).
A patient’s regimen is based on multiple
factors, including viral genotype, prior
failed therapies, co-infection, and other
hepatic activity.
Medication costs vary, depending on the
therapy that a hepatitis C patient receives.
The traditional regimen of Ribavarin and
Pegylated Interferon, categorized as dual
therapy, costs slightly more than $3,000
Figure 1 Distribution of patients by therapy type
Source: Commcare claims database
Dual Therapy16%
Triple Therapy84%
Triple TherapyVictrelis56%
Triple TherapyIncivek28%
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40 | TRENDS IN COST AND UTILIZATION©2013 by Premier Inc. All rights reserved.
per month, while triple therapy can
range up to more than $21,000 per month
(Figure 2).
As published in the American Journal of
Managed Care in December 2012, the
general population’s rate of adherence on
hepatitis C therapy is 64.6 percent.8 In a
sample of 203 patients, 131 would be ad-
herent to their drug therapy, based on the
national average. At Commcare, however,
the adherence rate is over 91 percent; 185
of their 203 hepatitis C patients have been
100 percent compliant since the start of
therapy. In this cohort, 54 additional
patients would be adherent to their
hepatitis C therapy, compared to the
national average.
Unlike many other treatment regimens,
where patients continue where they left
off if aprescription is skipped,hepatitis C
is unique. If patients miss a refill in their
six-month regimen, they must restart
treatment from the beginning.
A patient who misses month five must
start back at month one and incur five
extra monthly prescription payments.
Non-adherence ismost commonfollowing
the first month of drug therapy when
patients become more aware of the high
cost of treatment. Therefore, the lowest
Non-adherence ismost common
following the firstmonth of drug therapywhen
patients becomemoreaware of the highcost of treatment.
Source: Commcare claims database
Figure 2 Costs for hepatitis C drug therapy
Therapy types Cost
Dual therapy $3,185
Triple therapy (Victrelis) $8,165
Triple therapy (Incivek) $21,581
OUTLOOK • SPRING 2013 | 41
cost for non-adherence would be if all 54
patients stopped taking their medication
at month two, then restarted at month
one and did not miss another month of
therapy. This would result in at least one
month of drug therapy wasted.
Figure 3 shows the costs associated with
one month of missed medication for 54
patients.
Programs that reduce medication non-
adherence, especially for chronic diseases
with high-cost drug therapies, are
particularly important in minimizing
unnecessary medical expense and waste
in thehealthcare system.Asdemonstrated
in Figure 3, $798,570 is the actual savings
through Commcare’s patient disease
management efforts – approximately
$15,000 per patient.
Astoundingly, this scenario is the most
conservative estimate of savings through
adherence. In reality, many of these
patients would be non-adherent for more
than one month or become non-adherent
later in the treatment regimen (and need
to retake several additional months of
therapy instead of one). It also ignores
inpatient hospital and outpatient costs
incurred due to non-adherence.
There are an estimated 32,960 people
currently being treated for hepatitis C
in the U.S.9 Considering the national
adherence average among hepatitis C
patients, 8,752 of the 32,960 would be
adherent. Expandedover thispopulation,
Commcare’s adherence rates, as compared
to the national average, would result in a
minimum savings of $130 million.
References
1. Cutler, DM and Everett, W. “Thinking outside the
pill box,”New England Journal of Medicine,
http://www.nejm.org/doi/full/10.1056/NEJMp1002305.
2. Ibid.
3. “In chronic disease, nationwide data show poor
adherence by patients to medication and by
physicians to guidelines,”Managed Care Magazine,
http://www.managedcaremag.com/archives/0802
/0802.peer_evidence.html.
4. Cutler, DM and Everett, W. “Thinking outside the
pill box,”New England Journal of Medicine,
http://www.nejm.org/doi/full/10.1056/NEJMp100
2305.
5. “Hepatitis C FAQs,”Centers for Disease Control
and Prevention,
http://www.cdc.gov/hepatitis/c/cfaq.htm#cFAQ21 .
6. “Economic Burden and Current Managed Care
Challenges Associated with Hepatitis C,”American
Journal of Managed Care,
http://www.ajmc.com/publications/supplement/2
012/ACE007_12dec_HepC/ACE007_12dec_Mathis_
S350to9.
7. Ibid.
8. “Economic Burden and Current Managed Care
Challenges Associated with Hepatitis C,”American
Journal of Managed Care,
http://www.ajmc.com/publications/supplement/2
012/ACE007_12dec_HepC/ACE007_12dec_Mathis_
S350to9.
9. “HCV admissions rise while HIV ones fall,”Med-
pagetoday.com,
http://www.medpagetoday.com/MeetingCover-
age/IDWeek/35475.
Figure 3 Cost associatedwith onemonth ofmissed therapy for 54 hepatitis C patients
Therapy types # of patients Cost per patient Total savings
16%ondual therapy 9 $3,185 $28,665
56%on triple therapy - Incivek 30 $21,581 $647,430
28%on triple therapy -Victrelis 15 $8,165 $122,475
Total cost for onemonth ofmissed drug therapy (n=54) $798,570
Figure 4Cost associatedwith onemonth ofmissed therapy for allhepatitis C patients currently receiving treatment
Therapy types # of patients Cost per patient Total savings
16%ondual therapy 1400 $3,185 $4,459,952
56%on triple therapy – Incivek 4904 $21,581 $105,833,224
28%on triple therapy -Victrelis 2448 $8,165 $19,987,920
Total cost for onemonthmissed drug therapy (n=8,752) $130,281,096
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AbstractThe following abstract, developed by the Premier
healthcare alliance, provides an overview of a study
analyzing trends in cost and utilization. The full article
is available to Premier health system members.
42 | TRENDS IN COST AND UTILIZATION©2013 by Premier Inc. All rights reserved.
Resourceutilizationbestpractices:
DIAGNOSTICIMAGINGDiagnostic imaginghasexperiencedan85percent increase involumeover thepastdecade,1 particularly in
theuseofadvanced imagingprocedures. Therehasbeensomedebate in thehealthcare communityas to
whether suchsteepgrowth is justified.Major concerns stemfromthesafety implicationsof increasedpatient
radiationexposure.
Concernsabout thegrowth in imagingutilizationalsocomefromfindings that cite largegeographic
variations inuseacross theU.S.,withutilizationapproximately50percenthigher incertainareas,2 and
questionable clinical guidelines forvariousdiagnosticprocedures. Theseconcernsunderscore theneed for
morecomparative-effectiveness researchandclearlyworded, evidence-basedguidelines.
Todeterminepotential opportunities for improvementandcost savings, thePremierhealthcarealliance
examined imagingutilizationamongmemberhospitals. Theanalysis identifiedhospitalswith thehighest
average imaginguseandcomparedusage toabenchmarkgroup for likepatients.Ourbenchmarkgroupwas
comprisedof facilitieswithaverage imagingcostsper case in the lowest25percentofallhospitals in the
sampleand lower-than-expected inpatientmortality rates, aswell as lower-than-expectedaverage lengthof
stay. Thestudyresultsareavailable toPremierhealthsystemmembers.
Workingcollaborativelywithpractitionersand identifyingphysicianchampions is critical to successful
imagingmanagement. If opportunities forutilization improvementexist, collaborative resourceutilization
groupscan implementevidence-based imagingprotocols, provideeducationandclinicaldecisionsupport
tools to informpractitionersofprotocols in real time,monitorutilizationonanongoingbasis, andmeasure
impactof improvementefforts.
1. Parker, Laurence, Levin, DC, Frangos, A, and Vijay Rao. “Geographic Variation in the Utilization of Noninvasive Diagnostic Im-aging,” American Journal of Roentgenology (2010): 1034-1039. doi: 10.2214/AJR.09.3528.2. Ibid.
OUTLOOK • SPRING 2013 | 43
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SarahWatt is an economic analyst with
Wells Fargo Securities. Based in Charlotte,
NC, she covers theU.S.macro economy,
including the labormarket,manufacturing
sector and inflation trends. She regularly
writes indicator reports, produces special
commentary and contributes to the
company’sWeekly Economic&Financial
Commentary.
What is your estimate forGDP growth in the next12months?
The economy should growaround1.6
percent in 2013. This is notably lower than
the 2.2-percent pacewe expect to see once
wegetGDPdata for the fourth quarter.
Real GDP growth appears to have slowed
to a 1 percent rate during the final quarter
of 2012, as businesses spending paused
during the fiscal cliff negotiations.We
expect thisweaknesswill carry through
to the first part of the year,withweak
consumer spending early ondue to the
expiration of the payroll tax holiday and
increased tax rates onhigher income
earners. However, growth should pick
up as the year progresses,withGDP
increasing to a 2.4-percent pace by the
fourth quarter of 2013.
What impactwill health-carehaveonGDPgrowth?What other sectorswillhave the greatest impact
on growth in the next 12months?
Alotofthestrengthinhealthcarecanbeseen
in thesector’s employmentgrowth,andthat
E C O N O M I C SECONOMIC OUT LOOK
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44 | ECONOMICS©2013 by Premier Inc. All rights reserved.
1
2
Aconversationwith
SarahWatteconomic analyst,
Wells Fargo Securities
OUTLOOK • SPRING 2013 |45
continues tooutpace theoverallmarket. The
Decemberpayroll datashowsthat the
healthcare industryaddednearly340,000
newjobs in2012,up fromaround300,000
in2011.Wesawthestrongestgrowth in
outpatient care,which rose6.1percent,
andhomehealthcare,whichcontinues to
increaseata ratehigher thanotherareasof
the industry. Forexample, employment
withinhospitalshas increasedonlyslightly
less than2percentover thepastyear.
Another area thatwillmove theneedle on
GDP is housing. Construction spending for
residential investmentwill increase 17
percent in 2013.We’re expecting housing
starts (the number of privately ownednew
houses onwhich constructionhas been
started) to increasemore than 25percent,
andwe’ll likely see increased resale activity
as prices rebound andmore traditional
buyers comeback into themarket. This
recovery in housingwill have a large ripple
effect throughout the broader economy,
especially on the retail sector and other
service industries linked to housing.
Onearea thatwillhaveanegative impacton
GDPisgovernmentspending,duetodelayed
spendingcuts in thedebt ceiling
negotiations.Mostof thisdragwill come
fromthe federalgovernment;we’veactually
seenstateand localgovernmentspending
stabilize. Later in2013,we’ll see local and
stategovernmentspendingactuallygive
abitofaboost toGDP,but thatwill be
outweighedbythe federal spendingcuts.
What dowe see going onwith the global economyin the next 12months?What effect will the
global economyhave on theU.S. in the next12months?
We think the global economy is going to
strengthen somewhat, but overall growth
will still beweak byhistoric standards. The
global economywill probably growabout
2.8 percent, compared to ahistoric average
of 3.6 percent. This is a slight improvement
overwhatwe saw in 2012, but it’s still
below trend.
China seems to have avoided ahard
landing. Export growthhas stabilized, the
pace of industrial production is pickingup,
and inflationhas comedown to about 2
percent fromapproximately 4 percent one
year ago. That’s allowed the authorities to
loosenmonetary policy a bit,whichhas
improved lending. It looks like theeconomy
will be a bit stronger this year,withGDP
increasing about 8 percent. However, the
return to double-digit GDP growthwill
remain elusive over the next fewyears as
China shifts froman investment-led
economy tomore balanced growth that
includes greater domestic consumption.
Another areawe’ll bewatching closely this
year isEurope.Thecontinent isstill struggling
with theeffects of the sovereigndebt crisis,
andit isnowinarecessionthatwillprobably
continue throughtheearlypartof thisyear.
Growth for2013asawholewill likelyeven
out toapproximately0.2percent.Overall,
weexpectverysluggishgrowth inEurope
thatwillweighoneconomicactivity in the
U.S. and theglobal economymore broadly.
3
Trade is themost direct link between the
global economyand theU.S. Since the
global economywill be growing at a faster
rate than theU.S. in 2013, theU.S. should
see net exports add toGDP.Historically
weak global growth, however,will keep
inflation tameas youwon’t see outsized
demand for commodities.
What changes do youexpect to see over thenext 12months in theU.S.unemployment rate?
Weexpect the employment rate to stay
essentially flat over the next 12months.
WeakGDPgrowthwon’t create the
demandneeded to bring down theunem-
ployment rate in ameaningfulway.When
looking at unemployment, the labor force
participation rate is really thewild card.
Typically in a recession, the labor force
participation rate declines asworkers get
discouraged or go back to school, only to
increase againwhen the economy starts
to recover and job prospects improve.We
really haven’t seen that yet in this cycle.
Someof that is due to demographic trends,
such as the babyboomers reaching retire-
mentage, butwe’re also seeingadecline in
“primeageworkers,”peoplebetweenthe
agesof25and54. It’s reallyanyone’sguess
as tohowmanyof thosepeople comeback
into theworkforceas theeconomystrength-
ens.We sawboth the unemployment rate
and the labor participation rate decline 0.7
percentage points fromDecember 2011 to
December 2012, indicating that there is a
direct link between the two.
Can you describe overallinflation projections forthe next 12months in theU.S. economyandwhat
thismaymean for healthcare?
Overall, the trend for inflation over the
next year is going to be tame.We’re
looking at top-line inflation to rise
approximately 1.8 percent, and core
inflation,which excludes themore volatile
components of food and energy, to also
increase 1.8 percent. Inflation is at a
comfortable point formonetary policy
and the economymore broadly.
The reasonwe’re still having such tame
inflation right now isweak domestic
demand– as evidenced by our expectation
for a year of sub-2 percentGDPgrowth.
Even thoughunemployment has come
down, it’s still elevated abovewhat
economists consider the natural rate of
unemployment,which is between5.5 and
6percent. Because there is such ahigh
degree of labormarket slack, there is still
not thatmuchpressure onprices. Also,
global demand isweak,whichwill help to
keepprice growth lowhere in theU.S.
Therewill be someareas of upward
pressure. For instance,we’re still seeing
somepressure on foodprices from the
drought this summer. Also, alongwith the
housing recovery,we’re seeing increases in
rental prices. Homeownership is still very
affordable, butwe are seeing rental rates
in themulti-family and apartment
markets increasing, and that heavily
impacts the rate of inflation, since shelter
costs account for 30 percent of CPI.
Medical inflationhas followed adifferent
trend.Historically,medical care inflation
has outpaced broader inflation, and that
should continue asmedical care ismuch
less price-sensitive than other goods. The
agingpopulationwill only increasedemand
formedical care, andwith increased
demandyou get increased price pressures.
However,we should see the trend in
cost increases stabilize this year, as a lot
of healthcare companies are closely
managing their expenses ahead of
changes surrounding reimbursement rates
and coverage rules due to theAffordable
CareAct. This should help keepmedical
costs from really soaring in 2013.
4
5
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What are yourexpectations forcommodity prices in thenext 12months?
It’s likelywe’ll see onlymoderate growth in
commodityprices since theglobal economy
still isn’t firing on all cylinders. Thiswill
keep demandon commodities from rising
too rapidly, as there is stillweakness in
Europeandsubstandardgrowthhereand
inChina.Of coursewith commodities,
prices arealwaysprone toevent risks like
wesawwith thedrought thispast summer.
Wecould seepricepressurespopupdue to
unforeseenevents.
Oil prices are notoriously difficult to fore-
cast, but they’ll gradually rise this year as
theU.S. and global economies improve.
That assumesnomajor geopolitical issues
arise thatwould increase risk for oil prices.
What is the impact of theAffordable Care Act (ACA)on thehealthcare industryin the next 12months?
The election confirmed that theACAwas
going tomove forward, so really, 2014will
be the big year for theAffordable CareAct.
Because there are somanynew regula-
tions that need to be implemented, 2013
will be about preparing for those changes.
Therewill be a lot of pressure on insurance
providers to look at costs, givennew rules
regarding coverage and reimbursement.
What is the expectedimpact of ACA initiatives(e.g., ACOs) on hospitalprofitability in the next12months?
Profitability isgoingtoremaincompressed
ashospitalsprepare for thenewregulations.
Dependingonwhathappenswiththedebt
dealandhowreimbursementstomedicalcare
providersarestructured,there’sagoodchance
thatprofitswillbesqueezed.However,hospi-
talshavemadeaconcertedeffort tocontrol
costs,whichwill softentheblow.Thegood
news is thatutilization ratesare stabilizing.
Growthmaystillbe limitedasoutpatient
caregainsmomentumandemployer-
sponsoredhealthplansmovetocost-sharing
programsthat increase transparencyabout
whatprocedures reallycost.Thatcould lead
toadecrease inelectiveprocedures.
7
6 8
ECONOMIC AND SUPPLY CHAIN TRENDSIMPACTING OUR MEMBERS
NUMBERSBEHIND THE
48 | ECONOMICS©2013 by Premier Inc. All rights reserved.
Premier distributed an online survey to
approximately 9,000member health
system leaders nationwide to solicit their
perspectives on thehealthcare supply
chain – in particular, the impact of
economic and industry trends. The
survey (n=535) provided awealth of
data on the key objectives of the Premier
healthcare alliance.
Forecast growth inoutpatientadmissions
With the shift toward populationhealth
management and accountable care, health
systems are focusing on integrating the
care continuum, including outpatient,
rehabilitative, andhome care. Improving
the continuity of carewill help health
systems reach readmission goals as part
of theAffordable CareAct.
As a result of a greater focus onnon-acute
care and changes inMedicare inpatient
and outpatient designations,1 69 percent
of respondents anticipate an increase
in outpatient admissions in 2013,
compared to the prior year. At the same
time, 53 percent expect an outpatient
increase of up to 5 percent, and 16percent
anticipate an admissions increase of
more than 5percent. Only 7 percent of
respondents forecast a decrease in
outpatients (see Figure 1).
Three-quarters of respondents expect their
inpatient admissions to remain static or
increase in 2013, a finding that is similar to
fall 2012 predictions.
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100.0%
80.0%
60.0%
40.0%
20.0%
Decrease bymore than 5%
0.0%
Source: Premier online survey for EconomicOutlook Spring 2013 publication
Figure 1 Inpatient and outpatient admissions forecasts
3.1% 1.3%
Decrease byup to 5%
20.6% 6.0%
Increase byup to 5%
26.6%
Increase bymore than 5%
8.3% 15.8%
� Inpatient � Outpatient
52.7%
No change
41.4%24.2%
50 | ECONOMICS©2013 by Premier Inc. All rights reserved.
Source: Premier online survey for EconomicOutlook Spring 2013 publication
Figure 3 Top two drivers of healthcare costs
Drivers of healthcare costs Spring 2013 Fall 2012 Spring 2012
Healthcare legislation andmandates 48% 45% 51%
Overutilization of products and services 29% 33% 23%
Labor costs 23% 19% 21%
Misalignment of quality andpayment incentives 22% 20% 17%
Lack of clinical coordination of care 22% 20% 17%
Patient demand for healthcare services 19% 22% 17%
Health information technology 15% n/a n/a
Pharmaceuticals 12% 14% 18%
Newclinical technology/equipment 6% 8% 11%
Medical devices 5% 5% 9%
Source: Premier online survey for EconomicOutlook Spring 2013 publication
Drivers of healthcare costsFigure 2
� Healthcare legislation andmandates
� Overutilization of products and services
� Labor costs
� Lack of clinical coordination of care
� Misalignment of quality and payment incentives
� Health information technology
� Patient demand for healthcare services
� Pharmaceuticals
� Medical devices
� New clinical technology/equipment
33%
12%
13%
11%
8%
7%
6%
5%3%
2%
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Regulation andoverutilization remainbiggest
drivers of healthcare costs
Legislation is the largest driver of respondents’
healthcare costs. One-third cite healthcare
legislation as the top driver (see Figure 2), and
nearly half report that it is one of the top two (see
Figure 3). In the face of reimbursement cuts and
other financial impacts of healthcare reform,
hospital executives are engaging in various
initiatives to improve quality of carewhile
reducing systemcosts andwaste. (See related
“Perspectives”article in this issue.)
In the samevein, and similar to responses in fall
and spring 2012, 13 percent of respondents cite
overutilizationofproductsandservicesas thesec-
ondbiggest costdriver, followedby laborexpenses.
Themajor shifts in responses for this question
since last year include (see Figure 3):
• Fewer respondents believe pharmaceuticals are
amainhealthcare cost driver than in the 2012
surveys;
• Labor costswere ranked as one of the top three
cost drivers in both spring 2012 and2013 but not
in fall 2012; and
•More respondents believemisalignment of
quality andpayment incentives is amain cost
driver than in 2012.
Capital budgets and investments
Capital budgets are increasing for 40 percent of
2013 survey respondents (see Figure 4). The
percentage of respondentswith increasing or
stable capital budgets is relatively unchanged
from this time last year (65 percent in spring
2012, compared to 63 percent in spring 2013).
25.0%
30.0%
20.0%
15.0%
10.0%
5.0%
0.0%
� Fall 2011 � Spring 2012 � Fall 2012 � Spring 2013
Increased by30%ormore
Source: Premier online survey for EconomicOutlook Spring 2013 publication
Figure 4 Change in capital budgets
Increased10% to 29%
Increased1% to 9%
No change Decreased1% to 9%
Decreased10% to 29%
Decreased by30%ormore
52 | ECONOMICS©2013 by Premier Inc. All rights reserved.
Capital investment areas remained flat
over the past 18months,with 43 percent
of budgets dedicated to IT and telecommu-
nications –most notably in the area of
electronic health records (EHRs) and other
integrated technologies (see Figure 5). In
moving towardmeaningful use criteria,
health systems are investing in IT first,
followedby infrastructure.
Supply chain to target cost-savings goals
and cost-reduction opportunities
Tomeet the demands of the current
healthcare environment, 27 percent of
respondents’organizations are dedicating
resources to EHR-specific IT investments
for supply chain improvement (see
Figure 6).
Product standardization is considered by
37percent of respondents to be among the
top twoareas of resource dedication for
supply chain improvement,while building
relationshipswith physicians and
clinicians is a key area of concern for
27 percent of respondents.
An organization’s cost-savings goals
appear to be a growing factor, as 35
Source: Premier online survey for EconomicOutlook Spring 2013 publication
Figure 6 Areas of resource dedication for supply chain improvement
Area of resource dedication Ranked first Ranked second Spring 2013 Fall 2012
Product standardization 18.0% 18.8% 36.8% 32.7%
IT investment – EHR-specific 26.6% 8.9% 35.5% 31.4%
Building relationshipswith physicians 10.3% 16.6% 26.9% 27.3%
Reducing costs for physician preference items 12.1% 12.6% 24.7% 27.2%
Value analysis 8.8% 13.5% 22.3% 27.2%
Reducing costs for commodity products 6.8% 8.9% 15.7% 12.4%
Data standardization 5.1% 8.2% 13.3% 11.6%
IT investment –non-EHR-specific 5.7% 4.4% 10.1% 12.0%
Integrating supply chain and revenue cycle systems 4.0% 5.3% 9.3% 11.6%
Automation 2.6% 2.7% 5.3% 6.6%
TOPTWOAREAS
Figure 5 Area of capital investment spend
Source: Premier online survey for EconomicOutlook Spring 2013 publication
Laboratory equipment
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Other
Other clinical equipment
Surgical suites/equipment
Imaging equipment
Infrastructure
IT and telecommunications
� Spring 2013 � Fall 2012 � Spring 2012 � Fall 2011
OUTLOOK • SPRING 2013 |53
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percent of respondents list it as having the
greatest impact on their supply chains,
compared to 28 percent in fall 2012 (see
Figure 7). Extending the supply chain
across the continuumof care – for
instance, through centralized purchasing –
has the greatest impact for 15 percent of
respondents’ supply chains.
The supply chain serves an important role
in building efficiencies and reducing costs
for improved quality and integrated care.
Nearly half of respondents (49 percent)
believe that physician andhealth system
engagement surrounding evidence-based
decisionmaking is the greatest healthcare
trend impacting their supply chains,
followed closely by a similar trend toward
improvedutilizationmanagement
(see Figure 8).
Source: Premier online survey for EconomicOutlook Spring 2013 publication
Source: Premier online survey for EconomicOutlook Spring 2013 publication
Figure 8 Healthcare landscape trends with greatest impact on organization
Healthcare landscape trends Spring 2013 Fall 2012
Increased physician-health systemengagement 48.7% 53.9%
Focus onutilizationmanagement 44.2% 37.8%
Involvement in value analysis process 28.3% 30.3%
Movement for supply chain integration across health system 22.6% 19.5%
Populationhealthmanagement and coordination across continuumof care 18.6% 14.8%
Consideration of newsupply chainmetrics to reflect impact to care process 17.4% 13.4%
Consideration of supply chain contribution to patient-centeredhealthcare 8.9% 14.5%
Location andproduct identification standardization 6.8% 9.2%
TOPTWOAREAS
Figure 7 Factors with the greatest impact on supply chain
Comparative effectiveness data
0% 5% 10% 15% 20% 25% 30% 35% 40%
Other
Commodity prices
Healthcare information technology
Medical device prices
Drug shortages
Value analysis process
Integrating the supply chain acrossthe continuum of care
Cost savings goals of the health system
� Fall 2012 � Spring 2013
54 | ECONOMICS©2013 by Premier Inc. All rights reserved.
About the survey
Inwinter 2012-2013, Premier, in collabora-
tionwithCustomerCareMeasurementand
Consulting LLC, commissionedanonline
survey of nearly 9,000healthcare leaders
across ourmembership, representing both
acute andnon-acute care. The survey re-
spondents (n=535) included a cross-section
ofmembers across geographical area and
organizational size and type. The survey
collected data onmembers’perspectives
on thehealthcare supply chain,with a
particular focus on related financial and
economic industry trends.
Approximately 85 percent of respondents
represented acute care providers. Nearly
one-third of respondents (30 percent)were
C-suite; 26 percentwere service-line or
practice-areamanagers/directors; and 20
percentwere supply chain ormaterials’
managers. Urban and rural areaswere
equally represented. An overviewof the
respondent profile is below.
Reference1. “RACTarget: Inpatient vs. OutpatientDesignation,”RACMonitor, http://www.racmoni-tor.com/news/3-feature-aritcles/137-rac-target-in-patient-vs-outpatient-designation.
C-Suite Service line orpractice areamanager/director
Supply chainormaterialsmanagement
Officeadministrator/manager
Clinician Finance and/or accounting
Qualityimprovement
Physician Other
Figure 9 Organizational role of survey respondents
29.3%
26.2%
20.3%
8.4%
5.4%
2.9%
2.1%
0.4%
5%
Multi-hospitalsystem/IDN
Largehospital
(500 + beds)
Midsizedhospital
(between 200&500 beds)
Smallhospital(less than200 beds)
Criticalaccesshospital
Academicmedicalcenter
Multi-specialtygrouppractice
Surgerycenter
Senior-livingfacility
Figure 10 Respondents by organization type
30%
14%
27%
17%
17%
8% 8% 7% 7%
Single-specialtygrouppractice
2%
Physician-ownedspecialtyhospital
1%
Other
4%
OUTLOOK • SPRING 2013 |55
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Operatingmargins for acute-care hospitals
have improved since 2007 and2008,when
they stood at less than 1percent.Median
operatingmargin increased 300percent
from2007 to 2011 but decreased 31
percent in the first three quarters of 2012,
compared to 2011.
Hospitals inthefirstquartile (top25percent)
have seen significant improvement in
operatingmargin, rising from5.8 percent
in 2008 to 8.6 percent in 2011.However,
they sawa significant decrease in
operatingmargin, to 7.1 percent, in the
first three quarters of 2012. Though the
gapbetween themedian and the first
quartile expanded from2008 to 2011
(reaching 6.5 percent in 2011), the first-
quartilemargins appear to have beenhit
harder in 2012, bringing the gapbetween
the two to 5.7 percent last year.
AN UPDATE ON
hospitalperformance
metrics
AN UPDATE ON
hospitalperformance
metrics
Figure 1 Operating margin of acute care hospitals, 2008-2012 (Q3)
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
� Average � Median � 1st quartile
2008 2009 2010 2011 2012
Source: A database maintained by the Premier healthcare alliance
56 | ECONOMICS©2013 by Premier Inc. All rights reserved.
Profit per acute beds in service has
returned to 2009-2010 levels for the first
quartile, after seeing anearly $30,000
increase in 2011 compared to 2010.
Similarly, themedian sawa17percent
decrease in profit per acute bed in the
first three quarters of 2012, compared to
2010-2011 levels. Regardless, the first
quartile still largely outperformsboth the
median and the average.
Premier’smember survey showed that
35 percent ofmember health systems
expect an increase in inpatient admis-
sions in 2013, compared to 2012,while
68 percent of respondents expect an in-
crease in outpatient admissions (see
“Behind theNumbers”article in this
edition). The decline in inpatient revenue
persists as a percent of overall patient
revenue, decreasing from60percent in
2008 to 54 percent in 2012. Asmore care
shifts to the outpatient setting,wewill
continue to see declines in inpatient
revenue as a percent of gross patient
revenue. Declines of approximately 5
percent have been seen in themedian
and first-quartile groups since 2007,
though themedian inpatient revenue
has remained static as a percent of gross
patient revenue since 2010.
$200,000
$180,000
$160,000
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$0
� Average � Median � 1st quartile
2008
Source: A database maintained by the Premier healthcare alliance
Figure 2 Profit and loss per acute beds in service, 2008-2012 (Q3)
2009 2010 2011 2012
Figure 3 Inpatient gross patient revenue as a percent of gross patient revenue, 2008-2012 (Q3)
51.0%
52.0%
53.0%
54.0%
55.0%
56.0%
57.0%
58.0%
59.0%
60.0%
61.0%
� Average � Median � 1st quartile
2008 2009 2010 2011 2012
Source: A database maintained by the Premier healthcare alliance
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Baddebt expense has grown in 2012 for
the average,while decreasing slightly for
themedian andmore significantly, for the
first quartile. Following the first three
quarters of 2012, the first quartile’s bad
debt sits at its lowest point in five years.
Total operating expense for themedian
and average remained relatively constant
in the first three quarters of 2012,
compared to 2011 and2010 levels. Though
the first quartile saw the greatest increase
in total operating expense as a percent of
net patient revenue (NPR) in 2012, a 10
percent gap remains between the first
quartile andboth themedian and average.
Note: Data shown for 2012 does not
includeQ4. Someadjustmentsmaybe
made inQ4 thatwill alter the overall
yearly numbers. Updatednumbers
will be in the fall 2013 edition of the
EconomicOutlook.
RichWestbay, programmanager,
SupplyFocus®, Premier healthcare alliance,
contributed to this article.
Figure 4 Bad debt expense as a percent of net patient revenue, 2008-2012 (Q3)
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
� Average � Median � 1st quartile
2008 2009 2010 2011 2012
Source: A database maintained by the Premier healthcare alliance
Figure 5 Total operating expense as a percent of net patient revenue, 2008-2012 (Q3)
80.0%
82.0%
84.0%
86.0%
88.0%
90.0%
92.0%
94.0%
96.0%
98.0%
100.0%
� Average � Median � 1st quartile
2008 2009 2010 2011 2012
Source: A database maintained by the Premier healthcare alliance
58 | ECONOMICS©2013 by Premier Inc. All rights reserved.
Thesemetrics are based on a sample of 332healthcare facilities that have submitted three
years of inpatient and outpatient data to a databasemaintained by the Premier healthcare
alliance. In order to include data from2012, yearly data is shown in fiscal years (July to
June) rather than calendar years.
The sample is representative of a cross-section of ourmembership that includes variation in
geographic area and organizational size and type. This report identifies year-over-year (YOY)
percentage changes in historical volumes for key data elements, such as inpatient and
outpatient increases, surgery growth, andpayormix from July to June 2011 (FY2011) to the
sameperiod in 2012 (FY2012).
Figure 1 FY2012 quarterly trends
Source: A databasemaintained by the Premier healthcare alliance
Notes: Quarterly numbers show thepercent change from the samequarter in the previousfiscal year. Annual totals represent the percent change overall in FY2012 compared to FY2011.
Y/YGrowth Q3 2011 Q4 2011 Q1 2012 Q2 2012 FY2012
Inpatient
Outpatient
Total discharges
Inpatient surgeries
Outpatient surgeries
Births
Medicare discharges
Medicaid discharges
Self-pay discharges
Managed care and otherpayor discharges
1.93%
2.94%
2.40%
2.54%
0.54%
1.36%
4.27%
0.07%
0.25%
2.68%
3.45%
2.50%
1.86%
3.86%
1.57%
2.88%
3.57%
0.05%
0.51%
1.71%
1.40%
3.63%
3.07%
1.45%
1.35%
1.09%
5.86%
0.29%
1.17%
2.79%
2.29%
3.25%
2.62%
3.21%
0.88%
2.79%
4.17%
0.17%
0.81%
3.47%
0.61%
2.39%
2.06%
1.63%
0.96%
1.19%
3.51%
0.09%
1.82%
2.76%
PREMIER’SPATIENTVOLUMETRENDS
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• Inpatient volumes decreased 1.9 percent in FY2012 compared to FY2011.
• Outpatient volumes for FY2012 increased 2.9 percent compared to FY2011.
• Inpatient surgeries decreased 2.5 percent fromFY2011.
• Outpatient surgery volumes decreased 0.5 percent in FY2012 compared to FY2011,whichwas upa slight 0.3 percent YOY fromFY2010.
• Payormix:Medicare andmanaged care volumes increased in FY2012.Medicare volumewas up4.3 percent for FY2012, compared to FY2011;managed care and other payor volume sawa2.7 percent increase over FY2011. Medicaid dischargeswere nearly flat, at 0.1 percent higher thanFY2011,while self-pay discharges decreased 0.3 percent over FY2011.
OF NOTE:
60 | ECONOMICS©2013 by Premier Inc. All rights reserved.
Discharge trends
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
� Total discharges � Inpatient discharges � Outpatient discharges
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q22010 2010 2011 2011 2011 2011 2012 2012
Y/Ypercentchange
Discharges by payor type
� Medicare discharges � Medicaid discharges � Self-pay discharges � Managed care and other payor discharges
Y/Ypercentchange
Source: A databasemaintained by the Premier healthcare alliance
Source: A databasemaintained by the Premier healthcare alliance
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q22010 2010 2011 2011 2011 2011 2012 2012
OUTLOOK • SPRING 2013 |61
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Y/Ypercentchange
Surgery and emergency department visits
� Inpatient surgeries � Outpatient surgeries � ED visits
Y/Ypercentchange
Average length of stay
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
� Y/Y percent change � Average length of stay (days)
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q22010 2010 2011 2011 2011 2011 2012 2012
3.56
3.54
3.52
3.72
3.50
3.48
3.46
3.44
3.42
3.40
3.38
Note: Average length of stay includes only inpatient data; outliers have been excluded.Source: A databasemaintained by the Premier healthcare alliance
Source: A databasemaintained by the Premier healthcare alliance
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q22010 2010 2011 2011 2011 2011 2012 2012
62 | ECONOMICS©2013 by Premier Inc. All rights reserved.
Whatprice indexes areimportant in thehealthcareindustry?
Industry stakeholders – including suppliers,
healthcare systems, and theCenters for
Medicare&Medicaid Services (CMS) – use
three key price indicatorswhen examining
inflationary pressures in themarketplace:
•The consumer price index (CPI),
•The producer price index (PPI), and
•TheCMSmarketbaskets.
CPI and PPImeasure the average change
over time in the prices of fixed goods and
services. The CPI is primarily used to
compare ahousehold’s cost for a specific
basket of finished goods and serviceswith
the cost of the samebasket during an
earlier benchmark period. Theweight
given to each basket item is fixed.
ThePPIusesa similarbenchmarkapproach,
but itmeasures price changes reported by
establishments at thewholesale, rather
than the retail, level.While both indexes
measure inflation, they differ in the goods
and services eligible for inclusion.1
Economic indicators that aremore specific
to the healthcare industry are CMS
marketbaskets,whichmeasure howmuch
more or less itwould cost at a later time to
buy the samemix of goods and services
purchased during a base period. These
indicators reflect price inflation facing
medical services providers.
Each index is summarizedhere and is
accompanied by recent relevant data that
provide additional budgeting resources.
Consumer price index
TheCPImeasures price change from the
consumer’s perspective and includes goods
and services purchased for personal
consumption byurbanU.S. households.
While there aremany categorieswithin
the CPI, the twomost commonly used for
healthcare are the CPI for all urban
consumers (CPI-U) and the CPI formedical
care.Medical care is one of eightmajor CPI
categories, and it has two classifications,
commodities and services,with each
containing several itemcategories (strata).2
The CPI-Uwasunchanged before seasonal
adjustment fromNovember 2012 to
December 2012,while the all-items’ index
increased 1.7 percent before seasonal
adjustment for the 12months from
December 2011 toDecember 2012.
Medical care CPI sawanoverall unadjusted
3.2 percent increase fromDecember 2011
toDecember 2012, but therewasno
change fromNovember 2012 toDecember
2012. The categories ofmedical care
commodities andmedical care services
increased 1.7 percent and 3.7 percent,
respectively, inDecember 2012 compared
to 2011.3
Producer price index
In contrast to CPI, the PPImeasures price
change from the perspective of the seller
and includes the entiremarket output of
U.S. producers. Since PPI captures price
movement prior to the retail level, itmay
foreshadowsubsequent price changes for
business and consumers.4
The PPI for finished goods,which is the
most commonly usedmeasure of PPI, rose
1.3 percent, on anunadjusted basis, for the
12months that endedDecember 2012.5
The 12-month change fromDecember
2011 toDecember 2012 for the net output
of selected industries is:
•Pharmaceutical andmedicine
manufacturing, 5.1 percent;
•Medical equipment and supplies
manufacturing, 1.2 percent; and
•Surgical andmedical instrument
manufacturing, 0.2 percent.6
Additional information is available from
theBureau of Labor Statistics at
www.bls.gov/CPI andwww.bls.gov/PPI.
CMSmarketbaskets
TheCMSmarketbaskets update payments
Premier’sguidetoeconomic indicatorsPrice indexes: CPI, PPI andCMSmarketbaskets
and cost limits inmultiple CMSpayment
systems,while individualmarketbaskets
provide amore accuratemeasure of their
own inflation indexes. The:
•Prospective Payment System (PPS) hospital
marketbasket updates inpatient hospitals’
operating andoutpatient PPSpayments as
well as cost limits for children’s hospitals,
cancer hospitals, and religious, non-
medical healthcare institutions.
•Skilled nursing facilitymarketbasket up-
dates payments to skilled nursing facilities.
•Homehealth agencymarketbasket
updates homehealth PPS payments.
•PPShospital capitalmarketbasket updates
inpatient hospitals’capital PPSpayments.
•RPLmarketbasket updates inpatient-
rehabilitation, psychiatric, and long-term
care PPS payments.
•Medicare economic index is usedwith the
sustainable-growth rate to update the
physician fee schedule.7
Themarketbaskets are constructed from
mutually exclusive spending categories,
whichuse data collected fromhospitals’
Medicare cost reports and corresponding
price indexes. The overall hospital price
index is the sumof each category’s product
weight and relevant price index. The price
indexes, or proxies,which are used to
calculate themarketbasket, include data
from theBureau of Labor Statistics (most
commonly the producer price indexes).
Themarketbasket levels andpercentage
changes are updated quarterly,with each
new forecast containing an additional
quarter of historical data.8 CMSprojects
payment updates for the coming fiscal
year using amarketbasket containing the
latest available data at the time the final
regulation is published. This is based on
the CMS fiscal year running fromOctober
to September. Once this update has been
determined, it is generally not revised to
includemore recentdata.However, because
marketbasket data is updated quarterly,
the currentmarketbasketmaybe different,
depending on the variances in the forecast
data anddata currently available.9
Themarketbasket of interest tomost hos-
pitals is the Inpatient Prospective Payment
System (IPPS),which should closely ap-
proximate ahospital’s projected change in
Medicare revenue. In FY2012, CMSrevised
its estimatedmarketbasketupdate forhos-
pitals that report qualitydata to3percent.
OnAugust1, 2012, CMSreleased its final
rule for FY2013, stating that inpatientpay-
ments in theaggregatewill increase2.3
percent to reflect amarketbasketupdate
of 2.6percent.10 Thekey cost category in
the index is compensationexpense,which
includes laborandbenefits and isweighted
at 60 percent. The index also includes
major purchasing categories, such as food,
pharmaceuticals, blood, and equipment.
Additional information is available fromthe
Centers forMedicare&Medicaid Services at
www.cms.gov/MedicareProgram-
RatesStats/05_MarketBasketResearch.asp.
References1. “PPI programspotlight,”Bureau of Labor Sta-tistics,www.bls.gov/ppi/ppivcpi.pdf.2. “Measuring price change formedical care inthe CPI,”Bureau of Labor Statistics,www.bls.gov/cpi/cpifact4.htm.3. “Consumer Price Index –December 2012,”Bu-reau of Labor Statistics,http:/bls.gov/cpi/cpid1212.pdf.4. “Producer Price Indexes: programoverview,”Bureau of Labor Statistics,www.bls.gov/ppi/ppi-over.htm#Link6.5. “Producer Price Index –December 2012,”Bu-reau of Labor Statistics,http://www.bls.gov/news.release/pdf/ppi.pdf.6. “Producer Prices Indexes output of selected in-dustries and their products,”Bureau of LaborStatistics,http://www.bls.gov/web/ppi/ppitable05.pdf.7. “Medicare program rates and statistics,”Cen-ters forMedicare andMedicaid Services,www.cms.gov/MedicareProgramRatesStats/05_MarketBasketResearch.asp.8. Centers forMedicare andMedicaid Services,http://www.cms.gov/MedicareProgramRatesStats/downloads/mktbskt-pps-hospital-2006.pdf.9. Ibid.10. “FY2013 IPPS Final Rule includes 2.3 percenthospitalpaymentupdate,”AssociationofAmericanMedicalColleges,https://www.aamc.org/advocacy/washhigh/highlights2012/300648/fy2013ippsfinalruleincludes2.3percenthospital-paymentupdate.html.
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OUTLOOK • SPRING 2013 |63
CPI-U, Medical care CPI, and IPPS marketbasket rates (2005-2012)
5.0%
Annualpercentchange
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
� CPI-U Medical care CPI �Medicare marketbasket - inpatient hospital
2005 2006 2007 2008 2009 2010 2011 2012 2013
��
� ��
��
��
�
�
�
�
�
�
��
Note: Rates are current as of February 2013.
Premier’s Medical-SurgicalInflationary Calculator
A resource for proactivelymanagingmedical-surgical supply spend
TheMedical-Surgical Inflationary Calculator
is a quick and easy-to-use resource designed
to helpmembers estimate Premiermedical-
surgical supply spend. The calculator:
> Compares Premier’s contractual price
protection and suppliers’price inflation
estimates to deliver a detailed estimate of
projected supply costs;
> Prepopulates the spendprofile fromone
SpendAdvisor® report and enables users to
manually adjust for anticipated spend;
> Compensates for off-contract spendwith
an optional SpendAdvisor report;
> Alertsmembers to contract categories that
will be renegotiated in the current year;
> Provides aggregate inflation estimates by
line of business; and
> Analyzes spendby individual facilityor IDN.
The calculator can be found through Pre-
mier’s Supply ChainAdvisor® site. Formore
information about theMedical-Surgical Infla-
tionary Calculator, please contact the Premier
SolutionCenter at solutioncenter@premier-
inc.com.
Premier’s Drug Budget Tool
A resource for proactive drugexpensemanagement
TheDrugBudget Tool prepopulates profiles
for analysis and enables users to evaluate
their drug purchases. The tool:
> Analyzes 92 percent of annual drug
purchases;
> Examines entire systems andmultiple
hospitals in a single SpendAdvisor report;
and
> Automatically fills in all of the application’s
analytic cells.
To learnmore about theDrugBudget Tool,
pleasecontact JerryFrazier, directorofPremier’s
Center for Evidence-based Pharmacy Practice,
Premier’s Supply Mix Index™
Amethodology for calculatingsupply cost indexes for eachMedicare Severity - Diagnosis-Related Group (MS-DRG).
The SupplyMix Indexmethodology,which
combines clinical and supply cost data from
more than370hospitals, is designed to:
> Enable the calculation of a hospital’s Supply
Mix Index based on theuniquemix of
services provided to patients. The Supply
Mix Index can also be calculated across
systems,within service lines, and at other
levelswithin a system.
> Be statistically sound. TheMS-DRGSupply
Mix Indexweights are calculated using
more than 4.4million patient-level records
fromPremier’s QualityAdvisor™database.
> Demonstrate amore direct correlation to
supply expense-per-patient case thandoes
the CaseMix Index. Premier’s SupplyMix
Index focuses on the supply costwithin a
case,while theCaseMix Index incorporates
other significant, non-supply-related
expenses.
> Allow for cross-hospital comparisons of
supply efficiency and intensity.
Premier’s newmethodologywill initially be
used in the executive-level reporting
application of SupplyFocus®used by acute
care facilities. SupplyFocus is also included
withOperationsAdvisor®, Premier’s labor
productivity andbenchmarking product.
To learnmore about Premier’s SupplyMix
Index, please contactMarkHiller, vice
president of innovative solutions, at
[email protected], or Richard
Westbay, programmanager, SupplyFocus, at
Premier supply chain solutions
64 | ECONOMICS©2013 by Premier Inc. All rights reserved.
OUTLOOK • SPRING 2013 |65
Alternate Site Healthcare
Cardiovascular Services
Clinical Laboratory Services
Facilities
Foodservice
Imaging
IT / Telecommunications
MaterialsManagement
Nursing
Pharmacy *
Surgical Services
Women and Children's
Not applicable
*Pharmacy data derived fromPremier's Drug Budget Development ToolEstimated inflationary changes are subject to change.
Range of supplier inflation estimates:
This figure shows the range of supplier-
reported inflation estimates for products
within a service line. The range does not
take into account Premier contract price
protection or utilization data.
Average of supplier inflation estimates:
The supplier’s estimate of the average
percent increase is based on a true
average.
Projected Premier contract inflation
estimates are calculated as follows:
Pharmacy–Projectionsarederived from
thePremierDrugBudgetDevelopmentTool.
All others (except Foodservice) –
Projections reflect the expectedweighted
average percent change in contract pricing
for the existing contract portfolio as of
February 1, 2013.
0.57%
0.02%
1.01%
1.74%
3.50%
1.16%
0.07%
1.27%
0.97%
3.94%
1.14%
0.28%
3.09%
2.05%
2.48%
4.01%
3.80%
2.84%
4.36%
4.21%
4.56%
Not applicable
3.55%
0.52%
5.0%
5.0%
7.0%
15.0%
9.0%
15.0%
5.0%
15.0%
15.0%
12.%
8.0%
0% -
0% -
0% -
0% -
3.0% -
0% -
0% -
0% -
0% -
0% -
0% -
Inflationsummary
Service line Range of inflationestimates
Average of inflationestimates
Projected Premiercontract inflationestimates
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66 | COMMODITIES OVERVIEW©2013 by Premier Inc. All rights reserved.
globaleconomy
lookingat the
The InternationalMonetary Fund (IMF)projected a slight increase in globalgrowth, froman estimated 3.2 percent in2012 to 3.5 percent this year.1 Emergingmarketswill play a critical role,with China,India, andBrazil expected to contribute 50percent of global economic growth in2013,compared to approximately 25 percentprior to the financial crisis.2 TheU.S.,though itwill return to near-record levelsin 2013,will contribute only 10 percent toglobal growth this year. The Eurozone isunlikely to contribute at all.3
Global economic uncertaintywill likelyrestrain increases in commodity prices in2013. The sovereign debt crisis and otherEurozoneweaknesses, alongwithsubstandard growth in theU.S. andChina,will keep prices from rising too rapidly.4
Economists predict theU.S. gross domesticproduct (GDP)will increase by about 2percent in 2013, though the fourth quarterof 2012 sawanunexpected 0.1 percentannualized contraction, primarily due to acontinueddecline ingovernmentspendingandtheeffectsofHurricaneSandy.5Becauseof this, the Federal Reserve extended thethird round of quantitative easing – anapproximate $85 billion permonthbond-buying program– to keep interest rateslowand encourage consumer spending.6
As consumer spending grows, demand forcommodities typically increases aswell,resulting in higher commodity prices.
As an example, copper ended themonth ofJanuarywith anear four-monthhigh duetostrongerU.S. economicdata.U.S. jobgainsin the latter half of 2012 and entering 2013have drivenupdemand for copper andother goods. Copper typically sees anincrease in demandas unemploymentdecreases, since employed consumers tendto spendmore on goods containing copper,such as cell phones and laptops.7
U.S. gasolineandcrudeoil prices areexpected to flatten in2013and2014, asgrowth in consumption is offset byincreasingglobal supply. Plastic resinpricesoftenalignwithpetrochemical prices, sincetheyarederived fromcrudeoil andnaturalgas. Becauseof this, flatteninggasandoilprices should result in flat ordecreasedplastic resincosts. Thoughsynthetic rubbersarealsoderivedfromoil, competitionfor rawmaterials fromthegrowingautomotivemanufacturing industry coulddriveupnatural and synthetic rubberprices.8
Cottonprices continued to decline at theend of 2012. China began selling from itsreserves in January,which could lead todrastically lower cotton demand. As cottonprices drop,many farmers have switchedto other,more lucrative crops. A potentialdecrease in the cottonharvest could drivecottonprices back up, as could sustainedstockpiling fromChina.9
Aquick lookat the last five years
Commodity prices have decreased a slight0.6 percent since January 2012,whileremaining 3.2 percent above 2009prices.However, prices are 5.9 percent lower thantheywere in July 2008,when the ThomsonReuters/Jefferies CRB Indexhit its currentfive-year high of 473.
References1. “Recovery shows a soft spot,”Wall Street Journal,http://online.wsj.com/article/SB10001424127887324156204578273611039517142.html?mod=WSJ_economy_LeftTopHighlights.2. “Global EconomyWatch – January 2013,”Price-waterhouseCoopers,www.pwc.com/.../publica-tions/assets/global_economy_watch_jan_2013.pdf.3. Ibid.4. SarahWatt,Wells Fargo Securities interviewwithauthor, January 7, 2013.5. “GDPunexpectedly shrinks, decline seen tempo-rary,” Reuters.com, http://www.reuters.com/arti-cle/2013/01/30/us-usa-economy-idUSBRE90T07520130130.6. “Recovery shows a soft spot,”Wall Street Journal,http://online.wsj.com/article/SB10001424127887324156204578273611039517142.html?mod=WSJ_economy_LeftTopHighlights.7. “Copper endsnear four-monthhigh on strongerU.S. economic data,”Wall Street Journal, http://on-line.wsj.com/article/BT-CO-20130201-711190.html?mod=rss_Commodities.8. “Global Auto Report”, ScotiabankGroup,http://www.gbm.scotiabank.com/English/bns_econ/bns_auto.pdf.9. “Cottonpushes higher on tepid Chinese sales,”Wall Street Journal,http://online.wsj.com/article/SB10001424127887323968304578246104227741308.html?_no-cache=1359751152120&user=welcome&mg=id-ws.j.
OUTLOOK • SPRING 2013 |67
Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13
2008
2009
2010
2011
2012
2013
Thompson Reuters/Jefferies CRB Index
500450400350300250200150100500
Source: Jefferies.comNote: The index is composed of 19 commodities: aluminum, cocoa, coffee, copper, corn, cotton, crude oil, gold, heating oil, lean hogs, livecattle, natural gas, nickel, orange juice, silver, soybeans, sugar, unleaded gas, andwheat.
*Refer to contract-specific price protection information in the inflation tables.
68 | COMMODITIES OVERVIEW©2013 by Premier Inc. All rights reserved.
Other 4%
Precious Metals 0.2%
Natural andSynthetic Rubber 1%
Cotton 2%
Paper 2%
Electronic Components 3%
Organic & Inorganic Chemicals 3%
Base Metals 4%
Plastic Resins 12%
Labor 33%
Energy 36%Energy36.0%
Labor33.0%
Plastic Resins12.0%
Other4.0%
A sample of Premier’s contracted suppliers
identified key rawmaterials that serve as
primary cost drivers of their products’
pricing. Potential category andmarket
impacts are shown for the rawmaterials
featured inthispublication.
Inorder tominimizetheriskassociated
withrawmaterials’pricing, healthcare
facilities should:
• Review categories thatmay be impacted
by fluctuations in rawmaterial costs;
• Use the inflation tables in thispublication
to locate supplierswith firmpricing in a
category impacted by rawmaterials of
interest;
• Refer to the contract launchmaterials in
Supply ChainAdvisor® to identify a
category’s lowest-cost provider; and
• Reference the inflation tables to find
suppliers that offer utilization-review
programs.
Minimizingrawmaterials risk
Price increase risk
High
Moderate
Low
Plastic resins Premier contract impact*Contrast media disposable injectorsIV therapy products - sets and tubingSafety phlebotomyCan liners
Energy Premier contract impact*Third-party freight managmentVascular compression therapyRoom turnover productsPatient beds, mattresses andtherapeutic surfaces - rental
Labor Premier contract impact*PC hardware and software resellersDocument management solutionsPatient lifts and lateral transfer devicesRadio-frequency identification asset trackingand management solutions
Precious Metals 0.2%
Electronic Components 3.0%
Base Metals 4.0%
Organic and InorganicChemicals 3.0%
Paper 2.0%
Natural andSynthetic Rubber 1.0%
Cotton 2.0%
OUTLOOK • SPRING 2013 |69
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70 | COMMODITIES OVERVIEW©2013 by Premier Inc. All rights reserved.
COPPERMARKETOVERVIEW
Coppermarketupdate
The secondhalf of 2012 saw the
price of copper increase 4.30 percent,
from$3.49/pound in late June, to
$3.64/pound onDecember 31.
During this six-monthperiod, the
price of copper ranged froma lowof
$3.29 to a high of $3.84.
The InternationalCopperStudyGroup
estimates that 2013will producea
global surplus of refined copper,
breakinga three-year trend. The
expectation is fueledby increased
output fromnewandexistingmines.
Actual resultswill be influencedby
economic factors that includeaworld
economic slowdownor expansion;
EuropeanUnionsovereigndebt issues;
political transitions in theMiddle
East andNorthAfrica; and lower
productiondue to laborunrest, utility
shortages, and capital deficits.1
Additional drivers for downward
pressure on copper prices include an
expectation that theU.S. Federal
Reservemayhalt asset andbond
purchases as early as this year;
continuing geopolitical uncertainty
and risk; declining growth rates in
theworld’smajor economies; high
debt levels; and long-term,
unresolved fiscal and economic
policy issues in theU.S. and Europe.
These factors combine to drive eco-
nomic, credit, and currency concerns
andpressure globalmarketswith
short-termvolatility in commodity,
currency, equity, and bondmarkets.2
Catalysts for continuedupward
pressure on copper prices include
recently reported positive economic
data from theU.S. andChina that
support globalmarkets and
commodityprices. Inaddition, global
central bankers continue to reiterate
theirwillingness toprovideadditional
monetary stimulus for themajor
global economies and currencies.
These factors positively affect copper
and other commodities.3
Although industry analysts are
forecasting a copper supply surplus
thatwould lead to a decrease in
prices, the global economy is in a
period characterized by loose fiscal
policy and anunprecedented
amount ofmonetary stimulus.4
Over the next twoyears, price
fluctuationsmaybe subject to forces
greater than supply anddemand,
and the price of copper, among
other commodities,maybecome
irrationally overpriced if there are
unintended consequences fromthe
world’s fiscalpolicydecisions.
References1. "HCCECopperOutlookDate: January 14,2013,"Honeywell Cable,www.honeywellca-ble.com/Pages/default.aspx.2. Ibid.3. Ibid.4. “Recovery shows a soft spot,”Wall StreetJournal,http://online.wsj.com/article/SB10001424127887324156204578273611039517142.html?mod=WSJ_economy_LeftTopHighlights5. "2012-10-ICSG_Forecast_Press_Release"International Copper StudyGroup,http://www.icsg.org/index.php/press-re-leases/viewcategory/113-forecast-press-re-lease.
Oct 09 Jan 10 Jan 11 Jan 12
2009
2010
2011
2012
Jan 13
2013
AverageMonthly Copper Prices (LondonMetal Exchange)
500
450
400
350
300
250
200
150
100
Source: U.S. Geological Survey: Copper Statistics and Information
cents/pound
OUTLOOK • SPRING 2013 |71
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Product categorieswith high copper content and 12-month price outlook
Construction services
Energy efficiency services
HVAC equipment, controls and services
Icemachines and dispensers
Maintenance, repair and operations
Medical gas pipeline equipment, services and accessories
Price increase risk: � High � Moderate � Low
������
Factor
Globalmonetary stimulus
Macroeconomic factors
Refined copper
production/U.S. surplus
Impact oncopper prices Comments
Loose fiscal policy and unprecedented amounts of
monetary stimulus in theworld’s largest economies
could place upward pressure on the price of copper.
Progress, or lack thereof, in the global economywill either
bolster or hinder copper usage and production, leading to
potential upward and downward pressure on prices.
The first global surplusof refined copper in three yearswill
placedownwardpressureonprices.5
Projections for 2013
72 | COMMODITIES OVERVIEW©2013 by Premier Inc. All rights reserved.
COTTONMARKETOVERVIEW
Cottonmarket update
Cottonprices return tomore
traditional levels
As expected, cottonprices continued
to decline in 2012 due to strengthen-
ing of theU.S. dollar. Therewas a
54percent cost decrease from2011,
with an average 2012 cost of $0.89
per pound.Novembermarked the
lowest price of the year, closing at
$0.81 per pound, a price not seen
since February 2010.
> China,which is believed to have
almost half of theworld's supply
of cotton in itswarehouses as of
mid-2012, began selling reserves
to domesticmills in January 2013,
amid fear from traders that the
auctionswould crush demand for
imported cotton.1
> Themarket also expects further
cuts toU.S. cotton acreage,which
was already forecast to fall 16
percent in the 2012-2013
marketing year that began in
August. Better prices for soybeans
and competing crops could push
farmers to shift their plantings. In
addition, poor growing conditions,
such as another drought, could
further curb the harvest.2
> Cornhas recently becomea key
challenger for cotton acreage,
especially in theUnited States,
where ethanol fuel programshave
allowed corn to commanda
highermarket price than cotton.3
> Weakvaluesmaypersuade
farmers to switch to other crops,
which could potentially erode
recordworld inventories and
provide price support.4
> Rising consumer demandand
decreased planting acreage could
drive cottonprices higher.
References1. “Cotton PushesHigher on Tepid ChineseSales,”WSJ.com, http://online.wsj.com/arti-cle/SB10001424127887323968304578246104227741308.html.2. Ibid.3. “Global Cotton Executives Explore FactorsAffecting Industry,”Cotton.org,http://www.cotton.org/news/releases/2012/summla.cfm.4. “Cottonprices to continue their decline,says ICAI,”Agrimoney.com,http://www.agrimoney.com/news/cotton-prices-to-continue-their-decline-says-icac--5052.html.
The Cotton “A” index is an estimate of theworld price of cotton. It is an average of the five
lowest quotations for a sample of 19 cottons traded internationally.
Jan 10 Jan 11 Jan 12 Jan 13
2010
2011
2012
2013
Cotton “A”Index
250
200
150
100
50
0
Source: Cotton.org and Bloomberg.comNote: Index valueswere unavailable from June 23, 2010, throughAugust 1, 2010, and again from June 10, 2011, throughAugust 1, 2011,due to insufficient quotes frommerchants.
cents/pound
COTTONMARKETOVERVIEW
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Product categorieswith high cotton contentand 12-month price outlook
Bandages, dressings and gauze
Lap sponges, or towels and specialty sponges
Restraints and fall prevention
Reusable textiles and textile services
Advancedwound care
�����
Price increase risk: � High � Moderate � Low
Factor
Decreased cotton crops/
Weather conditions
China stockpiling
Consumer demand
Impact oncotton prices Comments
Global cotton production is forecast to be down from2012, asmore prof-
itable competing crops crowdout cotton.*
The potential remains for unexpected changes in China’s cotton import
demand that could destabilizeworld commoditymarkets.*
Consumer demandwill be tied to the strength of the global economic
recovery. Cotton prices are nowat levels competitivewith those of other
fibers. Cotton demandwill eventually increase.
* Source: USDA
Projections for 2013
74 | COMMODITIES OVERVIEW©2013 by Premier Inc. All rights reserved.
ENERGYMARKETOVERVIEW
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TheU.S. Energy InformationAdministration (EIA)expects that theBrent
crudeoil spotprice,whichaveraged$112perbarrel in2012,will fall toan
averageof$105perbarrel in2013and$99perbarrel in2014.Theprojected
discountofWestTexas Intermediate (WTI) crudeoil toBrent,whichaver-
aged$18perbarrel in2012, falls toanaverageof$16perbarrel in2013and
$8perbarrel in2014,asplannednewpipelinecapacity lowers thecostof
movingmid-continentcrudeoil to theGulfCoast refiningcenters.
TotalU.S. liquid fuels consumption fell fromanaverageof20.8millionbbl/d
in2005 to18.6millionbbl/d in2012. TheEIAexpects total consumption to
rise slowlyover thenext twoyears toanaverageof18.8millionbbl/d in
2014. Thiswill bedrivenby increases indistillate and liquefiedpetroleum
gas consumption,with flat gasolineand jet fuel consumption.
Natural gasworking inventories, reaching record-high levels in early
November, ended2012at anestimated3.5 trillion cubic feet (Tcf), slightly
above the same time in2011. TheEIAexpects that theHenryHubnatural
gas spotprice,whichaveraged$4permillionBritish thermalunits
(MMBtu) in2011and$2.75permillionMMBtu in2012,will average$3.74
perMMBtu in2013and$3.90perMMBtu in2014.
International crude oilmarket
The EIA expects oilmarkets to loosen
in2013and2014, as increasingglobal
supplymore than offsets higher
global consumption. Projectedworld
supplywill increase by 1million
bbl/d in 2013 and1.7million bbl/d
in 2014,withmost of the growth
comingfromoutsidetheOrganization
of thePetroleumExportingCountries
(OPEC). NorthAmericawill account
formuch of this growth. Projected
world liquid fuels consumptionwill
increase by an annual average of 0.9
million barrels per day (bbl/d) in
2013 and1.3million bbl/d in 2014.
Countries outside theOrganization
for Economic Cooperation and
Development (OECD) are expected
to drive this growth.
World liquid fuels consumption
grewby an estimated 0.9million
bbl/d in 2012 to reach 89.2million
bbl/d. The EIA expects this growth to
remain constant over the next year
before pickingup again in 2014,
thanks to amoderate recovery in
global economy. Consumptionwill
reach 90.1million bbl/d in 2013
and91.5million bbl/d in 2014.
Non-OECDAsia is the leading
regional contributor to the
expected growth.
Reference1. U.S. Energy InformationAdministration,http://www.eia.gov.
Source: U.S. Energy InformationAdministration
[ OIL ]
[ GASOLINE ]
[ ]NATURALGAS
ENERGYMARKETOVERVIEW
76 | COMMODITIES OVERVIEW©2013 by Premier Inc. All rights reserved.
U.S. Gasoline and CrudeOil Prices
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
.50
0
Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15
Crude OilRetail Regular GasolinePrice Difference Forecast
dollarspergallon
2009
2010
2011
2012
2013
2014
2015
Source: U.S. Energy InformationAdministration, Short-TermEnergyOutlook, January 2013Note: Crude oil price is average refiner acquisition cost. Retail prices include state and federal taxes.
Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jan 15Jul 14
2012
2013
2014
2015
West Texas Intermediate (WTI) CrudeOil Price
260240220200180160140120100806040200
Source: U.S. Energy InformationAdministration, Short-TermEnergyOutlook, January 2013Note: Confidence interval derived fromoptionsmarket information for the five trading days ending January 3, 2013.
Intervals not calculated formonthswith sparse trading in "near-the-money" options contracts.
dollarsperbarrel
Historical spot priceSTEO price forecastNYMEX futures price95% NYMEX futures upper confidence interval95% NYMEX futures lower confidence interval
OUTLOOK • SPRING 2013 |77
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ENERGYMARKETOVERVIEW
Factor
Consumption growth
Political and production eventsthat could impact oil prices
OPEC production
Impact onoil prices Comments
World liquid fuels consumption grewby an estimated 0.9million bbl/d in2012 to reach 89.2million bbl/d. The EIA expects this growth to remainconstant over the next year before picking up again in 2014, thanks to amoderate recovery in the global economy. Consumptionwill reach 90.1million bbl/d in 2013 and 91.5million bbl/d in 2014. Non-OECDAsia is theleading regional contributor to expected growth.
Although supply growth in theUnited States and Russia during 2012outpaced the forecast at the beginning of the year, overall non-OPECliquid fuels’production fell below the year-ago expectations. The EIAforecasts non-OPECproduction to increase by 1.4million bbl/d in 2013and 1.3million bbl/d in 2014. Assumptions about themitigation of someexisting political impediments to production and the rapid evolution of theNorth American oil industry pose considerable risks to the forecast. NorthAmerica accounts for about two-thirds of the projected growth innon-OPEC supply over the next two years, based on increased productionfromU.S. tight-oil formations andCanadian oil sands.
Unplanned production outages in non-OPEC countries declined to 0.8million bbl/d inDecember 2012. This is the lowest level since January2012, although still above the historical baseline that prevailed during thefourth quarter of 2011. Syria and the Sudans are currently themostsignificant sources of disruption to non-OPECproduction. The EIA does notassume that a Syrian resolutionwill occur during the forecast period.Sudan and South Sudanmust overcomepolitical and technical obstaclesbefore significant flows from the latter can be restarted. The EIA projectsthat Sudan and South Sudan togetherwill produce 0.2million bbl/d in2013 and 0.4million bbl/d in 2014.
The EIA expectsOPECmembers to produce at least 30million bbl/d ofcrude oil over the next two years to accommodate the projected increaseinworld oil consumption and counterbalance supply disruptions. However,OPEC crude supplywill decrease by 0.6million bbl/d in 2013 and stay flatthrough 2014.Most of the 2013 decrease comes fromSaudi Arabia’sresponse to non-OPEC growth and increasing production from someOPECmembers such as Iraq, Nigeria, andAngola.
Projections for 2013
Source: U.S. Energy InformationAdministration
FOODMARKETOVERVIEW
78 | COMMODITIES OVERVIEW©2013 by Premier Inc. All rights reserved.
Foodmarketupdate
TheU.S. drought
The severedrought in theU.S. in thesummerof2012will continue to im-pact foodprices in2013.MorganStanleyestimates that thedroughtreducedGDPby0.5percent in2012and that estimate couldgrow inearly2013 if thedroughtpersists.1 Lastyear, 80percentof the countryexpe-rienceddrought conditions. The latestestimate is that61percentof thecountry isstillexperiencingadrought.Poorweatherhas led to increasedprices for corn,wheat, and soybeanssince2012.Becausecornisafeedstockfor cattle andhogs, rising cornpricescanalso lead to increasedmeat costs.
TheUSDA recently released a specialreport on the 2012U.S. drought,2
summarizing themajor impacts onfoodprices and consumers:> The largest impactswill likely befelt forbeef, pork, poultry, anddairy(especially fluidmilk) products.The full effects of the increase incorn prices for packaged and
processed foods (cereal, corn flour,etc.)will likely take 10-12monthsto affect retail food prices.
> The drought has the potential toincrease retail prices for beef, pork,poultry, and dairy productsthroughout2013.Droughtconditionsled to herd culling in response tohigher expected feed costs, andthis liquidation led to temporarilyreduced prices for beef andpork inAugust and September. However,theOctoberCPIreport indicatedthatthe liquidation’s impact hasended,withprices forbeefandporkexpected to increase through2013.
> Commodity prices are just one ofmany factors affecting retail foodprices.Historically, if the farmpriceof corn increases50percent, thenretail foodprices, asmeasuredbytheBureauof LaborStatistics (BLS)in theConsumerPrice Index (CPI),increaseby0.5 to1percent.Commoditiesmakeup less than15percentof theaveragevalueofretail foodpurchases, soeven ifallcommoditypricesdoubled, retailfoodpriceswould increasebynomore than15percent.
U.S. foodprices
TheUSDAprojects food priceswillincrease 3 - 4 percent in 2013, fol-lowing inflation of 0.5 percent in2012. The greatest increases are ex-pected in the categories of dairy andfresh vegetables.3 Projected in-creases of 3.5 - 4.5 percent in dairyprices are attributable to the risingcost of feed. TheUSDAnotes thatdairy prices have already started torise as high-cost products are enter-ing the production supply chain.Fresh vegetable priceswere quitelow in 2012, due to an increase inproduction resulting from favorablegrowing conditions.
References1. Koba,Mark. “Drought Still PlaguesUS:Food Prices ‘GoingUp.’ ” 1/11/13, CNBC,http://www.cnbc.com/id/100372886/Drought_Still_Plagues_US_Food_Prices_039Going_Up039.2. “U.S. Drought 2012: Farmand Food Im-pacts,” USDA, http://www.ers.usda.gov/top-ics/in-the-news/us-drought-2012-farm-and-food-impacts.aspx#consumers.3. “Food PriceOutlook 2013,”USDA,http://www.ers.usda.gov/data-products/food-price-outlook/summary-findings.aspx.
FAO Food Price Index
260
240
220
200
180
160
140
120
100
2002-2004=100
Jan 10 Jan 11 Jan 12 Jan 13
2010
2011
2012
2013
Source: FAO.org
The foodprice index from the Food andAgricultureOrganization (FAO) of theUnitedNationsis an average of six commodity groups:meat, dairy, cereals, oils, fats, and sugar.
Change last Change lastCommodity 12months month
Corn 15% 7%Soybeans 20% 5%Wheat 17% 2%Leanhogs 0% 2%Live cattle -4% 3%Sugar -21% -4%Coffee -1% -31%
Source: CNNMoney.com. Price change shown isfrom2/1/12 to 2/1/13 or 1/1/13 to 2/1/13.
Category SubcategoryInflation forecasts
Q2 2013 2013Impact on
contract pricing
Food Categories and 12-Month Price Outlook
Source: U.S. Foods Commodities Department
6.8%7.6%
-12.6%6.3%7.8%17.9%9.4%6.0%2.8%2.3%5.0%8.5%4.3%5.0%4.0%4.9%4.0%3.0%5.0%4.0%5.0%5.0%5.0%4.0%4.0%9.0%-5.0%-10.0%-10.0%10.0%2.5%2.0%7.5%2.5%-5.0%4.0%15.0%0.0%3.0%2.0%5.0%10.0%0.0%-2.5%
3.0-5.0%5.0%2.0%0.0%
-10.0%0.0%-5.0%
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Poultry Whole BirdsPoultry BreastsPoultry WingsBeef RibeyesPork Bellies/BaconPork TrimmingsPork HamsPork LoinsPork ButtsPork Spare RibsDairy Milk and CreamersDairy CheeseDairy ButterDairy Shell EggsDairy CulturedOils and ShorteningPotatoes FrozenBeverages Juice and Juice BasesBeverages Drinks, Drink Bases/Mixes, OtherBeverages Soda, RTD and Fountain SyrupBeverages CoffeeBeverages TeaBeverages Hot CocoaBakery Breads and RollsBakery DessertsGrocery Rice (Dry)Produce Vegetables - Lettuce/SaladsProduce Vegetables - PotatoesProduce Vegetables - TomatoesProduce Vegetables - OnionsProduce Vegetables - OtherProduce Fruits - CitrusProduce Fruits - MelonsProduce Fruits - GrapesProduce Fruits - BananasProduce Fruits - BerriesProduce Fruits - ApplesProduce Fruits - AvocadosProduce Fruits - OtherTomatoes CannedFruits CannedApple Products Canned (including sauce)Fruits FrozenVegetables CannedVegetables FrozenSeafood Shrimp, Value-AddSeafood Shrimp, Non-Value-AddSeafood Fish, Value-AddSeafood Fish, Non-Value-AddSeafood Other, Value-AddSeafood Other, Non-Value-Add
FOODMARKETOVERVIEW
OUTLOOK • SPRING 2013 |79
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6.9%8.5%
-20.6%13.1%26.3%21.5%14.2%-0.2%2.3%1.3%8.0%18.5%20.0%5.0%6.0%3.2%4.0%2.0%2.0%4.0%3.0%3.0%2.0%4.0%2.5%10.0%0.0%-5.0%-5.0%5.0%3.0%2.0%7.5%2.5%-5.0%3.0%15.0%0.0%2.0%3.0%10.0%15.0%-2.0%-1.5%
3.0-5.0%3.0%2.0%0.0%
-10.0%0.0%-5.0%
� = > 5% � = 0.1% - 4.9% � = < 0%
PLASTICRESINSMARKETOVERVIEW
80 | COMMODITIES OVERVIEW©2013 by Premier Inc. All rights reserved.
Plastic resinsmarketupdate
The Platts Global Petrochemical
Index (PGPI) is a benchmark of seven
widely used petrochemicals derived
fromcrude oil andnatural gas. Since
these petrochemicals are used to
make plastic, rubber, nylon, and
other consumer products, the plastic
resinsmarket often alignswith
petrochemical prices. According to
the PGPI, prices on the global
petrochemicalsmarket finished
2012higher than the prior year.
On a year-over-year basis, the price
climbedby 16percent compared to
December 2011.1
InNovember 2012, petrochemical
prices seemed tomove in stepwith
global crudeoil prices anddominated
demand factors during themonth.
Crude oil prices dropped 2percent
from theOctober average. The
petrochemicals ethylene and
polypropylene fell 7 percent and 2
percent, respectively, fromOctober to
November. Bothareused in textiles,
packaging, reusable containers, and
other items. The price of benzene,
used in various plastics, nylons, and
other textiles, climbedby 5percent,
offsetting the losses in ethylene and
polypropylene. The continuing lack
ofbenzenegloballywill keepupward
pressure onprices.2
The global economyand the shift
fromcrude oil to natural gaswill
continue to have an impact on the
plastic resinsmarket. Other factors
are geopolitical issues,weather
patterns, exchange rates, and
political instability.
Crude oil prices
On the expectation of actions tostimulate economic growth in theU.S., Europe, andChina, crude oilproduction in theU.S. experiencedthe largest yearly increase to datein 2012. And for the secondconsecutive year, average crude oilpriceswere at historically highlevels. Disruptions in oil productionin South Sudan, Yemen, Syria, andtheNorth Seahave put upwardpressure onprices. Due to newpipeline capacity, theU.S. EnergyInformationAdministration (EIA)expects crude oil prices to drop to$105per barrel in 2013, down fromanaverage $112 in 2012.3
Price increase risk:� High � Moderate � Low
Product categorieswith high plastic resincontent and 12-month price outlook
Custom procedure trays/packs, gowns and related products �
Can liners �
IV therapy products - sets and tubing �
Contrast media disposable injectors �
Patient bedside products �
Jan 09 Jan 10 Jan 11 Jan 12 Jan 13
2009
2010
2011
2012
2013
Plastic Resin Prices
300290280270260250240230220210200
Source: Bureau of Labor Statistics – Producer Price Index – Commodity – Plastic Resins andMaterials
Index-BaseYear1982=100
OUTLOOK • SPRING 2013 |81
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Factor
Newpipeline capacity
Normalweather patterns
Impact onplastic resin prices Comments
Crude oil prices are expected to drop.
Natural gas prices are expected to rise gradually,
remaining generally low.
Projections for 2013
Natural gas prices
Warmer earlywintermonths in late
2012 contributed to themonth-over-
monthdecline in natural gas prices.
Forecasts closer to normal for 2013
and2014 are expected to drive a
gradual increase, althoughprices
will remain relatively low. The EIA
reported an average price for natural
gas in 2012was $2.75 perMMBtu. It
is predicted to rise to $3.74 per
MMBtu in 2013 and to $3.90 per
MMBtu in 2014.4
References1. “Plastics Prices, U.S. Production finish2012 onhighnote,”Plastics Today,http://www.plasticstoday.com/articles/plastics-prices-us-production-finish-2012-high-note-011720132.2. “Petrochemical prices slid 2 percent in
November onweakeneddemand,”Platts.com, http://www.platts.com/news-feature/2012/pgpi/index.3. Johnson, Julianne. “EIA Sees Lower CrudeOil andGasoline Prices in 2013,”Agweb.com,January 8, 2013. Accessed January 25, 2013.http://www.agweb.com/article/eia_sees_lower_crude_oil_and_gasoline_prices_in_2013/.4. “Short-TermEnergyOutlook,”U.S. EnergyInformationAdministration.http://www.eia.gov/forecasts/steo/re-port/natgas.cfm.
NATURALANDSYNTHETICRUBBERMARKETOVERVIEW
82 | COMMODITIES OVERVIEW©2013 by Premier Inc. All rights reserved.
Natural andsyntheticrubbermarketupdate
Natural and synthetic rubbers areused extensively in the healthcareindustry for examand surgicalgloves. Natural rubber is derivedfrom latex sap extracted fromarubber tree,while synthetic rubberis synthesized fromchemicals thatresult frompetroleum refining.1
Several important trends areexpected to impact natural andsynthetic rubber pricing in 2013:
> Automotive sector:Almost 60percent of global rubber is used bytheworld’s tiremanufacturingindustry,with the remainderserving other sectors, such astransportation, construction,healthcare, andmining.2 ScotiabankGroupforecaststhatglobalautomotivesaleswill climb tomorethan64.7
millionunits in2013,marking a 10percent increase over 2011. This isstrengthenedbystrongemploymentgrowth in developingnations andlowglobal interest rates andmonetary expansion.3 In its GlobalAuto Report, released inDecember2012, ScotiabankGroup citessignificant growth in China, Brazil,Russia, Japan, and theUnited States.The report says China is “the keydriver of global car sales, accountingfor nearly 60 percent of the increaseinworld volumes over the pastdecade.”This growthwill continue,asmore than 20million peoplerelocate to China’s urban areas eachyear.Onekeygrowthdriver in theU.S.isvehiclereplacement,whichwill sendU.S.salestothehighestlevelssince2007.4
> Nitrile rubber prices underdownwardpressure: Syntheticnitrile butadiene rubber (NBR), amajor component of examgloves,
is composed ofmorethan 65percent but-adiene (BD). BDpricesreached record highs in2011andhavenowfallen55percent since theirpeak. BD, historicallythe key contributor to
highNBRprices, isnowexperiencinglowdemanddue tomacroeconomicconditions. ICIS, theworld's largestpetrochemicalmarket informationprovider, reports that BDproducersare not increasing costs to keyusersdue to the poor global economy. 5
NBRproducers in China, Japan, andSouthKoreahave loweredproductionoutput, and according to ICIS, “NBRprices are expected to remainunderdownwardpressure, given theweakdemand,oversupply,andexpectationsof a downtrend in feedstock prices.” 6
Despite the current conditions,future demandmaypushpriceshigher. GlobalNBRdemand,estimated at $1.7 billion in 2010, isexpected to reach $2.7 billion in2018, growing at a compoundedannual rate of 5.9 percent.7
> Natural rubber latexprices falling:Thailand, Indonesia, andMalaysiaare theworld’s topnatural rubber-producing countries. Naturalrubber prices have fallen by 47percent since they peaked inFebruary 2011. Sheela Thomas,chairman, Rubber Board, says:“The trend ismainly a result of thegrowing concerns aboutworldeconomy, particularly in the light
Product categorieswith high rubbercontent and 12-month price outlook
Price increase risk:� High � Moderate � Low
Examgloves �
Surgical gloves �
Price change percentages since January 2011
95%
45%
-5%
-55%
Pricechangepercentage
Jan 11 Jan 12 Jan 13
2011
2012
2013
Natural Rubber China, SIR-20Crude OilButadiene
Source: Propurchaser.com
OUTLOOK • SPRING 2013 |83
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Factor
Automotive sector
Nitrile butadiene rubber (NBR) prices
Natural rubber latexprices falling
Currency exchange rates
Crude oil prices
Impact onrubber prices Comments
Healthcareproductsusingnatural and synthetic rubber competewith the
growingglobal automotive industry for rawmaterial supplies.
The recent downturn inpriceswill continue in thenear futuredue to lowdemand.
Natural rubberpriceshave fallenby47percent since February2011becauseof
lowerdemand, synthetic substitutes, andaweakglobal economy.
TheU.S. dollar remainsweakagainst theChinese yuanandMalaysian ringgit.
The twomonomersused for synthetic nitrile gloves (butadieneandacrylonitrile)
arederived fromoil.Oil price forecasts areuncertaindue to conflicting reports of
oversupply and improvedglobal economicgrowth.
Projections for 2013
References1 . “Story of Rubber,” International Rubber StudyGroup (IRSG), http://www.rubberstudy.com/storyofrubber.aspx.2. Ibid.3. “Global Auto Report,”ScotiabankGroup, http://www.gbm.scotiabank.com/English/bns_econ/bns_auto.pdf.4. Ibid.5. “Butadiene –C4s: Prices,markets and analysis,” ICIS.com, http://www.icis.com/chemicals/butadiene-c4s/#?tab=tbc-tab2&_suid=135715627915209686950283076703.6. “Acrylonitrile butadiene rubber-Nitrile rubber,” ICIS.com, http://www.icis.com/chemicals/acrylonitrile-butadiene-rubber-nitrile-rubber/#?tab=tbc-tab2&_suid=135715674020107083162888339344.7. “NewReport: GlobalNitrile Butadiene Rubber (NBR) IndustryAnalyzed by TransparencyMarket Research,”Prweb.com, http://www.prweb.com/re-leases/2012/12/prweb10174306.htm.8. “Concerns over global economybehind fall in rubber prices,”Globalrubbermarkets.com, http://globalrubbermarkets.com/4640/sheela-thomas-con-cerns-over-global-economy-behind-fall-in-rubber-prices.html.9. “Global rubber consumptionnext yearwill reach 27.6million tons,”Globalrubbermarkets.com, http://globalrubbermarkets.com/2027/global-rub-ber-consumption-next-year-will-reach-27-6-million-tons.html.10. “Global natural rubber business outlook promising,”Globalrubbermarkets.com, http://globalrubbermarkets.com/4877/global-natural-rubber-busi-ness-outlook-promising.html.11. “NewReport: GlobalNitrile Butadiene Rubber (NBR) IndustryAnalyzed by TransparencyMarket Research,”Prweb.com, http://www.prweb.com/re-leases/2012/12/prweb10174306.htm.
of the debt crises in the Eurozone.There is a fall in import demandfromChina andpiling up ofinventory in theQingdao FreeTradeZone.”It isdifficult to forecastfuture prices because of volatilefactors, suchas theglobal economy,crude oil prices, currency exchangefluctuations, andweather events.8
> Global demand for rubber:According to the InternationalRubber StudyGroup, global rubberconsumption(naturalandsynthetic)is forecast to reach 26.6milliontons in 2012,with amoderate 3.1
percent growth signaling lowerdemand for vehicles and tires.Close to 4 percent growth isexpected in 2013,with a demandof 27.6million tons.9 The averageworld total rubber consumptiongrowth ratewas 3.7 percent from1961-2007 and2.3 percent from2008-2012. After the recent stifledmarket, rubber demand isexpected to recover in 2013-2014due to pent-up demand from2008through2012. Improvingworldeconomic growth rateswill alsosupport increased demand forrubber.10 A recentmarket report,
published by TransparencyMarketResearch, says rubber formedicalproducts is one of the fastest-growing segments, primarilybecause of the need for nitrilegloves used in disease outbreaksand occupational health safety.11
> Currency exchange rates: TheU.S.dollar remainsweak against theChineseyuanandMalaysianringgit.Asa result, healthcareproducts suchasexamandsurgical glovesmanufactured inAsiaaremorecostly in theUnitedStates.
STEELMARKETOVERVIEW
84 | COMMODITIES OVERVIEW©2013 by Premier Inc. All rights reserved.
Steelmarketupdate
>World crude steel production for2012was 1,548million tons, 1.2
percent higher than in 2011.North
America andAsia showed
increased production (2.5 percent
and 2.6 percent, respectively),
while the EUand SouthAmerica
haddecreased production
(-4.7 percent and -3.0 percent).1
>TheU.S. produced 88.6milliontons of crude steel in 2012, an
increase of 2.5 percent compared
to 2011.2
>Asia produced 1,012.7million tonsof crude steel in 2012, an increase
of 2.6 percent over 2011. The
region’s share ofworld steel
production increased to 65.4
percent in 2012 from64.5
percent in 2011.3
>China’s crude steel production for2012was 716.5million tons, an
increase of 3.1 percent over 2011.4
> In the EuropeanUnion, Germany’sproduction decreased 3.7 percent
to 42.7million tons in 2012.
Production decreased 5.2 percent
(to 7.2million tons) in Italy and
12.1 percent in Spain (to 13.6
million tons).5
>Theworld's largest steelmaker byvolume, ArcelorMittal, announced
the permanent closure of parts of
its factory in Liège, Belgiumdue to
poor demand. Among the closings
are six production lines thatmake
finished steel products for the auto
industry.6 The company said there
was “insufficient demand to
support therunningoftheseflexible
facilities andno improvement is
seen over themedium term.”7
> Steel demand is projected to slowsignificantly in 2013 because of
weaker economic growth in China
and the Eurozone sovereign
debt crisis.8
>TheWorld Steel Association (WSA)announced a decreased forecast
for steel consumption growth (to
2.1 percent) for 2012, down froma
projected 3.6 percent increase
(announcedinApril2012).9 In2011,
globalsteeldemandrose6.2percent.
>TheWSAdecreased its projectionof Chinese steel use in 2012 to 640
million tons, an increase of just 2.5
percent over the previous year –
significantly lower than the 6.4
percent growth in steel use from
2010 to 2011.10
>TheWSAexpects global demandto accelerate to 3.2 percent in
2013.11 This is down froman
earlier forecast of 4.5 percent.12
> Steel prices are expected tohave decreased 4.1 percent for
the year 2012.13
Product categorieswith high steel content and 12-month price outlook
Price increase risk:� High � Moderate � Low
Surgical instruments �
Standard and safety hypodermics �
Spinal implants and related products �
Orthopedic total joint implants �
Steam sterilizers �
OUTLOOK • SPRING 2013 |85
STEELMARKETOVERVIEW
Factor
Demand fromChina
Demand from EuropeanUnion
Impact onsteel prices Comments
Chinese demand for steel will increase due to contracting
economic growth.
EuropeanUnion demand for steel will decrease due to the sovereign
debt crisis.
References1. “World Crude Steel Production Increases by 1.2 percent in 2012,”World Steel Association, 22 Jan. 2013, http://worldsteel.org/media-cen-tre/press-releases/2012/12-2012-crude-steel.html.2. Ibid.3. Ibid.4. Ibid.5. Ibid.6. “ArcelorMittal to Close Parts of BelgiumPlant,”NYTimes.com, http://www.nytimes.com/2013/01/25/business/global/arcelormittal-to-close-parts-of-belgium-plant.html.7. Ibid.8. “Steel demand to lower over next 2 years,”Financial Times,http://www.ft.com/intl/cms/s/0/155d1ef4-1365-11e2-9cc7-00144feabdc0.html#axzz2JIplMFKp.9. Ibid.10. “World Steel AssociationCuts Forecast,”Financial Times, http://www.ft.com/cms/s/0/b7419748-9063-11e1-8adc-00144feab49a.html#axzz21pqQAD8M.11. Ibid.12. Ibid.13. “Producer Price Indexnews release,”Bureau of Labor Statistics, http://www.bls.gov/ro3/ppimetals.htm.
Projections for 2013
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OUTLOOK
About theAbout the publication
The Economic Outlook is Premier’s flagship publication that highlights emerging economic and industry trends impacting ourmembership and shaping the healthcare landscape. As an important thought leadership resource, the publication providesstrategic insight to financial, clinical and supply chain healthcare executives across the country.
A key aspect of the long-term strategy for the Outlook is to collaborate with internal and external subject matter experts tobuild consensus from diverse points of view. The publication harnesses the expertise of our network of healthcare leadershipto illuminate best practices and strategies needed to drive performance improvement. We strive to provide our membersand healthcare organizations with valuable, timely information and business intelligence derived from the industry’s mostprogressive participants.
This edition of the Outlook is focused on connecting care across the continuum. In the shift away from fee-for-service andtoward accountable care and population health management, there is a need to redesign the way healthcare is delivered toprovide greater connectivity between health systems, providers and patients. The content in this edition is intended to helpour readership better understand the implications of healthcare reform and provide insights into existing and evolvingopportunities for healthcare stakeholders to improve connectivity and patient care in a newly-shaped marketplace.
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The cover design demonstrates the period of great opportunity and innovation that the U.S. healthcare system is entering.Recent discussions surrounding healthcare have been primarily negative, focusing on the costs that need cutting and thechanges that need to be made. In moving beyond the hospital walls to a more integrated continuum of care, there is an openfield of potential for healthcare stakeholders to reinvent and improve the way that patients receive care.
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