STRATEGIC LEADERSHIP FOR FINANCIAL AND CLINICAL HEALTHCARE EXECUTIVES • A TWELVE MONTH OUTLOOK • SPRING 2014
ECONOMIC OUTLOOK
FOR FURTHER INFORMATION To learn more about this publication, please visit premierinc.com/economicoutlook, or email economicoutlook@premierinc.com.
13034 Ballantyne Corporate Place Charlotte, NC 28277
444 N Capitol Street NW, Suite 625 Washington, DC 20001-1511
T 704 357 0022
T 202 393 0860 F 202 393 0864
PREMIERINC.COM
PUR4146 03/14
T W E LV E M O N T H O U T LO O K | SPRING 2014
04
Using Wisely
08
Championing Total Cost Reduction
20
Finding Double-Digit Annual PPI Savings
About the cover Though health systems have long worked to create streamlined, efficient and highquality operations, the industry currently has both the imperative of rising costs and healthcare reform, as well as the requisite technology and data necessary to make long-term, significant change. This edition of the Economic Outlook, “Standards that Stick”, is about driving sustainable cost reductions within health systems. Health systems are no longer looking at just the low-hanging fruit or one-off changes to drive expenses down in the short term. Instead, they are combining all the tools they have – supply chain and clinical data, analytics, technology, physician engagement and more – to tackle variation within their systems to drive sustainable cost reduction.
About the publication The Economic Outlook is Premier’s flag-
Due to interest from our membership and
ship publication that highlights emerging
the industry, beginning in 2013 we ex-
economic and industry trends impacting
panded our Outlook series to include two
our membership and shaping the health-
new publications. The Quality Outlook,
care landscape. As an important thought
released annually during the summer, pro-
leadership resource, the publication pro-
vides thought leadership focused on clini-
vides strategic insight to financial, clinical
cal trends, performance improvement, and
and supply chain healthcare executives
best practices in safety and quality of care.
across the country.
The Industry Outlook, released annually during the winter, highlights one specific
A key aspect of the long-term strategy for
macro-level trend impacting healthcare
the Outlook is to collaborate with inter-
stakeholders and examines that trend
nal and external subject matter experts
across the supply chain.
to build consensus from diverse points of view. The publication harnesses the ex-
The content in this edition is intended
pertise of our network of healthcare lead-
to help our readership better understand
ership to illuminate best practices and
the implications of healthcare reform and
strategies needed to drive performance
provide insights into existing and evolving
improvement. We strive to provide our
opportunities for healthcare stakeholders
members and healthcare organizations
to improve connectivity and patient care
with valuable, timely information and
in a newly-shaped marketplace.
business intelligence derived from the industry’s most progressive participants.
We welcome your comments and questions. For additional information, please email economicoutlook@premierinc.com. premierinc.com/economicoutlook outlookmarketplace.hostedbywebstore.com
LETTER 01
EXECUTIVE LETTER
Breaking even on Medicare Mike Alkire, chief operating officer, Premier, Inc.
FEATURES | TACKLING TOTAL COST
04 USING WISELY
PERSPECTIVES 24 Standards that Stick
TRENDS 34 PACER Surgical Mesh Collaborative 37 Standardizing the Use of Surgical Mesh 41 Success Story: Bard Access Systems
OUTLOOK LEADERSHIP
08 CHAMPIONING TOTAL COST REDUCTION
14 MANAGING COST OF CARE
ECONOMICS 44 A Conversation with Ilir Hysa 48 Behind the Numbers 56 An Update on Hospital Performance Metrics 60 Patient Volume Trends 64 Guide to Economic Indicators 67 Premier’s Supply Chain Solutions 68 Inflation Summary 69 Success Story: OptifreightTM Logistics
MANAGING DIRECTOR Kayla Sutton
EDITORIAL STAFF
E XECUTIVE SPONSORS Mike Alkire, chief operating officer Durral Gilbert, president, supply chain services Amy Denny, vice president, strategy, supply chain services A special thanks to Ed Drouillard, Tina Harlan, Eric Johnson, Becky Leavitt, Traci McCoy, Rich Westbay, and Laura Yandell for their contributions to this edition of the Outlook.
17 FINDING DOUBLE-DIGIT ANNUAL PPI SAVINGS
20 CUTTING COMMODITY COSTS
COMMODITIES 72 Minimizing Raw Materials Risk 74 2014 Market Expecting Growth 76 Copper Market Overview 78 Cotton Market Overview 80 Energy Market Overview 82 Food Market Overview 86 Plastic Resins Market Overview 88 Natural and Synthetic Rubber Market Overview 90 Steel Market Overview 92 Success Story: US Foods
DESIGN AND PRODUCTION Chris Cardelli, director, creative services Sung Ginader, senior graphics designer, creative services Dave Dixon, associate graphics designer, creative services Bryan Verrone, project manager, creative services EDITORIAL SUPPORT Amanda Forster, vice president, public relations Alven Weil, director, public relations Bryan Alsop, senior manager, corporate communications
EX E C U TI V E LE TTER
Breaking even on Medicare
It explains why Fitch Ratings lowered its outlook on not-forprofit hospitals to negative for the first time in five years.3 And as Moody’s Investors Service points out, not since 2008 have not-for-profit hospital expenses outpaced revenues.4 Looking toward 2014, Standard & Poor’s predicted that “all but the strongest hospitals will see margins shrink.”5 Taking all of this into account makes you wonder if we should be asking ourselves how we can break even on Medicare margins. The truth is, a number of Premier alliance members have already asked themselves that question, and as a result, have embarked on some ambitious initiatives. Cincinnati-based Catholic Health Partners (CHP) is a prime example.
MEMBERS OF THE PREMIER ALLIANCE,
Rebecca Sykes, CHP’s senior vice president of resource management and CIO, summed it up well: “If we can’t make money on the Medicare population – or at least break even –
Can we break even on Medicare?
we don’t have a sustainable business model.”
It’s a question that’s likely on the minds of many health
She and her team decided to face the situation head-on. First,
system executives, from CEOs to physicians and supply
they set a goal of reducing weighted equivalent inpatient
chain managers.
admissions by $25 per discharge. Then they reached out to Premier, a long-time partner. Premier clinical specialists,
Unfortunately, the answer for about one-third of you is “no,”
project managers and analysts worked closely with CHP
according to the American Hospital Association. For others, barely
clinicians and physicians to reduce unjustified variation
breaking even under Medicare, the largest payer to just about every
through appropriate use of the right products and procedures
hospital in the U.S., is equivalent to success these days.
at the right price, place and time.
We referred to this challenge in last fall’s edition of the
The combined team set targets that included a:
Economic Outlook. With sequestration, Affordable Care Act
• Significant decrease in blood transfusions, lowering costs
1
changes, and other payment cuts, Medicare reimbursements to hospitals have been cut by more than $270 billion since October 2010. That’s in addition to Medicare’s 6 percent average underpayment noted by the Medicare Payment Advisory
without compromising quality and safety; • Reduction in patient days in intensive care settings, such as ICU and telemetry beds; and • Better understanding among CHP physicians of the impact
Commission. And all of this comes at a time when:
their orthopedic and cardiovascular implant choices had on
• Private payers provided only marginal 2014 rate increases,2 and
costs and outcomes.
• Health plans sold on Affordable Care Act exchanges are estimated to pay hospitals 20 to 30 percent less than other
The team designed and helped implement processes to reduce
commercial plans.
unjustified use across CHP’s 23 hospitals. Underlying all decisions was the use of quality and cost data to benchmark
OUTLOOK
QTR 2.14
1
EX E C U TI V E LE TTER
Breaking even on Medicare
against top performing peers, identify opportunities and
In last fall’s Economic Outlook, Senior Vice President of Premier
improve performance.
Performance Partners Wes Champion called Medicare breakeven “a mindset or rallying cry for hospitals and health systems.”
The result was impressive: more than $22 million in identified clinical variation, a savings of about $9 million in 2013 alone,
A number of Premier members have taken those words to
with the potential for much more in the future.
heart. They’ve stopping asking questions, and are working with physicians, supply chain managers and CEOs to come up with
CHP isn’t the only alliance member making this kind of
system-wide solutions. By doing so they’re making a statement
progress. Upstate in Akron, OH, Summa Health System targeted
around reducing clinical variation across healthcare settings.
just under $7 million in improvements through length of stay,
And they’re seeing the successes first hand.
level of care and resource utilization initiatives in 2013. Summa worked with a Premier team, addressing clinical
– MIKE ALKIRE Chief operating officer
/ Premier, Inc.
variation through process improvements. Now, it’s implementing an expanded performance improvement plan targeting another $25 million in improvements through labor productivity, revenue cycle, length of stay and supply chain opportunities. Its ultimate goal is to align with its three-year strategic targets and streamline processes that improve the patient experience and create value. Fairview Health Services (Minneapolis, MN) is taking its own unique approach to the issue of supply chain costs, partnering with suppliers to go “at risk” on commodity products. “As
Because when it comes to making a statement, results speak louder than words.
the Affordable Care Act gained momentum several years ago, it made us think differently about care delivery in this new environment,” said LeAnn Born, Fairview’s vice president of supply chain. “In turn, I began reaching out to suppliers to identify those who were really ready to try something new.” As a result Fairview’s supply chain team will begin a pilot program with Covidien later this year that changes supplier sales representatives into “utilization managers,” with incentives built around appropriate use of products, not selling more. It is a sort of shared savings from resource utilization improvement. Fairview aims to save $100,000-$200,000 in the first year of the program.
2
LETTER ©2014 by Premier Inc. All rights reserved.
REFERENCES 1. The Fragile State of Hospital Finances, American Hospital Association, http://www.aha.org/ content/00-10/05fragilehosps.pdf. 2. Melanie Evans, “Outlook 2014: Not-for-Profit Hospitals,” Modern Healthcare, January 4, 2014, http://www.modernhealthcare.com/article/20140104/MAGAZINE/301049991/outlook-2014not-for-profit-hospitals. 3. Beth Kutscher, “Fitch Lowers Not-for-Profit Hospital Outlook to Negative,” Modern Healthcare, December 12, 2013, http://www.modernhealthcare.com/article/20131212/ NEWS/312129953. 4. Becker’s Hospital Review, “Moody’s: 132 Statistics on Nonprofit Hospital Medians,” (August 26, 2013) http://www.beckershospitalreview.com/racs-/-icd-9-/-icd-10/moody-s-132-statistics-on-nonprofit-hospital-medians-fiscal-year-2012.html. 5. Melanie Evans, “Outlook 2014: Not-for-Profit Hospitals,” Modern Healthcare, January 4, 2014, http://www.modernhealthcare.com/article/20140104/MAGAZINE/301049991/outlook-2014not-for-profit-hospitals.
FEATURES Using Wisely, 4 Championing total cost reduction in health systems, 8 Managing cost of care with improved use of inpatient beds, 14 Finding double-digit annual PPI savings, 17 Cutting commodity costs at Fairview Health Services, 20
USING
WISELY Premier’s approach to measuring, comparing, and eliminating unnecessary costs
Mike Alkire
Chief operating officer / Premier, Inc.
Richard Bankowitz, MD
Chief medical officer / Premier, Inc.
Tim Lowe
Principal research scientist / Premier Research Institute
Doug Miller
Senior director, data management and clinical standards / Premier, Inc.
E
stimates of how much of healthcare expenditures are due to waste – the consumption, spending or employment of health services without adequate return – range as high as 30 percent.1 Although
there is growing consensus that reducing waste is one of the keys to cost containment,1,2,3 there is little agreement among stakeholders on how to identify and measure it.4 Published measures focusing on high-level overviews of hospital spending frequently do not provide adequate guidance for development of targeted waste reduction policies and programs.1 While some measures assess specific care areas, there are no comprehensive measurements that cover all hospital departments or provide a means to evaluate the success of targeted initiatives at a structural level. 3,4 Most hospitals simply don’t have the requisite expertise to develop and test measures to monitor quality improvement initiatives. 5 Fewer still have the resources to dedicate to developing and validating waste-specific measures without the guarantee of success. Moreover, the fragmented nature of healthcare often stymies providers’ ability to share
4
FEATURES ©2014 by Premier Inc. All rights reserved.
lessons learned, which can result in
such as electronic medical records or
Wisely, a standardized methodology
programs that are either unproductive
electronic prescribing systems, to save
to identify and monitor clinical and
or limited in scale to a single facility or
time and reduce errors. On a more
administrative functions for healthcare
health system.
macro level, an analysis of MedPAR data
waste reduction.
6,7
To tackle the issue, leading hospitals
10
shows that these combined strategies
and health systems have implemented
resulted in approximately 62 percent
A waste reduction framework
a range of efficiency and cost-
of hospitals improving their overall
Premier’s waste framework allows acute
improvement strategies to stem the
efficiency since 2001.
care facilities to benchmark themselves
tide of misuse or overuse of healthcare
11
While this is commendable, the reality
against peers and/or their own prior
resources. Continuous performance
is that most waste-reduction efforts
waste reduction results.13 Facilities are
improvement programs, for example,
thus far have been limited in scope and
ranked by performance relative to the
work to optimize every aspect of
effectiveness. Little data exists to help
adjusted proportional contribution of
operational efficiency and cut costs
hospital administrators decide which
each waste measure.
per patient. 8
high-impact areas to target first.12 What’s
Some waste prevention programs
The framework is composed of three
needed is a scalable, national approach
categories: clinical, operational and
leverage standardized care pathways to
that highlights just how much variation
supply chain waste. We define clinical
document the ideal sequence and timing
is truly waste and provides specific
waste as spending on treatments that
of staff actions for achieving quality
opportunities and dollar amounts for
have been shown to be ineffective,
outcomes with optimal efficiency.
hospitals to reclaim. To help with this
including those that may even result
Others rely on technology solutions,
challenge, Premier developed Using
in harm. Operational waste refers to
9
OUTLOOK
QTR 2.14
5
P
FEATURES
T F
C
E
that which occurs from inefficiency, such as services or interventions that are helpful to ensuring a successful outcome, but which aren’t delivered in an optimal fashion. Lastly, supply chain waste refers to ineffective inventory management and supply ordering
AVERAGE OPPORTUNITIES FOR
CLINICAL WASTE REDUCTION CLINICAL CATEGORIES
AVERAGE OPPORTUNITY
L aboratory testing
$1.7 million
Respiratory therapy
$1.5 million
measures and the means to compare
Diagnostic imaging
$1.4 million
hospital performance in terms of
Overuse of the ICU
$792,000
potential opportunity (revenue that
Safety incidents for surgical patients
$422,000
Anti-infective usage
$373,000
Overuse of blood
$284,000
Intraoperative central nervous system (CNS) drug use
$73,000
processes (see Figure 1). Each category includes general
could be reclaimed if waste was reduced). In developing the measures, we considered three main criteria: •C omprehension: Are the measures and scoring simple to understand? •F airness: Do the measures account for differences in patient populations? •C omparability: Does the scoring allow for both internal benchmarking as well as comparison with peers?
Measuring savings opportunities
AVERAGE OPPORTUNITIES FOR
OPERATIONAL WASTE REDUCTION OPERATIONAL CATEGORIES
AVERAGE OPPORTUNITY
Labor productivity
$5.1 million
data from 261 acute care hospitals
Length of stay
$3.1 million
participating in Premier’s QUEST®
Readmissions
$3.0 million
collaborative. Hospitals were divided
Skill mix
$1.8 million
Use of overtime
$1.8 million
ICU length of stay
$362,316
Measures were validated using
into two groups: 209 facilities for measure development and 52 facilities for validation. The 52 facilities were chosen based on distribution of hospital characteristics and represented a crosssection of members: large and small, teaching and non-teaching, urban or rural population served, and multiple geographic regions. With Using Wisely, Premier was able to calculate the average amount of savings that could be generated each year by a typical 200- to 300-bed hospital in each of the measure domains.
6
FEATURES ©2014 by Premier Inc. All rights reserved.
AVERAGE OPPORTUNITY FOR
SUPPLY CHAIN WASTE REDUCTION SUPPLY CHAIN Non-automated purchase orders
AVERAGE OPPORTUNITY $55,000
FEATURES
T E
Fig.1
C
Premier’s waste framework
Little to no health benefit Clinical waste Potential for harm
Inefficient processes U.S. healthcare waste
Operational waste Duplication
Poor inventory management Supply chain waste Inefficient ordering
Conclusion
•D escribes the opportunities for waste
them achieve greater efficiency, provide
There is considerable geographic
reduction with greater specificity than
additional value to patients and payers,
variation in the quantity and type
has existed in the past.
and prepare for rapidly declining
of care delivered to patients in the
At long last, hospital and health
reimbursement rates that endanger
United States. Hospitals or health
system leaders have a roadmap to help
future solvency.
systems that spend more than peers without experiencing better health outcomes have obvious cost-reduction opportunities. Waste in the U.S. healthcare system contributes to the high cost of care, drives our growing deficit, and diverts resources from other social needs. Although hospitals have made gains in efficiency and cost reduction over time, major changes have not been possible because providers lacked the knowledge and means to make them in a systematic, evidence-based way. Now, however, Premier offers a standardized, replicable framework that: • Better defines healthcare waste, • Provides a conceptual basis for its classification, and
REFERENCES 1. New England Healthcare Institute, How Many Studies Will It Take? (Cambridge, MA, February 25, 2008). 2. Office of the Actuary, National Health Care Expenditures Data 2012, (Washington, DC, Centers for Medicare and Medicaid Services, 2012. 3. D. M. Berwick and A. D. Hackbarth, “Eliminating Waste in US Health Care,” JAMA. 307, no. 14 (2012): E1-E4. 4. D. Miller, J. Martin, T.J. Lowe, “Developing a Mechanism to Identify Waste in the Acute Care Setting,” (AcademyHealth Annual Research Meeting, Orlando, FL, June 24-26, 2012). 5. J. R. Barro, R. S.Huckman, D. P. Kessler, “The Effects of Cardiac Specialty Hospitals on the Cost and Quality of Medical Care,” J Health Econ. 25 (2006): 702-721. 6. Centers for Medicare & Medicaid Services (CMS), Medicare Program; Hospital Inpatient Value-Based Purchasing Program, USDoHAH Services, 42nd ed., CFR Parts 422 and 480 (Washington, DC, 2011). 7. J. L. Hargraves, R. D. Hays, P. D. Cleary, “Psychometric Properties of the Consumer Assessment of Health Plans Study (CAHPS®) 2.0 Adult Core Survey,” Health Serv Res. 38, no. 6, Part 1 (2003): 1509-1528. 8. Julie Weed, “Factory Efficiency Comes to the Hospital,” New York Times, July 10, 2010, http://www.nytimes.com/2010/07/11/ business/11seattle.html?pagewanted=all (accessed January 13, 2014). 9. S. D. Pearson, D. Goulart-Fisher, T. H. Lee, “Critical Pathways as a Strategy for Improving Care: Problems and Potential,” Annals of Internal Medicine 123, no. 12 (December 1995): 941-948. 10. R. Hillestad, J. Bigelow, A. Bower, et al., “Can Electronic Medical Record Systems Transform Health Care? Potential Health Benefits, Savings, And Costs,” Health Affairs 24, no.5 (September 2005): 1103-1117, 10.1377/hlthaff.24.5.1103 Health Aff. 11. E. Kroch, M. Duan, S. Silow-Carroll, et al., “Hospital Performance Improvement: Trends on Quality and Efficiency: A Quantitative Analysis of Performance Improvement in U.S. Hospitals,” The Commonwealth Fund, April 2007. 12. J. B. Christianson, K. M. Volmar, Alexander J. Scanlon, DP, “A Report Card on Provider Report Cards: Current Status of the Health Care Transparency Movement,” J Gen Intern Med. 25, no.11 (2010): 1235-1241. 13. M. V. Pauly, D. J. Brailer, E. A. Kroch, “The Corporate Hospital Rating Project: Measuring Hospital Outcomes From a Buyer’s Perspective,” Am J Med Qual 11, no. 3 (1996): 112-122.
OUTLOOK
QTR 2.14
7
F
P
P
FEATURES
T F
C
E
CHAMPIONING TOTAL COST REDUCTION IN HEALTH SYSTEMS
Wes Champion
Senior vice president / Premier Performance Partners
In his role with Premier, Wes Champion has responsibility for all of Premier’s improvement services to our members, including collaboratives, embedded partners, one-to-one advisory services, and our research and thought leadership. Champion has approximately 22 years of experience in healthcare, primarily concentrating his efforts in leading large-scale organizational change that improves the quality, service, operational and financial performance of Premier members. With his financial and operational background, Champion also focuses on service line and strategic planning as well as financial services areas. Prior to joining Premier, Champion was a partner with Accenture and CapGemini Ernst & Young and led their business transformation services nationally. Champion has also served as chief financial officer of a primary care network, ambulatory service division, and providersponsored health plan for an integrated delivery and financing system.
8
FEATURES Š2014 by Premier Inc. All rights reserved.
P
FEATURES
T F
E
C
DAY 1
PATIENT A
Fig.1
07:30 AM
DAY 2
02:00 PM
10:00 PM
MEDICARE PAYMENT TO HOSPITAL
$600
DAY 1
DAY 2
DAY 3
07:30 AM
02:00 PM
12:30 AM
PATIENT B
MEDICARE PAYMENT TO HOSPITAL
$3,600
PATIENTS A AND B, admitted to the hospital with chest pain, receive the same care from the same doctors and nurses. Medicare pays $3,000 less for Patient A’s care because he was not an inpatient for two midnights.
I
n the fall 2013 Economic Outlook,
even initiatives are a mindset for health
would be considered inpatients, while all
we showed that 65 percent of
system leaders to look at their overall
others would be deemed outpatients and
MS-DRGs were reimbursed below
cost structure within specific confines.
reimbursed as such (see Figure 1).
cost by Medicare payments.
Costs need to be lowered across the
There is a belief that commercial
That’s a scary reality for hospitals,
board – for all patients and procedures
rates will follow Medicare’s lead, so
especially since Medicare is the largest
– but looking at cost within Medicare’s
decreases to Medicare reimbursements
payer for most of them. The concept of
parameters is a good proxy for all payers.
may signify things to come in the
“Medicare breakeven” is a rallying cry
Sequestration was extended in
commercial payer market. In addition,
for health systems that are looking to
the Budget Control Act of December
new care delivery and payment models
survive and thrive in the future.
2013, and further cuts are possible.
pioneered by CMS – such as readmission
This means that hospitals breaking
penalties, the Medicare Shared Savings
reimbursements decrease with
even under current conditions may
Program, and Bundled Payments for
sequestration, value-based purchasing
have difficulty doing so later on. The
Care Improvement (BCPI) – create
payment cuts, readmission penalties
two-midnight rule proposed by CMS
upside and downside risks for health
and behavior modification adjustments.
could also have an impact on hospital
systems. In the future, these types of
Health systems must maintain or
margins by cutting reimbursement for
payment models are likely to move
improve the quality of care they provide
inpatients who are discharged before
beyond Medicare.
while working within significantly
two midnights have passed. Patients
constrained budgets. Medicare break-
staying longer than two midnights
We’re seeing Medicare
10
FEATURES ©2014 by Premier Inc. All rights reserved.
In today’s market, total costreduction programs are all about
FEATURES
T E
C
P
F
“
Hospitals and health systems have been working diligently over the past several years to identify the low-hanging fruit of cost reduction.
Projects aimed at reducing total costs must pinpoint where variation is unnecessary, adds costs, or reduces quality.
”
decreasing unjustified variability.
Examples of variation throughout the
Hospitals and health systems have been
care delivery environment include:
working diligently over the past several
•C ontract pricing differences for
overuse/misuse of blood products and lab or imaging testing); • P urchasing practices (e.g., differing
years to identify the low-hanging fruit
clinically equivalent products (e.g.,
contracts and terms or conditions for
of cost reduction. Variability exists in
physician preference items);
purchased services);
many different places within health
•C linical care delivery (e.g., protocols
systems. Projects aimed at reducing
for placement of patients in the most
total costs must pinpoint where
appropriate level of care within the
variation is unnecessary, adds cost, or
hospital setting);
reduces quality.
•R esource consumption or use (e.g.,
• Staffing (e.g., each employee performs at the highest level of training); and • Pharmacy medication management (e.g., a standard formulary across a health system). OUTLOOK
QTR 2.14
11
P
FEATURES
T F
C
E
Fig.2
Areas of focus for Medicare break-even efforts
Resource utilization, supplies
Staffing/labor efficiency, nursing
Length of stay Source: Premier online survey for Economic Outlook spring 2014 publication
Resource utilization, purchased services
Level of care
Staffing/labor efficiency, physicians
Staffing/labor efficiency, outsourcing 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Premier is working with our members
identify root causes of variation and the
the variations noted earlier. The
to provide the tools and help implement
largest savings opportunities – and it’s
ability to change and sustain improved
changes that remove waste and reduce
not something health systems have been
processes makes total cost reductions
variations, wherever they exist.
able to do for long.
achievable. PremierConnect™
According to respondents to our
Enterprise, an analytics solution
Why now?
Economic Outlook survey of health
designed in collaboration with Premier
The changing financial landscape
system executives, 38 percent are
members, enables hospitals and health
in the U.S. healthcare system is one
currently engaged in a formal Medicare
systems to easily access, integrate
reason for the current emphasis on total
break-even effort to reduce costs within
and interpret information. It also
cost reduction. In addition, we have
their organizations. An additional 21
allows providers to focus on using
better products and technology than
percent expect to begin an engagement
that knowledge to improve patient
in the past, which allow us to look at
in the near future.
care, instead of struggling to manage
clinical, financial, operational, quality,
Integrated datasets, which are
technology and infrastructure. In terms
supply chain and other types of data
becoming more necessary than ever,
of total cost reduction programs, it gives
in an integrated fashion. This helps us
make it possible to identify and quantify
health systems the data they need and
12
FEATURES ©2014 by Premier Inc. All rights reserved.
FEATURES
T E
C
allows them to create the standards and
have multidisciplinary committees to
protocols necessary to reduce costs now
protocols for new processes.
support their cost-reduction projects,
in a way that will keep costs low in the
and the people involved range from
future. Most of the low-hanging fruit has
variability reductions is the
supply chain executives to strategy,
already been removed through smaller-
development of clinician-driven care
clinical, nursing, financial, technology
scale resource utilization efforts, so now
pathways or care bundles, which can
and quality officers.
it’s about creating a culture within the
Another necessity for sustaining
be “hardwired” into electronic medical
health system that supports ongoing
records (EMRs). Many health systems
Continuous process improvement
have made significant investments in
According to respondents to our
EMRs over the past five to 10 years,
semiannual Economic Outlook survey,
integrated innovations and strategy at
so creating protocols within that
those who are currently engaged in
Summa Health System (Akron, OH),
technology is a way to realize some of
Medicare break-even initiatives are
says, “Every opportunity you find leads
the return on those investments while
tackling several areas of unnecessary
you to the next opportunity.”
maintaining cost efficiencies.
cost at once, with more than two-thirds
For example, a Premier team helped
process improvement efforts. As Benjamin Sutton, vice president,
Health systems now have access to the
focused on resource utilization in
tools they need to bend the cost curve in
Catholic Health Partners (CHP) develop
supplies, staffing and labor efficiency,
a sustainable, hardwired fashion. This
protocols that set standards for the level
and length of stay (see Figure 2).
is where the rubber meets the road on
of care a patient with specific clinical
Maintaining wins in reducing
EMR and new payment and delivery
indicators should receive. These include
variation means continuous process
models. Most importantly, it’s where
prompts for providers if a patient is ready
improvement. Health systems are
all these things come together to drive
for a step down or transition to a different
working to create the standards and
high-value healthcare.
level of care. As CHP continues to roll out its EMR system across the organization, order sets are revised to reflect current evidence-based standards. This was particularly evident in CHP’s blood conservation initiative, where the inclusion of evidence-based standards
There are a few areas that routinely demonstrate the largest improvement opportunities for most health systems.
and alerts allowed the system to meet and maintain established targets. Unlike previous attempts to drive out healthcare costs, this effort has been
LEVEL OF CARE AND LENGTH OF STAY Variation in step-down or discharge procedures for like-patients result in overuse of critical/intermediate care or longer length of stay compared to benchmarks.
met with greater collaboration and involvement from diverse areas of the hospital. Cost-reduction programs were traditionally driven by administrators. Now almost all of our current projects with Premier members involve a chief clinician who is in a leadership or co-leadership position. In fact, all
RESOURCE USE (INCLUDING PHARMACY) Lack of standard products and procedures compares unfavorably to benchmark levels for high-quality outcomes.
PURCHASED SERVICES Since contracts for purchased services are often negotiated locally, the terms, conditions and rates can vary tremendously and can be difficult to manage.
PHYSICIAN PREFERENCE ITEMS Provider preference for high-cost implants or devices leads to higher spend, despite opportunity for use of clinically equivalent products that are less expensive.
of our participating health systems OUTLOOK
QTR 2.14
13
F
P
P
FEATURES
T F
C
E
Susan Dowling-Quarles Vice president, engagement and delivery / Premier Performance Partners
Ms. Dowling-Quarles is a vice president in the Premier Performance Partners consulting practice based in Charlotte, NC and Little Rock, AR. Prior to joining Premier, Ms. Dowling-Quarles held numerous management positions in the healthcare industry including interim management at the CNE level. Her experience spans operational assessments, focused reviews and portfolio development, preparation for regulatory compliance review, and patient care process redesign projects. She has extensive experience in hospital operations. Ms. Dowling-Quarles received her BS in Nursing from Mount Saint Mary College in Newburgh, NY and her master’s degree
MANAGING COST OF CARE WITH IMPROVED USE OF INPATIENT BEDS
A
ccording to a Moody’s Investors Service report, Medicare’s 0.7 percent inpatient prospective payment system rate increase for 2014 is less than the expected rise in hospital operating costs and is a credit negative for non-profit hospitals.1 A recent analysis conducted by
in Healthcare Management from Central
Premier researchers using 2012 hospital cost reports found the average Medicare
Michigan University.
margin was -8.7 percent, with 68 percent of hospitals nationwide losing money serving Medicare patients. 2
Using evidence-based data to control costs Patients and health systems alike benefit by the use of evidence-based criteria to manage level of care (LOC) and length of stay (LOS). Care plans based on this type of approach keep patients at the center of the care delivery model while simultaneously supporting clinicians as they design a comprehensive, cost-effective plan that delivers quality outcomes. Building an appropriate care plan requires engaged physician champions from all medical staff specialties, as well as development of evidence-based guidelines for admission and discharge from critical care and step-down units.
14
FEATURES ©2014 by Premier Inc. All rights reserved.
Catholic Health Partners (CHP), a multi-hospital system based in Cincinnati, asked Premier to help evaluate its resource use related to critical care and intermediate beds, which impacts overall length of stay.
CHP identified a $10-million opportunity and achieved $5 million in savings in the initiative’s first year.
Fig.1
Average costs for varying levels of care
Average daily cost of
$600
$800-$1,200
Average daily cost of
MEDICAL/SURGICAL UNITS Approximately five to six patients per nurse
INTERMEDIATE CARE Approximately four patients per nurse
CRITICAL CARE UNITS Typically have one nurse for every two patients
$1,600
Source: “Reducing ICU length of stay,” Premier, Inc.’s Fall 2013 Economic Outlook
Average daily cost of
Effective care plans also need consistent
Results-driven partnerships
criteria for all levels of care (intensive,
processes for:
Member hospitals have partnered
intermediate or general medical/
• Initial bed placement,
with Premier to highlight areas of
surgical) are applied. An expected
• Patient transfer throughout the care
opportunity and create specific targets
LOS based on the admitting diagnosis
to achieve enhanced performance.
serves as a framework for managing
•D ischarge procedures, and
continuum,
Premier’s QualityAdvisor™ database
the episode of care. Tests, procedures
• Review of outlier cases to identify and
provides comparative information to
and daily review are coordinated by
address areas for improvement.
help hospitals establish targets for
a multidisciplinary team to facilitate
Costs vary between different levels
both level of care and length of stay.
effective care transitions. The team
of care due to the staffing and other
The standard comparison includes
engages physicians, nurses, care
resources necessary to manage patients
Premier’s top-performing hospitals and
managers, social workers and others for
at that care level (see Figure 1). Care
takes into consideration overall cost,
an integrated approach that optimizes
plans assure that patients receive the
LOC, LOS, readmissions, complications
treatment plans, outcomes and resources.
appropriate care throughout their
and mortality.
inpatient stay, have smooth discharge procedures, while also decreasing costs.
Once the need for inpatient services has been determined, admission
The inclusion of pharmacy and ancillary therapies – such as respiratory, physical, occupational and speech – has OUTLOOK
QTR 2.14
15
P
FEATURES
T F
E
C
Fig.2
Example of critical care usage monitoring
PERFORMANCE
CHANGE
Utilization performance
Change in utilization
ICU: baseline utilization rate
ICU: current utilization rate
STEP-DOWN: baseline utilization rate
STEP-DOWN: current utilization rate
TELEMETRY: baseline utilization rate
TELEMETRY: current utilization rate
MED/SURG: baseline utilization rate
MED/SURG: current utilization rate
ICU utilization
CIC/CCU utilization
STEP-DOWN utilization
17.12%
4.76%
10.62%
19.05%
0.00%
0.00%
88.36%
90.48%
Positive
No Change
Negative
Cardiovascular
2.16%
0.00%
95.68%
94.44%
0.00%
0.00%
7.55%
0.00%
Positive
Negative
Positive
General surgery
61.67%
25.00%
73.33%
50.00%
0.00%
0.00%
101.67%
50.00%
Positive
Negative
Positive
Internal medicine
30.00%
33.33%
35.00%
33.33%
0.00%
0.00%
80.00%
66.67%
Negative
No Change
Positive
Internal medicine
Note: Numbers in figure are not attributed to a specific health system or hospital; numbers were created for the purpose of an example.
helped facilities identify opportunities
•C ommunication to key stakeholders,
require additional attention (see Figure 2).
to move from IV treatment to oral
including physicians, consultants,
QualityAdvisor also supports
medications, implement and manage
patients and their families.
physician-led reviews of clinical
weaning protocols, and evaluate patient
Some organizations have gone a step
outcomes for specific DRGs. Any patient
mobility. The early identification
further and implemented a shorter,
with a LOS of more than five days is
of potential barriers to a patient’s
early evening update to encourage
reviewed weekly to compare clinical
progression through the various levels
communication and participation with
outcome measures and total cost. Action
of care positively affects length of stay
late-rounding physicians.
plans are developed with assigned
and the rate of complications. QualityAdvisor helps hospitals
Premier consultants conduct detailed
responsibilities for follow-up activities
LOS analyses using QualityAdvisor
(e.g., family intervention, enrollment in
monitor quality metrics, LOC and LOS.
comparative data. They also provide
government programs and placement
Daily reviews have a designated leader
on-site leadership support and
options). Case managers and social
(such as a physician, nurse or case
implementation assistance that includes:
workers play a key role in this process.
manager) who facilitates discussion and
•E valuation of case management,
The physician leader, chief medical
planning. These sessions, whether held
•U nit-based nursing gatherings,
officer or service line chief initiates
at the patient’s bedside or in a central
•R esource reviews, and
communication with physicians who
location, focus on what needs to occur to
•O ther strategies to reduce LOS and
have consistent outliers to understand
update the existing plan of care. Common elements of daily reviews
related costs.
issues and provide appropriate support,
Physician involvement is engaged
education or counseling.
include:
through individual performance
• Patient diagnosis;
reports that provide LOS opportunities,
strategies is an integral component of
• Expected and current length of stay
quality outcomes and improvement
managing the total cost of care, since it
(compared to benchmarks based on
recommendations. Administrators
focuses on meeting patient needs while
similar patient diagnosis and comorbid
and physicians work together to
monitoring clinical and quality outcomes.
conditions);
create action plans that drive future
REFERENCES
• Goals for the day and/or stay; • Barriers to transition to the next level of care; • Assignments for follow-up actions; and
16
FEATURES ©2014 by Premier Inc. All rights reserved.
performance enhancements. Regular reporting and ongoing communications alert physicians to areas that have shown improvement and those that
The coordination of LOC/LOS
1. Moody’s: Low Medicare Rate Increase Bad News for Nonprofit Hospitals, August 2013. http://www.beckershospitalreview.com/racs-/-icd-9-/-icd-10/moody-s-low-medicarerate-increase-bad-news-for-nonprofit-hospitals.html. 2. Premier, Inc., “Medicare breakeven: The imbalance of cost and reimbursement,” from Fall 2013 Economic Outlook.
Todd Koca President and CEO / SYMMEDRx Healthcare Solutions
Koca is the founder, president and CEO of SYMMEDRx Healthcare Solutions, a data analytics firm focused on helping hospitals manage the contract cycle and prices for physician preference items. He has 20 years of physician preference item contracting experience, as well as 11 years in sales,
I
n the quest to provide high-quality, cost-conscious care, physician preference items (PPIs) can easily derail hospital supply budgets. PPIs are typically highcost medical devices, products such as hip and knee implants, pacemakers, defibrillators, coronary and peripheral angioplasty balloons, stents, and
anterior cervical fusion plates and screws. They are so named because, currently and historically, physicians have chosen
the medical devices they want to use for their patients. Hospitals negotiate with
operations and contracting leadership roles
manufacturers, either on their own or through a group purchasing organization
with Boston Scientific.
(GPO), to purchase the devices that physicians, many of whom are independent contractors, have ordered. Negotiations often include confidentiality provisions
P
FEATURES
T F
E
C
Fig.1
Willingness to try non-branded physician preference items
2.7% 0.3%
If clinical outcomes were equal, 67 percent of provider respondents would be 19.3%
willing to try a non-branded PPI. Only 3 percent of clinicians reported that they would be unlikely to try an alternative.
29.7%
48.1%
Definitely would
Probably would
Probably would not
Definitely would not
Might or might not
Source: Premier online survey for Economic Outlook fall 2013 publication
that prevent hospitals from disclosing
incremental pricing increases. In
to what others are paying. Every year,
the price they paid for these products,
addition, there may be limited evidence
price increases of 5-15 percent are
which obstructs transparency in the
as to whether the new products actually
passed on to hospitals by more than 700
marketplace.
offer clinical improvements.
PPI vendors, representing more than
One study found that PPI acquisition
In the fall 2013 Economic Outlook
800,000 PPI stock keeping units.
costs can account for more than
survey of member healthcare
60 percent of total hospital supply
executives, 19 percent of physicians
variation in regional spending in
expenditures. While roughly 80
said they would “definitely” try a non-
vascular care, largely due to device
percent of the supplies purchased by
branded physician preference item
selection. 3 Higher costs were not
most organizations are commodity
if it demonstrated the same or better
associated with better outcomes.
items, 80 percent of the cost is
clinical outcomes. Another 48 percent
Regional, hospital and physician
attributable to PPIs.
“probably” would (see Figure 1).
differences can make PPI contracting
1
2
A recent study showed significant
Furthermore, preferences for
While this tendency seems to have
certain devices can develop early
shifted over the past several years, with
and vendor selections and physician-
in a physician’s career and can be
more providers willing to try other
hospital/physician-vendor relationships
influenced by relationships with
products, it still exposes an obstacle to
create a dynamic that is quite different
medical device manufacturers. Lack
controlling costs. Physicians’ variation
from typical medical-surgical supply
of price transparency, coupled with
in preferences leads to less negotiating
purchasing. Since PPI accounts for a
close relationships among physicians
leverage for hospitals that may have
significant portion of a hospital’s supply
and their preferred device sales
doctors using several different medical
spend, it creates a tremendous challenge
representatives, can make it difficult to
devices for the same procedure.
and opportunity for cost savings.
reduce PPI costs.
With the above-mentioned lack of
New technology, purportedly
difficult. The abundance of product
Given that contracting for physician
marketplace transparency, hospitals
preference items is inherently local,
representing significant advances, is
have an even harder time determining
successful management of the PPI
released frequently and usually with
if the price they are quoted is similar
contracting cycle requires accurate
18
FEATURES ©2014 by Premier Inc. All rights reserved.
FEATURES
T E
C
information, a credible contracting plan,
to ensure pricing compliance, monitor
providers are challenged to reduce
proven implementation processes and
implant-selection appropriateness and
costs without compromising quality.
the ability to audit performance.
help maintain savings.
PPIs have been a recognized cost driver
2. A preparedness assessment
for many years; in our semiannual
Creating a solution
Another critical piece of the PPI
executive survey, 27 percent of
Premier, through its business
contracting process is assessing a
respondents said that reducing PPI
partnership with SYMMEDRx
health system’s relationships with its
costs is one of their top two areas of
Healthcare Solutions, recently
physicians. These vary widely and can
resource dedication for supply chain
augmented its national portfolio
significantly influence how a hospital
improvement in the next 12 months.
with a localized PPI contracting
should engage with PPI vendors for
strategy. Unlike traditional, line-
maximum savings.
item benchmarking, SYMMEDRx
Physician-health system dynamics that
PPI benchmarking data and analytics can augment a hospital’s value analysis process and enable administrators
Empower™ cross-references all
can influence PPI purchasing include:
to better negotiate pricing. Without
functionally equivalent (substitutable)
•E mployed versus non-employed
changing physician behavior, this data
PPI codes across vendors within a health system. It also cross-references against an external database. This allows a hospital to compare pricing and usage for all vendors that sell clinically
physicians, •T he use of physician-engagement incentives, •C ompetition from the local hospital market, and
has helped health systems reduce PPI costs by an average of 16 percent. Contracting is a first step in reducing supply expense, especially in PPI. Members of the Premier alliance have
equivalent products. This type of
•C -suite support.
frequently discussed the value of having
benchmarking data uncovers significant
3. Physician and vendor engagement
physician engagement and leadership
price disparities for like items – on
Approaching physicians with actual
in supply chain decision-making. Once
average, a 14.1 percent price disparity.
benchmarks is vital to a successful PPI
physicians are given benchmarks to
Components of effective PPI value
strategy. Physicians must support the
demonstrate their PPI spend compared
analysis include:
proposed contracting strategy, and
to others with similar clinical outcomes,
1. Data analytics
the use of data to show their spend
they are typically willing to change their
The availability of credible, quality,
compared to other physicians doing the
preferences or even become involved in
comparative data is mandatory
same procedures is a prime means of
negotiations with suppliers. It all comes
for the success of any PPI-related
gaining this support. Effective vendor
down to data.
initiative, whether it be developing
engagement is equally important and
new contracts, eliminating unjustified
is driven by contracting options and
clinical variation or other improvement
pricing structures.
projects. Designed by physicians and
4. Monthly contract auditing
clinicians, Empower is an analytics
Traditionally, healthcare providers
engine that assesses historically paid
have had significant challenges in
prices for a database composed of 70
monitoring PPI contract pricing and
million PPI price points. This allows
usage compliance beyond simple
hundreds of thousands of lines of
purchase order or invoice tracking.
data to be categorized, compared and
With automated, cross-referenced data,
benchmarked within hours.
contract auditing can be done monthly
Using these analytics, Premier can perform monthly audits for members
to determine new areas of focus. More than ever before, healthcare
REFERENCES 1. E.S. Schneller, and L. Smeltzer, Strategic Management of the Health Care Supply Chain (San Francisco: Jossey-Bass, 2006). 2. Premier, Inc., “Physician Preference: Balancing Cost and Quality,” from Fall 2011 Economic Outlook. 3. Philip P. Goodney, et al., “Relationship Between Regional Spending on Vascular Care and Amputation Rate,” JAMA Surg. 149, no.1 (2014): 34-42, doi:10.1001/jamasurg.2013.4277.
OUTLOOK
QTR 2.14
19
F
P
FEATURES
T E
M
C
any health systems
at the cost to care for the population
preference items (PPIs). “Commodities
are looking for new
and ask ourselves ‘if we meet these
end up being a good test for future
and creative ways to
quality standards, how can we drive
program additions, like PPIs,” he
lower supply costs,
down cost?’ We took that same approach
explained. “With Covidien, we can
when looking at supplier partners.”
expand this to PPIs in the future and
especially with increased financial pressures resulting from sequestration,
Fairview found its first partner in
build off the relationship we have.”
reimbursement cuts and healthcare
Covidien, a company more committed
reform. Since supplies are the second
to helping Fairview’s providers select
benchmarking data also influenced
largest health system expense (after
the right products instead of aiming
Fairview to start with commodities.
labor), it is a prime area for focus.
to sell the most. “One of the most
“We had a lot of the necessary
When Fairview Health Services
Born said the availability of
interesting things about the shared-
information, from our own databases
(Minneapolis, MN) began dealing
savings model is that Covidien’s sales
and from Premier, to determine
with new care delivery and payment
representatives are now utilization
what products are used, how, in what
models, the system’s supply chain
managers,” noted John Carrico,
quantity, and for which procedures.
leaders searched for partners willing to
Fairview’s senior director, supply chain
Then we were able to match that data
go at-risk with them to reduce costs.
operations. “They will be paid based on
with the data the supplier has about us.”
“As the Affordable Care Act gained momentum several years ago, it made
appropriate utilization of products, not on the amount of product they sell.”
us think differently about what kind
Metrics play a major role in the project. Using resource utilization data, Fairview looked at line-byline product use against drivers of
new environment,” said LeAnn Born,
Sharing savings on commodity items
Fairview’s vice president of supply
To pilot the program, Fairview focused
acute discharges, patient days and
chain. “In turn, I began reaching out
on Covidien products already on its
related items – to identify providers,
to suppliers to identify those who were
Premier contracts. That helped supply
nursing departments and services
really ready to try something new.
chain managers from a contract
with the highest use. Pinpointing
“Fairview’s been engaged with
perspective and also limited the
areas of unnecessary variation helped
scope of the program to 220 SKUs.
Fairview determine standards and
of health system we would be in this
Medicare and various payer partners on shared savings and at-risk care delivery
According to Carrico, commodity
models, such as our Pioneer ACO
items are a good starting point, since
(accountable care organization). We look
they are easier to change than physician
activity – surgery volume, adjusted
create best practices for its caregivers.
OUTLOOK
QTR 2.14
21
F
P
P
FEATURES
T F
E
C
“We fail or succeed together, and having that mentality is a huge step in selecting the right partners.”
Keys to success
to drive down costs and improve
with other healthcare stakeholders
Engagement is a vital part of Fairview’s
outcomes and patient experience.”
that are also willing to change how
program, and quite likely, will drive
In addition, Fairview has involved
they’ve done things traditionally.
its ultimate outcome. An initiative
senior leaders, as members of an
that began with collaboration on a
executive steering committee, in both
having that mentality is a huge step
new opportunity continues with the
the commodities program and other
in selecting the right partners.”
increased involvement of physicians
supply chain cost-reduction projects.
and utilization managers.
This has helped to establish the right
Long-term vision
culture for change, both in the supply
Fairview’s commodities program
chain and throughout the organization.
with Covidien is projected to produce
Carrico pointed out that Fairview has clinically integrated project managers embedded in the supply chain who
As Born said, “These changes can’t
“We fail or succeed together, and
$100,000-$200,000 annually in
can educate others about unnecessary
happen quietly, so we’re trying to
hard savings. The supply chain team
variations. “With Covidien’s
bring more visibility to leaders across
expects additional soft savings from
representatives who will now serve
the organization. Engagement across
changing the way providers think
as utilization managers and our great
broad groups helps gain support for
about product utilization while
clinicians, who are very aware of their
our projects and creates a culture
increasing patient and nursing
role in managing product expense, we’ve
that is focused on this type of work.
satisfaction through best practice
really tried to create the right culture
Leadership awareness can lead to
utilization of Covidien products.
to support our cost-reduction efforts.”
success elsewhere in the health system.”
The development of the commodities
Connecting across the continuum
In the long term, Fairview expects to expand its commodities program
program has also spurred discussions
of care and with external partners is
and develop similar risk-sharing
about future opportunities for shared-
critical if projects are to change the way
initiatives with other suppliers
savings programs. “The first step is
things have always been done. “Our
and external partners. The health
to establish a routine for managing
health system needs to be willing to
system is betting that its efforts
use of these products, which means
do things differently to reduce overall
will result in innovative and much
establishing a good relationship with
costs,” said Carrico, “and that’s a
needed supply chain cost savings.
the utilization managers and our
two-way street. It’s important for us
clinicians,” added Carrico. “That
to be engaged with our own providers
gives us a broader understanding
in order for them to be engaged with
of how we’re all working together
us. And it’s important for us to engage
22
FEATURES ©2014 by Premier Inc. All rights reserved.
PERSPECTIVES Standards that stick, 24
PERSPECTIVES
T
E
C
Over the past three years, Medicare reimbursement cuts have been the healthcare trend with the greatest impact on health systems, according to results from Premier’s spring 2014 Economic Outlook survey of healthcare executives (n=522). Nearly two-thirds (64 percent) of respondents to the semiannual survey cited reimbursement cuts as one of the top two trends impacting their organizations in the next 12 months, down from 76 percent in spring 2012 and the peak at 79 percent in spring 2013 (see Figure 1). The decline is likely a result of greater clarity around actual (rather than proposed) reimbursement cuts and efforts by health systems to reduce costs to meet these lower payment rates.
Fig.1
Healthcare trends with greatest impact on organization in the next 12 months
Spring 2012 Reimbursement cuts
Fall 2012 Spring 2013 Fall 2013
New care delivery models, such as accountable care organizations
Spring 2014
Uncompensated care
Health information technology requirements (meaningful use and EMR) Consolidation among health systems
Source: Premier online survey for Economic Outlook spring 2014 publication
Employer health benefits/ insurance exchanges
Focus on utilization of products and services
Advanced data analytics (excluding EMR)
Comparative effectiveness research
0%
20%
40%
60%
80%
100%
Note: Responses that appear blank were not response options during the applicable survey fielding period.
OUTLOOK
QTR 2.14
25
F
P
P
PERSPECTIVES
T F
E
C
New care delivery models, such as accountable care organizations (ACOs), remain the second largest trend affecting
(IDNs) are more likely to participate in
26, have preexisting conditions, have
an ACO than standalone hospitals.
purchased insurance through the mar-
2
The American Hospital Association
ketplace exchanges, or qualify for new
survey respondents’ health systems.
reported that hospitals provided approx-
expanded public coverage has resulted
Reports estimate that more than 500
imately $41 billion in uncompensated
in fewer no-pay patients. As a potential
ACOs exist nationwide, with ACO
care in 2011, but that number should
result, there was a 46 percent decrease in
participation almost quadrupling since
decline as new healthcare reforms
respondents who chose uncompensated
spring 2012. Non-rural hospitals and
are implemented. Extended coverage
care as a top trend from spring 2012 to
hospitals in integrated delivery networks
through the ACA to those who are under
spring 2014.
3
1
Fig.2
Healthcare trends with greatest impact on organization in the next 12 months, by geographic region
Northeast/Mid-Atlantic Reimbursement cuts
Southeast Midwest West
New care delivery models, such as accountable care organizations
Uncompensated care
Health information technology requirements (meaningful use and EMR) Consolidation among health systems
Source: Premier online survey for Economic Outlook spring 2014 publication
Employer health benefits/ insurance exchanges
Focus on utilization of products and services
Advanced data analytics (excluding EMR)
Comparative effectiveness research
0%
26
PERSPECTIVES Š2014 by Premier Inc. All rights reserved.
10%
20%
30%
40%
50%
60%
70%
80%
PERSPECTIVES
T
E
Fig.3
C
P
F
Top healthcare trends impacting supply chain
FALL 2013
SPRING 2013
FALL 2012
Increased physician-health system engagement across clinical and supply chain operations
21.3%
24.8%
29.6%
38.4%
Supply chain integration to align with clinical care, revenue capture, and IT across facility/health system Focus on waste management (e.g., resource utilization, as a means to reduce supply cost)
19.7%
20.1%
10.7%
6.3%
14.5%
13.9%
21.4%
17.3%
Centralized purchasing
13.7%
15.0%
n/a
n/a
Comparative effectiveness/value analysis research
11.6%
10.3%
n/a
n/a
Use of new supply chain metrics/processes
8.1%
5.0%
n/a
n/a
Population health management and care coordination across the continuum
6.9%
5.6%
7.8%
4.8%
Location and product identification standardization (e.g., GLN, and GTIN)
4.3%
5.3%
1.5%
2.7%
Slightly more than one-third of
Source: Premier online survey for Economic Outlook spring 2014 publication
SPRING 2014
broader industry trends impacting health
cite supply chain integration as a top
non-acute facilities (34 percent) said
systems. The percentage of respondents
trend, compared to non-acute facilities.
employer health benefits and insurance
reporting increased physician-health
Centralized purchasing, a trend
exchanges will have the largest impact
system engagement as the top supply
that gained momentum in the past
on their organizations over the next 12
chain trend fell from fall 2012 (38
year, is the top trend impacting non-
months (second only to reimbursement
percent) to spring 2014 (21 percent).
acute supply chains over the next 12
cuts), compared to only 15 percent of
However, it remains the trend with the
months. Nearly half (47 percent) of all
acute-care facilities.
largest impact (see Figure 3). Acute-care
respondents said that they have fully
facilities were more than twice as likely
implemented a centralized purchasing
slightly by geographic region. While
as non-acute facilities to cite physician-
channel across all acute and alternate
reimbursement cuts are the top trend for
health system engagement as the top
sites. Another 39 percent have the
all, more survey respondents in the
trend impacting their supply chains.
capability to centralize purchasing, but
Trends impacting health systems differ
Southeast (72 percent) suggest that
Physician engagement has been useful
have yet to complete implementation.
reimbursement cuts have the biggest
in helping supply chain leaders lower
Centralized purchasing can streamline
effect on their organizations (see Figure
costs in historically challenging areas
and standardize purchasing across
2), compared to the Northeast and
such as physician preference items (PPIs).
facilities, which drives better pricing
Mid-Atlantic (60 percent), Midwest (65
Getting physicians involved in supply
and enables tracking of supply usage
percent), and West (56 percent). While
chain decisions can be advantageous
throughout an organization.
consolidation among health systems is the
to reducing costs while maintaining or
second most cited trend for the Northeast,
improving quality outcomes.
it is the fifth-ranked trend in the Southeast and sixth in the Midwest.
Integration with clinical care, revenue
Health systems’ cost-savings goals will remain a major influence over supply chain decisions in the next 12 months,
capture, and IT across health systems
as one-third of respondents named
is the supply chain trend most affecting
it the existing area of focus with the
Tackling cost with supply chain strategies
20 percent of respondents, up from 6
greatest influence on their supply chains.
percent in fall 2012. Acute-care facilities
Reductions in overuse or unnecessary
Trends with the biggest influence on
were more than three times as likely
variation in care will receive the most
supply chains are more varied than
– 22 percent compared to 7 percent – to
focus for 18 percent of respondents, OUTLOOK
QTR 2.14
27
P
PERSPECTIVES
T F
E
C
while another 14 percent selected supply
30 percent of them. Building relationships
in dedicating resources to comparative
chain integration as their top focus (see
with physicians and clinicians is a top focus
effectiveness or value analysis.
Figure 4).
area for another 28 percent (see Figure 5).
Nearly half (47 percent) of all survey
Several areas of resource dedication
Resource dedication to reduce costs in commodity items appears to
respondents cite product standardization
remained fairly static since fall 2012.
be a growing trend, increasing from
as one of the top two areas of resource
The largest changes include a stronger
12 percent of respondents in fall 2012
dedication within their supply chains
focus on product standardization, an
to 21 percent this spring. Fairview
over the next 12 months. EHR-specific IT
increase in emphasis on reducing costs
Health Services (Minneapolis, MN), in
investments are the prime focus for
for commodity items, and a decrease
partnership with Covidien, is targeting
Fig.4
Existing area of focus with the greatest impact on supply chain, next 12 months
Fall 2012 Cost-savings goals of the health system
Spring 2013 Fall 2013 Spring 2014
Reductions in overutilization/ variation in care
Integrating the supply chain across the continuum of care
Implementing healthcare information technology
Drug shortages Source: Premier online survey for Economic Outlook spring 2014 publication
Medical device prices
Comparative effectiveness/ value analysis research
Commodity prices
0%
5%
10%
15%
20%
Note: Responses that appear blank were not response options during the applicable survey fielding period.
28
PERSPECTIVES Š2014 by Premier Inc. All rights reserved.
25%
30%
35%
40%
PERSPECTIVES
T
E
commodity items in a major effort to
outcomes, and reduce supply expense.
drive proper supply utilization. Fairview has moved beyond the
“One of the biggest accomplishments
C
It’s become foundational to what we’re doing in supply chain,” noted LeAnn
toward being clinically integrated
Born, vice president, supply chain,
traditional materials management and
has been establishing our business
Fairview Health Services.
value analysis process to evolve into a
intelligence team. Utilizing clinical
clinically integrated supply chain. Its
and supply chain tools – like Premier’s
between products and quality outcomes
goals are to use clinical and financial
Supply Mix Index™ – provide the
now, which has helped spur us to begin
data to drive decisions, coordinate care
decision support we need to decrease
our partnership with Covidien. We
through best practices, improve patient
cost and improve quality outcomes.
have the data to look at utilization and
Fig.5
“We’re able to connect the dots
Top two areas of resource dedication for supply chain improvement
Fall 2012 Product standardization
Spring 2013 Fall 2013 Spring 2014
IT investments (EHR-specific)
Building relationships with physicians and clinicians
Reducing costs for physician preference items
Source: Premier online survey for Economic Outlook spring 2014 publication
Reducing costs for commodities
Comparative effectiveness/ value analysis research
Data standardization
IT investments (non-EHR-specific)
0%
10%
20%
30%
40%
50%
OUTLOOK
QTR 2.14
29
F
P
P
PERSPECTIVES
T F
E
C
determine best practices that we can
be important in targeting appropriate
management and chief information
implement through our utilization
utilization with physician preference
officer of the Cincinnati-based Catholic
managers and engaged physicians.”
items later.”
Health Partners (CHP).
Hospitals that are part of an IDN
Paul Minnick, executive vice
were less likely to dedicate a high
Driving sustainable cost reductions
president and chief operating officer at
number of resources to EHR-specific
Pressures from ongoing Medicare
Beebe Healthcare (Lewes, DE) seconded
IT investments, possibly because these
reimbursement cuts, sequestration,
that notion. “As an organization with
investments have already been made.
and large long-term investments to
a very large Medicare patient mix, the
IDNs were more likely than non-IDN
implement new care delivery models
impending changes in healthcare reform
respondents to dedicate resources to
and advanced technology have left
made it imperative that we focus on a
reduce costs in PPI items (see Figure 6).
hospitals feeling a financial squeeze. As
multi-faceted approach of cost reduction
they work to reduce costs across their
and efficiency improvement.”
“Changing physician behavior around commodity items is a lot easier than
organizations, many are looking at
with physician preference items, but
Medicare population data to determine
to the prevalence of reimbursement
it can still move the needle in terms
ways they can decrease unnecessary
and patient population data from
of standardization and reducing costs
variation and standardize their supply
CMS, can be a good proxy for all
in the supply chain,” explained John
chain and clinical operations.
patients. Hospitals can use their
Carrico, senior director, supply chain operations, Fairview Health Services.
Medicare patients in particular, due
“If we can’t make money on the
clinical and supply chain information,
Medicare population – or at least break
along with Medicare reimbursement
even – we don’t have a sustainable
data, to identify areas of waste and
itself, and the learnings we get from
business model,” said Rebecca Sykes,
opportunities for standardization.
going at-risk on commodity items, will
senior vice president of resource
“Both the partnership with Covidien
Fig.6
Top two areas of resource dedication for supply chain improvement, IDN and non-IDN
IDN
Non-IDN
Product standardization (e.g., reducing the number of vendors that supply like products)
24.1%
22.7%
IT investments – EHR-specific
18.7%
24.9%
Reducing costs for physician preference items
16.7%
9.9%
Building relationships with physicians and clinicians
10.8%
12.7%
Comparative effectiveness/value analysis research
8.4%
5.5%
Data standardization (e.g., standardization of item masters and accounting systems across facilities)
8.4%
4.4%
Reducing costs for commodities
6.9%
10.5%
IT investments – non-EHR-specific
5.9%
9.4%
PERSPECTIVES ©2014 by Premier Inc. All rights reserved.
Source: Premier online survey for Economic Outlook spring 2014 publication
30
According to survey respondents, the
PERSPECTIVES E
T C
top three drivers of waste within their
over the past three years to improve
organizations are:
productivity within their health
if they currently engaged in an MBE
• Inadequate care coordination
system. “Our goal has been to get our
project, 38 percent said yes. Among
(e.g., fragmented transitions,
overall staffing at the 50th percentile
them, 32 percent managed projects
readmissions);
of productivity compared to similar
internally and 6 percent with consulting
organizations,” said Minnick.
initiatives. Of those respondents that
• Inefficient labor costs (e.g., suboptimal staffing mix, excessive overtime); and • Product selection (e.g., product
When survey respondents were asked
“We’ve also partnered with Premier to
do not have an active project, 21 percent
look at non-labor costs, which for us are
expect to begin one in the future (see
conversion and standardization
heavily focused on physician preference
Figure 7).
opportunities).
items and purchased services, length
Central to Medicare break-even
of stay and level of care. We are always
its goal of reducing weighted equivalent
(MBE) or other total cost-reduction
looking at how we can purchase and
inpatient admissions by $25 per discharge.
projects is the use of quality and
provide quality products and services to
A diverse team worked with CHP clinicians
cost data to benchmark against top
create a sustainable culture of quality
and physicians to design and help
performers, identify opportunities,
care at a low cost, and these break-even
implement processes to reduce unjustified
drive efficiencies and monitor improved
efforts have been a great way to identify
variation across CHP’s 23 hospitals.
performance. With data, larger drivers
and implement standards.”
of waste can be narrowed down to
CHP partnered with Premier to meet
The team targeted areas of clinical
Beebe Healthcare surpassed its goal
usage with high variation within CHP,
specific areas of focus that are more
to reduce $3.5 million in non-labor
including:
feasibly managed.
expenses, met its $2 million labor
• Significant decreases in blood
Using Premier’s QualityAdvisor™ app, leaders at Beebe Healthcare worked
Fig.7
expense goal, and has currently saved
transfusions that lowered costs without
$5.1 million.
compromising quality and safety;
Engagement in Medicare break-even (MBE) project
32.0%
Active internal initiative Active consulting initiative
41.4%
Looking to begin an MBE project No current or planned project 6.1% 20.5%
Source: Premier online survey for Economic Outlook spring 2014 publication
OUTLOOK
QTR 2.14
31
F
P
P
PERSPECTIVES
T F
E
C
“Overall, we’re looking for performance improvement through revenue enhancements and
expense reductions of over $1 billion over the next decade. That means driving out waste in our health system, streamlining our supply chain and clinical operations,
”
and maintaining high-quality care. • Reduction in patient days in intensive care settings such as ICU and telemetry beds; and
initiatives in 2013 alone. “We created a 10-year performance improvement plan that addresses
result in an additional $25 million in improvements this year. “The improvements we’re making
• Better understanding among
how we’re going to thrive in this new
now aren’t fixed and final,” said Sutton.
CHP physicians of how their
healthcare environment,” explained
“It’s continuous process improvement
role in choosing orthopedic and
Benjamin Sutton, vice president,
to ensure we’re making the right
cardiovascular implants can improve
integrated innovations and strategy,
choices, maximizing efficiency and
costs and outcomes.
Summa Health System. “Overall, we’re
meeting cost-savings potential. Every
CHP ultimately identified $22 million
looking for performance improvement
opportunity you find leads you to the
in clinical variation and realized $9
through revenue enhancements and
next opportunity.”
million in savings in 2013.
expense reductions of over $1 billion
Most Medicare break-even initiatives
Medicare break-even projects are
over the next decade. That means
part of a major effort to reduce total
do not have a sole area of focus. Instead,
driving out waste in our health system,
costs within health systems. Long-term
the biggest opportunities are identified
streamlining our supply chain and
survival and success as a healthcare
and the internal or consulting team
clinical operations, and maintaining
organization means identifying areas of
determines capacity to begin work. The
high-quality care.”
variation and implementing solutions
most common areas of focus align with
“We noticed the greatest initial
to be more efficient and cost-effective
Wes Champion’s article in this edition:
opportunities for improvement in
while providing high-quality clinical
79 percent of respondents with MBE
labor productivity, revenue-cycle
care. These efforts aren’t about one-
projects are focusing on resource use
management, length of stay, and supply
time savings projects. Rather, it’s about
with supplies; 74 percent on staffing and
chain. Among other things, we’re
creating standards that stick to take cost
labor efficiency in nursing; 70 percent
aiming to create a system that optimizes
out of the system over the long haul.
in length of stay; and 62 percent in
staffing skill mix, so that we can better
resource use of purchased services.
manage normal fluxes in patient
Summa Health System (Akron, OH), now aligned with HealthSpan Partners, an auxiliary organization of CHP, has
admissions while driving down overtime costs and increasing labor efficiency.” Summa has put in place a three-
also been working with a Premier team
year strategic plan that dictates
to target clinical variation through
cost-reduction targets and process
process improvements. Summa
improvement goals. Following on the
targeted just under $7 million in
heels of its initial $7-million cost-
improvements through length of stay,
reduction target, it’s now working to
level of care and resource utilization
implement an expanded plan that will
32
PERSPECTIVES ©2014 by Premier Inc. All rights reserved.
REFERENCES 1. Premier, Inc. Accountable Care Organization and Population Health Management Trends. (December 2012) https:// www.premierinc.com/wps/wcm/connect/9e3ec8e7-35cf42e3-8406-4a2d77682019/ACO-Survey-White+Paper. pdf?MOD=AJPERES. 2. Ibid. 3. Ann Carrns, “Paying Your Medical Bills Is More Complicated,” The Boston Globe, September 25, 2013, http://www. bostonglobe.com/business/2013/09/24/paying-your-medical-bills-more-complicated-than-past/MnOPKkbIcGFpvKgWWy5lxK/story.html.
TRENDS PACER surgical mesh collaborative, 34 Standardizing the use of surgical mesh , 37 Success Story: Bard Access Systems, 41
PACER surgical mesh collaborative determines clinical best practice
TRENDS
T E
P
C
remier’s Partnership
identify opportunities to change existing
member systems’ general surgeons
for Advancement of
mesh practices and, if possible, revise
served as subject matter experts and
Comparative Effectiveness
purchasing patterns to reduce costs
facilitated discussions.
Review (PACER) program
while improving or maintaining quality.
is designed to optimize healthcare
The project, which began with
The surgical mesh project reviewed
a systematic literature review of
delivery by sharing usage, outcomes and
clinical and supply chain data and shared
surgical mesh use in hernia repair, was
spend data across integrated delivery
best practices to eliminate unnecessary
eventually expanded to include breast
networks (IDNs). Multidisciplinary
variation in product use. Each IDN
reconstruction. The group also analyzed
teams discuss benchmarks and best
sent four team members with relevant
integrated data from the MySpend™
practices, while supply chain leaders
expertise; general surgery, clinical
and QualityAdvisor™ performance
collaborate to make informed, evidence-
operations, performance improvement
improvement solutions to evaluate:
based decisions on clinical and
and change management, and supply
• Market share;
physician preference items (PPIs).
chain were represented.
• Product distribution;
The PACER surgical mesh project,
After the project’s launch, biweekly
which began in August 2013, involved
meetings were held in September,
a group of 12 IDNs divided into two
October and November, during which
cohorts (ASCEND® and LIDN) that
the group shared best practices and
met concurrently and interacted
evaluated clinical outcomes and
throughout with Premier staff. The
usage data to support their decision-
ASCEND cohort consisted of Community
making process. At each meeting,
• Per-case spend; • Percent of mesh spend on biologic products; • T he unique biologic and synthetic mesh SKUs purchased; and • T he types of procedures in which mesh was used.
Regional Medical Center (Fresno, CA) Hoag Memorial (Newport Beach, CA), Marshfield Clinic (Marshfield, WI), Presbyterian Healthcare Services (Albuquerque, NM), Thomas Health Mesh
System (Charleston, WV), and the University of Tennessee Medical Center (Knoxville, TN). The LIDN cohort included Adventist Health (Roseville,
Synthetic
CA), Carolinas HealthCare System
Biologic
(Charlotte, NC), Fairview Health Services (Minneapolis, MN), Henry Ford Health System (Detroit, MI), Norton Healthcare (Louisville, KY), and Texas Health Resources (Arlington, TX). Both groups had a common objective: to accelerate implementation of
Polyester
Polypropylene
ePTFE
• Various coatings • Absorbable/Non-absorbable • Average cost ~$200 – $700
Bovine
Porcine
Human
• Absorbable • Storage and rehydration requirements • Average cost ~$3,000 – $6,000
accountable care, bundled payments, clinical integration and shared savings within their systems. Ideally, they would OUTLOOK
QTR 2.14
35
F
P
P
TRENDS
T F
E
C
Member implant logs revealed a high
Health Services. “They had such a
whole identified a savings opportunity
level of biologic mesh use in breast
meaningful conversation and created
of 10-20 percent. Projected annual
reconstructive surgery. This led to an
a great baseline understanding of the
savings for the group is $1.3 million, or
invitation for plastic surgeons from
clinical aspects that the conversation
14.6 percent of total spend.
each of the health systems to review the
then became about sourcing.”
data and contribute their own subject matter expertise.
As part of the project, Premier
Following data examination and
will monitor member conversion,
discussions, the group recommended
compliance, and savings. Ongoing
standardization of synthetic mesh
work includes conversion to the new
Outcomes and recommendations
inventory to one or two suppliers for
dual-source vendors, education for
“The surgical mesh project began
all items that could be clinically cross-
surgeons using biologic mesh in hernia
with clinical data and comparative
referenced. Ten of the 12 IDNs – with
repair, and the creation of a pricing
effectiveness research, and allowed our
total annual surgical mesh spend of
transparency program.
doctor – who performs the most hernia
$8.9 million – chose to participate in
repairs in the state of Minnesota – to
a 90 percent dual-source contract,
across the county is a great catalyst for
meet with peers across the county
with additional value available to
making things happen within our own
to compare how they use mesh, for
members standardizing on a sole
health system,” said Born. “There’s
what, and why,” said LeAnn Born,
source that met the needs outlined in
nothing but benefit to being involved.”
vice president, supply chain, Fairview
the utilization review. The group as a
SUCCESS in
CARDIAC STENTS
“Working with other health systems
PACER recently completed a pilot project examining clinical evidence and outcomes, as well as usage data, to determine best practices and unnecessary variation in cardiac stent use. Five large IDNs, which met biweekly from December 2012 to February 2013, decided on dual-source vendors for drug-eluting stents. George Hersch, vice president of materials management, Norton Healthcare, was quoted about the project in Premier’s inaugural Quality Outlook: “Dialogue and collaboration led us to see the lack of differentiation among manufacturers. This allowed us to make our decision and helped our physicians gain confidence that these products would have positive outcomes for their patients.” The group had a 99.3 percent compliance rate within the first 90 days of the agreement. Within the first seven months of implementation (May through December 2013) of the new contracts, PACER participants saved $2.2 million.
36
TRENDS ©2014 by Premier Inc. All rights reserved.
Standardizing the use of surgical mesh
E
ach year, surgeons worldwide use approximately 20 million mesh devices, predominantly for hernia repair. Even so, manufacturer-sponsored research has yet to identify a preferred – or ideal – mesh, be it synthetic or biologic. Recent studies focused on orthopedic devices have shown physicians are often unaware of
device costs. It’s not a stretch to presume that the same lack of awareness exists in other areas of healthcare. 1
Premier brought together a group of supply chain and clinical professionals to discuss the costs of surgical
mesh in their facilities. That discussion was part of a larger conversation about appropriate mesh usage for hernia procedures, based on exact procedure type and patient needs. Surgeons involved in the discussion agreed they prefer biologic over synthetic mesh under certain conditions, such as in: •A n infected or contaminated environment; •L arge, complex ventral hernia repair cases when a synthetic mesh is otherwise contraindicated; •H iatal/paraesophageal hernia repair (using biologic as buttress to crural closure); and • Situations where patients with multiple prior synthetic mesh infections refuse repeated use of synthetic mesh.
TRENDS
T F
E
C
Fig.1
Spread of stock keeping units (SKUs) per overall mesh spend
9.0 8.0
90% of facilities
7.0 SKUs per $10,000 spent
P
6.0 5.0 50% of facilities
4.0 3.0 2.0 1.0 0.0 < $75,000
$75,000 – $200,000
With these observations in mind,
$200,000 – $400,000
> $400,000
Despite the large number of existing
Source: A database maintained by Premier, Inc.
Start with the data
synthetic mesh appears to be the choice for
choices, the mesh market is still
In a directional analysis of 244 Premier
most primary hernia (non-hiatal) repair.
evolving. As one surgeon put it, “When
facilities, the range of average stock
Surgeons who were aware of the
I first started practicing, I’d go to do a
keeping units (SKUs) of mesh per
disparity in cost between synthetic and
case, and there would be a small basin
$10,000 spend was stratified based on
biologic meshes were less familiar with
of mesh, one of each kind that we held
total mesh spend (see Figure 1). Though
the price variance among synthetic
for hernia surgeries. Now I walk in, and
those facilities with greater overall
products. The average price of synthetic
there’s a large cart.”
spend appear to have fewer SKUs per
mesh ranges from $200 to $700 per
Are all the different products really
$10,000, many of the larger-spend
unit, whereas the average price of
making a difference? In some ways, yes.
facilities (>$400,000) have more than
biologic mesh is from $3,000 to $6,000
Surgeons believe they need varying
50 SKUs. That compares to between two
per unit. On average, Premier facilities
composites, weights or coatings, depending
to nine SKUs for a facility with less than
spend 56 percent of their mesh dollars
on the specific needs of the patient.
$75,000 in spend.
on biologic mesh. The price variation
However, there are times when a
On average, participants in the
is further complicated by the virtually
variety of products only results in
analysis had one biologic SKU per
unlimited number of mesh choices,
larger inventory and little or no clinical
$10,000 in mesh spend and 4.3 synthetic
including:
difference. The differences in shape
mesh SKUs per $10,000 in spend.
• Shapes and types for every type of
alone – oval versus circular – can cost
hernia repair, • Products used for laparoscopic repair versus open repair, and •S izes within each of the different types.
38
TRENDS ©2014 by Premier Inc. All rights reserved.
Facilities that want to standardize
a health system hundreds of dollars.
should investigate the amount of line
This fact underscores the importance
items held for mesh. High levels may be
of educating providers about the cost
due to multiple suppliers or variations in
implications of their selections.
physician choice.
TRENDS
T E
Fig.2
C
Median spend for synthetic and biologic mesh (per $100,000 in total facility mesh spend)
100% Total synthetic spend
90%
Total biologic spend
35%
80% 70%
63%
57%
48%
50%
75%
50% 40% 65%
30% 20%
37%
43%
52%
50%
$300,000 – $400,000
$400,000 – $500,000
25%
10% 0%
< $100,000
$100,000 – $200,000
$200,000 – $300,000
Source: A database maintained by Premier, Inc.
60%
> $500,000
Total facility spend
In an aggregate analysis of
determining the appropriate product for
surgical supply chain changes. It helps
participating Premier facilities in this
high-quality outcomes and considering
to have:
discussion, hernia repair procedures
the variation in supplier pricing for
• A common goal, based on the
accounted for 80 percent of overall mesh
exact matches or those that appear
used. Other areas of use included:
functionally and clinically equivalent.
• Burn programs*,
Among facilities in the analysis,
challenges indicated by the data; • A greed-upon next steps for affected supply chain managers, operational
• Wound management*, and
greater total mesh spend was
• Plastic/reconstructive surgery.
directionally related to the percentage
• Regular stakeholder communications;
staff and physicians;
Individual surgeons know what types of
of biologic mesh used (see Figure 2).
• Consensus on the types of mesh to use
mesh they use, but they may not know how
Extensive use of biologic mesh could
for specific patients or procedures; and
their choices compare with what other
be an opportunity to standardize and
surgeons in their facility are using. Cost
reduce costs.
• Protocols for assessing new mesh products as they become available.
differences among items include potential product preparation requirements that
Education and collaboration
impact overall productivity. For example,
Changing products, especially in
biologic storage and preparation may
surgery, requires buy-in from practicing
affect soft costs.
physicians. That can be accomplished
*Mesh for burn or wound management tends to be thinner than the kind used for hernia repair. However, the thickness of mesh can be hard to differentiate within first-level data.
Purchasers may reduce expenses
by providing current data that shows
by ordering a larger sheet of mesh and
usage in comparison both with other
cutting it in half for bilateral repairs.
facilities and among physicians within
REFERENCE
Some preferred mesh shapes may
the same location. Many health systems
come at a premium. Reduce costs by
use physician champions to encourage
1. Kanu Okike, et al., “Survey Finds Few Orthopedic Surgeons Know The Costs Of The Devices They Implant,” Health Affairs 33, no.1, doi: 10.1377/hlthaff.2013.0453.
OUTLOOK
QTR 2.14
39
F
P
>> MEMBER SNAPSHOT Clovis Community Medical Center (Clovis, CA)
INITIATIVE IDEA
SHARE
ENGAGE
Consolidate mesh and decrease inventory “Our initiative was a grassroots effort from operating
choices we stocked. Physicians voted directly on the
room nursing leadership,” said Regina Wells,
storyboard regarding the products they wanted to
RN, clinical supervisor, surgical services, Clovis
continue using. I then spoke with the doctors who
Community Medical Center. “We proposed a review
chose mesh that no one else selected. I asked them to
of currently used mesh products to key users to
switch, and most were willing.”
consolidate and streamline our inventory. We made this announcement at our surgical supervisory
and surgeons in general were absolutely critical to
committee with our chair of surgery present.
the success of this outreach,” noted Siew-Ming Lee,
“I created storyboards that featured a photo of each
MD. “In addition, the knowledge that their peers were
physical mesh, the packaging, usage numbers and the
mostly using a particular mesh product did influence
price,” Wells continued. “They were grouped into like-
a surgeon’s decision to at least try, if not change, the
mesh products from the various companies but used
mesh he or she was using. This was particularly true
for the same type of hernia repair. The storyboards
for biologic mesh.”
demonstrated to our physicians the vast number of
40
“I think the face-to-face discussions with outliers
TRENDS ©2014 by Premier Inc. All rights reserved.
SUCCESS STORY
Magnet tracking and ECG PICC placement technology helps eliminate radiation exposure and cost associated with confirmatory chest X-ray
I
n 2013, Adventist Health System (AHS) set out to show that standardization and cost savings across its organization do not have
to compromise the quality of patient care. Through a partnership with Bard Access Systems (BAS), AHS introduced a new technology into its organization that enables the immediate release of peripherally inserted central catheter (PICC) lines for use, thereby improving patient care and reducing cost. AHS is a 45-hospital organization, including its 996-bed flagship Florida Hospital. In an effort to reduce its supply chain costs, AHS began an initiative to standardize PICC placement across the organization. Together, BAS and AHS assessed the current PICC usage across the organization and investigated areas for improvement. Traditionally, in order to ensure proper PICC tip placement, a confirmatory X-ray is required, thus delaying the administration of therapy to the patient. Therapy can be further postponed if multiple X-rays are needed to confirm PICC tip placement. The delays in treatment and multiple imaging tests contribute to increased operational costs.
OUTLOOK
QTR 2.14
41
P
TRENDS
T F
E
C
“Not only are we saving the time it takes to get the chest X-ray read, but
more importantly, we’re decreasing the amount of radiation exposure to our patients.” existing PICC tray. BAS was able to
the patient’s ECG signal, the technology is
therapy administration and decrease
offer a solution with customized PICC
indicated for use as an alternative method
cost associated with confirmatory X-ray,
kits that specifically met the needs of
to chest X-ray and fluoroscopy for PICC tip
BAS introduced AHS to its technology
AHS. The kits contain the latest BAS
placement confirmation in adult patients
that uses magnetic tracking and
PICC tip confirmation technology and
electrocardiography (ECG) technology
all the additional components nurses
situations for this technique are in patients
to navigate and confirm the PICC tip
previously had to pull separately. After
where alterations of cardiac rhythm
location. This technology allows a
implementation, the number of active
change the presentation of the P wave as
specially-trained nurse to place the
PICC trays across the organization
in atrial fibrillation, atrial flutter, severe
PICC at the patient’s bedside and clear
dropped to eight, resulting in a
tachycardia, and pacemaker driven rhythm.
the line for immediate use without the
91-percent reduction in product codes
In such patients, who are easily identifiable
need for a confirmatory X-ray in patients
needed for PICC placement.
prior to catheter insertion, the use of an
In order to help remedy the delay in
that have a consistent cardiac rhythm.
By implementing BAS’ magnet /
This eliminates both the cost of the
ECG technology for PICC placement
X-ray and the harmful radiation.
and having customized PICC trays,
“The nurses on the floor absolutely
technology to decrease their cost per
Team) now because they can use the
PICC placement procedure, decrease the
PICC lines immediately,” said Debbie
time needed to administer therapy after
McPherson, PICC Charge RN, Florida
PICC placement and decrease radiation
Hospital Orlando.
exposure to patients. This initiative and collaboration between BAS and AHS
takes to get the chest X-ray read, but
demonstrates that quality care can be
more importantly, we’re decreasing the
achieved at lower cost to both patient
amount of radiation exposure to our
and hospital.
patients,” added Eve Ellis, PICC RN, Florida Hospital Orlando. Another area of focus was the
BAS’ magnet tracking & ECG technology of Peripherally Inserted Central Catheters
codes used at the various facilities,
(PICCs). It provides real-time PICC tip
approximately 91 different codes. Nurses
location information by using passive
were also pulling additional procedural
magnet navigation and the patient’s cardiac
components separately to add to the
electrical activity (ECG). When relying on
TRENDS ©2014 by Premier Inc. All rights reserved.
PICC tip location.
Please consult http://bardaccess.com/imagingsherlock-3cg.php?section=Resources for any indications, contraindications, hazards, warnings, cautions, and instructions for use. The opinions and clinical experiences presented herein are for informational purposes only. The results from this institution may not be predictive for all institutions. Individual results may vary depending on a variety of specific attributes.
is indicated for guidance and positioning
extensive number of different PICC
42
additional method is required to confirm
Adventist Health System has the
love us (the Venous Access Service
“Not only are we saving the time it
Limiting but not contraindicated
THIS ARTICLE IS A PAID ADVERTISEMENT. This article was not written by Premier and is not an endorsement by Premier.
ECONOMICS A conversation with Ilir Hysa, economist, Moodyâ&#x20AC;&#x2122;s Analytics, 44 Behind the numbers, 48 An update on hospital performance metrics, 56 Patient volume trends, 60 Guide to economic indicators, 64 Premierâ&#x20AC;&#x2122;s supply chain solutions, 67 Inflation summary, 68 Success Story: OptiFreightTM Logistics, 69
ECON OMI CS 2 0 1 4
A CONVERSATION
with ILIR HYSA Economist, Moody’s Analytics
for Moody’s Analytics. He develops housing
What is your estimate for gross domestic product (GDP) growth in the next 12 months? What sectors will have the greatest impact on growth?
models and international forecasts; contributes
We anticipate economic activity to continue picking up pace and the GDP to grow 3
to the company’s Regional Financial Review
percent this year. All ingredients needed for increased growth in 2014 and beyond
publication; and writes blogs and commentaries
are in place, including stronger business confidence, which has otherwise dragged
Ilir Hysa covers U.S. state and regional economies
for Moody’s Analytics’ Dismal Scientist website. He received his PhD in economics from the Graduate Center of the City University of New York.
in the recent economy. Thanks to improving credit quality and lower debt burdens, consumer expenditure, the largest component of the GDP – currently at 68 percent – will grow as well, making it the most significant contributor to GDP growth this year.
What changes do you expect to see over the next 12 months in the U.S. unemployment rate? How will unemployment impact the healthcare industry (if at all)? As economic growth accelerates, more jobs will be created, gradually driving unemployment rates down. But by definition, the unemployment rate doesn’t capture the full range of labor market developments. For instance, an aging population and retiring or discouraged workers who have left the workforce during the recession will play a large role in the bigger picture of labor market dynamics. Now with the economy improving, historical data suggest that some people who were unable to find
44
ECONOMICS ©2014 by Premier Inc. All rights reserved.
ECONOMICS
T E
C
What role do you think healthcare will play in overall GDP growth?
“
Healthcare will play a central role in overall economic activity, and
healthcare-related spending will make up a large portion of total
consumer expenditures this year, as it normally does. The slowing of healthcare spending we’ve seen in recent years is encouraging. It’s not just a reflection of increased efficiency but also of improved cost-sharing requirements, contraction of federal programs, and a sluggish economy. It’s still unclear whether Affordable Care Act (ACA) provisions played a role in the decline in healthcare spending. Without taking other potential ACA contributions into account, improved economic conditions and expanded coverage will support healthcare, and we’re likely to see a continued impact on GDP growth in the future.
work during the recession will come back into the labor force.
Overall, we’re likely to see moderate growth in commodity
Factors such as the speed at which the aging population retires
prices. Economic growth will accelerate in the U.S. and
and the influx of both new and discouraged workers will largely
internationally, resulting in greater demand for commodities.
impact the total labor market and unemployment rates.
At the same time, the global oil supply will rise as some oil-
As the economy gets stronger, and unemployment falls,
producing countries, mainly the U.S., Iraq and Brazil, continue
more people will be able to get healthcare coverage through
expanding production. Finally, higher interest rates will
their employers or the marketplace exchanges. Because of this,
undermine the appeal for oil-based financial instruments,
hospitals should expect to see fewer cases of charity care and a
keeping prices relatively stable.
stronger bottom line.
Can you describe overall inflation projections for the next 12 months and what they may mean for healthcare? What are your expectations for commodity prices?
The Federal Reserve has stated that it may slow its asset-buying program within the year. How will this and other monetary policies affect the U.S. economy in the next 12 months? It’s important that quantitative easing (QE) doesn’t turn
Inflation rates on personal consumption expenditures are
into quantitative tightening until the Federal Reserve’s
expected to remain at the Fed’s target of 2 percent this year.
balance sheet shrinks – and that it is done in a way that sets
However, we may see slightly higher inflation next year, if
the right expectations.
Dr. Janet Yellen, the new Federal Reserve chair, is willing to tolerate higher inflation to reach full employment levels.
The Federal Reserve has said it has no pre-set course on concluding the asset-buying program, but it seems as though OUTLOOK
QTR 2.14
45
F
P
P
ECONOMICS
T F
E
C
the $10 billion/month of QE reduction we have seen recently will achieve the goal by this year’s end. So it’s likely that the Fed will maintain the current course if there is no reason to dramatically cut back. It will probably be a very gradual process. Overall, monetary policy will remain very accommodating for the economy. So far, the Federal Reserve has been successful in keeping short- and long-term interest rates steady. The transition from Bernanke to Yellen is anticipated to be fairly smooth, since both have similar views on inflation, unemployment and quantitative easing. Dr. Yellen has been a member of the Federal Open Market Committee, so she’s had a hand in shaping current monetary policy, and we don’t expect many big changes with her appointment. Another point worth emphasizing is that Yellen’s first term will be challenging. The Federal Reserve needs to strengthen its credibility and communications, successfully end its QE program, and begin normalizing interest rates. Should something go wrong in how the QE is concluded, it could lead to a spike in interest rates, hurt the economy and damage the Fed’s reputation.
What do you anticipate the short-term impact of the Affordable Care Act on the U.S. economy will be, if any? What impact will implemented ACA reforms have in 2014 on the healthcare industry, and specifically, on healthcare supply chain stakeholders?
What effect will the global economy (i.e., slowdown in China, Europe’s rebounding) have on the U.S. in the next 12 months? We anticipate stronger global growth this year, but there are downside risks to our forecast. Deceleration in China is a soft landing, so it shouldn’t have much of an impact on the U.S.
healthcare services is inelastic, the decline has been partly due
economy in the coming months. Europe is a different story.
to the weak state of the economy. With an improving economy,
Growth will remain sluggish there, and another slowdown
and a larger share of the population covered by health
isn’t unrealistic. That could hurt the U.S. economy through
insurance, we should see a flat or reversed trend in the next
financial markets and trade.
year. More people entering the marketplace exchanges, coupled with an improving economy, should have a positive impact on
What inpatient or outpatient trends have you been seeing, and how do you expect these trends to continue in the next 12 months? The decline in inpatient services seen in recent years in many areas of the country persists. Though generally demand for
46
ECONOMICS ©2014 by Premier Inc. All rights reserved.
both inpatient and outpatient trends.
In the next 12 months, what is the expected impact of ACA initiatives (for example, ACOs and population health management) on hospital
ECONOMICS
T E
“
Implementation of the ACA will lead to broader coverage
this year, which bodes well for the industry overall. Enrollment
C
projections from the Centers for Medicaid & Medicare Services and the Congressional Budget Office, as well as actual numbers reported from the federal government, put the cumulative enrollment at 7 million this year. The actual enrollment falls short of the projections; approximately 75 percent of projected participants have actually enrolled at this point. However, with nearly 4.2 million people enrolled in exchanges in February 2014, and more expected by the March 31 deadline, we’re likely to see the industry grow and hospitals improve their financials this year because of the expanded coverage.
profitability? What factors could affect overall health system profitability?
the investments necessary to move to these new models will
The establishment of nearly 360 ACOs serving 5.3 million
short term.
Americans under Medicare is a promising start in building an
likely leave negligible financial changes for hospitals over the The public knowledge of what these initiatives are all
outcomes-based healthcare system. The steps taken toward
about – what they intend to do and promote – is limited.
ACO development and population health practices have not yet
While the movement to outcomes-based models is a positive
resulted in significant gains for health systems, however. Short
development, it’s going to take time to educate people
term, healthcare providers face costly adjustments needed
about their options. Meanwhile, the healthcare industry is
to comply with reform requirements. On the one hand, these
transforming itself and building new foundations for greater
outcomes-based, fee-for-service models help reduce excessive
growth next year and beyond.
use or waste by patients and physicians that add to costs. But OUTLOOK
QTR 2.14
47
F
P
ECONOMICS ECON OMI CS 2 0 1 4
BEHIND THE NUMBERS Financial and economic trends impacting our members
ECONOMICS
T E
L
egislation remains the
(e.g., meeting Meaningful Use
many of these initial investments
top driver of healthcare
requirements, creating more patient-
have already been made.
costs for respondents of
centered infrastructures and tracking
The percentage of respondents who
our semiannual Economic
C
performance). However, in the past two
cited labor costs as one of their top two
Outlook survey (see Figure 1). Reform
years, the percentage of respondents
drivers jumped from 24 percent in fall
mandates and initiatives required
citing healthcare legislation as the
2013 to 38 percent in spring 2014, and
some initial high-cost investments
top driver has fallen, possibly because
labor remains the second largest
Fig.1
Top two drivers of healthcare costs, combined
Spring 2012
Healthcare legislation
Fall 2012 Spring 2013
Labor costs
Fall 2013 Spring 2014
Health information technology
Misalignment of quality and payment incentives
Pharmaceuticals
Overutilization
Source: Premier online survey for Economic Outlook spring 2014 publication
Unjustified variation in care
Lack of clinical coordination of care
Patient demand
New clinical technology/equipment
Medical devices
0%
10%
20%
30%
40%
50%
60% OUTLOOK
QTR 2.14
49
F
P
P
ECONOMICS
T F
E
C
contributor to healthcare costs. Labor,
were more likely to point to healthcare
respondents are experiencing a
typically the highest actual expense for
legislation or misalignment of quality
shortage of medical professionals
a health system, is likely becoming
and payment incentives. This
within their organization, including
more of an issue due to the acquisition
demonstrates that the size or location
primary care physicians (63 percent),
of physician offices and the move to
of a health system may significantly
specialty physicians (48 percent),
more centralized operations.
influence the challenges it faces.
and nurses (33 percent). A shortage
Consolidation, in fact, may spur a focus
of practitioners may influence rising
The spring survey also brought a
on skill mix and staffing efficiency as
spike in respondents listing health
labor costs â&#x20AC;&#x201C; a market in which there is
cost-reduction factors.
information technology as a leading cost
a shortage means that health systems
contributor, as it rose from 17 percent in
may be paying substantial overtime
the fall to 25 percent currently.
to maintain the appropriate skill mix
Labor costs top healthcare costs for non-acute, rural, and/or non-IDNs, whereas acute, non-rural, and/or IDNs
Fig.2
within their systems.
Approximately four in five
Shortage of medical professionals, regional variation
Primary care physicians Specialty physicians Northeast and Mid-Atlantic
Nurses
Southeast
Source: Premier online survey for Economic Outlook spring 2014 publication
Midwest
West
0%
50
ECONOMICS Š2014 by Premier Inc. All rights reserved.
10%
20%
30%
40%
50%
60%
70%
ECONOMICS
T E
Fig.3
C
Percent of operating budget dedicated to capital purchases (C-suite only)
1.7% 0.9%
9.5% 25.0%
0% – 5% 6% – 10%
15.5%
11% – 15% 16% – 20% 21% – 30% 31% or more
47.4%
Source: Premier online survey for Economic Outlook spring 2014 publication
Fig.4
Changes in capital budget since previous year (C-suite only)
30%
Fall 2011 Source: Premier online survey for Economic Outlook spring 2014 publication
25% 20% 15% 10% 5% 0% Increase of ≥ 30%
Increase of 10% – 29%
Increase of 1% – 9%
No change
Decrease of 1% – 9%
Decrease of 10% – 29%
Spring 2012 Fall 2012 Spring 2013 Fall 2013 Spring 2014
Decrease of ≥ 30%
OUTLOOK
QTR 2.14
51
F
P
P
ECONOMICS
T F
E
C
There is minimal variation in the availability of medical professionals across
least impact.
quarter spend up to 5 percent on capital
There is slightly more variability with
investments, and 47 percent spend
different regions of the country (see Figure
nurses; between 25 and 40 percent of
2). More than 60 percent of respondents in
respondents have a shortage, with the least
each region – Northeast and Mid-Atlantic,
impact in the Northeast/Mid-Atlantic and
rebounded slightly compared to the
Southeast, Midwest, and West – said they
Southeast regions.
fall survey, with 62 percent of C-suite
have a shortage of primary care physicians.
Nearly three-quarters of C-suite
between 6 and 10 percent. Respondents’ capital budgets
respondents forecasting increasing
Between 43 percent and 52 percent noted
respondents reported dedicating up to 10
or flat budgets this year compared to
a shortage of specialty physicians in their
percent of their overall operating budgets
last, up from 58 percent in the fall (see
region, with the West experiencing the
to capital purchases (see Figure 3). One-
Figure 4). However, the percentage
Fig.5
Area of largest capital investment
Fall 2011 Spring 2012
IT and telecommunications
Fall 2012 Spring 2013 Fall 2013
Infrastructure (e.g., construction)
Spring 2014
Note: Zero percent of survey respondents in fall 2012 selected “laboratory equipment” as their largest area of capital investment.
Surgical suites/equipment
Imaging equipment Source: Premier online survey for Economic Outlook spring 2014 publication
Other clinical equipment
Laboratory equipment
Other
0%
52
ECONOMICS ©2014 by Premier Inc. All rights reserved.
10%
20%
30%
40%
50%
ECONOMICS
T E
expecting increasing or flat budgets is
C
The IT/telecommunications area,
More care is moving to the outpatient
still lower than 2012 levels, which could
which encompasses EMR systems and
setting this year, as a result of healthcare
be the result of having already made
advanced data analytics, continues to
reform incentives to reduce costs through
large capital investments in line with
drive most of the capital investments
greater efficiency and care coordination,
healthcare reform.
reported in the survey (see Figure 5).
as well as changes to Medicare
C-suite respondents said
The second largest area of capital
designations for some procedures.
approximately 62 percent of their
investment is infrastructure, including
capital budgets would be dedicated to
new construction or expansion. This fell
to increase for 59 percent of survey
acute care, while 38 percent will be
from the fall survey but remains higher
respondents â&#x20AC;&#x201C; 41 percent anticipate
dedicated to the non-acute space.
than 2011 responses.
an increase of up to 5 percent over last
Fig.6
Outpatient admissions are expected
Inpatient and outpatient admissions forecasts
45% Source: Premier online survey for Economic Outlook spring 2014 publication
40% 35% 30% 25% 20% 15% 10% 5% 0% Increase of more than 5%
Increase of up to 5%
No change
Decrease of up to 5%
Inpatient Outpatient
Decrease of more than 5%
OUTLOOK
QTR 2.14
53
F
P
P
ECONOMICS
T F
C
E
year, and 18 percent expect an increase
respondents from rural, non-rural, acute,
responding from other facilities expect
of more than 5 percent (see Figure 6).
IDN, and non-IDN facilities project an
an outpatient increase this year over last.
Only 29 percent anticipate an increase
increase in inpatient admissions within
in inpatient admissions this year; 35
the next 12 months. That compares to 43
About the survey
percent expect flat inpatient admissions,
percent of non-acute facilities.
In winter 2014, Premier, Inc., in
and 36 percent expect a decrease.
The opposite is true for outpatient
Non-acute facilities have the greatest
collaboration with Customer Care
admissions. Only 46 percent of non-acute
Measurement and Consulting LLC,
variation in admissions forecasts.
respondents forecast an increase in outpa-
commissioned an online survey of
Between one-quarter and one-third of
tients, whereas approximately 60 percent
approximately 10,000 healthcare
Fig.7
Role of survey respondents
C-suite
Supply chain or materials management Service line or practice area manager/director Office administrator/manager Source: Premier online survey for Economic Outlook spring 2014 publication
Finance and/or accounting
Physician/clinician
Quality improvement
Other
0%
54
ECONOMICS Š2014 by Premier Inc. All rights reserved.
5%
10%
15%
20%
25%
30%
35%
ECONOMICS
T E
C
leaders across our membership,
health management, quality incentives,
delivery network (IDN). Urban and rural
representing both the acute and non-
and financial and economic trends
areas were almost equally represented,
acute healthcare markets. The survey
impacting the industry.
and there were approximately equal
respondents (n=522; response rate=5
The majority (80 percent) of
numbers of respondents from the
percent) included members across
respondents were C-suite, supply chain,
following geographic areas: Northeast
geographical area and organizational
materials management, service line,
and Mid-Atlantic; Southeast; Midwest;
size and type. The survey collected data
or practice area executives. Slightly
West (includes Southwest, Northwest
on membersâ&#x20AC;&#x2122; perspectives about the
more than half (51 percent) came from
and West Coast). An overview of the
healthcare supply chain, population
a multi-hospital system or integrated
respondent profile is shown below.
Fig.8
Types of respondent organizations
Large hospital (501+ beds) Midsized hospital (between 200 and 500 beds) Small hospital (less than 200 beds) Critical access hospital (less than 25 beds) Ambulatory or outpatient center Multi-specialty group practice
Source: Premier online survey for Economic Outlook spring 2014 publication
Surgery center
Senior living facility
Single-specialty group practice Physician-owned specialty hospital
Other
0%
5%
10%
15%
20%
25%
30%
35% OUTLOOK
QTR 2.14
55
F
P
ECON OMI CS 2 0 1 4
Operating margins for acute care
in outpatient discharges in aggregate in
hospitals have consistently improved
FY2013 (July 2012 to June 2013).
year-over-year since 2007, according to
AN UPDATE
ON HOSPITAL PERFORMANCE
METRICS
an analysis from a database maintained
dropped in 2012 for the first quartile and
by Premier, Inc. (see Figure 1). Overall,
median, likely due to implementation
median operating margins increased the
of technology and ACA preparations.
most, at 361 percent, from 2007 to 2012,
The average, median and first quartile
while both average and first quartile (top
saw increases in profit per acute bed in
25 percent) margins rose by more than
service from 2012 to 2013 (see Figure 3).
100 percent over the same time period.
Profit per acute bed ranged from
In aggregate, all of the acute care
$31,106 for the median to $118,099 for
hospitals in the analysis saw an
the first quartile.
increase in margins from 2012 to 2013, in line with the American Hospital hospital margins are strengthening.
patient revenue since 2011, supporting 1
Health systems are involved in a variety
percent in 2013, up from 3.8 percent
of supply chain initiatives designed
in 2012; margins for the first quartile
to reduce overall supply spending,
increased from 9.3 percent to 11.3
including several highlighted in this
percent from 2012 to 2013.
edition of the Economic Outlook (see
a percent of total patient revenue has
Figure 4). Premier’s Using Wisely Index enables
declined following introduction of
acute care facilities to benchmark
the Affordable Care Act (ACA), which
against peers on three main categories
emphasizes better care coordination,
of potential waste: clinical, operational
encourages health systems to prevent
and supply chain. Health systems have
readmissions and emergency treatment,
begun using this waste dashboard, along
and decreases Medicare reimbursement
with other data, to lower costs within
payments. On average, inpatient gross
their own facilities.
patient revenue decreased as a percent of
Bad debt expense as a percentage of
total patient revenue from 61.3 percent in
net patient revenue has fluctuated since
2007 to 47.5 percent in 2013 (see Figure 2).
2010 for the median, average, and first
The median and first quartiles have seen
quartile. While the first quartile saw a
less steady drops in inpatient share of
decrease in bad debt, from 6.3 percent
revenue than the average.
of net patient revenue in 2011 to 4.6
Although inpatient revenue is
©2014 by Premier Inc. All rights reserved.
the growth in operating margins.
Average hospital margins were 4.0
Inpatient gross patient revenue as
ECONOMICS
Acute care hospitals have seen a decrease in supply expense per net
Association’s recent findings that
56
Profit per acute bed in service
percent in 2013, the median and average
decreasing due to reduced patient
both increased from 2011 (see Figure 5).
volume, Premier’s member volume
Bad debt should fall for hospitals when
trends indicate a 2.0 percent increase
coverage expansion has been fully
ECONOMICS
T E
C
F
implemented and health systems see fewer uncompensated care patients.
Fig.1
Operating margin of acute care hospitals 2007 – 2013
Total operating expense as a percentage of net patient revenue has also fluctuated over the past three years for the first quartile, where there was a sharp increase in 2012 (see Figure 6). that required large initial investments (e.g., advanced analytics, ACOs, and population health management tools).
10% 8%
Source: A database maintained by Premier, Inc.
That was likely due to new initiatives
12%
6% 4%
The average and median remained fairly steady from 2011 to 2013, with the median showing a small increase and the average a small decrease. Both
2% 0% 2007
2008
2009
2010
2011
2012
2013
groups, however, had lower operating expenses as a percentage of net patient
Average
Median
1st Quartile
revenue in 2013 than in 2008.
Fig.2
Inpatient gross revenue as a percentage of gross patient revenue 2007-2013
70% 60% Source: A database maintained by Premier, Inc.
50% 40% 30% 20% 10% REFERENCE 1. Beth Kutscher, “Hospitals on the Rebound, Show Stronger Operating Margins,” Modern Healthcare, January 3, 2014, http://www.modernhealthcare.com/article/20140103/ NEWS/301039973?AllowView=VDl3UXk1TzRDdmVCbkJiYkY0M3hlMEtwakVVZERlVT0=&utm_source=link20140103-NEWS-301039973&utm_medium=email&utm_ campaign=mh-alert#.
0% 2007
2008
2009
Average
2010
Median
2011
2012
2013
1st Quartile
OUTLOOK
QTR 2.14
57
P
P
ECONOMICS
T F
C
E
Fig.3
Profit per acute bed in service 2007-2013
$200,000 $180,000 $160,000 $140,000 Source: A database maintained by Premier, Inc.
$120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 2007
2008
2009
Average
Fig.4
2010
Median
2011
2012
2013
1st Quartile
Supply expense as a percentage of net patient revenue 2007-2013
20% 18% 16% 14% Source: A database maintained by Premier, Inc.
12% 10% 8% 6% 4% 2% 0% 2007
2008
2009
Average
58
ECONOMICS Š2014 by Premier Inc. All rights reserved.
2010
Median
2011
1st Quartile
2012
2013
ECONOMICS
T E
Fig.5
C
Bad debt expense as a percentage of net patient revenue 2007-2013
10% 9% 8% 7% Source: A database maintained by Premier, Inc.
6% 5% 4% 3% 2% 1% 0% 2007
2008
2009
Average
Fig.6
2010
Median
2011
2012
2013
2012
2013
1st Quartile
Total operating expense as a percentage of net patient revenue 2007-2013
100%
95%
Source: A database maintained by Premier, Inc.
90%
85%
80%
75% 2007
2008
2009
Average
2010
Median
2011
1st Quartile
OUTLOOK
QTR 2.14
59
F
P
ECON OMI CS 2 0 1 4
PATIENT VOLUME
The metrics reported below are based on a sample of 425 healthcare facilities that submitted three years of inpatient and outpatient data to a database maintained by Premier, Inc. The sample, which accounts for 131.4 million patient discharges, represents a cross-section of our membership that includes variations in geographic area and organizational size and type. This report identifies year-over-year (YOY) percentage changes in volume for key data elements such as inpatient and outpatient discharges, surgery growth, and payer mix from Q3 2011 to Q2 2012 (FY2012) to the same period in 2012 - 2013 (FY2013).
TRENDS
Fig.1
FY2013 quarterly trends
YOY growth
Q4 2012
Q1 2013
Q2 2013
FY2013
Inpatient
-2.49%
-0.56%
-2.46%
-0.71%
-1.57%
Outpatient
1.21%
3.96%
0.47%
2.24%
1.96%
Total discharges
0.81%
3.47%
0.16%
1.93%
1.58%
Inpatient surgeries
-3.20%
-1.57%
-3.40%
-0.74%
-2.24%
Outpatient surgeries
-3.84%
-0.66%
-0.37%
1.79%
-0.79%
Births
-1.20%
0.16%
-1.31%
1.07%
-0.34%
Medicare discharges
2.63%
4.61%
2.23%
5.15%
3.65%
Medicaid discharges
0.16%
5.16%
1.14%
1.32%
1.92%
Self-pay discharges
1.86%
3.03%
-3.83%
-4.22%
-0.83%
-0.43%
2.04%
-0.94%
1.18%
0.46%
Managed care and other payer discharges
60
ECONOMICS Š2014 by Premier Inc. All rights reserved.
Source: A database maintained by Premier, Inc.
Q3 2012
ECONOMICS
T E
CHANGES OF NOTE 1.6%
INPATIENT VOLUME decreased
2.0%
FY2013
OUTPATIENT VOLUME increased
2.2%
0.8%
INPATIENT SURGERIES decreased
OUTPATIENT SURGERIES decreased
1.6% DISCHARGES OVERALL increased
FY2012
C
Discharges in all payer categories (except self-pay) were up in FY2013. MEDICARE 3.7% VOLUME increased
1.9%
MEDICAID VOLUME increased
0.8% SELF-PAY decreased
MANAGED CARE AND OTHER PAYER VOLUME 0.5% increased
TRENDS OUTLOOK
QTR 2.14
61
F
P
ECONOMICS
T C
E
Fig.2
Discharge trends
5% 4% 3% 2% Source: A database maintained by Premier, Inc.
YOY percent change
F
1% 0% -1% -2% -3% -4% Q3.2011
Q4.2011
Q1.2012
Q2.2012
Fig.3
Q3.2012
Inpatient discharges
Total discharges
Q4.2012
Q1.2013
Q2.2013
Outpatient discharges
Discharges by payer type
8% 6% 4% Source: A database maintained by Premier, Inc.
YOY percent change
P
2% 0% -2% -4% -6% Q3.2011
Q4.2011
Medicare
62
ECONOMICS Š2014 by Premier Inc. All rights reserved.
Q1.2012
Q2.2012
Medicaid
Q3.2012
Self-pay
Q4.2012
Q1.2013
Q2.2013
Managed care and other payers
ECONOMICS
T E
Fig.4
C
Surgery and emergency department visits
10% 8%
4%
Source: A database maintained by Premier, Inc.
YOY percent change
6%
2% 0% -2% -4% -6% Q3.2011
Q4.2011
Q1.2012
Q3.2012
Q4.2012
Q1.2013
Q2.2013
Emergency department visits
Outpatient surgery visits
Inpatient surgery visits
Average length of stay
0.5%
3.54
0.0%
3.50
-0.5%
3.46
-1.0%
3.42
Days
Y0Y percent change
Fig.5
Q2.2012
3.38
-1.5% Q3 2011
Q4 2011
Q1 2012
Q2 2012
Year-over-year percent change
Q3 2012
Q4 2012
Q1 2013
Q2 2013
Average length of stay (days)
Note: Average length of stay includes only inpatient data; outliers have been excluded. Source: A database maintained by Premier, Inc.
OUTLOOK
QTR 2.14
63
F
P
ECON OMI CS 2 0 1 4
GUIDE TO ECONOMIC
What price indexes are important in the healthcare industry?
goods and services purchased for
Industry stakeholders – including
households. While there are many
suppliers, healthcare systems, and
categories within the CPI, the two most
the Centers for Medicare & Medicaid
commonly used for healthcare are the
Services (CMS) – use three key price
CPI for all urban consumers (CPI-U) and
indicators when examining inflationary
the CPI for medical care. Medical care is
pressures in the marketplace:
one of eight major CPI categories, and it
• The consumer price index (CPI);
has two classifications, commodities and
• The producer price index (PPI); and
services, with each containing several
• The CMS marketbaskets.
item categories (strata).2
The CPI and PPI measure the average
INDICATORS
PRICE INDEXES CPI, PPI, AND CMS MARKETBASKETS
personal consumption by urban U.S.
The CPI-U increased 0.1 percent in
change over time in the prices of fixed
January on a seasonally adjusted basis.
goods and services. The CPI is primarily
From December 2012 to December 2013,
used to compare a household’s cost for
the all-items index increased 1.5 percent
a specific basket of finished goods and
before seasonal adjustment, largely as
services with the cost of the same basket
a result of growth in the energy and
during an earlier benchmark period. The
shelter indexes. 3
weight given to each basket item is fixed.
After seasonal adjustment, medical
The PPI uses a similar benchmark
care CPI remained flat from September
approach, but it measures price changes
to December 2013. Medical care
reported by establishments at the
commodities increased 0.5 percent in
wholesale, rather than the retail, level.
January as the prescription drug index
While both indexes measure inflation,
rose. Medical services increased 2.5
they differ in the goods and services
percent overall in 2013, and saw a 0.2
eligible for inclusion.
percent increase in January.4
1
Economic indicators that are more specific to the healthcare industry are
Producer price index
CMS marketbaskets, which measure how
In contrast to the CPI, the PPI measures
much more or less it would cost at a later
price changes from the perspective of
time to buy the same mix of goods and
the seller and includes the entire output
services. These indicators reflect price
of U.S. producers. Since the PPI captures
inflation facing medical services providers.
price movement prior to the retail level,
Each index is summarized here and is accompanied by recent relevant information that provides additional budgeting resources.
it may foreshadow subsequent price changes for business and consumers. 5 The PPI for finished goods, which is its most commonly used measure, rose 1.2 percent, on an unadjusted basis, from
64
ECONOMICS ©2014 by Premier Inc. All rights reserved.
Consumer price index
December 2012 to December 2013.6 The
The CPI measures price change from
12-month change, from December 2012
the consumer’s perspective and includes
to December 2013, for the net output of
ECONOMICS
T E
Fig.1
C
CPI-U, Medical care CPI, and IPPS marketbasket rates
5%
Annual percent change
4% 3% 2% 1% 0% -1% 2007
2008
CPI-U
2009
2010
Medical care CPI
2011
2012
2013
2014
Medicare marketbasket - inpatient hospital Note: Rates are current as of February 2014.
selected industries is (unadjusted):
CMS marketbaskets
outpatient PPS payments, as well as
• Hospitals, 1.5 percent;
The CMS marketbaskets update
cost limits for children’s hospitals,
• Offices of physicians, 0.3 percent;
payments and cost limits in multiple
cancer hospitals, and religious, non-
• Nursing care facilities, 0.9 percent;
CMS systems, while individual
medical healthcare institutions.
and • Medical and diagnostic laboratories, -1.3 percent.7 Additional information is available from the Bureau of Labor Statistics.
marketbaskets provide a more accurate
• Skilled nursing facility marketbasket
measure of their own inflation indexes:
updates payments to skilled nursing
•P rospective Payment System (PPS)
facilities.
hospital marketbasket updates inpatient hospitals’ operating and
• Home health agency marketbasket updates home health PPS payments. OUTLOOK
QTR 2.14
65
F
P
P
ECONOMICS
T F
E
C
• PPS hospital capital marketbasket
The marketbasket of interest to most
• Temporary reduction of 0.8
updates inpatient hospitals’ capital
hospitals is the Inpatient Prospective
percentage points to fulfill
PPS payments.
Payment System (IPPS), which should
requirements of the American
• R PL marketbasket updates inpatient
closely approximate a hospital’s
Taxpayer Relief Act; and
rehabilitation, psychiatric, and long-
projected change in Medicare revenue.
term care PPS payments.
On August 2, 2013, CMS released its
projected spending increases
final rule for FY2014, stating that
associated with changes to admission
the sustainable-growth rate to update
inpatient payments in the aggregate
and medical review criteria for
the physician fee schedule.8
would increase 0.7 percent over FY2013,
hospital inpatient services.12
The marketbaskets are constructed
after accounting for inflation and other
The key cost category in the index is
• Medicare economic index is used with
• 0.2 percentage-point cut to offset
from mutually exclusive spending
adjustments. This included an initial
compensation expense, which includes
categories, which use data collected
update of 2.5 percent for hospitals that
labor and benefits, and is weighted at 60
from hospitals’ Medicare cost reports
submit data on quality measures, with
percent. The index also includes major
and corresponding price indexes. The
a 0.5 percent update for hospital that
purchasing categories, such as food,
overall hospital price index is the sum
do not submit that data. The final rule
pharmaceuticals, blood, and equipment.
of each category’s product weight and
includes a:
relevant price index. The price indexes,
•P roductivity cut of 0.5 percentage
11
or proxies, which are used to calculate the marketbasket, include data from
points;
Additional information is available from the Centers for Medicare & Medicaid Services.
•0 .3 percentage-point reduction
the Bureau of Labor Statistics (most
mandated by the ACA;
commonly the producer price indexes). The marketbasket levels and percentage changes are updated quarterly, with each new forecast containing an additional quarter of historical data.9 CMS projects payment updates for the coming fiscal year using a marketbasket containing the latest available data at the time of publication. This is based on the CMS fiscal year, which runs from October to September. Once an update has been determined, it is generally not revised to include more recent data. However, because marketbaskets are updated quarterly, the current marketbasket may be different, depending on the variances in the forecast data and data currently available.10
66
ECONOMICS ©2014 by Premier Inc. All rights reserved.
REFERENCES Bureau of Labor Statistics, PPI Program Spotlight, www.bls.gov/ppi/ppivcpi.pdf. Bureau of Labor Statistics, Measuring Price Change for Medical Care in the CPI, www.bls.gov/cpi/cpifact4.htm. Bureau of Labor Statistics, “Consumer Price Index Summary,” March 13, 2014, http://www.bls.gov/news.release/cpi.nr0.htm. Bureau of Labor Statistics, CPI Detailed Report – January 2014, http://www.bls.gov/cpi/cpid1312.pdf. Bureau of Labor Statistics, Producer Price Indexes: Program Overview, www.bls.gov/ppi/ppiover.htm#Link6. Bureau of Labor Statistics, “Producer Price Index News Release,” January 15, 2014, http://www.bls.gov/news.release/ppi.nr0.htm. Bureau of Labor Statistics, “Producer Prices Indexes Output of Selected Industries and Their Products,” January 15, 2014, http:// www.bls.gov/news.release/ppi.t04.htm. 8. Centers for Medicare & Medicaid Services, Medicare Program Rates and Statistics, www.cms.gov/MedicareProgramRatesStats/05_ MarketBasketResearch.asp. 9. Centers for Medicare & Medicaid Services, Medicare Program Rates and Statistics, http://www.cms.gov/MedicareProgramRatesStats/downloads/mktbskt-pps-hospital-2006.pdf. 10. Ibid. 11. “CMS Releases FY2014 IPPS Final Rule,” AHA News Now, August 2, 2013, http://www.ahanews.com/ahanews/jsp/display.jsp?domain=AHANEWS&dcrpath=AHANEWS/AHANewsNowArticle/data/ ann_080213_IPPS. 12. Ibid. 1. 2. 3. 4. 5. 6. 7.
ECON OMI CS 2 0 1 4
• Provides aggregate inflation estimates by line of business; and • Analyzes spend by individual facility or IDN.
PREMIER’S SUPPLY CHAIN
The calculator can be found on Premier’s Supply Chain Advisor ® site. For more information about the Medical-Surgical Inflationary Calculator, please contact the Premier Solution Center at solutioncenter@premierinc.com.
ensure appropriate resource utilization and supply efficiency, while identifying spending waste. The Supply Mix Index methodology combines clinical and supply cost data from more than 497 hospitals. It is designed to: • Enable the calculation of a hospital’s Supply Mix Index based on the unique
Premier’s Drug Budget Tool
SOLUTIONS
A resource for proactive drug expense management The Drug Budget Tool prepopulates profiles for analysis and lets users evaluate their drug purchases. The tool: • A nalyzes 92.4 percent of annual drug purchases; • Examines entire systems and multiple
Premier’s Medical’s-Surgical Inflationary Calculator A resource for proactively managing medical-surgical supply spend The Medical-Surgical Inflationary Calculator is an easy-to-use resource designed to help members estimate medical-surgical supply spend.
hospitals in a single SpendAdvisor report; and • Automatically fills in all of the application’s analytic cells. To learn more about the Drug Budget Tool, please contact Jerry Frazier, director of Premier’s Center for Evidence-based Pharmacy Practice, at jerry_frazier@premierinc.com.
The calculator:
mix of services provided to patients. The Supply Mix Index can also be calculated across systems, within service lines, and at other levels within a system. • Be statistically sound. The MS-DRG Supply Mix Index calculates weights using 4 million patient-level records from Premier’s QualityAdvisor™ database. • Demonstrate a more direct correlation to supply expense-per-patient case than the Case Mix Index. Premier’s Supply Mix Index focuses on the supply cost within a case, while the Case Mix Index incorporates other significant, nonsupply-related expenses. • A llow for cross-hospital comparisons of supply efficiency and intensity. Premier’s new methodology will
•C ompares Premier’s contractual price
initially be found in the executive-level
protection and suppliers’ price inflation
Premier’s Supply Mix Index™
reporting application of SupplyFocus®,
estimates to deliver a detailed estimate
A methodology for calculating supply cost indexes for each Medicare SeverityDiagnosis-Related Group (MS-DRG).
which is used by acute care facilities.
one SpendAdvisor® report and allows
Premier’s newly patented Supply Mix
productivity and benchmarking product.
users to manually adjust for anticipated
Index allows users to calculate supply
spend;
expense per patient procedure. Using the
of projected supply costs; •P repopulates the spend profile from
•C ompensates for off-contract spend
index, hospitals can accurately isolate
with an optional SpendAdvisor report;
supply costs as a percentage of the total
• Alerts members to contract categories that
cost of a clinical procedure and compare
will be renegotiated in the current year;
SupplyFocus is also included with OperationsAdvisor®, Premier’s labor
To learn more about Premier’s Supply Mix Index, please contact Mark Hiller, vice president of innovative solutions, at mark_hiller@premierinc. com, or Richard Westbay, program manager, SupplyFocus, at richard_westbay@premierinc.com.
it with other hospitals nationwide to OUTLOOK
QTR 2.14
67
ECON OMI CS 2 0 1 4
Range of supplier inflation estimates: This figure shows the range of supplier-reported inflation estimates for products within each service line. The range does not take into account Premier contract price protection or utilization data.
INFLATION SUMMARY
Average of supplier inflation estimates: True average of supplier-reported estimates of inflation on their products.
Projected Premier contract inflation estimates are calculated as follows: Pharmacy – Projections are derived from the Premier Drug Budget Tool. All others (except Foodservice) – Projections reflect the expected weighted average percent change in contract pricing for the existing contract portfolio as of April 1, 2014.
Service line
Range of inflation estimates
Average of inflation estimates
Projected Premier contract inflation estimates
Alternate Site Healthcare
0% - 5%
2.30%
0.45%
Cardiovascular Services
0% -
6%
2.50%
0.15%
Clinical Laboratory Services
2% - 5%
3.30%
0.96%
Facilities
0% - 15%
3.50%
1.49%
Foodservice
2%
- 6%
3.50%
Not Available
Imaging
0%
- 15%
2.60%
0.90%
IT / Telecommmunications
0% - 8%
2.60%
0.09%
Materials Management
0% - 15%
3.70%
1.36%
Nursing
0% - 10%
3.40%
1.02%
Pharmacy
Not Applicable
Not Applicable
10.80%
Purchased Services
0% - 15%
3.20%
1.86%
Surgical Services
0% - 10%
3.00%
1.37%
Women & Children’s
0%
3.20%
0.15%
- 8%
Note: Estimated category inflation is subject to change.
68
ECONOMICS ©2014 by Premier Inc. All rights reserved.
SUCCESS STORY
ASCEND® members’ choice for freight management Save more on every shipment with OptiFreight™ Logistics from Cardinal Health
P
remier’s ASCEND® members have an inside track on cutting costs, increasing efficiency and improving
supply chain performance. And Premier continually adds new value with strategic best practices such as freight management, a strong, yet often overlooked way to lower supply chain costs. For ASCEND members, the solution is OptiFreight™ Logistics from Cardinal Health. And the word is out: OptiFreight™ delivers. The freight program from OptiFreight™ Logistics saves healthcare providers significantly – ASCEND members saved nearly $1 million in the first six months alone.* The savings are not just due to betternegotiated shipping rates; the true difference is OptiFreight™ works with vendors to ensure they use the service for every package shipped to members. The greater vendor compliance, the lower the costs. And that’s where the program excels, according to the numerous ASCEND members who have already made the switch.
Better rates and rebates In addition to increased vendor compliance and the deep shipping
OUTLOOK
QTR 2.14
69
“We were with another freight management company before and weren’t happy with the service,” said Jacob Adams, director of supply chain for St. John Medical Center in Cleveland, part of University Hospitals.
“OptiFreight™ made the transition simple and handled all the details, including training our staff, so we could hit the ground running and start saving right away, with no hiccups. In the first month alone we cut our freight costs by 25 percent and are well on the way to saving $50,000 in our first year.”
discounts that OptiFreight™ offers
It’s easy to get started
simple and handled all the details,
via the ASCEND contract, members
Freight management solutions from
including training our staff, so we could
are also benefiting from additional
OptiFreight™ Logistics are simple
hit the ground running and start saving
rebates. These rebates are based on
to implement. All of the details for
right away, with no hiccups. In the first
total ASCEND contract compliance and
launching are executed and managed
month alone we cut our freight costs
are triggered once the entire ASCEND
in just a few short weeks, ensuring that
by 25 percent and are well on the way
membership reaches a certain level of
members do not have to wait for savings.
to saving $50,000 in our first year.”
compliance each year. Members are well
Some of the nation’s largest and most
on track to achieving the Year Two goal.
prestigious healthcare organizations
What makes such strong compliance possible? For starters, the culture of ASCEND itself. In addition, the
have already switched, such as University Hospitals in Cleveland, Ohio. “We were with another freight
contract’s advantage is built in:
management company before and
members enjoy lower rates, and by
weren’t happy with the service,”
motivating more vendors to take
said Jacob Adams, director of supply
advantage of those rates, OptiFreight™
chain for St. John Medical Center in
earns further loyalty of members. It’s a
Cleveland, part of University Hospitals.
classic win-win.
“OptiFreight™ made the transition
70
ECONOMICS ©2014 by Premier Inc. All rights reserved.
To save more on every shipment, contact Alex Labosky, Senior Manager of Corporate Accounts for OptiFreight™ Logistics. Call 614-945-5444 or email alex.labosky@cardinalhealth.com.
*Based on aggregate cost per package reduction for ASCEND members shipping through the OptiFreight™ Logistics program between June 1, 2013 and December 31, 2013. THIS ARTICLE IS A PAID ADVERTISEMENT. This article was not written by Premier and is not an endorsement by Premier.
COMMODITIES Minimizing raw materials risk, 72 2014 market expecting growth, 74 Copper market overview, 76 Cotton market overview, 78 Energy market overview, 80 Food market overview, 82 Plastic resins market overview, 86 Natural and synthetic rubber market overview, 88 Steel market overview, 90 Success Story: US Foods, 92
P
COMMODITIES
T F
C
E
MINIMIZING
RAW MATERIALS RISK
A
sample of Premier’s contracted suppliers identified key raw materials that serve as primary drivers of their products’ pricing. Potential category and market impacts are shown for the raw materials commonly used in healthcare products and supplies.
In order to minimize the risk associated with raw materials’ pricing, healthcare facilities should: • Review categories that may be impacted by fluctuations in raw material costs; • Use the inflation tables in this publication to locate suppliers with firm pricing in a category impacted by raw materials of interest; and • Refer to the contract launch materials in Supply Chain Advisor® to identify a category’s lowest-cost provider.
LABOR PREMIER CONTRACT IMPACT* Intraoperative neurophysiological monitoring services
•
Surgical instrument and scope repair
•
Cardiac rhythm management devices
•
ENERGY PREMIER CONTRACT IMPACT* PC hardware and software resellers
•
Video laryngoscopes
•
Third-party freight management
•
PLASTIC RESINS PREMIER CONTRACT IMPACT* Pain management - local anesthetic
•
Contrast media injectors/disposable
•
Can liners
•
*Refer to contract-specific price protection information in the inflation tables. Price increase risk: Red = High; Yellow = Moderate; Green = Low
72
COMMODITIES ©2014 by Premier Inc. All rights reserved.
COMMODITIES E
Fig.1
T C
This figure illustrates the percent of inflation on medical-surgical supplies attributed to each raw material.
Natural and synthetic rubber, 1.4%
Precious metals, 0.4% Cotton, 1.6%
Paper, 2.7% Base metals, 3.6% Organic and inorganic chemicals, 4.8% Electronic components, 5.2%
Plastic resins, 13.6%
Energy, 33.0%
Labor, 33.9%
Source: Premier online survey for Economic Outlook spring 2014 publication
OUTLOOK
QTR 2.14
73
F
P
2014
T
MARKET EXPECTING GROWTH
hird quarter 2013 data
billion per month.7 Quantitative easing
to the Thomson Reuters/Jefferies
showed a U.S. economic
is likely to continue such incremental
CRB index, commodity prices were
growth rate of 4.1 percent,
decreases as inflation remains steady
7.0 percent lower in January 2014
with a 3.2 percent annual
and the labor market improves.
than February 2013 (see Figure 1).
increase from the third quarter to
8
Global growth is expected to rise by
Commodity prices were much
the fourth. Overall, the 2013 gross
3.7 percent in 2014 over the previous
more stable in 2013 than in past
domestic product (GDP) rose 1.9
year, primarily due to recovery in
years. In February 2014, prices were
percent. Growth was largely due to
advanced economies, and is projected
39 percent lower than the July 2008
an uptick in personal expenditures
to hit 3.9 percent in 2015. More stable
spike and 41 percent higher than
and private sector inventory, as well
advanced economies, and resulting
the 2009 low point (see Figure 2).
as lower local government spending. 3
higher demand for exports, should also
Economic activity in the U.S. is expected
drive growth in emerging markets.
1
2
to continue on the upswing, resulting in 3 percent GDP growth in 2014.4 According to the Wall Street Journal
9
China remains a question mark for both commodity markets and the global economy in general. Annual growth in
Dollar Index, the U.S. dollar (USD)
China was flat, at 7.7 percent in 2013, a
gained 4.8 percent in 2013 against other
13-year low.10 Though growth exceeded
major currencies. This is the largest
expectations for the country last year,
annual increase since 2008.5 The
it is unlikely the world’s second largest
dollar should continue to strengthen
economy can maintain that pace.11
as the Federal Reserve slows its
Since China has been one of the
quantitative easing program. The euro
largest consumers of commodities
saw the biggest jump of all currencies
during its double-digit growth phase,
in 2013, increasing 4.1 percent against
a slowdown there means decreased
the USD following stabilization
demand for commodities such as
of the European debt crisis.
cotton, copper and steel.12 Forecasts
6
The Federal Reserve announced in
are uncertain regarding when or if the
December 2013 that it would reduce
country will decrease its commodity
its bond-buying program from $85
consumption this year, making
billion per month to $75 billion. In
the future of several commodity
January 2014, the Fed said it would
markets questionable. According
again decrease the program, to $65
74
COMMODITIES ©2014 by Premier Inc. All rights reserved.
REFERENCES 1. U.S. Economy at a Glance, Bureau of Economic Analyses, U.S. Department of Commerce, https://www.bea.gov/ newsreleases/glance.htm. 2. Samatha Sharf, “U.S. GDP Grew at 3.2 Percent in the Fourth Quarter 2013,” Forbes, January 30, 2014, http://www.forbes. com/sites/samanthasharf/2014/01/30/u-s-gdp-grew-3-2in-fourth-quarter-2013/. 3. Ibid. 4. Ilir Hysa, Moody’s Analytics, interview with author, January 21, 2014. 5. Nicole Hong, “Dollar Logs Biggest Annual Gain Since 2008,” Wall Street Journal, December 31, 2013, http://online.wsj. com/news/articles/SB100014240527023041373045792914 70056552100. 6. Ibid. 7. Joshua Zumbrun and Jeff Kearns, “Fed Cuts QE to 65 billion Pace as Labor Market Improves Further,” Bloomberg, January 30, 2014, http://www.bloomberg.com/news/201401-29/fed-cuts-qe-to-65-billion-pace-as-labor-market-improves-further.html . 8. Ibid. 9. World Economic Outlook Update: Is the Tide Rising? International Monetary Fund, January 2014, http://www. imf.org/external/pubs/ft/weo/2014/update/01/. 10. Kevin Yao and Aileen Wang, “China’s 2013 Economic Growth Dodges 14-Year Low but Further Slowing Seen,” Reuters, January 20, 2014, http://www.reuters.com/ article/2014/01/20/us-china-economy-gdp-idUSBREA0I0HH20140120 . 11. Ibid. 12. Michael Bleby, “China’s Rebalancing Could Halve Commodity Prices,” BRW, March 26, 2013, http://www.brw.com. au/p/business/china_rebalancing_could_halve_commodity_i7GQ1VEhFjwK0Wnmh6LpAJ.
COMMODITIES E
Fig.1
T C
Thomson Reuters/Jefferies CRB Index, February 2013 – January 2014 310 300 290 280 270 260 250 Feb–Apr 2013
May–July 2013
Aug–Oct 2013
Nov 2013–Jan 2014
Source: www.Jefferies.com Note: The index includes 19 commodities: aluminum, cocoa, coffee, copper, corn, cotton, crude oil, gold, heating oil, lean hogs, live cattle, natural gas, nickel, orange juice, silver, soybeans, sugar, unleaded gas, and wheat.
Fig.2
Thomson Reuters/Jefferies CRB Index, January 2008 – February 2014 500 450 400 350 300 250 200 150 100 50 0 2008
2009
2010
2011
2012
2013
2014
Source: www.Jefferies.com
OUTLOOK
QTR 2.14
75
F
P
COPPER MARKET OVERVIEW
PRODUCT CATEGORIES WITH HIGH COPPER CONTENT AND 12-MONTH PRICE OUTLOOK Construction services
•
Energy efficiency services
•
HVAC equipment, controls, and services
•
Ice machines and dispensers
•
Maintenance, repair, and operations
•
Copper market update Average price forecasts for copper
Monetary policy generally impacts commodity prices, and quantitative
range from $6,650 to $7,200 per
easing has historically put upward
metric ton. Per pound, copper prices
price pressure on copper and other
are estimated to hover around $3.20
commodities. The Federal Reserve’s
to $3.30 in 2014. According to most
monthly $10-billion reduction in its
analysts, copper forecasts for 2014
bond-buying program will likely cause
remain neutral.
some level of downward price pressure
1
Since China is the world’s top consumer, with 40 percent of global
on most commodity markets, including copper.5
copper use, the country’s weak economic data remains a concern. However, China’s appetite for copper increased 11 percent last year and has not yet shown signs of decreasing.2 While China’s demand remains fairly steady, the predicted surplus is decreasing; London Metal Exchange stockpiles have fallen 50 percent since June 2013. 3 Deutsche Bank expects supply in the global copper market to exceed demand this year by 320,000 metric tons, less than half of the 750,000-ton surplus it expected at this time a year ago.4
76
COMMODITIES ©2014 by Premier Inc. All rights reserved.
REFERENCES 1. “Copper Seen as ‘Not Too Hot and Not Too Cold’ in 2014,” Kitco News, http://www.kitco.com/news/2013-12-17/Copper-Seen-As-Not-To-Hot-And-Not-To-Cold-In-2014.html. 2. “China Lights the Way for Copper,” Wall Street Journal, January 17, 2014, http://online.wsj.com/news/articles/ SB10001424052702304419104579326701752873782?mod=WSJ_Commodities_LEFTTopNews. 3. Ibid. 4. Ibid. 5. HCCE Copper Outlook, Honeywell Cable, January 13, 2014. 6. Ibid. 7. “China Lights the Way for Copper,” Wall Street Journal, January 17, 2014, http://online.wsj.com/news/articles/ SB10001424052702304419104579326701752873782?mod=WSJ_Commodities_LEFTTopNews. 8. Ibid. 9. Ibid.
COMMODITIES E
Fig.1
T C
Average monthly copper prices (London Metal Exchange) 500 450
Cents per pound
400 350 300 250 200 150 100 Sep 2010
Jan 2011
May 2011
Sep 2011
Jan 2012
May 2012
Sep 2012
Jan 2013
May 2013
Sep 2013
Source: U.S. Geological Survey: Copper statistics and information
Fig.2
Projections for 2014
FACTOR
IMPACT ON COPPER PRICES
COMMENTS
Quantitative easing
Quantitative easing drives upward pressure on prices for most commodities, although decisions to decrease bond-buying will provide some downward pressure.6
Uncertain surplus
Deutsche Bank expects supply in the global copper market to exceed demand this year by 320,000 metric tons, less than half of the 750,000-ton surplus it expected at this time a year ago.7 London Metal Exchange stockpiles have fallen 50 percent since June 2013.8
Strong Chinese demand
Chinaâ&#x20AC;&#x2122;s economic downturn has not slowed its desire for copper, as previously predicted. China increased its copper appetite by 11 percent in 2013.9
OUTLOOK
QTR 2.14
77
F
P
COTTON MARKET OVERVIEW
PRODUCT CATEGORIES WITH HIGH COTTON CONTENT AND 12-MONTH PRICE OUTLOOK Bandages, dressings, and gauze
•
Lap sponges or towels and specialty sponges
•
Restraints and fall prevention
•
Reusable textiles and textile services
•
Skin integrity: prevention, healing, and support
•
Cotton market update
World cotton acreage is set to rise in
Cotton prices rose 12 percent in 2013
the 2014-2015 season, contributing to
and were a much stronger commodity
the 3.6 million bales in extra production
market than both previous forecasts
expected this year. The increase in
and other agricultural materials. The
supply will likely result in downward
National Cotton Council’s Cotton “A”
pressure on prices.6
1
Index showed cotton prices peaked in March 2013 at 94.45 cents per pound and hit their lowest point in November at 84.65 cents per pound.2 Despite higher prices, 2012-2013 inventories hit a record high at 89.1 million bales. 3 Ongoing concerns that China would begin draining its stockpiles kept bearish pressure on price forecasts, but it appears that concern has weakened for the near future.4 Reports out of China suggest that this year’s crop was damaged by an early frost, pushing down the country’s output by more than one million bales.5
78
COMMODITIES ©2014 by Premier Inc. All rights reserved.
REFERENCES 1. “Cotton Prices – Will They Defy Doomsters Again in 2014?” Agrimoney.com, December 30, 2013, http://www.agrimoney. com/feature/cotton-prices---will-they-defy-doomstersagain-in-2014--247.html. 2. Monthly Prices: ‘A’ Index, National Cotton Council of America, http://www.cotton.org/econ/prices/monthly.cfm (accessed February 7, 2014). 3. “Cotton Prices – Will They Defy Doomsters Again in 2014?” Agrimoney.com, December 30, 2013, http://www.agrimoney.com/feature/cotton-prices---will-they-defy-doomstersagain-in-2014--247.html. 4. “Cotton Prices Hit 5-Month High as China Fears Wane,” Agrimoney.com, January 16, 2014, http://www.agrimoney. com/news/cotton-prices-hit-5-month-high-as-china-fearswane--6670.html. 5. “Cotton Finds Open Door to Imports in China Despite Massive Inventories,” FUTURES Magazine, December 19, 2013, http://www.futuresmag.com/2013/12/19/cottonfinds-open-door-to-imports-in-china-despite. 6. “Cotton Prices – Will They Defy Doomsters Again in 2014?” Agrimoney.com, December 30, 2013, http://www.agrimoney. com/feature/cotton-prices---will-they-defy-doomstersagain-in-2014--247.html. 7. “Cotton Prices Hit 5-Month High as China Fears Wane,” Agrimoney.com, January 16, 2014, http://www.agrimoney. com/news/cotton-prices-hit-5-month-high-as-china-fearswane--6670.html. 8. “Cotton Prices – Will They Defy Doomsters Again in 2014?” Agrimoney.com, December 30, 2013, http://www.agrimoney. com/feature/cotton-prices---will-they-defy-doomstersagain-in-2014--247.html.
COMMODITIES E
Fig.1
T C
The Cotton “A” Index The Cotton “A” Index is an estimate of the world price of cotton. It is an average of the five lowest quotations for a sample of 19 cottons traded internationally.
250
Cents per pound
200
150
100
50
0 2010
2011
2012
2013
Source: National Cotton Council of America Note: Index values were unavailable from June 23, 2010 through Aug. 1, 2010 and again from June 10, 2011 through Aug. 1, 2011 due to insufficient quotes from merchants.
Fig.2
Projections for 2014
FACTOR
IMPACT ON COTTON PRICES
COMMENTS
Uncertain demand
With China as the world’s largest consumer of cotton, the country’s surmounting inventories will limit imports in 2014. However, this concern existed in 2013, and consumption remained strong.7
Increasing supply
Forecasts suggest there will be 3.6 million bales in extra production this year.8
OUTLOOK
QTR 2.14
79
F
P
ENERGY MARKET OVERVIEW
COMMODITY
CHANGE IN LAST 12 MONTHS
CHANGE LAST MONTH
Oil (light crude)
6%
-2%
Heating oil
0%
-3%
Natural gas
20%
-4%
Unleaded gas
-6%
8%
Source: CNNMoney.com. Price change shown is from February 13, 2014 to March 13, 2014 or March 13, 2013 to March 13, 2014.
Oil
U.S. liquid fuels consumption rose by approximately 2.1 percent in 2013, with liquefied petroleum gas contributing the most to the increase. Projected liquid fuels consumption for 2014 is flat.1 Production is expected to be strong through 2015: the U.S. Energy Information Administration (EIA) forecasts production to increase from 7.5 million bbl/d in 2013 to 8.5 million bbl/d in 2014 and 9.3 million bbl/d in 2015.2 The growth in U.S. production of crude oil has led to a significant decline in petroleum imports.
Gasoline
Despite price increases due to demand, the EIA projects that lower crude oil prices, strong export demand for diesel fuel, and high levels of refinery runs will put downward pressure on regular gasoline.3 Gasoline retail prices in January averaged $3.29/gallon.
Natural gas
Cold weather in December and January impacted demand, supply, and prices for natural gas, with some of the largest storage withdrawals seen since 1994 (when recordkeeping of withdrawals began).4 Natural gas production is predicted to grow at an average of 2.1 percent in 2014 and 1.3 percent in 2015. Henry Hub natural gas spot prices averaged $4.24/MMBtu in December and $3.73/MMBtu for 2013 overall. Gas spot prices are expected to average $3.89/MMBtu in 2014 and $4.11/MMBtu in 2015.5
International crude oil market The EIA projects that production
slightly, to 1.4 million bbl/d, in 2015. Growth is primarily outside of OECD
of world liquid fuels from non-OPEC
countries, with China the single
countries will grow year-over-year by a
biggest contributor to growth. OECD
record high of 1.9 million bbl/d in 2014,
consumption is expected to decline
while OPEC production will remain
slightly in 2014.
relatively flat through 2014 and 2015,
8
Brent crude oil spot prices averaged
compared to 2013 levels. Syria and Yemen
between $108/bbl and $112/bbl for the
are expected to continue to contribute
sixth consecutive month in December
to non-OPEC supply disruptions
2013. The EIA expects the Brent crude
over the next two years. Libyan and
oil price to weaken as non-OPEC supply
Iranian crude oil supplies are currently
exceeds consumption; Brent crude oil
unavailable due to unrest in these
prices are expected to average
countries; the timing for this volume to
$105/bbl in 2014 and $102/bbl in 2015.9
become available is uncertain.7
West Texas Intermediate (WTI) crude
6
Global consumption exceeded
oil spot prices are forecast to reach
estimates in 2013, reaching
$92/bbl in 2014, an average $12/bbl
approximately 1.2 million bbl/d
lower than Brent prices. WTI crude oil
in 2013. Consumption is likely to
spot prices are projected to average
stay at that level in 2014 and grow
$90/bbl in 2015.10
80
COMMODITIES ©2014 by Premier Inc. All rights reserved.
REFERENCES 1. Short-Term Energy Outlook: U.S. Crude Oil and Liquid Fuels, U.S. Energy Information Administration, January 2014. 2. Ibid. 3. Short-Term Energy Outlook: U.S. Crude Oil and Liquid Fuels, U.S. Energy Information Administration, January 2014. 4. Short-Term Energy Outlook: Natural Gas, U.S. Energy Information Administration, January 2014. 5. Ibid. 6. Short-Term Energy Outlook: Global Crude Oil and Liquid Fuels, U.S. Energy Information Administration, January 2014. 7. “OPEC Guide: An Uncertain Year Ahead for OPEC,” Platts, January 7, 2014, http://www.platts.com/news-feature/2014/oil/opec-guide/index. 8. Short-Term Energy Outlook: Global Crude Oil and Liquid Fuels, U.S. Energy Information Administration, January 2014. 9. Ibid. 10. Ibid. 11. Short-Term Energy Outlook: Global Crude Oil and Liquid Fuels, U.S. Energy Information Administration, January 2014. 12. Ibid. 13. Short-Term Energy Outlook: Natural Gas, U.S. Energy Information Administration, January 2014.
COMMODITIES E
Fig.1
C
Projections for 2014 FACTOR
Fig.2
T
IMPACT ON ENERGY PRICES
COMMENTS
Strong crude oil production
Record-high year-over-year production growth is expected from non-OPEC countries.11 Increased supply will put downward pressure on prices.
Consumption in China
Consumption is expected to remain flat this year compared to 2013. China and other non-OECD countries are the only areas for potential unexpected growth in consumption, which is dependent on other political and economic factors.12
Severe winter weather
Severe winter weather, especially in the Midwest and Northeast U.S., has caused natural gas supplies to drain faster than expected. Extended periods or specific instances of severe winter weather could cause heightened demand, while lowering supplies.13
Henry Hub natural gas prices Projections
12
Dollars per million BTU
10 8 6 4 2 0 2013
2014
Historical spot price
2015
STEO forecast price
95% NYMEX futures upper confidence interval
NYMEX futures price
95% NYMEX futures lower confidence interval
Source: Short-Term Energy Outlook, January 2014. Note: Confidence interval derived from options market information for the 5 trading days ending Jan. 2, 2014. Intervals not calculated for months with sparse trading in near-the-money options contracts.
U.S. gasoline and crude oil prices
Projections
12 10 Dollars per gallon
Fig.3
8 6 4 2 0 2010
2011
2012
Retail regular gasoline
2013
Crude oil
2014
2015
Price difference
Source: Short-Term Energy Outlook, January 2014. Note: Crude oil price is composite refiner acquisition cost. Retail prices include state and federal taxes.
OUTLOOK
QTR 2.14
81
F
P
FOOD
MARKET OVERVIEW
Global food prices
The United States Department of
The United Nations’ FAO Food
Agriculture’s Economic Research
Price Index indicated flat prices from
Service (ERS) notes that prices fell
November to December 2013. December
in 2013 for pork, eggs, vegetables, and
saw sharp increases in dairy and
nonalcoholic beverages. At the same
peaking meat prices but a decline in
time, prices rose for beef and veal,
sugar, cereal, and oil prices. In 2013,
poultry, fruit, and other foods.6 ERS
the Food Price Index averaged 209.9
forecasts that food price inflation will
points, slightly above December’s 206.7,
return to a range closer to the historical
which was down 1.6 percent from 2012.
norm: the food, food-at-home and food-
Nevertheless, it remains the third
away-from-home CPIs are expected
highest annual value on record.
to increase 2.5 to 3.5 percent over
1
2
Global production of corn has
2013 levels.7 However, severe weather
increased by approximately 270 million
patterns, as have been seen so far this
metric tons since 2004, which kept
winter, particularly in the Midwest and
cereal supplies high and costs low in
Northeast, have already impacted 2014
2013.4
prices and could drive prices higher.
3
U.S. food prices The Consumer Price Index (CPI) for all food saw only slight changes from September through November 2013. At the end of that period, the CPI was up 1.2 percent from November 2012. The food-at-home CPI has fallen 0.25 percent since January 2012, while the food-away-from-home CPI increased 2.1 percent from November 2012 to November 2013.5
82
COMMODITIES ©2014 by Premier Inc. All rights reserved.
REFERENCES 1. World Food Situation: FAO Food Price Index, Food and Agricultural Organization, http://www.fao.org/worldfoodsituation/foodpricesindex/en/. 2. Ibid. 3. “Innovation and Investment Pop Commodity Price Bubble,” Wall Street Journal, Dec. 8, 2013, http://online.wsj. com/news/articles/SB100014240527023045794045792341 70771914520. 4. Ibid. 5. Food Price Outlook, 2013-14, USDA Economic Research Service, (updated January 24, 2014), http://www.ers.usda. gov/data-products/food-price-outlook/summary-findings. aspx#.UuFB0hAo7rc. 6. Ibid. 7. Ibid.
COMMODITIES E
Fig.1
T C
The Food Price Index The Food Price Index from the United Nationsâ&#x20AC;&#x2122; Food and Agriculture Organization (FAO) is an average of five commodity groups: meat, dairy, cereals, oils and fats, and sugar.
250 240
2002 â&#x20AC;&#x201C; 2004 = 100
230 220 210 200 190 180 2011
2012
2013
Source: FAO.org Note: The November 2013 release of the FAO Food Price Index (FFPI) introduced a number of revisions to the way the FFPI is calculated, including changes to its commodity coverage. The revised FFPI has been extended to 1961.
Fig.2
Price change by commodity
Commodity
Corn
Soy Beans
Wheat
Lean Hogs
Live Cattle
Sugar
Coffee
Change last 12 months
-34%
-1%
-5%
54%
16%
-7%
45%
Change last month
6%
2%
10%
26%
2%
6%
27%
Source: CNNMoney.com. Price change shown is from Mar. 18, 2013 to Mar. 18, 2014 or Feb. 18, 2014 to Mar. 18, 2014.
OUTLOOK
QTR 2.14
83
F
P
P
COMMODITIES
T F
C
E
Fig.3
Food categories and 12-month price outlook
CATEGORY
SUBCATEGORY
Poultry
Whole birds
Poultry
PREMIER CONTRACT COVERAGE
IMPACT ON PRICING
-1.4%
-1.9%
Yes
•
Breasts
-16.5%
-9.0%
Yes
•
Poultry
Wings
-20.2%
-17.3%
Yes
•
Beef
Chucks
6.5%
3.5%
Yes
•
Beef
Ribeyes
5.9%
4.1%
Yes
•
Beef
Loins
4.9%
6.1%
Yes
•
Beef
Rounds
7.5%
5.3%
Yes
•
Beef
Thin meats
3.2%
5.8%
Yes
•
Pork
Bellies/bacon
-8.5%
-12.3%
Yes
•
Pork
Trimmings
-3.7%
-7.3%
Yes
•
Pork
Hams
-5.7%
-8.2%
Yes
•
Pork
Loins
-5.1%
-4.0%
Yes
•
Pork
Butts
-8.5%
-7.8%
Yes
•
Pork
Spare ribs
0.1%
-5.1%
Yes
•
Dairy
Milk and creamers
9.4%
-0.3%
Yes
•
Dairy
Cheese
-4.0%
-4.0%
Yes
•
Dairy
Butter
0.0%
0.0%
Yes
•
Dairy
Shell eggs
0.0%
0.0%
Yes
•
Dairy
Cultured
-6.8%
-0.6%
Yes
•
-15.0%
-8.0%
Yes
•
2.0%
2.0%
Yes
•
2.0%
2.0%
Yes
•
Oils and shortening Potatoes
Frozen
Chemicals and cleaning
Q2 2014
2014
Disposables
Foil
0.0%
0.0%
Yes
•
Disposables
Paper, board
2.0%
5.0%
Yes
•
Disposables
Paper, recycled
2.0%
5.0%
Yes
•
Disposables
Paper, virgin fiber
2.0%
5.0%
Yes
•
Disposables
Plastic PE
5.1%
5.2%
Yes
•
Disposables
Plastic PS
2.6%
2.1%
Yes
•
Disposables
Plastic PET
1.0%
-2.0%
Yes
•
Beverages
Juice and juice bases
0.0%
0.0%
Yes
•
Beverages
Drinks, drink bases/mixes, other
0.0%
0.0%
Yes
•
Beverages
Soda, RTD, fountain syrup
0.0%
3.8%
Yes
•
Beverages
Coffee
-10.0%
-4.0%
Yes
•
Beverages
Tea
1.0%
2.0%
Yes
•
Red = >5%; Yellow = 2.1 – 5%; Green = 0 – 2% Source: United States Department of Agriculture, Economic Research Service
84
COMMODITIES ©2014 by Premier Inc. All rights reserved.
COMMODITIES
T
E
CATEGORY
SUBCATEGORY
PREMIER CONTRACT COVERAGE
IMPACT ON PRICING
Beverages
Hot cocoa
1.0%
2.0%
Yes
•
Bakery
Breads and rolls
3.0%
3.0%
Yes
•
Bakery
Desserts
2.0%
2.0%
Yes
•
Bakery
Flour
-3.5%
-8.0%
Yes
•
Sugar
1.0%
3.5%
Yes
•
Grocery
Beans, black
2.0%
1.5%
Yes
•
Grocery
Beans, pinto
5.0%
4.0%
Yes
•
Grocery
Beans, other
8.0%
6.0%
Yes
•
Grocery
Rice
0.0%
-2.9%
Yes
•
Produce
Vegetables - Lettuce/salads
4% – 5%
4% – 5%
Yes
•
Produce
Vegetables - Potatoes
4% – 5%
4% – 5%
Yes
•
Produce
Vegetables - Tomatoes
4% – 5%
4% – 5%
Yes
•
Produce
Vegetables - Onion
4% – 5%
4% – 5%
Yes
•
Produce
Vegetables - Other
4% – 5%
4% – 5%
Yes
•
Fruits - Citrus
3% – 4%
3% – 4%
Yes
•
Produce
Fruits - Melons
3% – 4%
3% – 4%
Yes
•
Produce
Fruits - Grapes
3% – 4%
3% – 4%
Yes
•
Produce
Fruits - Bananas
3% – 4%
3% – 4%
Yes
•
Produce
Fruits - Berries
3% – 4%
3% – 4%
Yes
•
Produce
Fruits - Apples
3% – 4%
3% – 4%
Yes
•
Produce
Fruits - Avocados
3% – 4%
3% – 4%
Yes
•
Produce
Fruits - Other
3% – 4%
3% – 4%
Yes
•
Tomatoes
Canned
2.0%
U/A
Yes
•
Fruits
Canned
Bakery
Produce
Apple products
Canned (including sauce)
Q2 2014
2014
C
5-7%
U/A
Yes
•
-20.0%
U/A
Yes
•
U/A
Yes
•
Vegetables
Canned
2.0%
Seafood
Shrimp, value-add
2.0%
1.0%
Yes
•
Seafood
Shrimp, non-value-add
1.0%
0.5%
Yes
•
Seafood
Fish, value-add
0.5%
0.5%
Yes
•
Seafood
Fish, non-value-add
1.0%
1.0%
Yes
•
Seafood
Other, value-add
1.5%
1.0%
Yes
•
Seafood
Other, non-value-add
0.5%
0.5%
Yes
•
Red = >5%; Yellow = 2.1 – 5%; Green = 0 – 2% Source: United States Department of Agriculture, Economic Research Service
OUTLOOK
QTR 2.14
85
F
P
PLASTIC RESINS MARKET OVERVIEW
PRODUCT CATEGORIES WITH HIGH PLASTIC RESIN CONTENT AND 12-MONTH PRICE OUTLOOK Custom procedure trays/packs, gowns, and related products
•
Can liners
•
IV therapy products
•
Contrast media disposable injectors
•
Patient bedside products
•
Plastic resins market update Petrochemicals The Platts Global Petrochemical Index (PGPI) is a benchmark of seven widely used petrochemicals derived from crude oil and natural gas. Since these petrochemicals are used to make plastic, rubber, nylon, and other consumer products, the plastic resins market often aligns with petrochemical prices. The Gulf Cooperation Council (GCC), a political and economic group of Arab states bordering the Persian Gulf, anticipates record-high petrochemical exports in 2014 following enactment of the World Trade Organization’s Bali Package, an agreement designed to promote commerce between developing and developed countries. In 2012, the GCC exported 60.7 million mt of petrochemicals; although 2014 exports are supposed to exceed that volume, specific expectations have not been released.1 Petrochemicals prices increased in December 2013 to $1,406 per metric ton, up 4 percent from the prior month. This price increase was in line with oil prices during the same time period. Prices increased 4 percent from December 2012 to December 2013.2
86
COMMODITIES ©2014 by Premier Inc. All rights reserved.
Because plastic resin is derived from
below Brent prices. WTI crude oil spot
crude oil and natural gas, its pricing
prices are expected to average $90/bbl
often reflects their markets, and the
in 2015. 5
shift from crude oil to natural gas will continue to have an impact on plastic resins. Other factors that affect
Natural gas prices Natural gas production is predicted
its pricing are the global economy,
to grow at an average of 2.1 percent in
geopolitical issues, weather patterns,
2014 and 1.3 percent in 2015. Henry Hub
exchange rates, and political instability.
natural gas spot prices averaged $4.24/ MMBtu in December and $3.73/MMBtu
Crude oil prices The U.S. Energy Information Administration (EIA) expects
for 2013 overall. Gas spot prices are projected to average $3.89/MMBtu in 2014 and $4.11/MMBtu in 2015.6
production of world liquid fuels from non-OPEC countries to grow year-overyear by a record high of 1.9 million bbl/d in 2014, while OPEC production will remain relatively flat through 2014 and 2015 from 2013 levels. 3 Brent crude oil spot prices averaged between $108/bbl and $112/bbl for the sixth consecutive month in December 2013. The EIA expects the Brent crude oil price to weaken as non-OPEC supply growth exceeds growth in consumption; Brent crude oil prices are projected to average $105/bbl in 2014 and $102/bbl in 2015.4 West Texas Intermediate (WTI) crude oil spot prices are forecast to reach $92/bbl in 2014, an average $12/bbl
REFERENCES 1. “Gulf Cooperation Council Petrochemicals Exports to Hit Record High in 2013: GPCA,” Platts, February 3, 2014, http://www.platts.com/latest-news/petrochemicals/ dubai/gulf-cooperation-council-petrochemicals-exports-27887853. 2. “Global petrochemical prices gained 4% in December as energy prices climbed,” Reuters, January 17, 2014, http:// www.reuters.com/article/2014/01/17/platts-petrochemical-idUSnPnNYkShj2+168+PRN20140117. 3. Short-Term Energy Outlook: Global Crude Oil and Liquid Fuels, U.S. Energy Information Administration, January 2014. 4. Ibid. 5. Ibid. 6. Short-Term Energy Outlook: Natural Gas, U.S. Energy Information Administration, January 2014. 7. Short-Term Energy Outlook: Global Crude Oil and Liquid Fuels, U.S. Energy Information Administration, January 2014. 8. Ibid. 9. “Gulf Cooperation Council Petrochemicals Exports to Hit Record High in 2013: GPCA,” Platts, February 3, 2014, http://www.platts.com/latest-news/petrochemicals/ dubai/gulf-cooperation-council-petrochemicals-exports-27887853.
COMMODITIES E
Fig.1
T C
Plastic resin prices 300 290
Index-base year 1982 = 100
280 270 260 250 240 230 220 210 200 2011
2012
2013
Source: Bureau of Labor Statistics – Producer Price Index – Commodity – Plastic Resins and Materials Manufacturing Note: All indexes are subject to revision for four months after publication.
Fig.2
Projections for 2014
FACTOR
IMPACT ON PLASTIC RESIN PRICES
COMMENTS
Crude oil prices
Record-high production from non-OPEC countries is expected to grow at a faster rate than consumption.7
Natural gas prices
Gas spot prices are predicted to increase in 2014, on average, compared to 2013.8 Sustained severe winter weather, as seen in many parts of the U.S., could cause price increases.
Export of petrochemicals
Increase in exports from Gulf Cooperation Council may influence overall supply.9
OUTLOOK
QTR 2.14
87
F
P
NATURAL AND SYNTHETIC
RUBBER MARKET OVERVIEW
PRODUCT CATEGORIES WITH HIGH RUBBER CONTENT AND 12-MONTH PRICE OUTLOOK Exam gloves
•
Surgical gloves
•
Natural and synthetic rubber market update Natural and synthetic rubbers are used extensively in the healthcare
growth in other emerging markets will
synthetic rubber will show less growth
lead to continued increases over the
than expected in 2014, due to historic
next five years.
surpluses, government spending cuts
6
•N itrile rubber: Synthetic nitrile
in the United States, and the European
industry for exam and surgical gloves.
butadiene rubber (NBR), a major
recession. The growth forecast for
Natural rubber is derived from latex
component of exam gloves, is
2014 is currently 4 percent.10
sap extracted from a rubber tree, while
composed of more than 65 percent
synthetic rubber is synthesized from
butadiene (BD). Global demand
chemicals that result from petroleum
of butadiene has been negatively
refining.1
impacted by an oversupply for the past
Several important trends are
several years. Demand is expected
expected to impact natural and
to remain soft for at least the first
synthetic rubber pricing in 2014:
quarter of 2014.7
• Automotive sector: Almost 60 percent
Increasing manufacturer interest
of global rubber is used by the world’s
in nitrile rubber gloves – away from
tire manufacturing industry, with
natural rubber latex and vinyl gloves
the remainder serving other sectors,
– is influenced by higher margins for
such as transportation, construction,
nitrile rubber. Manufacturers also
healthcare, and mining. Global
want to offset higher energy costs and
vehicle sales hit 82.8 million in 2013,
meet rising European demand.8
2
a 4.2 percent increase from 2012
•N atural rubber latex: Natural rubber
and the first time global sales have
is used in latex exam and surgical
exceeded 80 million. Growth in the
gloves. The International Rubber
United States and China is responsible
Consortium, based in Bangkok,
for the increases from last year, with
Thailand, is urging natural rubber
the United States seeing 7.6 percent
producers not to sell at the current low
growth year-over-year.
prices. Despite low inventory, prices
Worldwide auto sales are expected
have been falling due to a slowdown in
to increase between 3.4 percent
China’s purchasing.9
3
4
and 5.0 percent in 2014. China is
•G lobal demand for rubber: According
predicted to account for one-third
to the International Rubber Study
of all auto sales by 2018, but major
Group, global demand for natural and
5
88
COMMODITIES ©2014 by Premier Inc. All rights reserved.
REFERENCES 1. Story of Rubber, International Rubber Study Group (IRSG), http://www.rubberstudy.com/storyofrubber.aspx. 2. Ibid. 3. “Global Auto Sales Hit Record High of 82.8 Million,” CNBC, January 9, 2014, http://www.cnbc.com/id/101321938. 4. Ibid. 5. Bernie Woodall and Laurence Frost, “Global Auto Forecasts Rosy, With Reservations, for 2014,” Reuters, January 12, 2014, http://www.reuters.com/article/2014/01/12/us-autoshow-globalsales-idUSBREA0B0GH20140112. 6. “Global Auto Sales Hit Record High of 82.8 Million,” CNBC, January 9, 2014, http://www.cnbc.com/id/101321938. 7. “Acrylonitrile Butadiene Rubber-Nitrile Rubber: Market Overview,” ICIS, Updated January 2014, http://www.icis. com/chemicals/acrylonitrile-butadiene-rubber-nitrile-rubber/?tab=tbc-tab2. 8. Afiq Isa, “Nitrile Gloves Continues To Show Better Margins,” The Edge Malaysia, January 30, 2014, http://www.theedgemalaysia.com/first/273450-highlight-nitrile-gloves-continue-to-show-better-margins.html. 9. Huileng Tan, “Asian Group Tries To Stem Rubber’s Swoon,” Wall Street Journal, February 10, 2014, http://online.wsj. com/news/article_email/SB1000142405270230455880457 9374410575515906-lMyQjAxMTA0MDEwMTExNDEyWj. 10. Reuters, “Global Rubber Demand Growth To Be Slower Than Expected in 2013-IRSG,” Yahoo! News, May 21, 2013, http://news.yahoo.com/global-rubber-demand-growth-slower-104407990.html. 11. “Global Auto Sales Hit Record High of 82.8 Million,” CNBC, January 9, 2014, http://www.cnbc.com/id/101321938. 12. “Acrylonitrile Butadiene Rubber-Nitrile Rubber: Market Overview,” ICIS, Updated January 2014, http://www.icis. com/chemicals/acrylonitrile-butadiene-rubber-nitrile-rubber/?tab=tbc-tab2. 13. Huileng Tan, “Asian group tries to stem rubber’s swoon,” Wall Street Journal, February 10, 2014, http://online.wsj. com/news/article_email/SB1000142405270230455880457 9374410575515906-lMyQjAxMTA0MDEwMTExNDEyWj. 14. Short-Term Energy Outlook: U.S. Crude Oil and Liquid Fuels, U.S. Energy Information Administration, January 2014.
COMMODITIES E
Fig.1
T C
Rubber price changes
100%
Price change percentage
75% 50% 25% 0% -25% -50% -75% 2011
2012
Natural rubber China, SIR-20
2013
Crude oil
Butadiene
Source: Propurchaser.com
Fig.2
Projections for 2014
FACTOR
IMPACT ON RUBBER PRICES
COMMENTS
Automotive sector
Healthcare products using natural and synthetic rubber compete with the growing global automotive industry for raw material supplies. 2013 auto sales reached record highs, and growth is expected to continue in 2014.11
NBR prices
Demand remains soft for NBR, although reports are mixed as to whether this trend will continue in 2014.12
Natural rubber latex prices
Natural rubber prices are at all-time lows, despite diminished inventories over the past several months. Natural rubber producers have been urged to slow sales so as not to further drive down prices.13
Crude oil prices
The two monomers used for synthetic nitrile gloves (butadiene and acrylonitrile) are derived from oil. Production for 2014 remains strong, while consumption will likely be flat.14
OUTLOOK
QTR 2.14
89
F
P
STEEL
MARKET OVERVIEW
PRODUCT CATEGORIES WITH HIGH STEEL CONTENT AND 12-MONTH PRICE OUTLOOK Surgical instruments
•
Standard and safety hypodermics
•
Spinal implants and related products
•
Orthopedic total joint implants
•
Steam sterilizers
•
Steel market update
Steelmakers continue to have
Since early 2012, steel prices have
excess capacity, which is one of the
experienced downward pressure,
biggest issues impacting the steel
which continued until the early part of
market. Capacity use stands below
2013 when prices saw a small revival.
80 percent, resulting in surplus
1
U.S. steel imports rose 23 percent
supplies compared to demand.6
from December 2013 to January 2014. Some analysts expect the rise in imports to drive down U.S. prices.2 World crude steel production reached 1,607 megatonnes in 2013, a 3.5 percent increase from 2012. Production growth is attributed to Asia and the Middle East, while all other regions saw decreases in 2013. 3 China’s crude steel production increased 7.5 percent in 2013 from 2012; China’s share of production increased from 46.7 percent in 2012 to 48.5 percent in 2013.4 The EU, North America, and South America all saw decreases in production in 2013. Forecasts for global steel use are 3.1 percent for 2013 and 3.3 percent in 2014. Steel demand in China is predicted to increase 6 percent, compared to 0.7 percent in the rest of the world, resulting in overall global steel demand of 3.1 percent in 2014.5
90
COMMODITIES ©2014 by Premier Inc. All rights reserved.
REFERENCES 1. U.S. Bureau of Labor Statistics, Producer Price Index. 2. Ben Levisohn, “US Steel: The Pain Is Only Just Beginning,” Barron’s, February 5, 2014, http://blogs.barrons.com/ stockstowatchtoday/2014/02/05/us-steel-the-pain-is-onlyjust-beginning/. 3. “World Crude Steel Output Increases by 3.5% in 2013,” World Steel Association, January 23, 2014, https://www. worldsteel.org/media-centre/press-releases/2014/Worldcrude-steel-output-increases-by-3-5--in-2013.html. 4. Ibid. 5. “Worldsteel Short Range Outlook,” World Steel Association, October 7, 2013, http://www.worldsteel.org/media-centre/ press-releases/2013/worldsteel-short-range-outlook.html. 6. Global Steel Report 2013, Ernst & Young, http://www. ey.com/Publication/vwLUAssets/Global-Steel-Report-2013/$FILE/Global-Steel-Report-2013_ER0046.pdf. 7. Ibid. 8. Ben Levisohn, “US Steel: The Pain Is Only Just Beginning,” Barron’s, February 5, 2014, http://blogs.barrons.com/ stockstowatchtoday/2014/02/05/us-steel-the-pain-is-onlyjust-beginning/.
COMMODITIES E
Fig.1
T C
Iron and steel prices 270
Index-base year 1982 = 100
260 250 240 230 220 210 200 2011
2012
2013
Source: Bureau of Labor Statistics – Producer Price Index – Commodity – Iron and Steel
Fig.2
Projections for 2014
FACTOR
IMPACT ON STEEL PRICES
COMMENTS
Surmounting inventories
Steelmakers have excess capacity, and a steel surplus remains.7
Increase in imports
An increase in imports to the U.S. may put downward pressure on U.S. steel prices.8
OUTLOOK
QTR 2.14
91
F
P
SUCCESS STORY
Implementing a value analysis process for savings in foodservice
92
COMMODITIES Š2014 by Premier Inc. All rights reserved.
COMMODITIES
T
E
L
C
F
isa Schairer, Vice President of Food and Nutrition at Aurora Healthcare, was challenged with the task
of reducing costs in its 15-hospital system in 2011. These facilities were functioning independently without a single leader accountable for results. They were utilizing the Premier foodservice program but not to its full potential. Schairer began by establishing a centralized purchasing department and implementing a value analysis team. All product categories were reviewed
The first year resulted in an 11-percent reduction in food costs, saving the organization $1.9 million.
and standardization began with an emphasis on committed manufacturer agreements (CMAs). Partnering with US Foods in this process allowed Aurora to choose the contracted products that best suited its organization from a cost, quality and nutritional component.
food costs, saving the organization $1.9
the information from these tools to
Meetings with the Aurora value
million. Aurora was able to increase its
assist in managing its operations.
analysis team and US Foods were
rebates earned by over 50 percent, which
held monthly. A dedicated healthcare
reduced expenses another 7 percent.
account manager arranged sampling
To fully understand their current
By 2013, $3.9 million in foodservice expenses had been saved throughout the Aurora facilities. The value analysis
of over 500 items, along with detailed
costs, Aurora utilized several of US
team continues to meet on a monthly
information on each product to help
Foodsâ&#x20AC;&#x2122; value-added tools, including
basis to convert products to current
the value analysis team in the decision
the BaselineÂŽ, a financial diagnostic
contracts, review industry trends and
process. Once products were chosen,
tool. These tools allowed the health
change products that are no longer
others were removed from the order
system to understand how much it was
meeting the organizationâ&#x20AC;&#x2122;s needs.
guide and a standardized, locked order
spending, and get a clearer picture of
guide was implemented for all facilities.
where the dollars were being spent.
In 2011, Aurora had nearly 200
Implementation of a financial operating
foodservice vendors in their system,
report gave the system the ability to
which was reduced to fewer than 100
monitor its costs in real time and make
through this process. US Foods provided
the necessary changes to achieve its
the documented product savings as
goals. A strategic plan was developed
changes were made. The first year
based on this information and then put
resulted in an 11-percent reduction in
into place. Aurora continues to utilize
THIS ARTICLE IS A PAID ADVERTISEMENT. This article was not written by Premier and is not an endorsement by Premier.
OUTLOOK
QTR 2.14
93
P
STRATEGIC LEADERSHIP FOR FINANCIAL AND CLINICAL HEALTHCARE EXECUTIVES • A TWELVE MONTH OUTLOOK • SPRING 2014
ECONOMIC OUTLOOK
FOR FURTHER INFORMATION To learn more about this publication, please visit premierinc.com/economicoutlook, or email economicoutlook@premierinc.com.
13034 Ballantyne Corporate Place Charlotte, NC 28277
444 N Capitol Street NW, Suite 625 Washington, DC 20001-1511
T 704 357 0022
T 202 393 0860 F 202 393 0864
PREMIERINC.COM
PUR4146 03/14
T W E LV E M O N T H O U T LO O K | SPRING 2014
04
Using Wisely
08
Championing Total Cost Reduction
20
Finding Double-Digit Annual PPI Savings