Economic Outlook: Spring 2011 by Premier, Inc.

outlook economic

>>> INSIGHT INTO INDUSTRY TRENDS IMPACTING THE PREMIER HEALTHCARE ALLIANCE

M A R C H • 2 0 1 1 •

THE GLOBALIZATION OF U.S. HEALTHCARE HEALTHCARE DISTRIBUTION MARKET GLOBALIZATION

A tangible and growing impact on the U.S. supply chain

MADE IN AMERICA

A new competitive landscape for healthcare

NAVIGATING THE DRUG SHORTAGE CRISIS IN AMERICAN HEALTHCARE TRENDS IN COST AND UTILIZATION

Elevating patient care at the right cost

A T W E LV E M O N T H OUTLOOK

About the publication This report is the latest in a series of semiannual Economic Outlook reports published by the Premier healthcare alliance. The goal of this publication is to highlight emerging economic and industry trends that may impact healthcare organizations in the next 12 months. The publication harnesses the expertise of our network of internal and external subject matter experts as well as in-depth research conducted through proprietary surveys and one-on-one interviews. We welcome your comments and questions. For additional information, please email EconomicOutlook@premierinc.com. premierinc.com/economicoutlook

letter 04 FROM THE PRESIDENT Advancing change to improve the health of communities Mike Alkire, president of Premier Purchasing Partners

features 06 GLOBALIZATION

44 COMMODITIES OVERVIEW

THE GLOBALIZATION OF U.S. HEALTHCARE Leading supply chains focus on flexibility ……………..........................………… 06

WHY ARE COMMODITY PRICES RISING? An analysis of the primary drivers impacting raw material prices......….….............................44

HEALTHCARE DISTRIBUTION MARKET GLOBALIZATION: A tangible and growing impact on the U.S. supply chain Eric Coldwell, managing director, Robert W. Baird & Co. Inc…….................08

Minimizing raw materials risk.......................................................………...........48

BUILDING A SMARTER SUPPLY CHAIN Best practices and recommendations for pandemic preparedness..... 10 MADE IN AMERICA: A new competitive landscape for healthcare An interview with Nucor Corporation CEO, Dan DiMicco……................... 16

Copper market overview……..……………...........................................………..........49 Cotton market overview……………………………....................................……..........52 Energy market overview……………………………………………..................…….........57 Food market overview…………………………………………………………….................. 62 Plastic resins market overview…………………………………………….......….......... 66 Rubber and latex market overview………………………………..................….......68

WHERE IN THE WORLD? Manufacturing origin of medical supplies and equipment used in the U.S. …..................................................... 20

Steel market overview………...………….....….....................................…….............. 70

24 PERSPECTIVES

72 ECONOMIC INSIGHTS

BEHIND THE NUMBERS: Trends impacting our members..….….............. 24

Global economic growth and its impact on healthcare...........….......... 72

A VIEW FROM THE TOP: How Premier's financial leaders are realigning priorities amidst reform and recovery?........................................27

Premier’s guide to economic indicators CPI, PPI, CMS marketbaskets..................................................................…......... 74

NAVIGATING THE DRUG SHORTAGE CRISIS IN AMERICAN HEALTHCARE Coleen Cherici, Jerry Frazier, Marv Feldman, Bruce Gordon, Christina Petrykiw, Wayne Russell, Jay Souza………………………….................... 30

76 ECONOMIC GUIDES

DATA INTEGRATION: A win-win for patients and providers An interview with IBM’s director of healthcare transformation, Paul Grundy, MD........................................................................................……............ 39

Premier’s budgeting calculators……………...................................………........... 76 Premier’s inflation summary………..………………………….................………........ 77

40 TRENDS IN COST AND UTILIZATION ELEVATING PATIENT CARE AT THE RIGHT COST………………...........................40 ABSTRACTS OF UTILIZATION STUDIES CONDUCTED BY THE PREMIER HEALTHCARE ALLIANCE...............................................................……… 42

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Members of the Premier alliance, The British novelist Arnold Bennett said, “There is nothing wrong with change, if it is in the right direction.” Given our current operating environment of reform – new care delivery models, changing reimbursements and new approaches to delivering population health – there can be no question that change will be the one constant in healthcare.

Letter from the President Advancing change to improve the health of communities

But are we moving in the right direction? In many respects, the answer to that question depends on who you ask. And to confuse the issue further, I’d argue that the answers will vary depending on which area of change you focus on. THE GLOBALIZATION OF CHANGE You’ll notice the theme throughout this edition of the Economic Outlook is the globalization of the U.S. healthcare industry. The fact is, we’re seeing change in where and how products are produced – and this is a change I’d say is not moving in the right direction. In the commodities markets, we’ve seen dramatic upticks in pricing for raw materials that are foundational to many healthcare products, including oil and cotton, largely due to increased demand in developing countries. In fact, growing demand in China and other Asian nations has led to the highest crude oil prices since 2008. EIA has raised its forecast for the average cost of crude oil to refiners to $105 per barrel in 2011. These are the current realities of the globalization trend. When we source from all over the globe, we’re at the mercy of everything from foreign demand to economic development swings to weather trends, all of which we in the U.S. have almost no control over. A more effective way to control volatility would

be better forecasting to anticipate demand and potential market dynamics that may affect pricing. And an equally strong argument may be made for seeking out domestic alternatives so that in the event of a pricing change, other options are available, potentially at a better price. But the issue of globalization affects more than just pricing. It can also affect the quality of patient care. For example, today more than 90 percent of all nutritional supplements, face masks, exam gloves, enzymes and amino acids are manufactured overseas. Even basic items are produced outside the United States. For example, China manufactures two-thirds of the world’s aspirin and 70 percent of its penicillin, and is poised to become the sole supplier within a few years. So if there was a global pandemic, whose population do you think would get the goods? I'm going to guess it would not be the U.S., or at least not in the quantity that would support our demand. We've already seen an example when the Olympics were held in Beijing and our hospitals struggled to get exam gloves. Manufacturer outsourcing strategies may cut labor and material expenses in the near-term, but there is a hidden price tag. Besides access, some of the countries to which we outsource have weak intellectual property protections and regulatory enforcement, making them safe havens for counterfeiters, whose knockoff goods threaten manufacturers and add upwards of $75 billion a year to our supply chain. There’s also a price for safety. From toxic toothpaste and pet food to counterfeit pharmaceuticals, some of these nations have poor safety records, exposing the U.S. healthcare sector to unprecedented risks. But is the healthcare industry actually promoting this type of behavior? We

continually see suppliers dictating demand, rather than the other way around, and we have done little to change this dynamic. Essentially, this creates pressure on manufacturers to make money by eliminating supply and production costs through offshoring, rather than developing products that satisfy real needs and capitalizing on savings based on demand-based volume. Sourcing to specification is a key strategy to curb this trend. It involves working with clinicians, documenting the product attributes that are medically necessary, and then working with manufacturers to create a product that only includes those features. We need to inject rationality into the marketplace by making better, more informed purchasing decisions that put the product’s end-user in the driver’s seat, factor in the cost of safety, and carefully consider the need for a diverse network of supply alternatives. In putting medical professionals in charge of design specifications, we can create products they truly want, based on clinical need. We can also be more predictive in forecasting when we need products to influence suppliers, providing them with more options on where to manufacture goods. And we can work with U.S. manufacturers to produce products to those specifications, get “no frills” alternatives on purchasing contracts for a price that competes with foreign products, and create a viable market for domestic goods that can increase corporate revenues and generate new jobs. IMPROVING QUALITY, ENHANCING EFFICIENCIES We are all aware of the change that is occurring through health reform. This change has magnified the need for health systems to safely reduce costs in areas that they may not have considered in the past. As hospitals prepare for the expansion of

care and possible reimbursement reductions, every product and service used for patient care should be evaluated to determine if the overall cost actually elevates care quality and safety, or if there is an offering of equal clinical efficacy at a lower price. Premier has placed a significant emphasis on this area, which we refer to as resource utilization. By pulling data from our quality and supply chain products, we are able to compare utilization with associated outcomes among hospitals. This offers the opportunity to identify savings without sacrifices to quality of care or safety. I’d like to highlight a few examples. After conducting a thorough review to identify evidence-based best practices, as well as alternative products and techniques that can be employed, a savings of more than $1 million across 10 member hospitals was identified by eliminating off-label use. We also identified minimal difference in the length of stay, readmissions and complications with on-label use. In another example, switching from a brand name drug to a generic equivalent could yield approximately $20 million in annual savings for Premier members. Again, both drugs are considered by experts to be safe, efficacious and good choices for treatment. And upon reviewing evidence-based results, there were no discernable differences in care outcomes, including occurrences of adverse effects and hospital admissions.

CHANGE WE DO BELIEVE IN Of course, at the end of the day, our focus always comes back to the patient. We have to understand the performance of products that are used on patients, and how effectively hospitals use those products. And we need to understand how effective those hospitals and products are on a national level. It is the responsibility of all of us – providers, manufacturers, suppliers – to guide this change. This involves working together to develop appropriate utilization practices, reduce unnecessary variation in product use, and bring to the table true innovation that will drive continued improvement. These are the changes that will not only provide additional efficiencies, but also improve patient safety. Because at the end of the day, if our mission and conscience don’t dictate that we focus on what this means for our patients, our bottom lines surely will.

Sincerely,

Mike Alkire President Premier Purchasing Partners

These examples clearly show that, in the absence of clinical superiority of one drug, procedure or device, it is prudent to evaluate usage patterns in order to choose the less expensive drug or product.

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G LO B A L I Z AT I O N ECONOMIC O U T LO O K

THE

LOBALIZATION OF U.S. HEALTHCARE

Leading supply chains focus on flexibility Globalization has forever changed the international competitive landscape. Over the last decade, healthcare organizations and their supply chains have become considerably more global and interconnected. In nearly every sector of healthcare, supply chains have been stretched farther than they have ever been stretched. It is estimated that between 1995 and 2007, the number of transnational companies more than doubled from 38,000 to 79,000, and foreign subsidiaries nearly tripled from 265,000 to 790,000.1 As firms have embraced just-in-time distribution processes, sought to eliminate redundancies, and become comfortable with the concept of single-source suppliers,

intercontinental transactions are now the norm. According to an IBM study based on conversations with nearly 400 supply chain executives worldwide, organizations “must make their supply chains more sustainable, flexible, and responsive through increased instrumentation, interconnection and intelligence.”2 Globalization has provided opportunities for many organizations to rapidly develop their product portfolios; leverage a broader network of customers, suppliers and technology; increase sales and revenue; and increase their margins. However, it has also brought with it a number of important economic and public health concerns.

Growing demand for healthcare services and supplies in emerging countries, geopolitical pressures abroad, and increased exposure to shocks and disruptions have all challenged the healthcare industry. During the H1N1 pandemic, demand for respirators and face masks far exceeded the available supply on hand in the U.S. The recent drug shortage crisis in America has been, in part, the result of quality issues with active pharmaceutical ingredients, of which 80 percent are estimated to be sourced in foreign markets. The articles that follow focus on the globalization of U.S. healthcare and its impact on the healthcare supply chain. 1 “World Investment Report 1996: Investment, Trade and International Policy Agreements.” United Nations.August 1996; “World Investment Report 2008: Transnational Corporations, and the Infrastructure Challenge.” United Nations. July 2008. 2. IBM Supply Chain Officer Study. “The Smarter Supply Chain of the Future.” January 2009.

Healthcare organizations have an imperative to understand the interdependencies inherent in their supply chains, and to examine their supply chain practices through a strategic lens focused on the public’s health.

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Healthcare Distribution Market Globalization: A tangible and growing impact on the U.S. supply chain Eric Coldwell, Managing Director, Robert W. Baird & Co. Inc. U.S.-based pharmaceutical and medical-surgical distributors are increasingly global operations, though the impact on the U.S. provider market is not well understood. The leading U.S.-based pharmaceutical and medical-surgical distributors – McKesson, Cardinal Health, AmerisourceBergen, Owens & Minor and PSS World Medical – will report revenue of

$307B in 2011, up 4 percent from 2010 due primarily to M&A as market volumes remain modest and generic pharmaceuticals and private label sales cannibalize revenue from higher-priced branded products. While primarily U.S. operations, these firms currently generate $13B in international revenue, with expectations for more ahead since the vast majority of the traditional U.S. market is consolidated. Further, as these firms leverage knowledge gleaned from

operating ancillary service and product lines outside the U.S., such as automation technologies, healthcare information technology sales, and consulting services, their comfort with global expansion will only increase. We believe that geographic expansion in traditional service areas will accelerate. Each of the Big Three pharmaceutical distributors operates beyond U.S. borders. For example, McKesson Canada supplies 40 percent of that country’s pharmaceuticals,

Yet these firms lack substantial revenue growth opportunity in traditional services within U.S. borders, due to past consolidation that limits prospects through M&A, multi-decade lows in new drug approvals, price erosion from generics and private label mix shift, limited population growth and low healthcare-seeking behavior due to the sluggish economy and challenging reimbursement and insurance trends.

Healthcare provider customers are beginning to think globally, with examples as far reaching as the Medco Celesio B.V. joint venture, Wal-Mart’s international footprint and rapid pharmacy expansion, and Tenet’s (subsequently derailed) pursuit of Australia’s Healthscope Ltd., just to name a few. International sourcing of generic pharmaceuticals is a major influence on the U.S. supply chain. According to a recent IMS Health report, 75 percent of U.S. prescriptions are filled with generics, yet these products represent just 22 percent of national pharmaceutical expenditures. Annual U.S. health system savings of more than $140B will be realized in 2011 and each 2 percent increase in generics utilization saves Medicaid alone an incremental $1B annually. Generics lower the overall cost burden on private, commercial and governmental payors, providing funds for coverage, reimbursement and economic stimulus that would be otherwise unavailable or that would cannibalize other spending. U.S. distributors, through multi-source programs and sole-source venues such as McKesson’s OneStop, AmerisourceBergen’s PROGenerics, and Cardinal’s SOURCE, contribute to overall savings through effective sourcing and compliance programs and through their scale and scope efficiencies. While international generic sourcing is a current profit driver, we cannot overlook the long-standing re-importation debate in the U.S. In our opinion it is not a case of if re-importation will be authorized, but when. Given the immense concerns about supply chain integrity and control, and the incredible logistics burden that will

come with re-importation, who better to facilitate the activity than the national pharmaceutical distributors?

ECONOMIC O U T LO O K

Distributors are flush with capital, with nearly $6 billion cash and equivalents at 2010-end and with an aggregate $3.5B$4.8B in free cash flow generation annually over the next five years. Despite massive share repurchase activity and rising dividends, these firms remain over-capitalized and shareholders will increasingly call for redeployment of low interest-bearing cash in the years ahead.

Suppliers trade globally and increasingly seek to standardize, centralize and globalize their service relationships. Further, maturation of emerging markets-based generics manufactures and low-cost med-surg suppliers will necessitate greater in-country exposure by distributors looking to capitalize on these opportunities.

The influence on healthcare providers and payors from distributors’ med-surg private label sourcing is the result of rapid international expansion. Brand manufacturers beware. Our children were born in a hospital using Cardinal Brands, during my last health screen the GP applied PSS Select ECG electrodes, and our son’s recent late-night visit to a MinuteClinic involved a McKesson Strep kit. The larger, publicly traded U.S. distributors will move $22.5B of medical-surgical supplies in 2011, the vast majority in U.S. borders and a growing percent from internationally sourced wholesaler “brands.” We estimate that these internal brands will represent between 15-22 percent of 2011 med-surg sales for Cardinal, McKesson and PSS, and growth will likely double the pace of sales for other suppliers. Sourcing is also moving beyond white-label and import/ reseller deals. Increasingly, distributors such as PSS are contracting directly with foreign factories from Mexico to China to Sweden, to make custom-designed lines. Conclusion: Distributors’ globalization efforts will increasingly impact the U.S. supply chain. Leading U.S.-based distributors generate $13B of international revenue today and will seek M&A in foreign markets to supplement flagging domestic growth and accentuate profitable growth through enhanced sourcing and broader channel partner relationships at home. Traditional Western manufacturers face growing direct competition from internationally sourced generics and private label medical-surgical supplies, forcing innovation and discounting to offset the economic challenge. Healthcare providers benefit from these trends through broader product selection at competitive rates and given the scale and scope efficiencies provided by sourcing globally through their domestic distribution partners.

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G LO B A L I Z AT I O N

and McKesson maintains a 49 percent interest in Mexican distributor Nadro. AmerisourceBergen is also a leading pharmaceutical and specialty distributor in Canada, following acquisitions such as Innomar, Access M.D., Rep-Pharm, Asenda, and Trent Drug. Cardinal brings pharmaceutical and medical-surgical commercial operations in Canada, Puerto Rico and, most recently and uniquely, China through the late November Yong Yu acquisition. Cardinal expects to “be making a number of small to mid-sized acquisitions” in China, and while AmerisourceBergen shows no interest in this market at present, it is eager to identify M&A targets – some of which may be ex-U.S. During 20092010 McKesson was rumored to be an interested party in European distributor PHOENIX, and is still considered a viable party to international M&A. The traditional med-surg distributors Owens & Minor and PSS aren’t materially exposed to commercial operations ex-U.S., yet O&M has expressed interest in Canada, and both firms’ international private brand sourcing mirrors the strategies of both Cardinal and McKesson. We believe global expansion is inevitable.

Building a Smarter Supply Chain Best practices and recommendations for pandemic preparedness Risk management is a fundamental building block of any supply chain strategy. Risks external to a supply chain, such as influenza outbreaks and natural disasters, often occur suddenly with disruptive effects that can last far beyond the event itself. This sentiment, coupled with a deepening realization that globalization leads to greater supply chain interdependence, has prompted many healthcare supply chain leaders to engage in smarter risk management and to develop best practices for pandemic preparedness.

This article provides an overview of pandemic preparedness and related supply chain best practices, with commentary from key supply chain executives and subject matter experts.

Does your organization have what it needs? PREMIER’S TOP 10 PANDEMIC PRODUCTS

> Beds and stretchers

> Face masks

> Environmental cleaners and disinfectants

> Hand hygiene supplies

> Exam gloves

> Isolation gowns

> IV tubing and solutions

> Morgue packs/ body bags

> Needles and syringes > Ventilators

“It’s time to realize the potential threats of outsourcing, and to be strategic about the supplies we import, and in what quantities. Although it is imperative that supply costs remain as low as possible, we can’t always assume that the global marketplace will be open for our business.” – Mike Alkire, president, Premier Purchasing Partners

HOW FAR ARE YOUR PANDEMIC PRODUCTS TRAVELING?

EXAM GLOVES

DISPOSABLE PERSONAL PROTECTIVE ATTIRE

China Malaysia Indonesia Thailand

China

SOAPS, LOTIONS AND WATERLESS HAND RINSES United States

SURGICAL AND ISOLATION MASKS Mexico China United States

ECONOMIC O U T LO O K

Premier recently surveyed contracted suppliers of pandemic products to gain a better understanding of their supply chain strategies and operations during times of unanticipated high demand. Beyond advancing insight into their manufacturing practices, survey respondents were asked to select the factors that are most likely to cause supply constraints. Such factors

could result in potentially significant, disruptive consequences for customers. Supply chain constraints Suppliers of pandemic products indicated that shipping or logistics delays; availability of raw materials; and changes in regulatory, FDA approval and inspection rates were their greatest concerns.

% % %

“ In 1997, nine out of 10 masks in America’s face mask supply were made in North Richland Hills, Texas; however, today nine out of 10 masks are made by foreign countries.”

53 49 33 Shipping or logistics delays

Availability of raw materials

Changes in regulatory or FDA approval and inspection rates

Represents the percentage of respondents who reported these areas as the most likely to cause supply constraints.

– Letter to the Secretary of the Department of Health and Human Services from members of Congress, December 2007

‘‘

The industry must wake up to the fact that things have changed – masks now come from China, Thailand, and Mexico instead of Texas, North Carolina, South Dakota, and Pennsylvania. In the midst of a global emergency is not the time to find out that one’s mask supply is half a world away or held up by a closed border.

’’

– Mike Bowen, executive vice president, Prestige Ameritech

ARE WE READY FOR THE NEXT PANDEMIC? Although the 2009-2010 H1N1 influenza pandemic was milder than expected, if another pandemic were to occur next year from an influenza virus that spreads more easily and has a high case fatality rate, would we be ready? Could we survive the disruptions in the global supply chain? We will need to build on our experiences with the H1N1 pandemic to ensure the

future resilience of our critically important supply chain. A disruption in the supply chain has the potential to threaten security, economic survival, and the well-being of our patients, the nation and the world. The following dialogues detail actions that both Premier members and contracted suppliers are taking to better prepare for such an event.

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G LO B A L I Z AT I O N

Which factors are most likely to cause supply constraints?

What are suppliers doing to ensure continuous product availability? While both short and long supply chains offer a number of advantages, it is critical that both excel at meeting customer needs. Shorter supply chains typically result in greater agility and responsiveness, shorter lead times, and lower transportation costs. Alternatively, longer supply chains

usually offer cost savings and the ability to better serve a global customer base. However, in the event of high, unexpected demand, specifically in the United States, the distance between point of production and point of consumption suddenly becomes a strategic concern.

Building a smarter domestic supply chain

Building a smarter global supply chain

Prestige Ameritech

Kimberly-Clark Corporation

Prestige Ameritech, the largest domestic manufacturer of surgical face masks in the United States, was formed to fill the vacuum created by the departure of the U.S. mask manufacturing community. The company manufactures all of its products in North Richland Hills, TX, and is committed to purchasing American-made raw materials. This makes Prestige Ameritech’s supply chain considerably shorter and more flexible than the majority of its competitors. Prestige Ameritech’s ability to quickly respond to demand changes was demonstrated during H1N1. According to Mike Bowen, executive vice president, “the company quadrupled its output by quickly building more automated face mask machines to meet demand.” The company’s ability to react quickly during demand spikes is complemented by the local labor pool. According to Bowen, “there are thousands of people in the vicinity of our facility who have worked here at one time or another. In global emergencies, we call on them to ‘staff up’ as we did with H1N1.”

Kimberly-Clark, a major manufacturer of face masks and exam gloves, serves customers across the United States and around the globe. According to Bill Delrow, leader of global customer management, “one of our responsibilities as a global company is to be a good steward to our customers.” The company fulfills this responsibility in several ways. When faced with a potentially long-term constraint, such as an influenza pandemic, the company pulls together a crossfunctional team to make sure all business units have a good understanding of Kimberly-Clark’s base business. Such a practice ensures, at a minimum, that base volume for current customers is met. Additionally, the team considers the location or region where the need is the greatest. According to Delrow, the company’s first priority in a pandemic situation is fulfilling orders for customers needing the product for daily use instead of for stockpiling purposes.

Bowen stated that the company remains competitive with other imports because it, “builds its own mask manufacturing equipment which minimizes the difference in labor costs between the United States and importers.” This sentiment was echoed by John Gaida, senior vice president of supply chain management at Texas Health Resources, who stated that as a rule, “U.S.-made products are more expensive due to labor but that some manufacturers, like Prestige Ameritech, have worked hard to reduce the price differential.”

Recent discussions with two of Premier’s contracted suppliers, Prestige Ameritech and Kimberly-Clark, highlight the measures each company has taken to maintain a flexible supply chain, thereby ensuring their customers receive the products they need when they need it the most.

Through its sourcing and manufacturing practices, Kimberly-Clark is able to maintain a flexible supply chain. The company sources many of its raw materials from North America and manufactures a significant amount of its pandemic related products in Mexico. This results in a supply chain that is shorter than companies with production facilities in Asia. Adding to the agility of the supply chain is Kimberly-Clark’s reactive capacity. This involves cross-training employees, upgrading assets, and increasing throughput of available production lines during times of unexpected demand.

ECONOMIC O U T LO O K

G LO B A L I Z AT I O N

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How are our members building a smarter supply chain? Although the majority of medical suppliers have plans in place to ensure optimal supply of their products, healthcare providers cannot solely rely on the actions of their primary supply chain partners. Considerable planning must also be done on the healthcare provider side, both at the facility and system level. One way in which healthcare providers can protect their supply chains from disruptions is to look beyond primary suppliers for vulnerabilities that can affect downstream activities. Research has demonstrated that only 7 percent of supply disruptions are caused by issues at first and second tier suppliers.1 Organizations with complex interactions and global interdependencies are only as strong as their weakest supply chain partners. According to John Gaida, senior vice president of supply chain management at Texas Health Resources, “we not only

work with our key suppliers, but also our primary distributor to help us plan for any pandemic situation that might come our way. We have selected key products we want on hand and quantities that are important for the day-to-day functioning of our 14 hospitals.” This practice was reiterated by Jim Olsen, vice president of materials management at Carolinas HealthCare System. According to Olsen, “their system strives to maintain strong working relationships with their key suppliers and primary distributor while also including an ‘unusual circumstance’ clause in all supplier contracts.” For both Olsen and Gaida, the location of a supplier’s manufacturing facility is taken into consideration when making purchasing decisions. Olsen stated that Carolinas HealthCare System would prefer to buy from U.S. suppliers whose shortened supply chains support U.S. manufacturing efforts. Gaida indicated

How can healthcare providers better prepare for the next pandemic event? With such a clear mandate for change, supply chain executives owe it to their organizations to reevaluate current pandemic planning strategies and initiatives. In a recent conversation with Dr. Robert Dunne, vice chief of emergency medicine at St. John Hospital and a member of the MI-1 disaster medical assistance team, several best practices for pandemic planning were shared. Dr. Dunne suggested that the topic of pandemic planning must be kept on the minds of financial decisionmakers within hospitals. According to Dr. Dunne, “the more disruptive the

emergency, the more seriously it is taken. Now that the threat of H1N1 has passed, pandemic planning is not always top of mind, especially as hospitals come under increased pressure due to reimbursement rate cuts and healthcare reform.” Dr. Roger Ray, executive vice president and chief medical officer at Carolinas HealthCare System, also believes that, “as the result of H1N1, hospitals and executive teams learned about the importance of planning for pandemic events.” As the champion behind the formation of Carolinas’ Corporate Command Center, Dr. Ray

that for Texas Health Resources, similarly to Carolinas HealthCare System, manufacturing location is always a concern, but often there is little choice. Gaida stated, “I would always choose a U.S.-made product if one was available and if it was of equal or better quality as determined by our clinical staff.” Of utmost concern for healthcare providers is the role that other countries can play in determining the availability of critical medical supplies. What would happen if those countries severely restrict or halt exports to the United States during a crisis? According to Olsen, encouraging suppliers to move more manufacturing back to the U.S. through one-on-one conversations is not effective. Instead, Olsen believes hospitals need to leverage the Premier alliance to join forces with other large systems, state governments and suppliers in an effort to stand behind the need for change. 1 Drakulich, Angie. "Predicting Gaps in the Supply Chain." PharmTech Talk. 17 June 2009. <http://blog.pharmtech.com/2009/06/17/predicting-gaps-in-the-supply-chain/>.

believes that the “orchestration of systemwide communication, dissemination of information, timely surveillance, and logistical support are all critical to ensuring success during a large-scale emergency.” Additionally, hospitals must be proactive, crafting and simulating a plan prior to an outbreak. Planning cannot begin once the disease is in its first stage. According to Olsen, “hospitals must have the right people and products in the right place at the right time. Employees must already be armed with the products and skill sets necessary to deliver high quality patient care.” Additionally, stakeholder engagement from physicians, nurses, pharmacists and clinical leaders is critical. Key decision-makers must have a direct

Finally, facilities must consider the inventory management practices implemented within their hospital. Organizations must learn to balance cost-containment efforts and “just in time” procurement strategies with a continued focus on risk management and mitigation approaches.

Are you ready? > Dr. Dunne believes, “we are the victims of our own success.” How has your view of the need and relevance for pandemic planning changed since the H1N1 outbreak? In your opinion, is pandemic planning more or less important among clinical and business leaders at your organization? > When was the last time your facility discussed pandemic preparedness or engaged in an exercise, such as a disaster response simulation? > What role can the Premier alliance and your organization play in helping you to prepare for the next pandemic event?

BEST PRACTICES AND RECOMMENDATIONS FOR PANDEMIC PREPAREDNESS INCLUDE: > Disaster response simulation models and scenario-based strategies for planning; > Global versus regional versus local procurement strategies and tactics; > Integration of risk management and mitigation approaches; > Key stakeholder engagement of financial, business and clinical leaders; > Optimization of inventory throughout all phases of pipeline activity, including pipeline inventory forecasting and analysis; > Price protection analysis; and > Shelf-level replenishment.

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ECONOMIC O U T LO O K

Dr. Dunne also recommends disaster response simulation models or role playing as an integral step in disaster preparedness, which Dr. Ray also believes is a very valuable exercise. In an effort to prepare for a large-scale emergency, Dr. Ray and his team of key stakeholders conducted an internal tabletop exercise which looked at constraints that challenge patient care optimization. The exercise assumed that essentially all scheduled or elective work went away in addition to major staff outages and early failing of

community support and first responders. Dr. Ray “believes a lot can be learned by any facility that takes the time and opportunity to work through a similar scenario.” Dr. Dunne also suggests that facilities have a strong vaccine program in place every year and a robust focus on the training of clinical staff.

G LO B A L I Z AT I O N

line of communication to the providers of front-line care.

Made in America A new competitive landscape for healthcare Warsaw, IN. Population: 13,000. According to Mitchell Roob, the state’s secretary of commerce, 35 percent of the world’s supply of orthopedic medical devices is manufactured here. Milwaukee, where GE Healthcare maintains X-ray and other imaging and scanning equipment manufacturing, is home to an estimated 11,000 healthcare related companies. Minnesota is thought to dominate the medical device manufacturing industry on a per capita basis.1 While many sectors of the healthcare industry, such as pharmaceuticals and commodity medical supplies, have moved their manufacturing offshore, the medical device industry still has a strong foothold in the United States. In fact, it is estimated that the U.S. accounts for more than 40 percent of the world’s production of medical devices.2 It is an industry that places much greater emphasis on the quality, safety and efficacy of products than the overall price. Domestic

manufacturing has enabled the medical device industry to maintain a much tighter locus of control on its supply chain. Furthermore, it is an industry that is well-suited for the benefits of domestic manufacturing, which support:3 > > > >

Complex, value-added products; Precision and exacting standards; Strict regulatory oversight; High dependence on research and development; and > Product customization and specialization.

the European regulatory process is quicker than that of the U.S. Additionally, the proposed medical device tax included in healthcare reform legislation may encourage some companies to move overseas as profit margins are impacted. Capital market constraints resulting from the economic downtown have also made it difficult for manufacturers looking to invest in expansions or for start-ups in search of venture capital backing. Given the current pressure on medical device manufacturers, it is important to

“We want to create and sell products all over the world that are stamped with three simple words: ‘Made in America.’ That’s our goal,” President Obama said last December. Despite all of this, pressure from regulatory agencies, consolidation in the industry, and rising overseas competition threaten the American presence of medical device manufacturers. The threat of rivals in Europe ensues, as it is well-known that

take a closer look at the role that manufacturing plays in the U.S. economy and the importance of domestic manufacturing for the U.S. healthcare market.

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Consider that manufacturing now accounts for approximately 12 percent of the U.S. economy. Fifty years ago, it accounted for approximately 30 percent.4 As America has shifted from a manufacturing economy to one that is fueled primarily by the services sector, it has shed millions of jobs. In fact, it is estimated that more than 6 million manufacturing jobs have been lost in the U.S. since 1988.5 The recent economic crisis further compounds the situation. While the U.S. economy appears to be emerging from the recession, the magnitude of the downtown has left substantial under-used

resources in labor and product markets. Policymakers have echoed the emphasis for a strong manufacturing sector as a way to rebuild the economy. The White House recently released “A Framework for Revitalizing American Manufacturing,” stating that “a competitive manufacturing base can help build a strong foundation for future job and economic growth in both manufacturing and services.”6 In recent months, President Obama has made his case for a reinvigorated manufacturing base. "We want to create and sell products all over the world that are stamped with three simple words: 'Made in America.' That's our goal," the president said last December. Manufacturing is and will continue to be an essential path for attracting investments, spurring innovation, and creating high-value jobs.

> Reducing the U.S. corporate income tax rate to match the OECD average would trigger new growth. By 2019, it could boost real GDP by $375.5 billion (2.2 percent), create an additional 350,000 manufacturing jobs, and increase total employment by 2.13 million. > Increasing the R&D tax credit by 25 percent and making it permanent could boost real GDP by $206.3 billion (1.2 percent), generate 270,000 manufacturing jobs, and raise total employment by 510,000 within a decade.

What investments and policies are recommended to encourage domestic manufacturing? Economic and tax policy changes could effectively stimulate the economy in the short term while positioning the nation for sustained higher economic growth over the long term. The U.S. corporate income tax rate is the second highest among countries belonging to the

Why is “made in America” important for the healthcare industry? Quality issues, shipment delays, high transport and inventory holding costs, decreased customer service levels, and protection of intellectual property are just a few of the reasons that some firms have chosen to move a portion of their manufacturing back to the United States. Additionally, long product delivery cycles

Organization for Economic Cooperation and Development (OECD).7 Below are two key findings as referenced by the Milken Institute’s recent “Jobs for America” report:8

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Why does manufacturing remain vital to America’s economy? Manufacturing remains vital to America’s economic prosperity. It enables the United States to precipitate an export-driven economy, whereby strong local economies are supported by regional competitiveness. It provides jobs for millions of Americans, and it enables firms to protect their intellectual property and maintain greater control over supply chain quality and flexibility. However, in the last few decades, domestic manufacturing has been in steady decline.

from offshoring have left many companies less responsive to consumer demand and less flexible in their supply chains. Some companies, such as Philips, are building a supply chain around the customer. Consider Philips’ warehousing and distribution strategy. Whereas several supply chains previously served the needs of various product lines, the firm has recently adopted one common distribution platform per region, which is much more customer-centric. Enabling more effective data integration and forecasting accuracy, the end result has been an increase in sales for the company.9 Additionally, domestic manufacturing places a continued focus on basic R&D which expands the knowledge base, innovation, and commercial development. Intellectual property (IP) should be recognized as one of America’s competitive strengths and should be defended at all levels, domestically and globally. U.S. IP is worth between $5 trillion and $5.5 trillion, yet the continuing trade in counterfeit products results in the loss of hundreds of thousands of jobs annually. According to Martin Van Trieste, the vice president of quality at Amgen, the counterfeit drug business has become increasingly attractive for criminals because the regulation that is currently in place for this type of activity is not very stringent. He estimated that if a counterfeiter invests $2,000 in faking a DVD, he can turn that into $20,000; if he invests $2,000 into counterfeiting cocaine, he can turn that into $200,000. However, if he invests $2,000 into faking a pharmaceutical drug, that investment can be turned into $2 million. While the profit potential for counterfeiting pharmaceuticals is high, the punishment for these types of

activities is less severe than for selling illegal drugs such as cocaine.10 In healthcare, where patients require high quality, safe, and readily available supplies and drugs, it is important that organizations implement a total cost model that considers the safety, reliability and integrity of the supply chain. Johnson & Johnson, which faced a substantial recall of children’s Tylenol and other over-the-counter medicines, recently reorganized and revamped its manufacturing practices. The company is creating a new position reporting directly to the chief executive to ensure quality production across the company and is refitting several of its domestic manufacturing facilities. In a statement made last fall, Chief Executive Officer William Weldon stated, “The people who use our products are our first priority, and we’ve let them down.”11

References: 1.Miller, Matt. “Revisiting manufacturing.” The Deal Magazine, 8/13/10 http://www.thedeal.com/newsweekly/features/cover-stories/revisiting-manufacturing.php (accessed 2/15/11). 2.Miller, Matt. “Why medical devices are made in America.” The Deal Magazine, 8/13/10 http://www.thedeal.com/newsweekly/features/why-medical-devices-are-made-in-america.php (accessed 2/15/11). 3.Ibid 4.http://www.nam.org/Resource-Center/Facts-About-Manufacturing/Landing.aspx (accessed 2/15/11). 5.(http://www.nucor.com/voice/Issues/Jobs/ (accessed 2/15/11) 6.Milken Institute, “Manufacturing 2.0: A More Prosperous California,” June 2009. 7.Deloitte, “2010 Global Manufacturing Competitiveness Index”. June 2010. 8.Milken Institute, “Jobs for America: Investments and policies for economic growth and competitiveness,” January 2010. 9.KPMG International, “Global Manufacturing Outlook: Relationships, Risk and Reach,” September 2010. 10."Interview with Martin van Trieste, founder of RX-360 Consortium." Telephone interview. 6 July 2009. Also accessed at http://securepharmachain.blogspot.com/2009/11/counterfeit-pharmaceutical-r oi.html 11.Rockoff, Jonathan D. “J&J to Revamp Manufacturing, CEO Says.” The Wall Street Journal. August 18, 2010 (accessed August 18, 2010).

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Daniel R. DiMicco, Chairman and CEO of Nucor Corporation How has the healthcare industry been impacted by offshoring trends and shifts in manufacturing? When I go to my pharmacy and my pharmacist tells me that my medications are in short supply and they have to change manufacturers three to four times just to get the drugs on hand, I’m left wondering how much of that is due to the offshoring practices of the pharmaceutical industry. What the healthcare sector is experiencing is what every other sector is experiencing. They just can’t compete from operations here with the cost advantages and massive incentives that come from manufacturing abroad. Nucor believes that the United States’ economic strength and competitiveness depends on a healthy, growing manufacturing sector. How are we able to restore the manufacturing sector in the United States? What investments in infrastructure and tax incentives are needed? Investments made in offshoring manufacturing to emerging countries in Asia and Latin America far outweigh the number of investments that have been made on the part of U.S. firms to bring manufacturing capabilities back to the United States or build them here to begin with. When business owners in the United States open their doors in the morning, they are automatically at a cost disadvantage of 40 percent or more – resulting from currency manipulation, foreign barriers to entry, and state-owned competition and procurement preferences. We just can’t compete against foreign governments. And these trade distorting practices are not just limited to the United States. They are occurring on a global level among many other developed nations. The current policies in place are ones in which the burden is placed on us, not our competitors. It is a system that encourages higher corporate taxes in the United States than most elsewhere and where companies producing here and desiring to export

face high taxes, and burdensome and costly regulations here, and high tariff penalties abroad. In order to be globally competitive, we need to develop tax incentives that encourage strong local economies and that establish the U.S. as a leader in all manufacturing disciplines. Until our government puts a tax system in place that is at least equal to, if not more advantageous than, what other countries offer and allows for the repatriation of foreign earned income without tax penalties, manufacturing will continue to move, remain and grow abroad. What trade remedies should the U.S. support to encourage an export-driven economy? The overall issue that we need to focus on as a country, including political and business leadership, is to undo the policies that have made us significantly less competitive as a nation. For example, we need to hold countries accountable for the trade agreements that they signed in the 1990s. Unless we force the end of trade mercantilism, stop allowing state-owned and advantaged enterprises from competing without penalties with private companies, and continuing their predatory trading practices, we will not have a dynamic, growing manufacturing sector that will get people back to work in large numbers here in the United States. Describe how currency manipulation on the part of China has enabled the country to gain an unfair advantage in global trade. Currency manipulation has enabled China to maintain an export-driven economy, whereby exports are cheap and imports are expensive. They sell their own goods and services essentially at a discount, but do not buy or allow their consumers to buy imported goods, by virtue of the higher prices that result from the undervalued currency (manipulation). Until the Chinese government makes the decision to let its currency float freely, China will continue to experience severe inflationary pressures by preventing the purchasing power of the Chinese citizens from rising.

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A Conversation with...

Where in the world? Manufacturing origin of medical supplies and equipment used in the United States >>> AN ANALYSIS OF IMPORT AND EXPORT TRADE DATA AND TRENDS IN GLOBAL MANUFACTURING LOCATIONS In recent years, product shortages and quality concerns involving products manufactured outside of the U.S. have garnered significant media attention. A cursory review of any supply cabinet usually turns up products manufactured all over the world. How much of what we use in the healthcare setting is “made in America?” And how has the ratio of U.S. manufactured products to imported products changed over the last decade? A review of Census Bureau trade data shows that while the majority of medical supplies and equipment used in the U.S. are produced in the U.S., that share has been steadily declining. A growing portion of the products used in healthcare are likely to be manufactured in Mexico, Ireland or China. This article will provide a brief overview of the global medical supplies and equipment market, will analyze the trade data that documents the share of imports in U.S. consumption, and will identify the countries exporting the greatest amount of medical supplies and equipment to the U.S. The global market for medical supplies and equipment The United States is the world’s largest market for medical supplies and equipment with consumption estimated at $88 billion in 2009. The U.S. represents approximately 50 percent of global spend in this market. Other large markets are the European Union (30 percent) and Japan (20 percent).1 While China and India currently represent a small share of the global market, their share is growing rap-

idly due to increasing demand from large populations and a developing middle class, and increased focus from governments on improving healthcare systems. The U.S. is also the world’s largest producer of medical supplies and equipment. The U.S. International Trade Commission

share of global medical manufacturing has declined in recent years, particularly in lower tech product segments. One of the key reasons for the decline in the U.S. share of global manufacturing is the increased propensity of U.S. multinationals to move production to offshore

Definition of medical supplies and equipment For purposes of this article, medical supplies and equipment include products in the following North American Industry Classification System (NAICS) segments: > Electromedical and Electrotherapeutic Apparatus Manufacturing (334510) – includes magnetic resonance imaging equipment, medical ultrasound equipment, and pacemakers. > Irradiation Apparatus Manufacturing (334517) – includes irradiation apparatus and tubs for medical diagnostic and medical therapeutic evaluation. > Surgical and Medical Instruments (339112) – includes syringes, hypodermic needles, catheters, surgical clamps, and thermometers. > Surgical Appliance and Supplies (339113) – includes orthopedic devices, surgical dressings, surgical sutures, gloves, hospital beds, and operating room tables. A complete listing of items found in each NAICS segment is available at www.census.gov/naics. This article excludes in vitro diagnostic substances and devices (325413) and dental equipment (339114), which are two smaller segments sometimes referenced as part of the medical supply or device market.

estimated that the U.S. share of medical manufacturing was 50 percent in 2005. The United States is recognized for its “ability to continually design, innovate, and place leading-edge, high technology medical devices in the U.S. and foreign markets.”1 However, the United States’

plants. U.S. headquartered companies have moved production of many commodity products to Latin America and Asia in an effort to reduce costs and remain competitive on price. In addition, U.S. multinationals have shifted production of many high-tech device products and

ECONOMIC O U T LO O K

2009 U.S. medical supplies and equipment consumption - $88 billion

Surgical Appliance and Supplies (US Mfg) Surgical Appliance and Supplies (Imports) $22.6 $21.9

The U.S. market for medical supplies and equipment Domestically manufactured products make up the largest share of U.S. consumption of medical supplies and equipment. While products manufactured in the U.S. still account for a majority of sales, this share has declined by 9 percent in the past seven years. In 2009, 69 percent of the medical supplies and equipment used in the U.S. were manufactured in the U.S., down from 76 percent in 2002. The only product segment where U.S. consumption of imported products is higher than consumption of U.S. manufactured products is irradiation

Surgical and Medical Instruments (US Mfg) Surgical and Medical Instruments (Imports)

$14.2 $8.6

Electromedical Apparatus Manufacturing (US Mfg)

$9.0

Electromedical Apparatus Manufacturing (Imports)

$7.0 $1.9

$3.1

Irradiation Apparatus Manufacturing (US Mfg) Irradiation Apparatus Manufacturing (Imports)

Source: Premier analysis of Census Bureau data including the Annual Survey of Manufacturers and U.S. International Trade Statistics. Note: Offshore production of U.S. headquartered companies is included in U.S. imports.

apparatus manufacturing. The irradiation apparatus manufacturing category has the highest share of imported products at 63 percent. Germany is the dominant exporter, followed by the Netherlands and Japan. U.S.-based manufacturers in this

category face substantial competition from Siemens (Germany), Philips (Netherlands), and Toshiba (Japan). The two largest medical supplies and equipment product segments, surgical

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equipment to global centers of excellence in the European Union and Switzerland. Locations in the European Union offer highly skilled workers, low corporate tax rates, and proximity to the European market.

and medical instruments, and surgical appliance and supplies, make up 70 percent or $62 billion of the $88 billion U.S. market for medical supplies and equipment. In these two categories combined, U.S. manufactured products represent nearly 70 percent of sales. These product segments are very broad and include commodities as well as higher tech devices. It is in these categories that we see the growing strength of Mexican, Irish and Chinese exports to the United States. The compound average growth rate of all U.S. imports exceeds the compound average growth rate of U.S. manufactured products by two times in the medical instruments segment, and by four times in the surgical appliance segment.

manufacturing. China’s exports to the U.S. in the surgical appliance segment grew at a CAGR of 20 percent since 2002.

the world’s 25 largest medical device companies and is a popular manufacturing location for U.S. multinationals.

China’s rapidly evolving manufacturing industry and focus on high-tech manufacturing may enable additional production of complex medical devices in the near future. Gordon Pan, a partner with Baird Capital Partners specializing in healthcare, stated that China is “still in the evolutionary stage” of medical manufacturing. However, “Every time I go to China, I find the pace of change is phenomenal. There’s no question that China will obtain that goal of high value-added manufacturing.”2 To reach that goal, China will need to work to

Ireland offers one of the lowest corporate tax rates in the world, with a standard rate of 12.5 percent. Ireland also offers the benefits of a common language, a highly educated workforce, and proximity to European markets. These factors have enabled Ireland to successfully build an internationally recognized medical device cluster encompassing manufacturing and research and development capabilities. It is estimated that 50 percent of the medical device firms located in Ireland also conduct R&D in Ireland.1

2009 U.S. medical supplies and equipment imports

Mexico 17%

Ireland 15%

All Other 41%

Germany 9% Japan China 5% 8% Switzerland 5%

Source: Premier analysis of Census Bureau data including the Annual Survey of Manufacturers and U.S. International Trade Statistics. Note: Intra-firm imports of finished products or parts may skew country level import detail. No data source exists to carve out intra-firm transactions at the product segment level.

Highlights of key trading partners CHINA China’s growth as an exporter has been led by commodity products. China’s low labor wages, less restrictive environmental regulations, and incentives for foreign direct investment have made them a powerhouse in the arena of low-cost

overcome concerns about quality standards and intellectual patent protection. IRELAND The largest exporter in the surgical appliance category is Ireland. Ireland’s exports have grown at a compound average growth rate of 18 percent over the last eight years. Ireland is home to 15 of

MEXICO According to the U.S. import statistics analyzed for this study, Mexico is the largest exporter of medical supplies and equipment to the United States. “Large U.S. hospital supply companies began substantive assembly and manufacture in Mexico in the 1970s. They benefited from relatively lower wages and from preferential duty treatment provided by both the United States and Mexico in the “maquiladora” program. Since that time, even as its wages and production costs have gone up, Mexico has advanced itself to become an outsourcing partner with higher technology U.S. firms, assembling such sophisticated products as selfexpanding and drug-eluting stents.”1 Proximity to the U.S., a stable political environment, and development of a medical manufacturing cluster in the Baja peninsula has supported Mexico’s continued growth in medical manufacturing. “Baja California – especially the city of Tijuana – is beginning to emerge as a desirable medical device manufacturing center. Tijuana’s outstanding system of universities and colleges provides a steady supply of highly qualified workers for the device community, and companies are taking advantage; more than 60 medical

ECONOMIC O U T LO O K

success in building a global center of excellence in medical manufacturing. Hayes states, “Ireland’s track record, quality and regulatory environment, and technology infrastructure has allowed it to stay at the forefront of this growth, and it is now a leading center for the development and manufacture of innovative high-value products and services in these areas. For example, Ireland is the leading global center for the manufacture of drug-eluting stents, with 75 percent of the world’s supply manufactured there. In addition, many companies use Ireland as a reliable pathway for securing European regulatory approval for new products. This generally allows for faster market access in Europe, where companies can generate revenues while awaiting FDA approval for the U.S. market.”

device firms currently operate in the Tijuana area.”3 Mexico faces increased competition from other Latin American countries like Costa Rica and the Dominican Republic where lower labor costs provide additional cost savings for labor intensive manufacturing operations. Conclusion The share of imports in domestic medical supplies and equipment consumption

Product segment

will likely continue to grow in years to come as medical manufacturers seek to reduce costs and gain footholds in the global market. As countries like China and Mexico develop manufacturing expertise and a strong local labor base, they will continue to move upstream in manufacturing, making more technologically advanced products and participating in R&D.

Imports as a % of total market (average 2008-2009)

CAGR U.S. mfg. products consumed in U.S. (2002-2009)

References 1.United States International Trade Commission. “Medical Devices and Equipment: Competitive Conditions Affecting U.S. Trade in Japan and Other Principal Foreign Markets”. March 2007. 2.Miller, Matt. “Why medical devices are made in America.” The Deal Magazine, 8/13/10 http://www.thedeal.com/newsweekly/features/why-medical-devices-are-made-in-america.php (accessed 2/18/11). 3.Crawford, Mark. “Steady as She Goes”. Medical Product Outsourcing, April 2008. http://www.mpo-mag.com/articles/2008/04/steady-as-she-goes (accessed 2/20/11).

CAGR imports consumed in U.S. (2002-2009)

Largest share of U.S. imports

Electromedical and Electrotherapeutic Apparatus Manufacturing

33%

5.0%

6.5%

Ireland Germany Mexico Japan

Irradiation Apparatus Manufacturing

63%

-3.7%

5.8%

Germany Japan Netherlands France

Surgical and Medical Instruments

30%

5.9%

11.7%

Mexico Ireland Germany Switzerland

Surgical Appliance and Supplies

28%

3.3%

13.0%

Ireland China Mexico Malaysia

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Paraic Hayes, vice president, life sciences executive with Ireland’s Industrial Development Agency, explains that a number of factors have enabled Ireland’s

P E R S P E C T I V E S ECONOMIC O U T LO O K

D BEHIN

THE

NUM

BER$ Trends impacting our members In an effort to understand the impact of economic and industry trends on our membership, Premier surveyed healthcare leaders across the country to obtain their insights on priorities and challenges impacting their organizations in the next year. The Economic Outlook member survey yielded a wealth of perspectives on the key objectives of the Premier healthcare alliance. Respondents indicated that expense reduction and operating margin improvement, reimbursement reductions, and investments in information technology are top financial priorities facing healthcare leaders.

Top Financial Priorities Facing Healthcare Leaders in 2011 Expense reduction and operating margin improvement

61.1% 11.4%

Potential reductions in reimbursement

7.9%

Investments in information technology Revenue cycle enhancements

5.0%

Access to capital

4.0%

Supply chain management improvements

4.0%

Other (please specify)

2.9%

Mergers & acquisitions among healthcare providers

1.8%

Favorable managed care negotiations

1.7%

Mergers & acquisitions among medical suppliers

0.2%

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Leaders believe that commodity prices, healthcare information technology, and patient safety initiatives are the top factors that will significantly impact their organizational supply chains. OF THE ITEMS LISTED BELOW, WHICH DO YOU EXPECT WILL HAVE THE GREATEST IMPACT ON YOUR ORGANIZATION'S SUPPLY CHAIN OVER THE NEXT TWELVE MONTHS? Commodity prices and the availability of raw materials

30.3% 21.7%

Healthcare information technology 13.0%

Patient safety / infection prevention initiatives 8.4%

Medical supplies industry consolidation Comparative effectiveness research

7.8% 6.9%

Specialty pharmaceutical expenses Other (please specify)

4.6%

Data standards and data integration

4.3% 3.0%

Pharmaceutical patent expiry

When asked to quantify the change in their capital budgets since last year, 72 percent of respondents indicated that capital budgets for 2011 remained flat or increased, as com-

pared to 28 percent who indicated a decrease in capital spending. Overall, capital budgets for 2011 have increased as compared to 2010.

CHANGE IN CAPITAL BUDGET SINCE LAST YEAR

Percentage of respondents

■ 2010 30% 25% 20% 15% 10% 5% 0% Decreased by 30% or more

Decreased by 10-29%

As capital budgets expand, Premier alliance members expect to make the largest capital investments in infrastructure, IT and telecommunications, and imaging equipment in the next 12 months.

■ 2011

Decreased by 1-9%

Unchanged

Increased by 1-9%

Increased by 10-29%

IT & Telecommunications

34.5%

Infrastructure (construction) Imaging equipment

Increased by 30% or more

29.4% 10.1%

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& QA

A view from the top:

How Premier's financial leaders are realigning priorities amidst reform and recovery?

ECONOMIC O U T LO O K

What are the top factors that you believe will impact your organization’s supply expense in the next 12 months? There is a continuous pressure to safely reduce supply chain costs, and it’s that much more magnified in today’s economic and reform environment. To address these factors, we must first off continue with the basic “blocking and tackling,” and we have been working very well with Premier to do so. With Premier’s assistance, Banner achieved over $40M in savings in 2010. One of the projects involved changing our approach to orthopedic total joint implant contracting. Banner moved to a one-price capped approach. We now pay one price for a total hip and one price for a total knee, which greatly simplified the process, reduced costs, and aligned incentives. We highly recommend that every hospital move to a one-price payment system for orthopedic total joint implants. As Medicare reimbursement reductions are being anticipated, what steps are you taking to ensure that charges are captured appropriately and that you are getting the maximum revenue reimbursement for services provided? We have wrapped our revenue cycle processes pretty tightly with layers of review to ensure correct documentation and coding. For instance, looking at charge capture performance within cath labs to make sure coding and capturing is correct. We are also following up on patient transfers using claims editors and second-level reviews. It amazes me the amount of money we put into the revenue cycle just to make sure we get properly reimbursed, but these steps are a necessity. What are some smart cost-cutting measures that you have recently implemented? In 2009, Banner introduced the “Fine Idea Program.” Peter Fine is our president and CEO. The program encourages employees to suggest ways to reduce costs via a hotline. It has been very successful. We’ve had thousands of suggestions, a dozen of which have been implemented. We expect to experience the benefits of these later this year. We have also embarked on a number of green initiatives which serve the purpose of both saving money and having a positive environmental impact. For instance, despite having electronic medical records, Banner consumes 206 million pieces of paper every year, with an annual cost of more than $11 million. One of our cost improvement projects is to reduce or eliminate printing, which will save paper, toner costs, handling costs, storage costs and shredding cost. What is being done to control costs from a physician preference (resource utilization) perspective? What are some of the physician (re)alignment strategies that you’ve employed to identify and implement savings opportunities? We are focusing on resource utilization to change physician preference and normal daily utilization patterns where appropriate. We have seen some traction specific to

surgical packs, using clinical data to produce granular information for physicians and clinicians to show how a lower cost pack produced the same quality outcomes as one that cost more. Premier has provided a full-time employee to help us further identify additional resource utilization opportunities. As a part of our clinical infrastructure, we implemented clinical practice groups that bring medical practitioners together to share best practices on how to most appropriately treat patients. From a supply chain standpoint, we examine which devices have produced the best outcomes, and what suppliers offered the devices at the best price. We have been pleasantly surprised at the willingness of clinical practitioners to come together and share information for the greater good of the overall organization. What HIT investments have you made or do you plan to make in the next one to three years? Describe the investments and their projected benefits for the organization. We have computerized physician order entry live in all but five of our 23 hospitals, with orders taken in the 90 percent range. The expectation is that we’ll be live in the remaining five hospitals shortly. And we are currently deploying electronic medical record systems for our medical groups. About half of our 800 doctors are on it.

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Dennis Dahlen Senior vice president of finance/chief financial officer Banner Health, Phoenix, AZ

>>>

A view from the top: How Premier's financial leaders are realigning priorities amidst reform and recovery?

Katherine Arbuckle, CPA Executive vice president and chief financial officer Bon Secours Health System Inc., Marriottsville, MD What are you working on going forward to grow the bottom line? Our primary focus has been on variable costs related to redesigning clinical processes, or what we call Clinical Transformation. We’ve organized dozens of teams of clinicians and financial experts throughout our system to work together to reduce costs through improvements in quality processes, and the results to date have been significant. In our fiscal year 2010 we saved approximately $38 million through cost reductions specific to, among other things, smarter, more efficient drug use such as moving patients from IV to oral antibiotics; reducing hospital-acquired conditions and complications; and redesigning care processes where our physicians have determined appropriate evidence-based clinical pathways – for example, the appropriate amount of blood needed for a heart surgery patient. It’s about being smarter around how to use resources, all the while maintaining and improving our high quality outcomes. And these are hard green dollars with approximately two-thirds falling to the bottom line after revenue reductions are considered. We are currently organizing new efforts to reduce fixed costs as well. However, these efforts are not as mature as our methods and momentum surrounding Clinical Transformation. What HIT investments have you made or do you plan to make in the next one to three years? We continue to move forward with EMRs in our hospitals and in the physician practice offices. We plan on being fully implemented in 2013 to qualify for government stimulus funding. We also launched a patient portal as a part of our ConnectCare program, which we consider to be critical to engage patients in achieving Clinical Transformation across BSHSI. To date, the portal has allowed 24,000 patients we serve to interact electronically to communicate with their physicians, schedule appointments, obtain lab test results, prescriptions and more. It’s a way for our patients to connect with us faster and in more comprehensive ways while avoiding unnecessary trips to the hospital and other care settings. This is an example of the new ways we are caring for our patients by leveraging critical clinical information to transform how we deliver care. What trends do you foresee for your organization and for the hospital industry as a whole? Both inpatient and outpatient volume will continue to be a challenge due to the economy and government and private payor reform provisions. But clinicians are working harder than ever to eliminate unnecessary procedures and treatments, a positive byproduct of volume reduction. Through reform, times will continue to be tight as Medicare cuts loom, so there will be ongoing attention placed on reducing both variable and fixed costs without sacrifices to quality.

What quality and patient safety initiatives are you implementing or expanding upon in the next one to three years? We are preparing to expand our accountability for the health and wellness of patients. Although our mortality results are well below benchmark, we will continue to push improvement

there. Likewise, with our complication rates, but we want to reach zero. Readmissions will be a major focus area – again we are doing well, but with our expectation of providing care coupled with reform provisions, we need to be better. Participation in Premier’s QUEST® collaborative will continue to support us in making enhancements in these areas. Our Clinical Transformation efforts will continue to demonstrate high quality at lower cost. We expect to expand and demonstrate our care management capabilities as we organize accountable care organizations and are actively participating in Premier’s Accountable Care Implementation Collaborative. Our focus is physician collaboration to improve quality while reducing costs, not only within the four walls of the hospital but also across the continuum to include pre- and post-hospital care. The concept of bundled payments with payors is another area that warrants much attention. Whether it’s accountable care organizations, bundled payments, or other elements of assuming accountability for patient health or recovery, we will be working with payors to come to develop new models that equitably share both the risk and benefits of these new accountabilities.

>>>

What are you working on going forward to grow the bottom line? We are placing a major focus on quality and efficiency enhancements. For instance, we started an inpatient hospitalist program with a goal of ensuring quality and efficient care. We’re focusing on, among other things, reducing lengthof-stay and readmissions. Revenue enhancement is another key area – specifically, revenue cycle and point of service collection to help front-end employees with reimbursement. We need to ensure appropriate organizational processes and systems are in place to streamline this process.

We have also enhanced our focus on telemedicine, having developed a program allowing our patients to remain close to home when receiving certain types of care. This also allows us to retain revenue by treating more patients within our system. What are smart cost-cutting measures that you have recently implemented? Our purchasing department is working diligently to achieve as much savings as we can out of the supply chain. Membership in the Premier alliance has been essential. We’re using MySpend™ to ensure vendors are in compliance with supply costs. And we joined the WNC Health Network to receive best tier pricing and reduce healthcare costs. In fact, we documented savings of nearly $610,000 in our last fiscal year.

As the national economy improves we expect to see an enhanced competition for clinicians. Our concern is that physicians and nurses will become scarcer in the more rural areas like ours as we can’t offer the same financial incentives as larger communities. There will be an ongoing need for improving physician alignment, whether employed or affiliated. We do own many practices in the area, and we’re starting to look at bundling of services across our system to improve performance, and reduce waste and variation. With better communication across our acute and post-acute care sites, we can more efficiently connect care and keep our usage patterns constant.

What HIT investments have you made or do you plan to make in the next one to three years? We have made significant investments in our IT capabilities over the last decade. Our acute care facility is fully live with electronic medical records and computerized physician order entry, so we will be eligible for meaningful use reimbursements. We’re very well-positioned in this arena, especially as a rural facility. Our focus now is to standardize electronic medical records on the non-acute side. And as our telemedicine program expands, we’ll begin to incorporate new audio and visual technologies. What trends do you foresee for your organization and for the hospital industry, as a whole, in the next three to five years? I think most of us would agree that, due to the economy and reform, it has never been so hard to plan for the future within this industry! But we’re doing our best to prepare for Medicare cuts across the board. And we’re also focusing on transitioning from a fee-for-service to a value-based purchasing environment. No matter what happens with reform in D.C., we have been and will continue to focus on reducing readmissions and other types of harm to improve overall quality and patient satisfaction.

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Kenneth W. Libby Jr., FHFMA, CPA Vice president of finance and chief financial officer Community Memorial Healthcenter, South Hill, VA

P E R S P E C T I V E S

& QA

Navigating the Drug Shortage Crisis in American Healthcare I. What is the nature of the problem? The frequency and impact of drug shortages have risen to critical levels, more than tripling since 2005, and affecting all segments of healthcare (Figure 1). 1 In 2010, over 240 drugs were either in short supply or completely unavailable and over 400 generic moieties were backordered for greater than five days.2,3 In most instances, these did not progress to critical shortages, but point to instabilities in the supply chain that cause national concern. Many of the drugs identified in 2010 have remained unavailable or in short supply in 2011.2, 4, 5

Seventy-seven percent of drugs in short supply in 2010 were sterile injectable products, critical in the acute care setting.6 Recent media coverage highlights the plight of patients and physicians faced with shortages for cancer drugs, anesthetic agents, and critical care medications that have contributed to delays in treatment and surgery, or changes in care plans. Drug backorders

cause patients to receive substitute therapies that add expense to patient care. Recent drug shortages have repercussions beyond traditional use. Thiopental, used for anesthesia in select patient populations and for lethal injections was in short supply.7,8 In January 2011, the remaining manufacturer of thiopental in the United States discontinued the product.9 The

Coleen Cherici, MBA, RPh, director, pharmacy consultant Jerry Frazier, PharmD, director of Center for Evidence-Based Pharmacy Practice Marv Feldman, MS, RPh, managing principal, senior director, medication management Bruce Gordon, PharmD, principal, pharmacy consultant Christina A. Petrykiw, PharmD CDE, clinical pharmacy specialist Wayne L. Russell, PharmD, FASHP, senior director, pharmacy Jay Souza, RPh, Director, pharmacy consultant

Food and Drug Administration (FDA) allowed temporary importation of thiopental. European countries are refusing to export the medication to the United States because they oppose the death penalty. 9,10 Understanding this crisis requires a review of several forces that have all concurrently converged to develop a significant change in business as usual in the American pharmaceutical market.

250

FIGURE 1:

Newly Reported Drug Shortages (2005-2010)

200 150 211

2 00 5

2 006

129

149

2 00 7

2 00 8

100

166

50 0 20 0 9

201 0

Source: Drug Information Service, University of Utah, 2010

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II. Why are these shortages occurring? Many trends contribute to the crisis, including quality of active pharmaceutical ingredients (APIs), drug recalls, industry consolidation, offshore production, and just-in-time inventories, among others. Recent regulatory and financial pressures further compound the problem. Raw material quality issues At least 42 percent of sterile injectable drug shortages in 2010 were due to product quality issues such as presence of particulates, microbial contamination, newly identified impurities, and stability changes. Nine percent were due to issues with raw materials and 5 percent were attributed to the shutdown of a manufacturing site.6 Foreign markets are the source for as much as 80 percent of the raw materials required to manufacture pharmaceuticals. The market for Chinese APIs halved to $16 billion in 2010 due in part to global pharma’s wariness over quality problems with Chinese APIs, exemplified by contamination of the heparin supply in 2008.11 Disruptions in the manufacturing processes increase financial burdens placed on manufacturers to ensure the quality and integrity of product ingredients. Manufacturer financial decisions Pressures are mounting to offset profit reductions resulting from patent expirations, healthcare reform, and investments related to FDA regulatory compliance for older products. Manufacturers are delaying or discontinuing investments, thereby

impacting product availability. At least 18 percent of sterile injectable shortages in 2010 were due to product discontinuations. Manufacturers are not required to report plans for product discontinuations to the FDA unless they are the sole manufacturer of a life-supporting or lifesustaining medication or a medication used to prevent a debilitating disease or condition. Early notification, even with these limited requirements, prevented at least 24 product shortages in 2010.6 Enforcement of FDA standards and regulations The FDA requires manufacturers to abide by current good manufacturing processes (cGMPs) to avoid regulatory action. The cGMPs are updated periodically. 12 Although the FDA reserves the right to inspect all manufacturing plants, insufficient resources have resulted in the FDA’s riskbased approach in deciding which factories are inspected in a given year.13 Furthermore, the FDA’s Unapproved Drug Initiative, launched in 2006, mandates submission of a New Drug Application containing clinical trial data to prove the safety and efficacy of products that were

brought to market prior to more stringent approval processes.14 Many of these products are now generic. High costs have led some manufacturers to cease production rather than invest to meet requirements and regulatory user fees inherent in the drug approval process. Other suppliers of the generic entities may not be able to respond to the increased market demand. While the FDA’s vigilance of cGMPs and actions against unapproved drugs help keep medications safe and effective for the public, new regulations may have a downstream impact on the entire marketplace. Leaner inventory levels In recent years, a “just-in-time” inventory trend has become popular in many segments of the supply chain. Stocking leaner quantities of raw materials and finished products improves efficiency.15 The reduction in onshore stockpiles of APIs, inactive product ingredients, and manufactured drugs creates some risk of instability in the pharmaceutical market.16 Gray market distributors During times of shortages, “gray market” distributors buy up available supplies and offer to sell them to end purchasers at significantly higher prices. Premier members report “gray market” prices of up to 100 times that of normal wholesaler acquisition prices for backordered products. A Kaiser Daily Health Policy Report highlighted how the chain of custody in

Changes in clinical practice and emergency situations Manufacturers may discontinue older products as their clinical demand decreases and profitability drops. One drug product shortage can increase demand for a

III. What is the impact on patient safety and quality control? A recent Institute for Safe Medication Practices (ISMP) national survey on drug shortages noted over 1,000 near misses, errors, and adverse outcomes due to drug shortages. Shortages of high alert medications were especially problematic in 2010 (Figure 2 on page 34)19

Some antibiotic and antiviral medication shortages contributed to patient mortality because specific bacteria and viruses were not sensitive to other available medications. The factors that may lead to errors when drug shortages occur include tactics that pharmacy directors and key stakeholders are beginning to incorporate into their failure mode analysis (TABLE 1 on page 34). The American Society of Health-System Pharmacists (ASHP) provides a detailed algorithm which may be used to improve

the organizational response to drug shortages.20 The ISMP recommends a rigorous action plan to reduce the risk of drug errors when a shortage occurs (TABLE 2 on page 34) .21,22 Clinicians should work prospectively as a team, and use a Failure Mode Effects Analysis model, to identify potential safety hazards with alternatives to the unavailable drug and then effectively communicate such concerns to all pertinent practice areas.

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Stockpiling by end-users Drug shortages have been exacerbated by stockpiling on the part of providers. Artificial shortages can result from endusers who attempt to protect themselves

from the instability of the drug supply chain by placing orders that exceed normal requirements.

therapeutically similar product that is not normally produced in quantities sufficient to meet unanticipated market needs. This scenario occurred in 2010 with the morphine and subsequent hydromorphone shortages.18 At least 4 percent of sterile injectable shortages in 2010 were due to increase in demand from another drug shortage.6

‘‘

The impact of the drug shortage crisis is far more disruptive to the patient care continuum than the pharmacy supply expense budget in recent months, causing changes in the way we operate on a daily basis. It has caused us to look closely at our procedures for managing shortages and to formalize many steps that were previously not considered imperative. In order to avoid a crisis, every step in the procurement, prescribing, dispensing, administration, and monitoring of drugs is reviewed carefully and modifications for safe practice must be implemented. Our key is to be the experts on drug information, which includes shortages, so we can effectively collaborate with medical staff and patient care associates to develop essential tactics for every area of practice when a shortage is anticipated. The objective is to prevent a crisis that impacts patient care.

’’

– Deb Saine, MS, RPh, Medication Safety Manager, Winchester Medical Center, Winchester, VA

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P E R S P E C T I V E S

the gray market may pass from one distributor to another, creating a string of transactions that lead to higher prices and drug integrity concerns.17

FIGURE 2:

High alert drugs causing disruptions in patient care and supply expense [ SU RVEY R ESPONSES ] 0

100 120

PROPOFOL

[ D RUG OR DRU G CATEGORY ]

NARCOTIC ANALGESICS SUCCINYLCHOLINE EMERGENCY SYRINGES FUROSEMIDE HEPARIN ANTIBIOTICS LIPIDS AMINO ACIDS DOXORUBICIN LEUCOVORIN SODIUM CHLORIDE CONCENTRATE

Source: Premier Drug Shortage Survey 2011

TABLE 1 | DRUG SHORTAGE FACTORS THAT MAY LEAD TO ADVERSE PATIENT SAFETY EVENTS > > > > >

Absence of early warning for drug shortage Poor communication between suppliers and end users Poor communication between pharmacy and end users Incomplete information on cause, duration, and expected resolution Labor challenges that limit ability to adopt proactive strategies

TABLE 2 | ISMP RECOMMENDATIONS WHEN A DRUG SHORTAGE OCCURS > > > > > > > > > > > > > > >

Identify and learn more about drug shortages Assess inventory of drugs available in pharmacy Research uses and optimal doses for drugs in short supply Conduct DUEs if necessary and decrease waste and unnecessary orders Identify potential therapeutic alternatives early Prioritize and place limitations on use with ethics committee consultation Conduct a failure analysis and take action Do not hoard medications Establish ongoing communications on possible alternatives and potential adverse events Establish a shortage network with other healthcare providers to obtain needed supplies Determine position regarding alternative suppliers Remove supplies from floor stock when able and have pharmacy dispense the drug Institute strategies to avoid errors with substitutes Proactively monitor adverse events and report to risk management Monitor and report drug shortages

IV. What is the impact on the cost of healthcare?

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FIGURE 3: Cost to Premier Members

Treatment Categories with Generic Alternatives (January to December 2010) COST OF DRUG SHORTAGES IN 12 MONTHS $0

$5M $10M $15M $20M $25M

INFECTIOUS DISEASE SURGERY ONCOLOGY CARDIOVASCULAR NEUROLOGY ENDOCRINOLOGY PAIN MANAGEMENT PSYCHIATRY ALLERGY GASTROINTESTINAL EMERGENCY CARE

Treatment Category with Cost > $1,000,000 in 12 Months

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P E R S P E C T I V E S

Premier’s ability to analyze the expansive pharmaceutical supply chain data of our members has enabled us to evaluate the financial impact of drug shortages when generic alternatives are available. Based on Premier’s current membership of approximately 2,500 hospitals and numerous non-acute care facilities, the annualized financial impact of drug shortages where generic equivalent alternatives are available exceeds $78 million. The cost impact to infectious disease, surgery, oncology, and cardiovascular therapy represents nearly $55 million annually (Figure 3). More than $66.6 million (or 85 percent) of this estimated financial impact in 2010 was felt within the acute care sector alone.

V. What are the professional organizations doing about the problem? The ASHP in conjunction with the American Society of Anesthesiologists, American Society of Clinical Oncology, and the ISMP hosted a Drug Shortage Summit on November 5, 2010. Pharmaceutical manufacturers, wholesalers and distributors, the FDA, the University of Utah Drug Information Service, Premier, and others participated in the summit.1 The goals were to: • Discuss the scope and causes of drug shortages • Investigate the impact on quality and safety of patient care • Identify the potential need for changes in public policy to prevent patient harm • Develop an action plan that reflects the recommendations of stakeholders At the summit, the FDA provided their perspective on statutory and regulatory authority and limitations related to drug shortages. The FDA will work with manufacturers to address shortages while trying to minimize patient risk. The extent to which the FDA can mitigate the impact of a shortage depends on whether it meets “medical necessity” criteria. If there is a shortage of a medically necessary product, they may engage in discussions with manufacturers to

encourage additional sources of the product, provide technical assistance to manufacturers experiencing difficulties with cGMPs, or expedite reviews of product marketing applications or manufacturing processes. Additionally, the FDA accelerates the approval process after reviewing the potential impact on drug safety and drug authenticity.5 Summit participants provided 21 recommendations for improving communication

VI. What is Premier’s response to the drug shortage crisis? Premier believes that new measures and accelerated efforts are needed to address issues with prescription drug shortages and is prepared to help members navigate the ongoing crisis. We are working aggressively to diminish shortage-related costs to member hospitals. Our expansive supply chain data repository provides unique opportunities to source drugs from suppliers that demonstrate the ability to meet member market demands. More than 125 suppliers have agreed to incorporate “failure to supply” language into their contracts with Premier. Premier provides advance weekly information for members about product availability and maintains a dedicated drug shortages management

Web page. 27 We encourage communication about product releases through professional networking via our PharmacyConnect® portal.28 In 2010, Premier launched its Failure-to-Supply Program, through which Premier members can recover credits associated with more expensive replacement products.29 In collaboration with our members, we have developed toolkits, programs, and professional advisories to help members manage drug shortages.

among stakeholders and removing barriers faced by the FDA and drug manufacturers.1 Participants are meeting with legislators to ensure inclusion of key drug shortage issues in federal legislation.23 Senator Amy Klobuchar’s planned legislation provides the FDA authority to require early notification from pharmaceutical manufacturers who decide to limit or discontinue production of prescription drugs. The legislation would also enable an expedited process for approving substitute treatments or importing safe, clinically equivalent drugs in cases of impending drug shortages.24 The ASHP and FDA maintain websites regarding drug shortages.4,5 The ASHP Drug Shortage Resource Center provides very comprehensive, up-to-date information and suggests clinically relevant alternatives to consider when a shortage occurs.1 The website also provides position papers on managing drug shortages and a sample policy and procedure that hospitals can use as a template. The ASHP and the FDA encourage reporting of drug shortages.25, 26

‘‘

“One of the key strategies for obviating the negative clinical and economic impact of drug shortages is to encourage early pharmacy staff knowledge and awareness of impending drug shortages. As the key pharmacy leader of a large integrated delivery network within the Premier membership, it is important for us to plan together as an alliance to develop tactics that will demand best practices for supply chain management. These include early supplier notification of impending drug shortages, appropriate supplier performance monitoring, and innovative contracting strategies for critical drugs which protect the members if a key medication becomes unavailable. Drug shortages and the ensuing expense burden add intolerable supply and workload costs to the pharmacy bottom line.”

’’

– Michelle Henderson, director, Pharmacy Services, Yankee Alliance, Andover, MA

PREMIER DRUG SHORTAGE SURVEY Premier member surveys conducted in January 2011 identified a number of innovative strategies that members have implemented to reduce the negative impact resulting from drug shortages. More than 350 Premier pharmacy leaders responded to the surveys. Members have added procedures, changed standard processes and modified normal communication strategies as a result of the drug shortage crisis. Formulary changes identified by members were directed toward changes in key tactics for how drugs are allocated during these times to reduce patient care impact:

FORMULARY STRATEGIES IMPLEMENTED TO REDUCE IMPACT ■ NON-TEACHING

Members’ focus on specific communication strategies designed to navigate through the challenges of the crisis that are important for success:

COMMUNICATION STRATEGIES IMPLEMENTED TO REDUCE IMPACT

■ TEACHING

[ # R ESPONSES ]

[# R ES PONS ES ]

ECONOMIC O U T LO O K

0 20 40 60 80 100 120 140 160

150

Frequent Communications to Patient Care & Medical Staff

100

Presented Impact to Medical Staff Committees

50 Presented Impact to Key Executives Added Safety Measures to Avoid Errors

Added Drugs to Formulary

Restrictions for Short Supply Drugs

Rationing for Short Supply Drugs

Added Inventory for Critical Drugs

Regular Internal Pharmacy Meetings to Formulate Actions Communicated Impact to Suppliers at Contact Meetings Create New Policy to Address Shortages and Safety Concerns Present Impact to Local Officials, Legislators, and/or Newspapers

Procedural changes identified by members were directed toward changes in purchasing methods, sources for supply, and new services:

PROCEDURAL STRATEGIES IMPLEMENTED TO REDUCE IMPACT

■ NON-TEACHING

■ TEACHING

The survey seems to suggest the need to find a consistent way to track the financial impact of drug shortages in the member facilities:

[ # R ESPONSES ] 0

50 100 150 200 250 300 3 50

Purchased from Compounding Pharmacy

DO YOU QUANTIFY THE FINANCIAL IMPACT OF DRUG SHORTAGES? ■ DON’T KNOW

Prepared Drug Extemporaneously

■ YES

■ NO

Daily Counts of Critical Drugs

60 50

Purchases from Unapproved Distributor

Opened Accounts with New Suppliers

30 20

Participated in Premier Failuer-to-Supply

10 Added Staffing or Labor Hours

0 ■ NON-TEACHING

■ TEACHING

LARGE URBAN

COMMUNITY

RURAL

Additional results from the “Drug Shortage Survey 2011” and future “operational pearls” will be highlighted in upcoming Pharmacy Weekly Updates and on the PharmacyConnect Drug Shortages Management page.30 Early adoption of these strategies will help transform what is now a crisis into an opportunity for improvement.

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200

References 1. Drug Shortages Summit Summary Report. Available at: http://www.ashp.org/drugshortages/summitreport 2. Premier Drug Shortage Management. Available at: http://www.premierinc.com/costs/private/tools-services/targetedcommunities/pharmacy/rxconnect/resources/Shortages/pdin-shortagesarchive.jsp. 3. Supply Chain Advisor. Premier Pharmacy Spend data 2010 4. ASHP Drug Product Shortages Management Resource Center. Available at: http://www.ashp.org/DrugShortages/Current/ 5. FDA. Current drug shortages. Available at: http://www.fda.gov/Drugs/DrugSafety/DrugShortages/ucm050792.htm 6. Drug Shortages Summit Summary Report: Appendix D. FDA’s role in addressing drug shortages. . Available at: http://www.ashp.org/drugshortages/summitreport 7. States with execution drug shortage. In: Daily Herald, January 11, 2011. 4 Condemned man seeks delay amid drug shortage. Available at http://www.13wmaz.com/news/local/story.aspx?storyid=111222&catid=52 8. Anesthesiologists “Extremely troubled” by sodium thiopental shortage. Outpatinet Surgery. January 2011. Available at: http://www.outpatientsurgery.net/news/2011/01/30-anesthesiologists“extremely-troubled”-by-sodium-thiopental-shortage 9. ASHP Drugs no longer available- thiopental injection, January 21, 2011. Available at http://www.ashp.org/Import/PRACTICEANDPOLICY/PracticeResourceCenters/DrugShortages/GettingStarted/DrugsNoLongerAvailable/Bullet in.aspx?id=563 10 Germany: no death penalty drugs to US. Accessed 1/24/2011. Available at : http://news.yahoo.com/s/ap/20110124/ap_on_bi_ge/eu_germany_us_execu tion_drug 11. FiercePharma February 22, 2010 — 11:34am ET | By Tracy Staton http://www.fiercepharma.com/story/chinas-api-exports-hurt-qualityissues/2010-02-22 12. Facts About Current Good Manufacturing Practices (cGMPs). Available at: http://www.fda.gov/Drugs/DevelopmentApprovalProcess/Manufacturing/uc m169105.htm 13. Questions and Answers, Pharmaceutical cGMPs for the 21st Century: A Risk-Based Approach. Available at: http://www.fda.gov/Drugs/DevelopmentApprovalProcess/Manufacturing/QuestionsandAnswersonCurrentGoodManu facturingPracticescGMPforDrugs/ucm072062.htm 14. CPG Sec. 440.100, Marketed New Drugs Without Approved NDAs and ANDAs. Available at: http://www.fda.gov/ICECI/ComplianceManuals/CompliancePolicyGuidanceM anual/UCM074382 15. Ruffa, Stephen A., (2008). Going Lean: How the Best Companies Apply Lean Manufacturing Principles to Shatter Uncertainty, Drive Innovation, and Maximize Profits, AMACOM (American Management Association)

16. Toyota to Recalibrate ,'" International Herald Tribune, February 8, 1997. Available at: http://www.accountingformanagement.com/just_in_time.htm 17. Kaiser Daily Health Policy Report. Prescription Drugs Resold, Repriced Through 'Gray Market. December 15, 2000. Available at: http://www.kaisernetwork.org/Daily_reports/rep_index.cfm?DR_ID=1732. 18. ISMP. Drug shortages threaten patient safety. ISMP Medication Safety Alert! July 29,2010; 15(15):1-3. Available at http://www.ismp.org/Newsletters/acutecare/articles/20100729.asp. 19. ISMP. Drug shortages: National survey reveals high level of frustration, low level of safety. ISMP Medication Safety Alert! September 23, 2010;15(20):1-4. Available at www.ismp.org/Newsletters/acutecare/articles/20100923.asp/ 20. Fox ER, Birt A, James KB, et al. ASHP Guidelines on Managing Drug Product Shortages in Hospitals and Health Systems. Am J Health-Syst Pharm. 2009; 66:1399-406. 21. ISMP. Part II of our national survey on drug shortages: proactive guidelines to safely managing scarce supplies. ISMP Medication Safety Alert! April 4, 2001;6(7):1-2. Available at www.ismp.org/Newsletters/acutecare/articles/20010404.asp/ 22. ISMP. Weathering the storm: Managing the drug shortage crisis. ISMP Medication Safety Alert! October 7, 2010;15(20):1-4. Available at www.ismp.org/Newsletters/acutecare/articles/20101007.asp/ 23. ASHP, Drug Shortages Summit Co-conveners take action on Capital Hill. Available at http://www.ashp.org/import/news/NewsCapsules/article.aspx?id=374 24. Senator Klobuchar urges FDA action to deal with unprecendented shortage of medication. Press release Decem ber 20, 2010. Available at http://klobuchar.senate.gov/newsreleases_detail.cfm?id=330180&. 25. Report a shortage to ASHP. Available at: http://www.ashp.org/DrugShortages/Report/ 26. FDA. How to report a drug shortage. Available at: http://www.fda.gov/Drugs/DrugSafety/DrugShortages/ucm142398.htm 27. Premier. Pharmacy Connect. Available at: http://www.premierinc.com/pharmacy/. 28. Premier. Pharmacy Discussion Groups. Available at: http://www.premierinc.com/costs/private/tools-services/targetedcommunities/pharmacy/listserv.jsp. 29. Failure to supply (FTS) reimbursement toolkit. Available at: http://www.premierinc.com/costs/private/tools-services/targetedcommunities/pharmacy/rxconnect/contracting/fts.jsp 30. Premier. Drug Shortages Management. Available at: http://www.premierinc.com/costs/private/tools-services/targetedcommunities/pharmacy/rxconnect/resources/Shortages/pdin-shortages-archi ve.jsp

Data integration: A win-win for patients and providers

What type of data should be shared? Any and all information from hospital and non-hospital sites that can help drive quality, cost and operational improvements should be shared among providers. So it’s clinical data that displays how care was delivered and the related outcomes. Supply chain data that links clinical outcomes and costs, which is a first step toward true comparative effectiveness research. And operational data regarding labor efficiency and overall operating costs.

For the non-acute care facilities, this will help with scheduling of appointments within a certain time frame, and allow for tracking of home care follow-up effectiveness. What is the benefit for providers and patients? Studies show that our healthcare system wastes billions of dollars annually, more than half of what the system spends. The biggest culprits include patient “overtesting,” readmissions and unnecessary ER visits, healthcare-associated infections and medical errors. Access to data on a unified platform supports providers to offer a safer, more informed care experience by accessing and using evidence-based information on the best ways to treat patients. The outcomes can include reductions in patient harm such as hospital-acquired

conditions, readmissions and unnecessary hospital visits. This integration also addresses new care delivery models through reform, including accountable care and value-based purchasing. This type of access to new insight from data will do for the physicians’ minds what the X-ray did for their vision.

ECONOMIC O U T LO O K

Why is the integration of data across a health system so important today? We’ve known for some time – and more and more recent analysis is showing – that enhanced collection, management and review of health data is needed to reduce fragmentation of medical information. Data that is unified, easily accessible and based on the entire care delivery system would identify opportunities to reduce preventable harm, disparities and waste in the system. But there is no comprehensive, nationwide view of performance and outcomes information from across the continuum of care – from hospitals to physician offices and other non-acute sites – available to providers today. In addition, the data that we have is often stored in many different formats across multiple locations.

With this information, hospitals can identify, for instance, specific readmission trends. Is it patients with certain procedures or diagnoses? Is it a particular physician or physician group? Is it patients discharged from a certain unit?

For patients, the benefit is greater certainty they will get the most effective treatment possible, and the assurance that the care they receive follows best practices from leading hospitals and healthcare experts across the nation. It’s a win-win for providers, patients and the industry as a whole. Care is more effective, people are happier and spend less time in care settings, and excess costs are reduced. What is being done to help health systems better integrate data? There are health systems today that have the capability to connect this data within their own systems. But this cannot be done on a multi-system or national basis to identify large-scale healthcare trends and opportunities for improvement. And the Dartmouth Institute is working with providers such as the Cleveland Clinic and Geisinger Health System in similar efforts.

IBM AND PREMIER: WORKING COLLABORATIVELY TO IMPROVE POPULATION HEALTH IBM and Premier are building a data platform to provide clinical decision support at the point of care delivery, helping doctors, nurses and other providers make faster, better decisions about how to treat each individual patient. We are collaborating to gain insight, measure performance and improve population health. Information in this format can be used to measure a range of healthcare trends and opportunities, including costs, harm, readmissions, comparative effectiveness, etc. IBM and Premier will extend this type of new insight to all hospitals in the nation, especially those who don’t have the ability to do this on their own.

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P E R S P E C T I V E S

Paul Grundy, MD, MPH, FACOEM, FACPM Director of healthcare transformation IBM

TRENDS IN COST A N D UTI L I Z ATI O N ECONOMIC O U T LO O K

ELEVATING PATIENT CARE AT THE RIGHT COST Efforts to improve patient care while addressing rapidly rising healthcare expenditures are at the forefront of priorities for legislators, healthcare providers, and physicians. As hospitals prepare for the expansion of care and possible reimbursement rate reductions, every product and service used for patient care should be evaluated to determine if the overall cost elevates the quality of care for each patient. While most healthcare technologies, including drugs, devices and procedures, must meet regulatory thresholds of efficacy to successfully enter the market, it is important for providers to place a

new emphasis on measurable evidence of effectiveness. Most organizations aim to use the right product at the right time for the right episode of care. However, hospitals and clinicians must ensure that each patient gets the most effective care every time. The goal of utilization analysis coupled with resource optimization is to learn which specific drugs, devices and interventions are most effective for specific patient populations and to validate that higher cost products and procedures are justified by improved outcomes.

In order to take a more proactive and preventative approach aimed at providing high quality care for patient populations, hospitals should establish a process whereby they regularly analyze utilization patterns and clinical outcome data as they emerge. Their practices should then be changed accordingly. This shift in policy and research methodology could have a profound impact on the healthcare system.

[

]

THE ABSTRACTS HIGHLIGHTED IN THE FOLLOWING PAGES

PROVIDE AN OVERVIEW OF A DATA-DRIVEN APPROACH

TO EVALUATING COSTS AND QUALITY OUTCOMES FOR

SEVERAL DRUGS AND PRODUCTS USED IN PATIENT CARE.

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Abstracts

The following abstracts provide an overview of studies conducted by the Premier healthcare alliance that analyze trends in cost and utilization. The full articles are available to Premier members. Bone morphogenic protein (BMP): Does it enhance quality outcomes? Carole Gilroy, RN, MSN, MBA Vice president, Premier Consulting Solutionsâ&#x201E;˘ Supply chain service line leader Bone morphogenic protein (BMP) is a chemical that promotes bone growth and is approved by the FDA for use in two procedures: long bone defects and anterior lumbar spine fusion procedures performed by orthopedics and neurological surgeons. It is postulated that 85 percent of BMP use is off-label or used for procedures not approved by the FDA. This has resulted in safety concerns and liability issues on the part of patients and providers. As hospitals prepare for reform, every product and service used for patient care and to support hospital operations needs to be evaluated to determine if the value provided offsets the cost. As a high-cost product, BMP is an ideal product to evaluate. This study highlights steps to evaluating the use of BMP by hospitals, and processes

to reduce its unjustified use to reduce costs and improve quality outcomes. Potential savings with short acting beta agonists Bruce Gordon, Pharm.D., Premier Purchasing Partners, clinical pharmacy specialist Anne Jernigan, Pharm.D., MBA, FACHE, Premier Purchasing Partners, clinical pharmacy specialist With thousands of drugs on the market, there is overlap and duplication. Sometimes an expensive brand name drug is the best choice, particularly if it has a unique therapeutic characteristic that provides a superior clinical benefit. However, there are times when the older, less expensive drug yields the same clinical result for most patients. If this is the case, and the less expensive drug is used, savings can be significant. This study compares two drugs used to prevent or relieve bronchospasm in patients with reversible obstructive airway disease. The drugs under consideration

have the same indications and were recommended and included in the National Institutes of Health guidelines for treating asthma exacerbations. Hospital executives know the importance of being good stewards of healthcare resources. Good stewardship makes it possible to care for more patients. In those instances where an established generic drug may be used as a safe alternative to an expensive brand name drug for specific patient populations, the choice should be considered. It is just one of many ways to conserve scarce healthcare resources. Optimal utilization of proton pump inhibitors for stress ulcer prophylaxis Bruce Gordon, Pharm.D., Premier Purchasing Partners, clinical pharmacy specialist Anne Jernigan, Pharm.D., MBA, FACHE, Premier Purchasing Partners, clinical pharmacy specialist Proton pump inhibitors (PPIs) and H2 receptor antagonists (H2RAs) are widely used to suppress gastric acid production

Intravenous immune globulin (IVIG): Should it be treated like it is in short supply? Jerry Frazier, Pharm.D, Premier Purchasing Partners, director of the Center for Evidence-Based Pharmacy Practice Mark Hummel, Premier Purchasing Partners, contract director, plasma/flu/vaccine team The selection and use of IVIG in todayâ&#x20AC;&#x2122;s healthcare marketplace have become both easier and more complex for providers. Compared to just a few years ago, there is now an adequate supply of product in the market and these products have increased on- and off-label indications of use. However, the IVIG market may tighten toward the end of 2011 based on a few important events that could impact product pricing and availability. IVIG pricing should be considered when making product use decisions, especially if there is a clinical opportunity to do so.

TRENDS IN COST A N D UTI L I Z ATI O N ECONOMIC O U T LO O K

and prevent peptic ulcer disease in both inpatient and outpatient settings. While widely used and regarded as safe and effective, providers often initiate or continue therapy without a close examination of patient risks and benefits. Studies have reported a high percentage of inappropriate use of this drug class, which has been validated across the Premier membership through an analysis of medication use evaluations. Unnecessary use impacts therapeutic value and healthcare expense. The medication reconciliation process, which is performed throughout a patientâ&#x20AC;&#x2122;s hospital admission, affords the perfect opportunity for pharmacists to investigate the need for continued therapy. This study reviews utilization and spend of PPIs and H2RAs nationwide and among the Premier membership and explores appropriate practices and strategies for use of these agents.

Manufacturer pricing programs, including rebates and discounts as well as Medicare reimbursement, should all be reviewed during the decision process since these are key components of the treatment regimen. Evidence-supported usage indications and the consideration of coexisting health conditions should continue to be the leading factors in product selection. Since approved on-label indications and off-label usage have increased across the available brands, the review and consideration of product characteristics continues to be critical in the decision process. This analysis provides further insight into clinical and financial aspects of the IVIG selection process.

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C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K

Why are commodity prices rising? Gold jumped 29 percent and copper was up 22 percent in 2010. Silver prices are at 30-year highs

commodities rally that has impacted nearly every raw material in the healthcare supply chain since the beginning of last year.

An analysis of the primary drivers impacting raw material prices and soft commodities such as sugar, coffee and cocoa have all surged. Wheat futures rallied to fourmonth highs and cotton prices recently peaked at their highest level since Reconstruction in the 1860s. These price shifts are part of the larger

Supported by fears of a weakening dollar, robust growth in emerging economies, and weatherrelated supply disruptions, economists have indicated that pricing pressures for commodities are expected to remain a concern for producers and consumers in 2011. For developed

nations like the U.S., the situation is further amplified because higher raw material prices often act as a price deflator, reducing purchasing power. In this slow recovery, rising inflation and the potential for reduced consumer spending could have significant implications for the global economy. A few of the primary drivers for the recent price surges in raw material pricing are discussed on the following pages.

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In early November 2010, the Federal Reserve announced another round of

plan pushes down yields on long-term U.S. Treasury bonds and therefore encourages investment in alternative assets, such as stocks, corporate bonds and commodities that may offer higher returns. However, this monetary easing policy may also weaken the value of the dollar. As a result, demand is spurred in the market for dollar-

denominated commodities such as oil and copper. Since the policy was announced, investors are purchasing commodities at record rates through futures markets and exchange-traded funds. The increased activity in the futures market is further driving up commodity costs. Barclays Capital estimates that approximately $60 billion was injected into commodities in 2010.1

consumer spending in China will expand by 22 percent, driven by a diversified economy and rising incomes. According to Pier Luigi Sigismondi, Unilever’s chief supply chain officer, “Current agrocommodity market inflation is a consequence of lower production yields

and unprecedented increases in demand from Asia.”2 However, in countries such as Indonesia, where inflation stood at 6.8 percent in February 2011, and India, which saw double-digit inflation figures in 2010, food and energy prices play a large role in driving inflation.

floods in Pakistan have dramatically reduced harvests and raised concerns about possible supply shortages. For example, heavy rains in China, the largest cotton producer, reduced crop output, resulting in a 5.4 percent drop in global production of cotton in 2010. Food markets have

also been significantly impacted by weatherrelated supply factors. Wet weather in Australia, a major exporter of high quality wheat used for flour production, has substantially reduced viable wheat yields, while dry weather in the U.S. raised concerns over the development of the winter wheat crop.

Fed’s monetary easing policy signals excess liquidity “quantitative easing” – a bond-buying program designed to spur growth and keep interest rates low and thereby provide consumers and businesses with cheaper access to credit. The $600 billion

Higher raw material prices are often an indication of both increased demand

Growing demand in emerging markets and higher inflation in developing countries. For example, it is estimated that in 2011 developing countries will expand by 6.3 percent, while

In addition to policy changes and strong demand from other nations,

Weather-related supply disruptions commodity prices are also impacted by weatherrelated supply disruptions that often tighten yields and crop production. Droughts in Russia and

Prices for both oil and non-oil commodities rose considerably in 2010, in response to strong global demand but also to supply shocks for selected commodities. Upward pressure on prices is ex-

pected to persist in 2011, due to continued robust demand and a sluggish supply response to tightening market conditions. The following pages outline inflationary

pressures on commodities, such as cotton and oil,

Commodity prices on the rise in 2011 among others that play a key role in the healthcare supply chain.

CHANGE IN PRICE IN 2010

SILVER

ALUMINUM

COPPER

CORN

OIL

{

GOLD

{

15%

{

52%

{

35%

{

67%

{

80%

C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K

30%

References 1.Meyer, Gregory. “Large bets fuel commodity bull run.” January 14, 2011. http://www.ft.com/cms/s/0/e02c47bc-2010-11e0-a6fb00144feab49a.html#axzz1GoLsHgif (accessed 3/16/2011) 2.Lucas, Louise, Felsted, Andrea, and Farrell, Greg. “Consumer Products: Material Differences.” December 7, 2010. http://www.ft.com/cms/s/0/d1e31d98-023d-11e0-aa40-00144feabdc0.html#axzz1GoLsHgif (accessed 3/16/2011)

O UTLO OK • 0 3 .1 1 |

Minimizing raw materials risk: A sample of Premier’s contracted suppliers identified key raw materials that serve as primary cost drivers of their products’ pricing. Potential category and market impacts are shown for the raw materials featured in this publication. In order to minimize raw materials risk, it

Plastic Resins Premier Contract Impact* Suction canisters, yankauers & tubing Custom Procedure trays/packs, gowns & related products Standard and Safety Hypodermics IV Therapy Products– Sets and Tubing

Labor 4%

is recommended that healthcare facilities: •Review categories that may be impacted by fluctuations in raw materials. •Use the inflation tables in this publication to identify suppliers with firm pricing in a category impacted by raw materials of interest.

Cotton Premier Contract Impact* Reusable textiles and textile services Bandages, dressings & gauze Lap sponges, OR towels and specialty sponges Advanced wound care

•Refer to the contract launch materials in Supply Chain Advisor® to identify a category’s low-cost provider. •Evaluate utilization opportunities. Reference the inflation tables to identify suppliers that offer utilization review programs.

Base Metals Premier Contract Impact* Physiological monitoring systems Cardiovascular imaging Surgical endoscopy & video equipment Patient beds, mattresses and therapeutic surfaces Base Metals consist of: Aluminum (67%) Copper / Brass (21%) Steel (10%) Lead (.7%) Nickel (0.1%)

Cotton 4%

Other 4% Plastic Resins 5%

Paper 2%

Base Metals 31%

Organic & Inorganic Chemicals 2%

Price Increase Risk High Moderate Low

Precious Metals 5%

Electronic Components 8%

Precious Metals consist of: • Gold (87%) • Platinum (13%) • Silver (.8%)

Latex and Rubber 13%

Latex and Rubber Premier Contract Impact* Surgeon gloves Exam Gloves *Refer to contract-specific price protection information in the inflation tables.

Energy 22%

Energy consists of: • Natural Gas (58%) • Fuel/Transportation (28%) • Crude Oil (14%) • Electricity (0.3%) Energy Premier Contract Impact* Specialty distribution – laboratory and/or research products Clinical reference laboratory testing services Medical / Surgical distribution

COPPER MARKET OVERVIEW Since 2001, the price of copper has increased from less than $1 per pound to more than $4 per pound on the Comex division of the New York Mercantile Exchange.1

Feb 08

Aug 08

Feb 09

Aug 09

2011

2010

2009

500 450 400 350 300 250 200 150 100 50 0

2008

cents/lb

Average Monthly Copper Prices (London Metal Exchange, Grade A)

Feb 10

Aug 10

Feb 11

Source: U.S. Geological Survey: Copper Statistics and Information References 1.Bloomberg Businessweek. “The Great Copper Heist.” November 24, 2010.

Worldwide copper production and consumption

The risk of disruption to the global copper supply is considered to be low because copper production is

Largest copper producers (2009)

globally dispersed and is not limited to a single country or region. However, because of its importance in construction and power transmission, the impact of any copper supply disruption would be high. Source: USGS Fact Sheet - June 2009

Largest copper consumers (2009)

United States 13%

Peru 13%

Chile 54%

United States 12%

China 54%

European Union 21%

China 10% Indonesia 10%

Source: Copper Investing News

C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K

World production and consumption of copper has increased dramatically in the past 25 years, resulting from developing countries entering the

global market. In the past 20 years, the Andean region of South America has emerged as the world's most productive copper region.

Korea 7%

Japan 7%

Source: International Copper Study Group

*Note: Due to broad economic growth, India’s increased demand for copper is set to move the nation from sixth place in world consumption of copper to second, just behind China, by 2020. Source: MercoPress, November 11, 2010.

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COPPER MARKET OVERVIEW

Didyou

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 Medical gas pipeline equipment Price increase risk: ■ High

Copper market update Copper soars to record highs > Copper is used predominantly for wiring, plumbing, coinage, electronics, manufacturing and construction. > Prices are highly sensitive to data that sheds light on the health of the economy, and by extension demand for the industrial metal. > Use of copper is on the rise due to increased development in countries such as China, India, Brazil and Russia.

■ Moderate

■ Low

> Strong demand is likely to continue due to increased use in cell phones (and cell phone towers), computers, cars, smart homes, pipelines and supertankers. > Copper prices soared by 140 percent in 2009, following the 2008 recession, as China embarked on a stockpiling program. > Analysts expect 2011 to be another year of rapid price gains for copper due to accelerating demand (from China and other emerging

know?

The United States was the world's largest copper producer until 2000; beginning in 2000, Chile became the world's leading copper producer.

markets) combined with shrinking stockpiles (from exhausting reserves and lower quality ore in copper mines worldwide). > According to the 2010/2011 forecast developed by the International Copper Study Group, in 2012 the market is expected to be more closely balanced, as an increase in refined copper production is expected to more than keep pace with sustained growth in overall demand. Source: Copper Investing News

PROJECTIONS FOR 2011

Factor

Impact on copper prices

Increasing world production

Comments U.S. copper mine production was expected to rise by more than 100,000 tons in 2011 owing to expansions and restoration of cutbacks.*

Demand from Asian markets

China’s apparent consumption of refined copper increased by 38 percent in 2009. Global demand is expected to rise by about 4.5 percent. Industrial demand growth for copper in China, which is based on anticipated semimanufacture production, is expected to grow by about 6 percent in 2011.*

Rate of economic recovery

There is much uncertainty imposed by the variable rate of economic recovery in many of the major copper consuming regions that experienced a severe recession in the 2008-2009 period.*

* Source: International Copper Study Group

}

C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K

{

CHILE ACCOUNTED FOR MORE THAN ONE THIRD OF WORLD COPPER MINE PRODUCTION IN 2009 WITH MINE OUTPUT OF NEARLY 5.4 MILLION TONS. Source: International Copper Study Group – The World Copper Factbook 2010

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COTTON MARKET OVERVIEW 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.

Cotton “A” Index 250

150

2011

2010

2009

100

2008

cents/lb

200

0 Feb 08

Aug 08

Feb 09

Aug 09

Feb 10

Aug 10

Feb 11

Source: Cotton.org Note: A Index values were unavailable from June 23, 2010 through August 2, 2010 due to insufficient quotes.

The relationship between cotton supply and cotton prices is commonly described through the stocks-to-use ratio, which has an inverse relationship with prices. The stocks-to-use ratio is calculated as the worldwide inventory of cotton divided by the worldwide demand for cotton.

Worldwide Cotton Stocks-To-Use Ratio

54%

50%

53%

50%

49%

55%

38%

43%

2009/2010

2010/2011

36%

30 20 10 0 2001/2002

2002/2003

Source: USDA

2003/2004

2004/2005

2005/2006

2006/2007

2007/2008

2008/2009

THE U.S. COTTON MARKET

> In recent years, cotton production has decreased due to farmers shifting crops to corn for the production of ethanol. > The U.S. market has shifted from a domestic market sourced primarily in America to a market oriented towards exports where U.S. cotton supplies the world.

C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K

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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 Advanced wound care Price increase risk: ■ High

Cotton market update Cotton prices reach historic highs in 2010 and early 2011 Cotton prices increased 117 percent in 2010 and have not shown any signs of weakening to date in 2011. The dramatic price increases have been driven by a number of factors: > Strong demand from China – China is the world’s largest textile producer and consumer of cotton. The value of finished textile products exported from China is expected to exceed $200 billion in 2011.1 In addition to growth in exports, China’s domestic demand for textiles has increased approximately 20 percent annually for the last five years.2 In recent months, the Chinese government has taken to stockpiling cotton as part of its strategic reserve, but has not provided additional details as to the quality or quantity.3 In the period January – November 2010, China imported 2.38 million

■ Moderate

■ ■ ■ ■ ■ ■ Low

tons of cotton, an increase of 81 percent compared to the same time period in 2009.4 Robust demand from China was a key factor that supported rising cotton prices in 2010.

According to the International Cotton Advisory Committee, cotton was the most volatile of all the 53 exchange-traded commodities in 2010.

> Supply constraints – Weather events in any of the major cotton producing countries can have an impact on crop yields and therefore cotton market prices. In 2010, flooding in Pakistan reduced cotton production in that country by an estimated 25 percent.5 With cotton stocks at very low levels, this event supported rising prices.

Weak U.S. dollar Pressure on the U.S. dollar in 2010 along with speculative investments also helped to support cotton prices. “As the U.S. dollar weakens, it can encourage flows of money into alternative financial markets like commodities. In addition, a weakening U.S. dollar also creates a more direct fundamental reason for export-oriented commodities like U.S. cotton to rise in price since it becomes cheaper relative to competing foreign cotton. So there is a double reason for cotton prices to rise when the U.S. dollar weakens.”6

With the rise of oil prices, many farmers shifted crops from cotton to corn for ethanol production. As a result, cotton production in 2009/2010 was at its lowest level in the last four years. As the global economy strengthened in 2010, and demand for cotton increased, ending stocks or inventory of cotton slipped to the lowest levels seen since 1994/1995.

In early February 2011, cotton prices hit $2 per pound for the first time in history. The price spike corresponded with a decrease in the International Cotton Advisory Committee’s (ICAC) estimate of world cotton stocks available at the end of the 2010/2011 use year. ICAC analysts projected that cotton prices would average near $1.75 through July 2011.7

United States 16% China 26%

Largest cotton producers (2009/2010)

Other 21% India 22%

Pakistan 8% Brazil 7%

United States 34%

Other 25%

Largest cotton exporters (2009/2010)

Uzbekistan 11%

China 42%

C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K

India 18%

Australia 6% Brazil 6%

Other 23%

Largest cotton consumers (2009/2010)

Pakistan 9% India 17% Brazil 4%

Turkey 5%

Source: USDA as reported by Cotton, Inc. in the January 13, 2011 U.S. Cotton Market Monthly Economic Letter O UTLO O K â&#x20AC;˘ 0 3 .11 |

COTTON MARKET OVERVIEW World Cotton Production 125 120

Million Bales

115 110 105 100 95 90 2006/2007

2007/2008

2008/2009

2009/2010

2010/2011(E)

Source: USDA

PROJECTIONS FOR 2011 Factor Increasing world production

Impact on cotton prices

Comments Higher prices have attracted more farmers to plant cotton. Worldwide cotton production is expected to rise 14 percent in 2011.* However, any price reductions due to increased supply would likely not materialize until the next crop year (August 2011).

Low estimated stocks (inventories) for 2010/2011

Ending stocks (inventories) of cotton expected to be slightly lower than

Demand from China

China expected to import 15 million bales, up 37 percent versus

2009/2010. *

2009/2010.* Weather conditions

Flooding and Cyclone Yasi impacted Australia in early 2011 and may reduce cotton production in the fourth largest exporting country.

* Source: USDA

References 1.Yarns and Fibers Exchange. “China’s textile industry has bid farewell to low-cost era”. 1/4/11. http://www.yarnsandfibers.com/news/index_fullstory.php3?id=23998&p_type=General# (accessed 1/14/11). 2.China Textile Leader. “Overarching Review of China Textile Industry during the 11th Five Year Plan Period”. 1/11/11. http://www.texleader.com.cn/en/NewsDetail.asp?AID=32893 (accessed 1/14/11). 3.Cui, Carolyn. “Chinese take a Cotton to Hoarding”. Wall Street Journal. 1.29.11. http://online.wsj.com/article_email/SB10001424052748704680604576110423777349298-lMyQjAxMTAxMDIwOTEyNDkyWj.html (accessed 1/30/11). 4.Cotton 24/7. “China’s Cotton Imports Continue to Skyrocket”. 12/22/10. http://www.cotton247.com/news/?storyid=1746&style=1 (accessed 1/14/11). 5.Karachi Cotton Association. “Floods may cause loss of 2.5 million bales”. 8/21/10 http://www.fibre2fashion.com/news/association-news/kca/newsdetails.aspx?news_id=90094 (accessed 1/18/11). 6.Robinson, Dr. John R. “The Cotton Marketing Planner Newsletter 1/14/11”. Cotton Incorporated. http://www.cottoninc.com/CottonMarketingPlannerNewsletter/?S=AgriculturalResearch&Sort=0 (accessed 1/18/11). 7.Agrimoney.com. “Cotton prices to dip, but not too far, experts say”. 2/2/11. http://www.agrimoney.com/news/cotton-prices-to-dip-but-not-too-farexperts-say--2777.html (accessed 2/2/11).

ENERGY MARKET OVERVIEW

OIL

The Energy Information Administration (EIA) expects a continued constriction of the world’s oil markets during the next two years. Oil demand and prices will continue to rise during 2011, which will play a significant role in economic recovery worldwide. The EIA expects that world consumption of oil will grow from 86.1 million barrels in 2007 to 92.1 million barrels by 2020.

GASOLINE

The price of crude oil is the most significant factor determining the price of gasoline. The EIA anticipates gasoline prices will continue to rise as the price per barrel of oil rises and the oil market as a whole continues to tighten. Expect prices to peak sometime during spring or summer 2011.

NATURAL GAS

As a result of the recession, world consumption of natural gas sharply declined during 2009 due to decreased demand for manufactured goods. The industrial sector currently consumes more natural gas than any other sector of the economy. As global economies continue to recover, so does the demand for natural gas. Natural gas pricing is expected to rise as demand also rises.

Oil is the world economy’s most important source of energy and is, therefore, critical to economic growth. Its value is driven by demand for petroleum products, particularly in the transportation sector. In the past few years, the healthcare supply chain has experienced sustained increases in the prices paid for services and products that rely on crude oil and oil byproducts as primary cost drivers. Given the significant role

that the price of oil plays in influencing transportation prices and the prices of other raw materials, such as steel and plastic resins, it is important to understand what has caused the price of oil to push past $100 per barrel. To address this, it is important to understand three key points: > First, crude oil and petroleum products are global commodities and, as such, their prices are determined by supply and demand factors on a worldwide basis.

C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K

International crude oil market

> Second, the price of crude oil is the most significant factor determining the price paid for petroleum products. Consequently, the price of gasoline is largely determined by the worldwide demand for and supply of crude oil. > Third, prices reflect the interactions of thousands of buyers and sellers. These interactions occur in the physical as well as futures markets, with prices reflecting both current and future expected supply and demand conditions.

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ENERGY MARKET OVERVIEW Worldwide Trade Flows of Crude Oil

The largest sources of oil supply are Saudi Arabia, Russia, the United States, Iran, Mexico, China, and Europe’s North Sea. Within the United States, the largest areas of production are the Gulf Coast – including the Gulf of Mexico, West Texas, California and Alaska. Source: BP Statistical Review of World Energy, 2010

West Texas Intermediate (WTI) Crude Oil Price 220

Historical spot price STEO price forecast NYMEX futures price 95% NYMEX futures price confidence interval

200 160 140 120 100

2013

2012

2011

2010

dollars per barrel

180

0 Jan 10

Jul 10

Jan 11

Jul 11

Source: U.S. Energy Information Administration, Short-term Energy Outlook, March 2011

Jan 12

Jul 12

Jan 13

Largest oil producers (2010)

United States 25%

Russia 27%

China 11% Saudia Arabia 26%

Iran 11%

Largest oil consumers (2009)

C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K

Japan 12%

United States 50%

China 22%

India 8% Russia 8%

Source: U.S. Energy Information Administration

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ENERGY MARKET OVERVIEW

Crude oil and gasoline market update The oil market impacts transportation and energy costs and is also a key driver of prices for other commodities such as plastic resins. Overall, expect a continued tightening of the worldâ&#x20AC;&#x2122;s oil market during the next two years, according to the EIA. Consumption of oil worldwide will continue to grow annually at an average rate of 1.5 million barrels per day through 2012. The bulk of this increase in demand is expected to be filled by the Organization of Petroleum Exporting Countries (OPEC), as non-OPEC nations are contributing very little to the overall inventory at this time. There are a number of significant factors that could push oil prices

higher or lower than expected. For example, should OPEC not increase production in alignment with global consumption, oil prices could be pushed significantly higher. Additionally, the rate of global economic recovery will play a major role in driving oil demand. Finally, expectations of higher oil demand, combined with unusually cold weather in both Europe and the U.S. Northeast have lifted prices. West Texas Intermediate (WTI) and other crude oil spot prices have risen about $15 per barrel since mid-February partly in response to the disruption of crude oil exports from Libya. Continuing unrest in Libya as well as other North African and Middle Eastern countries has led to the highest crude oil prices since 2008. EIA has raised its forecast for

the average cost of crude oil to refiners to $105 per barrel in 2011, $14 higher than in the previous Outlook. EIA has raised its 2011 forecast for WTI by only $9 per barrel to $102 per barrel because of the projected continued price discount for this type of crude compared with other crudes. EIA expects the retail price of regular-grade motor gasoline to average $3.56 per gallon in 2011, 77 cents per gallon higher than the 2010 average and about 40 cents above the projected price in the previous Outlook. EIA projects gasoline prices to average about $3.70 per gallon during the peak driving season (April through September).

ENERGY MARKET OVERVIEW

US Gasoline and Crude Oil Prices Crude Oil Retail Regular Gasoline

4.50 3.50 3.00 2.50

0 Jan 07

Jan 08

Jan 09

Jan 10

Jan 11

Jan 12

2013

2012

2011

.50

2010

1.00

2009

1.50

2008

2.00

2007

dollars per gallon

4.00

Jan 13

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, March 2011 Note: Crude oil price is refiner average acquisition cost. Retail prices include state and federal taxes.

PROJECTIONS FOR 2011 Impact on oil prices

C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K

Factor

Comments

Increasing demand from

Worldwide demand in areas such as China, Brazil, and the Middle East

emerging economies

has increased, thereby pushing prices up.

Political events that could cause

Ongoing uncertainty concerning the availability of exports from Iran, as

temporary supply disruptions

well as recent political unrest in Egypt and other African nations. The recent civil uprisings and lack of political stability in Egypt and Libya are also contributing to increased prices due to supply disruptions. The fear is that this unrest will continue to grow across the region and further limit availability of oil from this region.

OPEC production

Should OPEC not increase production as global consumption recovers, prices will be pushed up.

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FOOD MARKET OVERVIEW The Food and Agriculture Organization of the United Nations’ (FAO) food price index is an average of six commodity groups: meat, dairy, cereals, oils, fats and sugar.

FAO Food Price Index 260 220 200

120

2011

140

2010

160

2009

180

2008

2002-2004 = 100

240

100 Feb 08

Aug 08

Feb 09

Aug 09

Feb 10

Aug 10

Feb 11

Source: FAO.org

In the last year, nearly all major food commodities have seen dramatic price increases:

Corn 93%

Soybeans 47%

Wheat 59%

Lean hogs 19%

Source: CNNMoney.com. Price change shown is from 3/8/10 – 3/7/11.

Live cattle 20%

Sugar 39%

Coffee 113%

Largest wheat producers

Largest wheat exporters

European Union 21%

Other 33%

India 13% China 18% Russia 6%

United States 9%

Largest coarse grain producers

European Union 17%

Australia 11%

Argentina 6%

Largest coarse grain exporters

Other 19%

United States 30% United States 46%

China 16%

European Union 13% Mexico 3% Brazil 5%

Canada 14%

C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K

Other 33%

United States 29%

Other 23%

Argentina 14%

European Union 6% Brazil Ukraine 7% 8%

Source: USDA

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FOOD MARKET OVERVIEW Food categories and 12-month price outlook Industry inflation forecasts Category

Subcategory

2011

Poultry Whole Birds Poultry Breasts Poultry Wings Beef Ribeyes Beef Rounds Pork Bellies/Bacon Pork Hams Pork Loins Pork Butts Pork Spare Ribs Dairy Cheese Dairy Butter Oils and Shortening Potatoes Frozen Bakery Desserts Produce Vegetables - Lettuce/Salads Produce Vegetables - Potatoes Produce Vegetables - Tomatoes Produce Vegetables - Onions Produce Vegetables - Other Produce Fruits - Citrus Produce Fruits - Melons Produce Fruits - Grapes Produce Fruits - Bananas Produce Fruits - Berries Produce Fruits - Apples Produce Fruits - Avocados Produce Fruits - Other Tomatoes Canned Fruits Canned Apple Products - Canned (including sauce) Fruits Frozen Vegetables Frozen Seafood Shrimp, Value-Add Seafood Shrimp, Non-Value-Add Seafood Fish, Value-Add Seafood Fish, Non-Value-Add Seafood Other, Value-Add Seafood Other, Non-Value-Add ■ = > 5% Source: U.S. Foods Commodities Department

Impact on contract pricing (year average)

1.0% 8.4% -0.5% 6.2% 3.3% -4.8% -2.7% 3.0% 0.6% 2.8% 3.9% -6.7% 7.0% 3-5% 6.0% 1.0% 5.0% -8.0% -33.0% -8.0% 4.0% 2.0% 5.0% 2.0% 2.0% 4.0% 4.0% 2.0% 2-3% 10.0% 7-8%

■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

5.0% 8.0% 1.0% 1.0% 2.0% 1.0% 1.0% 1.0%

■ ■ ■ ■ ■ ■ ■ ■

■ = 0.1% - 4.9%

■ = < 0%

? W

FOOD MARKET OVERVIEW Food market update Global food prices The steep rise in global food prices has made headlines in recent months along with news of high food inflation in China and India. According to the United Nations, food prices have increased for eight consecutive months (since July 2010) and are now at the highest level recorded since the organization began tracking food prices in 1990.

Food price inflation and food shortages have been a factor in recent political unrest in countries like Egypt and Tunisia. At the World Economic Forum in February, “ …participants expressed worries that rising crop and meat prices will further contribute to political instability in developing and impoverished countries.”3 U.S. food prices Rising commodity prices have an impact on food prices in the U.S., but the impact is mitigated by the low percentage that food makes up of the average household’s expenditures. In addition, the U.S. consumes more processed foods where the commodity cost is only a fraction of

Food as a percentage of household final consumption expenditures1

United States...............5.7%

Russia............................28.7%

United Kingdom........8.6%

India............................32.4%

Australia......................10.7%

China..........................34.9%

Japan.............................14.6%

Indonesia..................45.7%

Mexico..........................24.2%

Azerbaijan................50.4%

WHAT’S CAUSING THE RISE IN FOOD PRICES?

> Increased demand from developing countries. > Droughts and flooding have reduced supply. > Higher oil prices lead to higher transportation costs. > Energy policies create additional demand for corn to produce ethanol. > Investor speculation in commodities markets. > Weak U.S. dollar makes dollar denominated exports more appealing.

the total cost of the product. “About 19 cents of every dollar spent on food covers raw material costs in the United States, so retailers can limit increases by cutting spending on labor or marketing, stated Ephraim Leibtag, a food economist at the USDA in Washington.”4

The USDA projects food prices to rise 4 percent in 2011, following inflation of 0.5-1.5 percent in 2010, the lowest rate of inflation in the last 18 years. The USDA raised their 2011 inflation estimate in February due to rising commodity prices.

C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K

Rising food inflation in China has led the government to restrict lending in an attempt to bring food inflation under control. This strategy in China and India could slow the pace of the global economic recovery. “The worry is that rampant commodity prices may cause another wobble in the world economy. Higher commodity prices act like a consumption tax, transferring income from households and companies which use the resources to companies and countries that produce them. As the producers tend to save more of their income than the consumers, more expensive commodities bear down on global demand.”1

Higher food prices are a key factor in measures of domestic inflation and have the potential to influence monetary policy worldwide. High food inflation has the most impact on countries where a large portion of disposable income is spent on food. For example, in the U.S. families spend only 5 percent of their disposable income on food. However, in Pakistan the percentage jumps to 46 percent.2

References 1 The Economist, “Rising commodity prices both reflect and threaten the world’s economic recovery” 1/20/11. 2 USDA, “Food CPI and Expenditures: 2007 Table 97”. http://www.ers.usda.gov/briefing/cpifoodandexpenditures/data/Table_9 7/2007table97.htm 3 Geewax, Marilyn. “Rising Food Prices Can Topple Governments, Too”. NPR. 1/30/11 http://www.npr.org/2011/01/30/13333180 9/rising-food-prices-can-topple-governments-too (accessed accessed 2/2/11). 4 Bjerga, Alan and Dreibus, Tony. “Record food prices cause riots, stoke U.S. farm economy”. Pittsburgh Post-Gazette. 1/23/11. http://www.postgazette.com/pg/11023/1119815-82.stm (accessed 1/22/11).

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PLASTIC RESINS MARKET OVERVIEW

Plastic Resin Prices

200 150

2011

2010

2009

100

2008

Index - Base Year 1982 = 100

250

0 Feb 08

Aug 08

Feb 09

Aug 09

Feb 10

Aug 10

Feb 11

Source: Bureau of Labor Statistics – Producer Price Index – Commodity – Plastic resins and materials

Plastic resins market update Plastic resin prices may surge as supplies shrink Sales of polypropylene, a primary form of plastic resin used in a number of healthcare supplies, grew almost 10 percent within North America in 2010, but a drop of almost 45 percent in export sales reduced total market growth to 2 percent. Plastic resin price increases have been driven by a number of factors: > Volatility in oil and natural gas prices – Plastic resin cost is subject to extreme volatility due to the daily fluctuation of its basic raw materials derived from crude oil and natural gas. Crude oil and natural gas, and therefore resin costs, are impacted by: global supply and demand, the state of the

economy, exchange Product categories with high plastic resin rates, natural disascontent and 12-month price outlook ters, weather patterns, Standard and safety hypodermics ■ geopolitical events, Endomechanical products ■ and threats of war or Can liners ■ political instability. Price Increase Risk: ■ High ■ Moderate ■ Low Additionally, a factor that may affect the > Quantitative easing and a weak longer-term prices of polypropylene U.S. dollar – According to ICIS is the use of lower priced natural Chemical Business, quantitative gas over crude oil. Ethane, derived easing by the Federal Reserve and from natural gas, produces less historically low bank rates in the propylene than crude oil. However, United States are likely to prompt a a switch back to crude oil is unlikely continual flight from the dollar to because of high switching costs.1 other assets, such as commodities, > Asian demand remains strong – and higher oil and petrochemical Asian demand could remain strong, prices. with higher prices in 2011, despite > Tight supply – Unplanned outages a slowdown in demand for have hit propylene production Chinese-made end products. For sites throughout the Gulf Coast Asia, the shortfall in plastic resin since late November.2 demand from the United States and other developed economies will be mitigated by urbanization in China and other Asian countries.

PLASTIC RESINS MARKET OVERVIEW

PROJECTIONS FOR 2011

Factor

Comments C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K

Oil prices

Impact on plastic resin prices

EIA has raised its forecast for the average cost of crude oil to refiners to $105 per barrel in 2011, $14 higher than in the previous Outlook. EIA has raised its 2011 forecast for WTI by only $9 per barrel to $102 per barrel because of the projected continued price discount for this type of crude compared with other crudes. The current situation in Libya increases oil market uncertainty because, according to various reports, much of the country's 1.8-million bbl/d total liquids production has been shut down and it is unclear how long this situation will continue. The market remains concerned that the unrest in the region could continue to spread.

Demand from emerging

Some moderate demand has been seen from Latin America. Strong

economies

urbanization in China and other Asian nations has curbed any increases in supply.

Shrinking supplies

Resin supply will likely remain tight in 2011 due to decreased capacity and high demand for plastics in China.

References 1. Esposito, Frank. “PP prices ready to surge as supplies ebb.” Plastics News. Pg. 1 Vol. 22. January 17, 2011. 2. Ibid

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RUBBER AND LATEX MARKET OVERVIEW Today, Asia is the main source of natural rubber, with the three largest producing countries (Indonesia, Malaysia and Thailand) accounting for approximately

who have shifted facilities to the Asian region, attracted by the local availability of raw materials and skilled manpower at lower costs.

75 percent of the world’s natural rubber production.1 The near monopoly of Asia in the production of latex-based goods, such as exam gloves, has been ensured by firms

SMR-20 Grade Rubber and Natural Latex Prices (Sen/Kg) 1800

SMR-20 Rubber Latex

1600 1200 1000

200

2011

400

(estimated)

2008

600

2010

800

2009

Sen/Kg

1400

0 Feb 08

Aug 08

Feb 09

Aug 09

Feb 10

Aug 10

Feb 11

Source: Malaysian Rubber Exchange (http://www3.lgm.gov.my/mre/mre.aspx)

Rubber/latex market update The price of latex concentrate has been steadily on the rise in Asian markets for the past nine months. In the production and export of gloves, catheters and latex thread, Malaysia clearly is the top producer. It was estimated that as many as 23,128 million pairs of gloves were produced in Malaysia in 2009 and about 45 percent of the world’s demand for examination and surgical gloves was met by the country. Catheter production was estimated at 119.4 million units.2 According to the International Rubber Study Group, natural rubber demand may

grow by 4.6 percent in 2011.3 Several important trends are expected to impact rubber and latex pricing in 2011:

Product categories with high rubber content and 12-month price outlook Exam gloves Surgeon gloves Price Increase Risk: ■ High

> Weather: Farmers have limited control over production. As with any farmed plant, successful rubber crops are largely dependent upon weather conditions. Unseasonal heavy rains in October 2010 decreased rubber output in India and Thailand. Above-average rain from La Nina weather has impacted rubber output in Indonesia, Malaysia and Thailand.

■ ■ ■ Moderate

■ Low

> Demand from Asia: According to the Association of Natural Rubber Producing Countries, a trade group of major rubber producing nations representing 92 percent of global supply, natural rubber demand in China, the largest consumer of natural rubber, may rise 9 percent this year. Additionally, rising car sales in India and China have fueled tire demand in Asian markets.

RUBBER AND LATEX MARKET OVERVIEW

PROJECTIONS FOR 2011

Robust domestic demand

Impact on rubber prices

C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K

Factor

Comments Robust demand from the healthcare supply chain in the United States continues to increase product pricing, boosted by increased awareness after the H1N1 pandemic.

China growth

China’s vehicle sales may grow 10 percent to 15 percent this year after jumping 32 percent to 18.06 million vehicles in 2010, according to a forecast by the China Association of Automobile Manufacturers.

Weather conditions

Flooding in Asia may impact production in the three largest rubber producing countries.

References 1.Brown, Kevin. “Tapping a Global Market.” FT.com. September 16, 2010. http://www.ft.com/cms/s/0/adbf2340-c1b4-11df-9d9000144feab49a.html#ixzz1Cl9qZW3B (accessed 2/1/2011) 2.Rubber Asia: The Complete Magazine on Rubber 3.Suwannakij, Supunnabul. “Rubber Demand to Grow 4.6% in 2011, Outpace Supply, Group Says.”Bloomberg.com. January 27, 2011 http://www.bloomberg.com/news/2011-01-27/natural-rubber-demand-to-expand-4-6-in-2011-outpace-supply-group-says.html. (accessed 2/1/2011)

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STEEL MARKET OVERVIEW The International Organization for Standardization (ISO) 7153-1 specifies stainless steel for surgical and dental instruments. There is a popular misconception that special “surgical” steels are used for all medical devices. However, as medical devices

represent approximately only 1 percent of the total production tonnage of stainless steel, there is little justification for the development of special surgical steels. Implant applications are an exception to this generalization. Specific requirements for resistance to

Price Increase Risk: ■ High

■ ■ ■ ■ ■

■ Moderate

Source: Business Briefing: Medical Device Manufacturing and Technology 2002

How are global economic conditions impacting pricing pressures in the steel industry? “Steel and steel products have

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

pitting corrosion and the quantity and size of non-metallic inclusions apply to implant-grade stainless steels, but do not apply to commercial stainless steels.

■ Low

seen a rapid increase in pricing over the last two months and there is a likelihood that these pricing pressures will remain in the next 12 months. In this country, our economy is growing very slowly and demand for steel is not driving pricing in the marketplace as much as the demand for the raw materials going into steel. Pricing has been primarily driven by international demand and more specifically by demand from China.” – Daniel R. DiMicco, Chairman and Chief Executive Officer of Nucor Corporation

Largest steel producers (2010)

Largest apparent steel users (2011 forecast)

European Union 16% Japan 10%

China 59%

United States 8% Russia 6%

European Union 15% China 63%

India 8% United States 8% Japan 6%

Source: World Steel Association Note: Apparent steel use reflects the deliveries of steel to the marketplace from domestic steel producers as well as from importers.

STEEL MARKET OVERVIEW Steel market update > Historically, the largest drivers of steel consumption have been the automotive and construction markets, which absorb more than 50 percent of total steel production. > World crude steel production has continued to show a steady increase since April 2009 following a moderate rise in demand and the resumption of work at idled facilities. > In 2001, China’s annual share of world production stood at 17 percent, while the EU accounted for the largest share at 18 percent. Since then, China’s share has tripled – driven by increasing demand for

Year-over-year crude steel production peaked globally in April 2010. • Production increased 79.4 percent in the U.S. to 6.8 million tons. • In the European Union, production increased 107.2 percent in Germany (to 3.9 million tons), 36 percent in Spain (to 1.6 million tons), 57.9 percent in Italy (to 2.4 million tons) and 21.5 percent in Turkey (to 2.4 million tons). • In Asia, production remained nearly flat at 77 million tons – based on China’s production remaining flat at 55 million tons, Japan’s decreasing 4 percent to 9 million tons, and South Korea’s increasing 1 percent to 4.8 million tons. • Production in the Middle East edged up 9 percent to 1.7 million tons due to booming infrastructure spending.

rapid urbanization and large infrastructure projects – while the other producers have seen their shares decrease. > According to the World Steel Association, steel demand in the U.S. was down 41.6 percent in 2009 at 57.4 million tons. However, with the economy in recovery mode, the industrial sector drove an increase in steel demand in 2010. > The World Steel Association expects global steel demand to improve 5.3 percent, to 1,306 million tons in 2011. Sources: Zacks Investment Research, Jun 29, 2010. The Bedford Report, Jan 26, 2011

C O M M O D I T I E S O V E R V I E W ECONOMIC O U T LO O K

PROJECTIONS FOR 2011

Factor Growth in the auto sector

Impact on steel prices

Comments Steel industry experts expect steel prices to increase by $25-30 per ton in the next three to four months, aided by growth in the auto sector.

Retiree costs

U.S. Steel and AK Steel, unlike most foreign producers and some domestic competitors such as Nucor and Steel Dynamics, have significant legacy costs for retirees related to labor contracts.

Demand from China

As the largest producer and consumer of steel, China’s rapid urbanization and investments in capital infrastructure have pushed prices up.

Lukewarm demand in the U.S.

Lukewarm demand in the U.S. may offset recent price increases that have resulted from rising raw material and labor costs.

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ECONOMIC I NSIGHTS ECONOMIC O U T LO O K

Global economic growth & its impact on healthcare

Recent growth in emerging markets, such as China, India and Brazil, is a significant driving force behind growth in the global healthcare sector. For example, a recent report released by investment firm UBS indicates that developing countries are expected to account for $550 billion of annual drug sales per year by 2020, accounting for more than 70 percent of all drug sales growth, pushing China and Brazil ahead of European nations such as France, England, and Germany in market size.1 Even in more developed nations, such as the United States, healthcare expenditures often contribute a significant portion to economic development. Economic growth on a national and worldwide level is often measured

through gross domestic product (GDP), an indicator that measures economic performance. GDP represents the market value of all final goods and services produced within an economy in a given period of time. GDP is divided into four categories of spending: 1 Consumption: goods and services bought by households; 2 Investment: goods bought for future use; 3 Government purchases: goods and services bought by federal, state and local governments; and, 4 Net exports: value of goods and services exported to other countries minus the value of goods and services of imports.

The World Bank has indicated that it expects the global economy to grow between 2.9 and 3.3 percent for 2011, with developing countries generating economic growth between 5.7 and 6.2 percent each year from 2010 to 2012, leading the recovery from global recession. In the January 2011 update of the World Economic Outlook, the International Monetary Fund (IMF) projected global growth at 4.5 percent in 2011. References 1. http://seekingalpha.com/article/222486-emerging-market-gdp-growth-should-drive-healthcare-etfs (accessed February 3, 2011) 2. https://www.cms.gov/NationalHealthExpendData/25_NHE_Fact_Sheet.asp (accessed February 3, 2011)

Economic experts have indicated that the United States economy grew by 2.9 percent for all of 2010 and healthcare capital outlays as a percentage of GDP are expected to rise to 16.2 percent, which is well above the 9.9 percent global average. According to the Centers for Medicare & Medicaid Services (CMS), the healthcare share of GDP in the U.S. is projected to reach 19.3 percent by 2019, and growth in national healthcare expenditures is expected to average 6.1 percent per year over a 10-year period (2009 – 2019).2

Real GDP Growth (Annual Percentage Rate) 10

percentage

7.5

Emerging and developing economics Advanced economics World

5 2.5 0 -2.5

1980

1985

1990

1995

2000

2005

2010

2015

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Premier Guide to Economic Indicators Price indexes: CPI, PPI, and CMS marketbaskets What price indexes are important in the healthcare industry? Three key price indicators considered by industry stakeholders, such as suppliers, healthcare systems, and the Centers for Medicare & Medicaid Services (CMS), when examining inflationary pressures in the marketplace include the consumer price index (CPI), producer price index (PPI), and the CMS marketbaskets.

goods and services as purchased during a base period. These indicators reflect price inflation facing providers in the provision of medical services. Below is a brief summary of each index and recent relevant data that aim to provide member organizations with additional resources for budgeting purposes. How are these indexes calculated?

CPI and PPI are both economic indicators that measure the average change over time in the prices of fixed goods and services. A primary use of the CPI is to compare a household’s cost for a specific basket of finished goods and services with the cost of the same basket during an earlier benchmark period. The weight given to each basket item is fixed. The PPI uses a similar benchmark approach, but instead it measures price changes reported by establishments at the wholesale level rather than at the retail level. While both indices are measures of inflation, they differ in the goods and services eligible for inclusion.1 Economic indicators that are more specifically used within the healthcare industry are CMS marketbaskets. CMS uses the marketbaskets to measure how much more, or less, it would cost at a later time to purchase the same mix of

Consumer price index (CPI) The CPI measures price change from the consumer’s perspective and includes goods and services purchased for personal consumption by urban U.S. households. While there are many categories within the CPI, the two most commonly used in healthcare are the CPI for all urban consumers (“CPI-U”) and the CPI for medical care. Medical care is one of eight major categories in the consumer price index. There are two medical care classifications, medical care commodities (MCC) and medical care services (MCS), each containing several item categories (strata).2 The CPI-U increased 0.5 percent in February 2011, and increased 2.1 percent before seasonal adjustment for the 12 months from February 2010 to February 2011. The

index for medical care rose 2.9 percent from February 2010 to February 2011, and the categories of medical care commodities (MCC) and medical care services (MCS) increased 2.7 percent and 3.0 percent, respectively, during this same time period.3 Producer price index (PPI) In contrast to CPI, PPI measures price change from the perspective of the seller and includes the entire market output of U.S. producers. PPIs capture price movement prior to the retail level. Therefore, they may foreshadow subsequent price changes for business and consumers.4 The PPI for finished goods, which is the most commonly used measure of PPI, rose 5.6 percent for the 12 months ended February 2011. The 12-month change from February 2010 to February 2011 for the net output of selected industries is: pharmaceutical and medicine manufacturing, 4.2 percent; medical equipment and supplies manufacturing, 2.4 percent; and surgical and medical instrument manufacturing, 0.6 percent.5 Additional information may be obtained from the Bureau of Labor Statistics at www.bls.gov/CPI and www.bls.gov/PPI

CMS marketbaskets The CMS marketbaskets are used to update payments and cost limits in the various CMS payment systems. Individual marketbaskets are produced for many of the payment systems to accurately measure the price inflation facing each of these providers: > Prospective Payment System (PPS) hospital marketbasket – updates inpatient hospital operating and outpatient PPS payments; updates cost limits for children’s hospitals, cancer hospitals, and religious non-medical healthcare institutions. > Skilled nursing facility marketbasket – updates skilled nursing facility PPS payments. > Home health agency marketbasket – updates home health PPS payments. > PPS hospital capital marketbasket – updates inpatient hospital capital PPS payments. > RPL marketbasket – updates inpatient rehabilitation, psychiatric, and long-term care PPS payments. > Medicare economic index – used in conjunction with the sustainable growth rate to update the physician fee schedule.6 The marketbaskets are constructed from

mutually exclusive spending categories, which are weighted using data collected via hospitals’ Medicare cost reports and corresponding price indices. The sum of the products of each category weight and corresponding price index gives the overall hospital price index. The price indices, or price proxies, used in calculating the marketbasket include Bureau of Labor Statistics (BLS) data, most commonly the producer price indices (PPI). The marketbasket levels and percent changes are forecasted quarterly, with each new forecast containing an additional quarter of historical data.7 CMS sets payment updates prospectively for the following fiscal year using a forecasted marketbasket containing the latest available data at the time the final regulation is published. Once this update has been determined, it is generally not revised for more currently available data. However, because marketbasket data are updated quarterly, the current marketbasket may be different depending on the differences in forecasted data and data currently available.8 The marketbasket of interest for most hospitals is the Inpatient Prospective Payment System (IPPS), which is expected

to closely approximate a hospital’s projected change in Medicare revenue. CMS revised its estimated marketbasket update for hospitals that report quality data in FY 2011 from 2.4 percent in the proposed rule to 2.6 percent in the final ruling. It is important to note that the key cost category in the index is compensation expense, which includes labor and benefits and is weighted at 60 percent. However, the index also includes major purchasing categories, such as food, pharmaceuticals, blood and equipment. Additional information may be obtained from the Centers for Medicare & Medicaid Services at www.cms.gov/MedicareProgramRatesStats/05_MarketBasketResearch.asp

References: 1. www.bls.gov/ppi/ppivcpi.pdf 2. www.bls.gov/cpi/cpifact4.htm 3. www.bls.gov/cpi/home.htm 4. www.bls.gov/ppi/ppiover.htm#Link6 5. www.bls.gov/ppi/ 6. www.cms.gov/MedicareProgramRatesStats/04_ MarketBasketData.asp 7. www2.cms.gov/MedicareProgramRatesStats/ downloads/ info.pdf 8. Ibid

CPI-U, MEDICAL CARE CPI, AND IPPS MARKET BASKET RATES 2005-2011 5.0%

3.0%

■ ▼

▼ ■

■ ▼

▼

▼ ■

2.0%

ECONOMIC I NSIGHTS ECONOMIC O U T LO O K

Annual percent change

4.0%

▼ ■

1.0% .0%

■ -1.0% 2005

2006

2007

2008

2009

2010

2011

■ CPI-U Medical Care CPI ▼ Medicare Market Basket - Inpatient Hospital

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ECONOMIC GUIDES ECONOMIC O U T LO O K

Premier budgeting calculators Premier’s Medical-Surgical Inflationary Calculator A resource to help proactively manage medical-surgical supply spend in 2011 The Medical-Surgical Inflationary Calculator is a quick and easy resource designed to help members estimate Premier medical-surgical supply spend during their budgeting process. The calculator: • Compares Premier contractual price protection and supplier price inflation

estimates to deliver a detailed estimate of projected supply costs. • Prepopulates your spend profile from one SpendAdvisor® report and enables you to manually adjust for expected changes in spend. • Alerts members to contract categories that will be renegotiated in the current year. • Provides aggregate inflation estimates by line of business.

• Analyzes spend at the individual facility or IDN level. The calculator is located in the Contract Resources section of Supply Chain Advisor (login required). If you would like to learn more about the Medical-Surgical Inflationary Calculator, please contact the Premier Solution Center at solutioncenter@premierinc.com.

Premier’s Drug Budget Tool

A resource to help navigate the way to proactive drug expense management in 2011-2012

The tool can be found in the PharmacyConnect® section of Premier’s website under Financial Management (login required).

The Drug Budget Tool V 5.6 saves time and money by prepopulating your profile for analysis and enabling you to analyze your drug purchases. The tool is designed to: • Analyze 90 percent of your annual drug purchases. • Allow you to analyze entire systems as well as multiple hospitals from one SpendAdvisor® report. • Automatically fill in ALL the analytic cells of the tool.

If you would like to learn more about the Drug Budget Tool, please e-mail Jerry Frazier, director of Premier’s Center for Evidence-Based Pharmacy Practice, at jerry_frazier@premierinc.com.

Pharmacy – projections are derived from the Premier Drug Budget Development Tool

Average of supplier inflation estimates: The supplier’s estimate of the average percent increase is based on a true average.

All others (except Foodservice) – projections reflect the expected weighted average percent change in contract pricing for the existing contract portfolio as of 3/1/2011

SERVICE LINE

RANGE OF SUPPLIER ESTIMATES

AVERAGE OF SUPPLIER INFLATION ESTIMATES

PROJECTED PREMIER CONTRACT INFLATION ESTIMATES

Alternate Site Healthcare

0% - 6%

2.1%

0.19%

Cardiovascular

0% - 15%

5.6%

0.18%

Clinical Laboratory Services

0% - 8%

1.9%

0.97%

Facilities

0% - 15%

4.3%

1.97%

2.0% - 5.5%

3.8%

Not Applicable

Imaging

0% - 10%

1.5%

0.36%

IT / Telecom

0% - 5%

2.0%

0.04%

Materials Management

0% - 12%

3.1%

0.76%

Not Applicable

0.30%

0% - 15%

3.6%

1.34%

Not Applicable

4.00%

Surgical Services

0% - 15%

2.5%

0.52%

Women & Children's

0% - 5%

1.9%

0.18%

Foodservice *

Medical Surgical Distribution Nursing Pharmacy **

ECONOMIC GUIDES ECONOMIC O U T LO O K

Inflation summary

Projected Premier contract inflation estimates are calculated as follows:

Range of supplier inflation estimates: These figures show the range of supplier reported inflation estimates for the various products within a service line. The range does not take into account Premier contract price protection or utilization data.

* Foodservice estimate extracted from Bureau of Labor Statistics ** Pharmacy data derived from Premier's Drug Budget Development Tool Estimated inflationary changes are subject to change. O UTLO O K • 0 3 .11 |

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FOR FURTHER INFORMATION To learn more about this publication, please visit premierinc.com/economicoutlook or email EconomicOutlook@premierinc.com.