Economic Outlook: Spring 2013 by Premier, Inc.

outlook economic

>>> PROVIDING STRATEGIC LEADERSHIP TO FINANCIAL AND CLINICAL HEALTHCARE EXECUTIVES

BEY ND THE HOSPITAL WALLS

RE-INVENTING THE AMERICAN HOSPITAL

Payment reform and the impact on the continuum of care

FACE TIME WITH DR. DAVID CUTLER

CONNECTING CARE ACROSS THE CONTINUUM: The crucial role of IT

SPR I NG • 2 0 1 3 • A T W E LV E M O N T H OUTLOOK

letter 04 EXECUTIVE LETTER THE RIDE TO CONNECTED CARE

Mike Alkire, chief operating officer, Premier healthcare alliance

features 06 BEYOND THE HOSPITAL WALLS

RE-INVENTING THE AMERICAN HOSPITAL Payment reform and the impact on the continuum of care

FACE TIME WITH DR. DAVID CUTLER

CONNECTING CARE ACROSS THE CONTINUUM The crucial role of IT

SUPPLY CHAIN TECHNOLOGY FOR SMALLER FACILITIES Casestudies ineProcurement

THE MOVETOWARD POPULATION HEALTH MANAGEMENT: O&AWITH JOSEPH DAMORE

22 PERSPECTIVES THE IMPERATIVE FOR CONNECTIVITY: Working toward accountable care .....................................................……22

About the cover

32 TRENDS IN COST AND UTILIZATION CLINICAL INNOVATION IN PERCUTANEOUS CORONARY INTERVENTION........................................................…..32 PCI IN THE OUTPATIENT SETTING: Spotlight on Premier member data............................................................…..36 THE COST OF NON-ADHERENCE: A look at Commcare pharmacy.....…...................................................................38 RESOURCE UTILIZATION BEST PRACTICES: Diagnostic imaging................................................................................42

The cover design demonstrates the period of great opportunity and innovation that the U.S. healthcare system is entering. Recent discussions surrounding healthcare have been primarily negative, focusing on the costs that need cutting and the changes that need to be made. In moving beyond the hospital walls to a more integrated continuum of care, there is an open field of potential for healthcare stakeholders to reinvent and improve the way that patients receive care.

48 ECONOMICS A CONVERSATION WITH -Sarah Watt, economic analyst, Wells Fargo Securities...........................................48 BEHIND THE NUMBERS: Economic and supply chain trends impacting our members................................52 AN UPDATE ON HOSPITAL PERFORMANCE METRICS.................................................................................................59 PREMIER’S PATIENT VOLUME TRENDS...............................................................................................................................62 Premier’s guide to economic indicators……………..........................………........................………...........................................66 Premier’s supply chain solutions……………....................................……...………........................………......................................68 Premier’s inflation summary………..………………………….................…....….………........................………...........................….....69

About the publication The Economic Outlook is Premier’s flagship publication that highlights emerging economic and industry trends impacting our membership and shaping the healthcare landscape. As an important thought leadership resource, the publication provides strategic insight to financial, clinical and supply chain healthcare executives across the country.

70 COMMODITIES OVERVIEW 2013 COMMODITIES OUTLOOK: Looking at the global economy....………........................……….............................70 Minimizing raw materials risk.......................................................……...…....………........................………...............................72 Copper market overview……..……………...........................................…...…….………........................……….................................74 Cotton market overview……………………………....................................……......………........................………...............................76 Energy market overview……………………………………………..................…….....………........................………...............................78 Food market overview……………………………………………………………..............………........................………............................... 82 Plastic resins market overview…………………………………………….......…......………........................………............................... 84 Rubber market overview………....................……………………….....................….………........................……….............................. 86 Steel market overview..………...………….....….....................................…….......………........................………................................ 88

A key aspect of the long-term strategy for the Outlook is to collaborate with internal and external subject matter experts to build consensus from diverse points of view. The publication harnesses the expertise of our network of healthcare leadership to illuminate best practices and strategies needed to drive performance improvement. We strive to provide our members and healthcare organizations with valuable, timely information and business intelligence derived from the industry’s most progressive participants. This edition of the Outlook is focused on connecting care across the continuum. In the shift away from fee-for-service and toward accountable care and population health management, there is a need to redesign the way healthcare is delivered to provide greater connectivity between health systems, providers and patients. The content in this edition is intended to help our readership better understand the implications of healthcare reform and provide insights into existing and evolving opportunities for healthcare stakeholders to improve connectivity and patient care in a newly-shaped marketplace. We welcome your comments and questions. For additional information, please email economicoutlook@premierinc.com.

premierinc.com/economicoutlook

OUTLOOK LEADERSHIP

EDITORIAL STAFF

Managing director Kayla Sutton

Design and production Christopher Cardelli, director, creative services Sung Ginader, senior graphics designer, creative services Bryan Verrone, project manager, creative services Arkon Stewart, designer, StewartMarr Creative

Executive sponsors Mike Alkire, chief operating officer Durral Gilbert, president, supply chain services Amy Denny, vice president, contract management A special thanks to Eric Johnson, Rich Westbay, Jeff Willink, Tina Harlan, Laura Yandell and Ed Drouillard for their contributions to this edition of the Economic Outlook.

Editorial support Amanda Forster, senior director, public relations Alven Weil, director, public relations Bryan Alsop, senior manager, corporate communications OUTLO OK • SPR I NG 2 013 |

letter 04 EXECUTIVE LETTER THE RIDE TO CONNECTED CARE

Mike Alkire, chief operating officer, Premier healthcare alliance

features 06 BEYOND THE HOSPITAL WALLS

RE-INVENTING THE AMERICAN HOSPITAL Payment reform and the impact on the continuum of care

FACE TIME WITH DR. DAVID CUTLER

CONNECTING CARE ACROSS THE CONTINUUM The crucial role of IT

SUPPLY CHAIN TECHNOLOGY FOR SMALLER FACILITIES Casestudies ineProcurement

THE MOVETOWARD POPULATION HEALTH MANAGEMENT: O&AWITH JOSEPH DAMORE

22 PERSPECTIVES THE IMPERATIVE FOR CONNECTIVITY: Working toward accountable care .....................................................……22

32 TRENDS IN COST AND UTILIZATION CLINICAL INNOVATION IN PERCUTANEOUS CORONARY INTERVENTION........................................................…..32 PCI IN THE OUTPATIENT SETTING: Spotlight on Premier member data............................................................…..36 THE COST OF NON-ADHERENCE: A look at Commcare pharmacy.....…...................................................................38 ABSTRACT: Resource utilization best practices in diagnostic imaging...................................................................42

44 ECONOMICS A CONVERSATION WITH Sarah Watt, economic analyst, Wells Fargo Securities............................................44 BEHIND THE NUMBERS: Economic and supply chain trends impacting our members................................48 AN UPDATE ON HOSPITAL PERFORMANCE METRICS.................................................................................................55 PREMIER’S PATIENT VOLUME TRENDS...............................................................................................................................58 Premier’s guide to economic indicators……………..........................………........................………...........................................62 Premier’s supply chain solutions……………....................................……...………........................………......................................64 Premier’s inflation summary………..………………………….................…....….………........................………...........................….....65

66 COMMODITIES OVERVIEW 2013 COMMODITIES OUTLOOK: Looking at the global economy....………........................……….............................66 Minimizing raw materials risk.......................................................……...…....………........................………...............................68 Copper market overview……..……………...........................................…...…….………........................……….................................70 Cotton market overview……………………………....................................……......………........................………...............................72 Energy market overview……………………………………………..................…….....………........................………...............................74 Food market overview……………………………………………………………..............………........................………............................... 78 Plastic resins market overview…………………………………………….......…......………........................………............................... 80 Rubber market overview………....................……………………….....................….………........................……….............................. 82 Steel market overview..………...………….....….....................................…….......………........................………................................ 84

OUTLOOK LEADERSHIP

EDITORIAL STAFF

Managing director Kayla Sutton

Editorial support Amanda Forster, senior director, public relations Alven Weil, director, public relations Bryan Alsop, senior manager, corporate communications O UTLO OK • SPR I NG 2 0 1 3 |

Executive letter The ride to connected care

become the healthiest they can be. Newly built Mosaic Life Care clinics were created to provide a natural, calming effect. Patients are greeted at the door with an iPad with reading materials and games already downloaded based on personal preferences. A fountain gurgles quietly in the background. “People actually WANT to come here,” Dr. Laney said. Not long ago, a gentleman visited Mosaic complaining that he wasn’t feeling well. He said his wife of 35 years had recently passed away. She always did the cooking, and since her death, his diet had suffered. His newly unemployed son moved back in, and their relationship was strained. A nonclinical caregiver, called a Life Coach, took the man to the grocery store, taught him how to choose healthy meals and suggested topics for conversation with his son.

Members of the Premier healthcare alliance, The thrill of receiving the 2009 Malcolm Baldrige National Quality Award left Heartland Health, a St. Joseph, MO, integrated healthcare system, wondering: What now?

“Instead of giving him an anti-depressant,” Dr. Laney explained, “we treated the root cause of his problems, his diet and his relationship with his son.” Both the man and his son continue their relationships with the caregivers at Mosaic. Connecting care

As a first step, Heartland’s leadership team studied innovative companies, and Harley-Davidson was one that stood out. Its success came not from building motorcycles but from creating lifestyles. As one Harley executive put it, “What we sell is the ability for a 43-year-old accountant to dress in black leather, ride through small towns and have people be afraid.”

“If Harley is a lifestyle company, we wondered why we couldn’t be a life-care company,” said Heartland President and CEO Mark Laney, MD. “That’s when we shifted focus to our patient experience.” What emerged is a new, patient-centered healthcare model, Mosaic Life Care, which views a person’s health in terms of life’s components – health, lifestyle, career, finances, creativity, relationships and spirituality – and takes a holistic, lessexpensive approach to helping people

Care providers can’t simply be manufacturers of healthcare or sick care. Whether it’s a 43-year-old accountant draped in leather and proudly riding a Harley, or a widower unsure of his present and scared for his future, providers need to link the care people receive to the lives they lead. Healthcare reform has placed an added emphasis on connecting care. In fact, according to results from our semiannual Economic Outlook survey, the number of respondents citing clinical coordination of care as a top driver of healthcare costs jumped 23 percent from a year ago. Among respondents: • 97 percent consider connecting care across the continuum important for

quality improvement initiatives to be effective; and • 61 percent say their health systems have the capabilities to do so, and 80 percent of those feel they’re doing it effectively. Albuquerque, NM-based Presbyterian Healthcare Services is driving coordinated care through its Hospital at Home program and has seen a 19 percent reduction in costs for participating patients. Its success is attributed to shorter stays and fewer lab and diagnostic tests, particularly for patients with congestive heart failure, pneumonia and urinary tract infections. Patient satisfaction scores have also increased significantly, with patients receiving multiple daily visits from caregivers, some of which last more than an hour. According to the program’s lead physician, Melanie Van Amsterdam, “Patients who have been in the hospital multiple times realize it is not always the healthiest place for them, and they are thrilled to be at home instead.”

Patient empowerment Patient-centric programs ultimately empower patients and their families with knowledge about their care, something that is essential to quality and efficiency. A recent Health Affairs study1 suggests that the medical expenses of highly engaged patients were up to 21 percent lower on average, highlighting the important role that patients play in determining outcomes. Patient empowerment and education are central to performance improvement programs such as Premier’s QUEST® collaborative, as well as the Center for Medicare & Medicaid Innovation’s Partnership for Patients (PfP) initiative. QUEST top performer SSM St. Mary’s Hospital (Centralia, IL) uses nurse health coaches to identify what’s important to patients so that together they can set goals that encourage appropriate lifestyle changes. Patients and families nationwide are also being engaged by hospitals participating

in Premier’s PfP Hospital Engagement Network (HEN). For example:

are medically necessary, how to take them and potential side effects.

importantly, it lends itself to significant costs savings and a better quality of life.

• Since recently hospitalized patients are often temporarily or permanently impaired, participating providers have adopted “teach back” strategies. They ask patients or caregivers to demonstrate their understanding of post-discharge instructions by explaining them in their own words.

All of these efforts are paying off. QUEST hospitals have saved more than 90,000 lives and $9.1 billion in 4 ½ years. And in just nine months, Premier HEN hospitals have avoided more than 51,000 preventable readmissions, and approximately $870 million in unnecessary costs.

As healthcare becomes more and more complex, there will always be opportunities to better connect care across the continuum, even for most integrated delivery networks. And that’s because when care is truly patientcentric, it focuses on so much more than what’s provided within the four walls of a care setting. Instead, it extends well into the communityandintopeople’shomesandlives.

Life-care providers • With approximately two-thirds of preventable readmissions caused by medication-related adverse events, Premier HEN members have begun conducting comprehensive medication reviews prior to discharge. This ensures patients understand their drugs, why they

Whether it’s a motorcycle/lifestyle manufacturer or a healthcare/life-care provider, a person-centric approach that connects to different parts of someone’s life creates a brand loyalty that can only improve customer satisfaction. More

Sincerely,

Mike Alkire Chief operating officer Premier healthcare alliance

Reference 1. “Patient involvement lowers health costs, study says”, MedlinePlus, http://www.nlm.nih.gov/medlineplus/news/fullstory_133729.html

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Executive letter The ride to connected care

in Premier’s PfP Hospital Engagement Network (HEN). For example:

are medically necessary, how to take them and potential side effects.

importantly, it lends itself to significant costs savings and a better quality of life.

Sincerely,

Mike Alkire Chief operating officer Premier healthcare alliance

Reference 1. “Patient involvement lowers health costs, study says”, MedlinePlus, http://www.nlm.nih.gov/medlineplus/news/fullstory_133729.html

OUTLO OK • SPR I NG 2013 |

BEYOND THE HOSPITAL WALLS ECONOMIC O U T LO O K

AHOSPITAL MERICAN RE-INVENTING THE

Payment reform and the impact on the continuum of care > Dan Mendelson is CEO of Avalere Health, a strategic advisory company providing product and data solutions that help healthcare organizations improve their operational effectiveness. Prior to founding Avalere in 2000, he directed the healthcare portfolio at the White House Office of Management and Budget (OMB). He is on the Board of Coventry Healthcare, is Adjunct Professor at Duke University’s Fuqua School of Business, speaks frequently on provider strategy, and can be followed @dnmendelson. Mary Coppage is a manager with Avalere Health, where she provides strategic support to Avalere clients, including hospitals and health systems, on payment and delivery reform, care transitions, and health information technology policy. Before joining Avalere, she held operations, compliance, and member advocacy roles at Presbyterian Health Plan in New Mexico. Erik Johnson is a senior vice president with Avalere Health. Using rigorous analytics and practical experience, he provides strategic guidance to hospital and health system clients on healthcare technology, operations, and financial issues. Before coming to Avalere, he was a managing director with Manatt Health Solutions and the Advisory Board Company.

While leaders in Washington fret over deficit reduction, Medicare reform, and the future of Obamacare, a quiet re-invention of the American hospital is proceeding. Payment reform aims to reward value over volume by holding providers explicitly accountable for outcomes while creating clear incentives for cost containment. Emerging payment models are taking the initial steps by focusing on specific, high-profile metrics to which payment will be tied, including the rate of unnecessary readmissions. Hospitals that don’t figure out how to care for patients across the continuum of care will be rendered obsolete.

Emerging payment models are taking the initial steps by focusing on specific, high-profile metrics to which payment will be tied, including the rate of unnecessary readmissions.

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An estimated 20 percent of Medicare beneficiaries with a hospital stay in any given year are readmitted within a month of discharge,1 and in 2008, preventable readmissions cost an estimated $25 billion.2 Just as important, 10 percent of beneficiaries account for 58 percent of Medicare spending.3

> Our current fee-for-service payment system often works against true improvements in cost reduction and quality improvement. It implicitly encourages excess volume while discouraging coordination of care across sequential sites. The Centers for Medicare & Medicaid Services (CMS) has been incrementally modifying payment systems for years to encourage provider accountability through various programs and demonstrations. More recently, private payors have also followed suit and started to move their own quality incentives to the provider level. The Affordable Care Act accelerated this process by enhancing CMS’ authority and experimental reach.

New payment systems are forcing a focus on care coordination Payment penalties for hospitals demonstrating above-average rates of readmissions were introduced into the Medicare program last October in an attempt to address major gaps in quality. An estimated 20 percent of Medicare beneficiaries with a hospital stay in any given year are readmitted within a month of discharge,1 and in 2008, preventable readmissions cost an estimated $25 billion.2 Just as important, 10 percent of beneficiaries account for 58 percent of Medicare spending.3

The penalties are small in terms of their dollar impact, but they represent a fundamental shift in a hospital’s scope of accountability by factoring in post-discharge activities that hospitals can’t necessarily control or have traditionally not paid for. The goal is to foster coordination among hospitals and post-acute and long-term care providers to prevent such readmissions. Present payment systems do not always create incentives for healthcare systems to think this way. Quality-related challenges – such as the lack of standardized discharge planning processes, poor follow-up, failure to reconcile medications, insufficient or missing data transfer post-discharge, and problems with patient/family engagement – can also complicate effective care transitions. CMS is tackling the care coordination problem from a number of angles. Its most comprehensive attempt to date is through two accountable care organization (ACO) programs, the Medicare Shared Savings Program and the more sophisticated Pioneer ACO model run by the Center for Medicare & Medicaid Innovation. Both programs are based on the concept of shared savings, with Pioneer offering the option of partial capitation in later years of the program. CMS is also developing the Bundled Payments for Care Improvement Initiative, which includes care episodes that span acute and post-acute care settings. ACOs and bundling represent the future of care delivery, yet much remains to be learned, and, as

ECONOMIC O U T LO O K

flow in order to identify preferred partners in the care continuum. Under current public and private programs, hospitals bear most of the burden for reducing readmissions and addressing inefficient care, and there are no signs that payors will let up. In fact, the metrics against which payments are assessed will only become more stringent over time. As a result, hospitals must take the lead in identifying opportunities that support alignment of their new business imperatives for improving quality of care, risk management, and financial performance.

ACOs, bundling, readmission penalties, and the spending-perbeneficiary measure all have something in common. All extend provider responsibility for patient care beyond a single inpatient stay and well beyond a facility’s four walls.

Hospitals have a number of options to identify and better manage their patients across the care continuum. Perhaps two of the most important approaches are identifying at-risk populations and the collaborations that can best mitigate risks.

Hospitals need to prepare to take on health-system risk

In addition to finding appropriate collaborators along the care continuum, hospitals must understand the local populations they serve and their health needs. Specifically, hospitals should analyze patients with select diseases and benchmark utilization relative to other facilities in their local market area and region, as well as to the national average. Including socioeconomic indicators, such as homelessness, financial status, family/ caregiver support, drug dependence, or other community variables, would elevate such techniques to more precisely stratify patient readmission risk.

To meet standards associated with these and other programs, providers will be forced to leave their silos and collaborate with a range of other providers across the care continuum. Success depends on identifying the right providers with which to collaborate. Payment reform will inevitably drive providers to seek greater visibility into both upstream and downstream patient

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BEYOND THE HOSPITAL WALLS

a result, the models continue to be voluntary under Medicare. CMS’ implementation of the Hospital Inpatient Valued-Based Purchasing Program (VBP) reinforces the longitudinal nature of the new focus hospitals must develop. The VBP program will include a new spending-per-beneficiary measure that is another example of how hospitals are being held responsible for a patient’s full episode of care. This measure compares expenditures for a Medicare beneficiary based on Part A and Part B spending from three days before to 30 days after the inpatient stay.

> Hospitals, as well, should utilize riskassessment tools at admission and discharge to identify specific patients most likely to be readmitted within 30 days.

Knowing where discharges go is key to improving care coordination Discharges to home For the 64 percent of patients who go home after a hospitalization,4 partnerships among those in the community referral network—consisting of primary care physicians and specialists, pharmacies, retail or outpatient clinics, and other community-based organizations—contribute to keeping patients “safe and sound.” Yet, these partnerships are not always fully leveraged. In fact, only 44 percent of Medicare beneficiaries discharged to home have a primary care visit within two weeks of discharge,5 and 60 percent of frail elderly patients fail to follow their full prescribed medication therapy after leaving the hospital.6 The Center for Medicare & Medicaid Innovation is supporting new postdischarge collaborations through the Community-Based Care Transitions Program. Such programs can provide important lessons about which home discharge services and collaborations are most effective in reducing readmissions. Discharges to post-acute care (PAC) or long-term care (LTC) Knowing PAC provider-level readmission rates is critical to a hospital’s discharge strategy. Over 20 percent of patients are discharged from the hospital to a PAC/LTC facility, yet that patient population returns to the hospital at higher rates than those discharged to home, most likely due to the more-complex nature of the patient

population. Understanding the PAC/LTC facilities in a hospital’s service area by examining discharges and readmissions will allow hospitals to identify the most clinically appropriate and cost-effective PAC settings. For example, an analysis using Avalere’s Vantage Care Positioning SystemTM, found that one hospital in Indiana discharged patients to 112 different skilled nursing facilities (SNFs) for post-acute care in 2010. Not surprisingly, SNF readmission rates were 22 percent. For this hospital, less concern with finding any empty PAC bed and more focus on a strategic discharge approach and care-transition partnerships holds the potential to improve patient readmission rates and lower spending. Operators of PAC facilities are beginning to recognize their new role in helping hospitals better manage patient care. In the past, the two had little incentive to work together. Now payment reform is spurring a mutually beneficial collaboration. Some hospitals engage with PAC partners by sending practitioners to the PAC facility to facilitate communication and collaboration among PAC staff and hospitalists, case managers, and physicians. Further, many SNFs and home health agencies run care transitions programs to ease the burden on hospital case management resources. These new collaborations, along with a better understanding of data and a more robust approach to patient risk stratification, can help shift an otherwise catch-all discharge process to one that is strategic, targeted, and efficient. Discharges to assisted living facilities (ALFs) ALFs have emerged as additional potential downstream collaborators for hospitals. Not traditionally considered care providers, many ALFs have steadily built their own

care-giving capabilities over the last few years. In particular, given the vulnerabilities that their residents exhibit, ALFs represent significant potential for reducing unnecessary readmissions and emergency room visits. With focus areas surrounding fall prevention and memory care, ALFs have targeted the health needs of their own residents and made significant clinical investments to address them. Hospitals, in turn, have begun to address these populations and residencies creatively, with investments of their own expertise and personnel to augment ALF efforts.

Managing care transitions creates hospital value The re-invention of American hospitals underway today is, in part, about how to effectively manage care transitions across the care continuum. In meeting this challenge, hospitals have the opportunity to thrive in any payment reform environment – whether value-based purchasing, shared savings, bundled payment, or global payment. Understanding patient populations and the capabilities of providers beyond a hospital’s four walls will ultimately be a key factor in defining the value of American hospitals in the context of integrated care. References 1. Jencks S, et al. "Rehospitalizations Among Patients in the Medicare Fee-for-service Program," N Engl J Med 2009; 360: 1418-28. 2. “Preventing Hospital Readmissions: A $25 Billion Opportunity,” National Priorities Partnership, 2010. 3. Jacobson, G., et al. “Medicare Spending and Use of Medical Services for Beneficiaries in Nursing Homes and Other Long Term Care Facilities: A Potential for Achieving Medicare Savings and Improving the Quality of Care,” The Henry J. Kaiser Family Foundation, October 2010. 4. Analysis from Avalere’s Vantage Care Positioning System. 5. Goodman, DC, Fisher ES, Chang C. “After Hospitalization: A Dartmouth Atlas Report on Post-Acute Care for Medicare Beneficiaries,” Dartmouth Atlas website, 2011. 6. Wright, R.M., et al. “Effect of Central Nervous System Medication Use on Decline in Cognition in Community-dwelling Older Adults: Findings from the Health, Aging and Body Composition Study,” J Am Geriatr Soc 2011. 57: 243-250.

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David Cutler, PhD, is the Otto Eckstein Professor of Applied Economics at Harvard University. Cutler served on the Council of Economic Advisers and the National Economic Council during the Clinton administration and has advised the presidential campaigns of Bill Bradley, John Kerry and Barack Obama. He was also senior healthcare advisor for the Obama presidential campaign. Currently, Cutler is a research associate at the National Bureau of Economic Research, a member of the Institute of Medicine, and a Fellow of the Employee Benefit Research Institute. Cutler is the author of Your Money or Your Life: Strong Medicine for America’s Healthcare System.

with DR. DAVID CUTLER, Harvard University

The Institute of Medicine (IOM) recently suggested that 30 percent of healthcare spending is related to waste or inefficiencies.1 What do you think are the areas with the biggest opportunities for removing waste, and how can healthcare providers go about doing so?

different categories, with the first being care that’s not delivered appropriately. This includes overuse (surgery that is not needed); underuse for chronic disease (patients who don’t take medication as prescribed and have an acute event); and genuine mistakes (infections or operating on the wrong body part). If total waste is 30 percent of healthcare spending, then care that’s not delivered properly is probably about half of that.

David Cutler: A number of reports have said this, so I’d say it’s a consensus estimate. I think waste falls into a few

Another big problem is very high administrative costs.2 A third issue is excessive pricing, as when people use a $3,000 O UTLO OK • SPR I NG 2 0 1 3 |

BEYOND THE HOSPITAL WALLS

TIME

FACE

scan that is available nearby for $1,000. And then there’s fraud and abuse. To address waste, I think providers should think about the efficiency with which they operate. The way they can do that is by asking themselves how they can provide the right care for the right patient. That will eliminate guesswork as well as the issue of doing too much or too little.

In addition to waste, you mention underuse of care as a main problem our healthcare system faces. Approximately 10 percent of patients do not fill their initial oral oncolytic prescription,3 and estimates state somewhere between 20 and 30 percent of chronic disease patients do not stick with their treatment plans.4 In response to this, some pharmacy benefit management (PBM) programs are developing value-based benefits (co-pay reduction for compliant patients) to incent compliance with medication protocols. What do you think about these programs? Are there other ways to tackle “underuse of care?” David Cutler: I think underuse of care is a significant issue, and one of its major components is underuse of prescriptions. A Merck study5 identified several reasons why people don’t take their medications appropriately. Some can’t afford them. Some don’t understand what their physicians prescribed. Some believe all medications are evil and that they’re being ripped off. And then there are the people who just forget. Knowing that people don’t take their medications still doesn’t provide an easy

solution for the problem. By asking patients a series of questions, you can determine where their weaknesses are and then find a means to address specific issues. Value-based benefits are really designed for the situations where price is a big deal. If you’re taking a drug that’s clearly appropriate for you, then we (the PBM) will waive the copay. It’s a very good start and a great mediator for patients with an affordability problem. But it’s not the total cure. Other ways to manage adherence are increasing engagement with the patient – having someone follow up with them or having more in-depth discussions in the office. Databases providing prescription refill information, like Commcare uses, can identify patients who need additional help and alert the clinicians or staff as needed. People are inherently bad at doing things that they know they need to do, especially when those things are complex. Provider organizationsneedtoofferintensiveassistance to help some patients remain adherent.

As healthcare moves toward value-based purchasing/pay-forperformance, what role does or will technology play in improving quality outcomes and reducing waste in the healthcare system? David Cutler: I think technology will play a big, big role, and we should distinguish the multiple types of technology. Diagnostic and therapeutic technologies, like new imaging, will tell you exactly who you should treat and how. Organizational technology is entirely different. Marcus Welby, from the 1970s television program, was a physician who was a “bring-the-bag-to-your-home” kind of doctor. There are very few procedures in healthcare today that Marcus Welby would recognize. But he would totally understand the system in which it operates – primary care doctors who refer to specialists, specialists who have

You’ve long been a proponent of improved quality as the emphasis of healthcare reform, as opposed to reduced cost. Can you explain briefly why that is and what you think the impact of the Affordable Care Act will be on the continuum of care? David Cutler: It’s essential that we don’t define what we’re doing strictly as lowering cost, but rather as improving the value of care. Some things have price tags that are too high, and we’re unwilling to pay for them. Other things are worth the cost, but we have to make sure they’re right for the patient.

Go back to Marcus Welby. He was a primary care doctor. He had a set of things he took care of, and he sent patients to specialists if they didn’t fit in his skill set. But patients don’t care about that. They have a problem, and they don’t care who takes care of it or how they do it; they just want to feel better. Who can look across the continuum of what’s needed for a patient and provide the appropriate care? When you frame it that way, you can see how the system can improve. People want to feel like someone’s managing their problems. We hope the ACA will positively affect that change. ACOs and other programs are setting up integrated care models, and the organization that can provide the best integrated care will work

ECONOMIC O U T LO O K

By taking advantage of technologies and organizational changes that healthcare has been extremely slow to adopt, we’ll be able to improve quality and reduce waste.

Quality is output for dollar input. How do we increase return on investment in the healthcare system? I hope the ACA will push us toward that. It’s telling providers and insurers that if they find a way to provide more value, we’ll find a way to pay for it. We’ll transform healthcare from do-more/earn-more to a do-better/ earn-more system. My hope is that the ACA will lead to that.

more and get paid more. The ACA isn’t just a series of programs. It is a philosophy that says people need someone to take care of their issues.

The CDC estimates that nearly one in two adults in the U.S. live with a chronic disease, accounting for more than 75 percent of healthcare costs.6 How do you think healthcare reforms will impact those 133 million Americans? David Cutler: What healthcare reform will do most materially is provide coverage. It’s very hard to get care without coverage. In addition, the reforms will incentivize providers to think of the patient as a whole person and ask themselves what they need to do to care for that person. Only some 3 percent of doctors can be emailed right now. At Kaiser, doctors aren’t paid for emailing, but they are paid to take care of their patients. Kaiser invested $4 billion in a consumer-oriented technology system. It’s a very good way for patients with chronic diseases to receive integrated care.

We’ll transform healthcare from do-more/earn-more

to a do-better earn-more system.

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arm’s-length relationships with hospitals, and so forth. The system looks much the way it did in the 1950s, and there are few things that we're glad still operate the same as they did in the 1950s.

The ACO model is encouraging integration across the continuum of care. What does integration look like to you and how important is it for different types of care providers (e.g., hospitals, physicians, long-term care centers) to have integrated systems? David Cutler: I think integration will take several forms. It may be a single organization employing doctors in the same physical setting who work as a team because a single doctor can’t manage all patients all the time. Then there’s more virtual integration, where you have big physician organizations linked to a hospital system. They’re not necessarily down the hall, but they’re working very closely to share patient information. Given the nature of patients’ problems, we’ll by necessity have some of both types of integration. It’s important that the information is there, and that incentives and ethics are right. The providers are all doing what is best for the patient, and the money just works out. But the money isn’t driving them to make different decisions.

How well do you think organizations are doing in integrating or sharing the data from their EHR investments? David Cutler: I think they probably have a ways to go. It’s not the buying of the computer system that’s the issue; it’s the use of that system that matters. Any organization that has looked at its internal data will realize that there is a large variation in how physicians prescribe care. While the EHR system allows you to record those variations, you still have to take the next step and decide which doctor is doing the right thing.

The more the provider community demonstrates that it can deliver savings, the less pressure there will be for cuts.

It’s really an opportunity for the provider community to do better. You need to get the physicians to set up a process so that the right thing gets done in each type of case. That’s a different thing than just gathering the information. My sense is that organizations have taken the first step in having the technology, but they haven’t made enough progress in really using the data.

Do you have any response to the fiscal cliff cuts and what that will mean for providers? David Cutler: On the one hand, the cuts are just ugly. When we don’t know what to do, we cut payments, and no one wakes up the next morning and says, “Boy, I’m glad we did that.” Another way to look at it is as an opportunity. I recently served on a panel with the CEO of a big physician group in my area, and his sentiment was that the medical community had been put into receivership. They weren’t doing the job they should’ve done for the community in terms of making people healthy and providing better value. The more the provider community demonstrates that it can deliver savings, the less pressure there will be for cuts. It’s really an opportunity for the provider community to do better. The pace of spending is unsustainable fiscally, and it’s important to change the industry from the inside out. It’d be one thing if we were spending a lot and every penny

was worth it. But with 30 percent of care being wasteful, we need to provide proof that what we’re doing is right.

Closing sentiments?

David Cutler: As far as the eye can see, our nation’s fiscal picture is in trouble. I think the next five years are going to be really crucial here. The focus on healthcare is not going to relent, regardless of the fiscal cliff or any particular deal this year. I don’t see us cruising along for the next five years – we need to make it better, or it will get much worse. We have a very challenging couple of years coming up, but it’s something that doesn’t have to be negative. It could be a very positive change. References 1. “How the U.S. Health-care System Wastes $750 Billion Annually,” http://resources.iom.edu/widgets/vsrt/healthcare-waste.html. 2. The Atlantic, http://www.theatlantic.com/health/archive/2012/ 09/how-the-us-health-care-system-wastes-750-billion-annually/262106/. 3. “One-tenth of cancer patients fail to fill initial oral oncolytic prescription,” Specialtypharmajournal.com, http://www.specialtypharmajournal.com/index.php?view=article&cat id=344%3Aoncology&id=2664%3Aone-tenth-of-cancer-patients-fail-to-fill-initial-oral-oncolytic-prescription&format=pdf&option=com_content&Itemid=556. 4. “2011 Specialty Pharmaceuticals: Facts, Figures and Trends,”Center for Healthcare Supply Chain Research. 5. “Tackling a different kind of health problem,” Merck, http://www.merck.com/about/featuredstories/adherence.html. 6. “Chronic disease prevention and health promotion,” CDC, http://www.cdc.gov/chronicdisease/ resources/publications/aag/chronic.htm.

ECONOMIC O U T LO O K

CARE

NECT

ACROSS THE CONTINUUM:

THE CRUCIAL ROLE OF

At a time of unprecedented change, if thereâ&#x20AC;&#x2122;s one thing that industry leaders across the U.S. healthcare system agree on, it's that now is the time when innovation is needed. True innovation will be necessary to effectively leverage information technology in order to Mark Hagland is editor-in-chief of Healthcare Informatics magazine. He has spent nearly 25 years as a healthcare journalist and editor. He has written two books about quality in healthcare, as well as thousands of magazine articles in the field. He has also won numerous national and regional journalism awards.

connect care across the continuum, holistically improve care delivery for patients, and enhance the health of entire communities.

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Fortunately, pioneering patient care organizations are showing the way, just as the need for innovation is exceptionally urgent, given the pressures on providers from federal healthcare reform mandates and other purchaser demands. Consider the following: In New Orleans, leaders at the Louisiana Public Health Institute have been collaborating, through the Crescent City Beacon Community they established, with primary care physicians across the metro area, in order to move forward in a community-wide, patient-centered medical home model. In western Colorado, leaders at the Colorado Beacon Consortium, a regional consortium that includes an independent physician association (IPA), a community hospital, a health plan, and a health information exchange, have partnered with a business intelligence and analytics software vendor to help physicians across the region leverage their electronic health record and clinical decision support capabilities to better manage the health of their patient populations. In Beaumont, Texas, the leaders of Southeast Texas Medical Associates, a mid-sized, multi-specialty medical group, have transformed the hospital discharge summary into a care-management map. This map, coupled with performance dashboards that give all physicians in the group an up-to-date view of their patient panels, is facilitating care management that improves patient outcomes and reduces hospital readmissions. At the Bon Secours Richmond (VA) Health

System, clinical leaders have been leveraging the electronic health records of the system’s primary care medical group, along with care management software, to proactively classify patients by clinical risk level and identify those at greatest clinical risk or who are noncompliant with physician instructions and medications. In the Denver area, leaders at the Colorado Foundation for Medical Care, the state’s quality improvement organization (QIO), have been working with providers in the metro area to improve transitions in care and reduce readmissions. One of the key learnings: there is a strong need for mechanisms that inform primary care physicians in real time of the discharge of their patients. All of these examples and more have a common thread: there is a need to eliminate the silos of information that continue to keep practitioners from effectively working together. Without that, it will be difficult or nearly impossible to create a truly connected continuum of care.

Matching available tools with pressing needs: A fit? One of the underlying challenges is that the tools available to bridge gaps in the continuum of care don’t necessarily match the actual functional needs pressing in on healthcare providers. It’s a bit akin to trying to paint a wall-sized fresco with two or three Crayola crayons. Yet the needs are so vast, and the time pressures so intense, that the idea that healthcare IT developers could create

entirely new classes of technologies in the white heat of this time of change seems patently absurd. So let’s look at the tools we have at hand. They fall into a few different categories. The first group includes electronic health/medical records (EMRs/EHRs), clinician documentation, clinical decision support, continuity of care documents, and associated technologies, such as natural language processing, speech recognition, electronic prescribing, and so on. All of these technologies are connected to creating, storing, and using clinical information. Then there are the technologies associated with sharing clinical information, primarily the various flavors of health information exchange. The next category includes business intelligence, data analytics, and all the other types of technologies and applications designed to help clinicians, administrators, and healthcare organizations better understand and use data and information. And of course, there are technologies such as data warehouses, data marts, picture archiving and communications system (PACS) solutions, and others, designed to store data and information. Finally, there is a separate group of technologies, this time on the hardware side, which includes all the mobile devices clinicians and other healthcare providers might use, such as smartphones and tablets, but also medical devices that automatically stream vital signs and similar current patient data into EHRs and other clinical information systems.

ECONOMIC O U T LO O K

What is particularly challenging is the overlay of available technology types, as mentioned above, across the balkanized reality of healthcare organizations, with clinicians working in organizations ranging from solo-practitioner settings to the largest medical groups and massive integrated health systems with dozens of hospitals and thousands of physicians under the same corporate umbrella. What’s more, the various points along the care continuum, from urgent medical care to inpatient hospital care to rehabilitative care to long-term care and beyond, are themselves operationally, functionally, and organizationally fragmented, under different ownership and governance, not to mention using disparate information systems.

So the “IT challenge” is really a far more fundamental healthcare system challenge, involving matching existing and gradually evolving tools and technologies to a patchwork quilt of care sites and providers, in a healthcare system that is fragmented in every way possible – by organization type, professional category, reimbursement model, organizational structure, and of course, presence of technology.

Racingintothefuture With the public and private purchasers and payors of healthcare demanding lower costs and greater transparency and accountability from providers, rapid advances in leveraging IT to achieve all those goals will be essential to the future of healthcare.

Fortunately, with pioneering organizations leading the way–often in partnership with innovative vendor companies–solutions to this fundamental problem are emerging every day, across many dimensions. Ten years from now, I believe we will look back on this current period as a time of great innovation and exploration, one that will have seen the active birthing of the new, more effective healthcare in America. Most of all, this new healthcare will be all about leveraging technology, including information technology, to continuously improve care. There’s simply no turning back now.

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Supply chain technology for smaller facilities

Case studies in eProcurement [ OVERVIEW ]

It can be challenging for non-acute and smaller acute-care providers to realize the same benefits from supply chain efficiencies as their larger peers. Premier’s eProcurement program combines proprietary tools with third-party technology to deliver cost-effective, high-performance supply chain technology to smaller facilities. The result is enhanced price management, operational efficiency, and supply-related revenue capture and reporting.

operational efficiency and supply-related revenue capture, as well as decreased medical-surgical supply expenses.

Two senior living facilities, in cooperation with Premier and their Premier-affiliated GPO sponsors, implemented the eProcurement program in September 2011. The following results are from their 14-month participation in the program. Both facilities experienced improvements in

To identify supply savings, prices for items purchased prior to program initiation were compared to prices paid for identical items over the 14 months. Results include items that matched on vendor, vendor catalog reorder number, and unit of measure.

Premier’s eProcurement technology allows supply chain managers to purchase from any vendor (note that this study did not include food and pharmacy items). It also provides increased visibility into Premier’s contract portfolio and enables cost reduction through increased contract utilization.

ECONOMIC O U T LO O K

A 30-bed skilled nursing facility, Facility 1 experienced price decreases on 32 percent of matched items. Annual supply expense savings totaled $6,583, a 3.27 percent reduction on total supply expense. Facility 1 also documented savings of $10,800 on chargeable supply items. Increased operational efficiency contributed another $21,200 in savings, driven by improvements in inventory processing and employee productivity.

Facility 2 A 75-bed skilled nursing facility, Facility 2 experienced price decreases on 29 percent of matched items. Annualized supply expense decreases totaled $11,923, a 4.89 percent reduction on total supply expense. The facility’s increased contract participation had a direct, positive influence on supply expense. Facility 2 also documented improvements of more than $25,000 to supply-related patient revenue and realized $16,480 in savings from reductions in electronic data interchange (EDI) costs and employee time

[ SUMMARY ] The Premier eProcurement program enables smaller healthcare facilities to drive operational improvements and cost savings through: • Electronic purchasing from any vendor, • Supply-related capture of patient revenue, • Overall management of perpetual inventory locations, and • The efficient matching of invoices to purchase documentation. Implementing comprehensive supply chain management technology improved purchasing processes, streamlined inventory management, and automated patientcharge capture. These operational changes resulted in documented annual savings of $38,583 and $53,403, respectively, for these two member institutions. Continued improvements in operational efficiency and contract purchasing will yield greater benefits in the future for these locations. For more information about the Premier eProcurement program please contact us at eprocure@premierinc.com. Brian Townsend, director, eProcurement program, and Richard Schall, vice president, continuum of care, Premier healthcare alliance, contributed to this article.

associated with supply charge reporting and research.

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Facility 1

& QA

>>> O&A with Joseph Damore The move toward population health management:

Joseph F.

Damore, FACHE, vice president, Premier Performance Partners, Premier healthcare alliance, is responsible for assisting physician groups, not-for-profit hospitals and health systems in developing integrated health systems and implementing accountable care organizations, including responsibility for Premier’s Partnership for Care Transformation collaborative. Prior to joining Premier, Damore served as CEO of Mission Health System in Asheville, NC and Sparrow Health System in Lansing, MI.

What’s going on in population health? Have you seen any acceleration in activity since the election or the Supreme Court decision? What are some specific examples of work being done by health systems to integrate population health in their practices? Joseph Damore: We’re seeing acceleration in the journey to population health around the country. The Supreme Court decision and the results of the November election have pushed this concept more in the forefront, and that’s a good thing for healthcare, because it’s really a critical piece in bending the cost curve. The other factor influencing the trend toward population health is some early results that show that it’s working. For decades, Medicare expenditures have far outpaced inflation rates, but for the first time in more than 40 years, the growth in Medicare per capita expenditures approximated the inflation rate in 2012. Also, several studies have shown that accountable care is beginning to have an impact on slowing healthcare costs. For example, Dignity Health, and Blue Shield of California conducted a study of the California Public Employees’ Retirement System (CalPERS) that indicates a fairly significant slowdown in the pace of healthcare expenditures. In the first year, the average cost per CalPERS member outside the program increased 10 percent, while the cost per person in the program decreased 1.6 percent. There’s also been increased interest, as noted by the number of new Medicare Shared Savings Program (MSSP) participants. In January 2013, 106 providers joined MSSP, which brings total participants to 252. We’re seeing a similar growth rate on the private side. Organizations are applying accountable care principles to population health management in all facets of payor relations. For example, several states are moving ahead with Medicaid reform that mimics the federal accountable care model. Oregon was one of the first to do that

last year. There has been similar legislation introduced in Tennessee and a recommendation in Alabama to reform Medicaid in that direction. In Arizona, Banner Health is partnering with Blue Cross of Arizona to form an ACO venture for their Medicaid population.

What do health systems need to be thinking about strategically, in terms of integrating across the continuum of care? Joseph Damore: More and more organizations are trying to create vehicles that integrate care both electronically and in actual physical delivery across the continuum. We’re seeing organizations improve care by: • Developing clinically integrated physicianhospital organizations that work collaboratively and share savings with independent physicians; • Implementing integrated, evidence-based care plans so that patient treatment protocols are the same, whether in a hospital, skilled nursing facility or other location; and • Increasing EHR connectivity across the continuum.

What is the role of prevention and patient engagement in having a successful population health initiative? Joseph Damore: Patient engagement is of the utmost importance in terms of working

Similar efforts to engage patients and their families in their care are part of Medicare’s Partnership for Patients (PFP) program. Hospitals collaborating with Premier on PFP have substantially improved their adherence to evidence-based readmission best practices. As an example, PFP participants ensure medical information and treatment plans are understood by patients and their caregivers prior to discharge. At discharge, patients receive clearly worded instructions regarding what to do if their conditions change and when changes should be considered emergencies. And post-discharge, providers follow up with patients to ensure that they know where to go for care.

Are there particular capabilities that a health system needs to effectively manage population care? Joseph Damore: Premier has a set of core capabilities that we suggest for health systems. The first is a robust primary care foundation that provides team-based, patient-centered medical home care. We really believe that this provides more cost-effective and higher quality care. On average, cost of healthcare

The second core capability is in care management. This is especially true for high-risk patients who suffer from multiple chronic diseases. We’ve seen several systems emulating AtlantiCare’s “special care center,” which is a team-based approach that provides high-risk, chronic disease patients with access to licensed social workers, nurse practitioners and physicians. AltantiCare has about four years of data that indicate the program has reduced costs, enhanced patient and staff satisfaction, and improved quality and health status. Additionally, care management is important in treating diseases tied to the big six chronic diseases – asthma, diabetes, congestive heart failure, COPD, hypertension, and chronic depression. Organizations that develop those programs have seen a reduction in hospitalizations and readmissions, as well as generally healthier patients. Care management is also important in managing care transitions. Case managers help guide a patient from one setting to another, such as from the primary care doctor’s office to hospital or home. The third core capability is information. Health systems must be able to analyze claim data so that they can identify high-risk patients and intervene in their care. Premier, in partnership with Verisk Health, has created a new application called PopulationAdvisor™, which allows us to offer that type of support to our members. Finally, we believe that it’s very important to have a good payor partner that is willing to share claim data on a real-time basis. That’s really the only way to have the information necessary to determine which patients are high-risk and need to be on advanced protocols.

What are some barriers or challenges to health systems in moving toward population health management?

Joseph Damore: I think the major challenge is changing the culture of your organization. The first step in that direction is creating a vision and realizing what you want to accomplish. That process isn’t going to happen overnight. It’s a journey that takes years. The most advanced population health organizations have been doing it for decades.

ECONOMIC O U T LO O K

There’s also the use of a waiver for generic pharmaceutical copays for employees who participate in chronic disease management or coaching programs in collaboration with their primary care doctors. A patient with asthma signs up for an asthma management program, and the health plan waives the copay for generic drugs to treat the condition. These programs are creating economic incentives that encourage employees to improve their own health.

per capita declines 7-8 percent with a robust medical home approach.

Then you have to build all of those core capabilities to successfully move forward with the vision, and that can bring with it some resource barriers in building the care management program and related IT investment. Alignment is an important part of culture transformation. We’re talking about changing how healthcare is delivered, so having physician leaders is an important part of gaining alignment within your organization.

Can you describe some of the work that’s being done in Premier’s Partnership for Care Transformation (PACT™) collaborative? Joseph Damore: The PACT collaborative helps our members meet the challenge of improving the health status and care experience for their patient populations. We help organizations analyze their current situations by identifying gaps in the core components, and we help them develop an action plan to move forward. We also provide education for health system leadership about the concepts and what we’re learning across the country from the early adopters. Then we assist in filling the gaps, for instance with data analytics or implementation of a care management program. Our newest PACT endeavor provides data analytics and benchmarking to our members. Starting in 2013, MSSP members will receive quarterly information on at least 15 key metrics related to utilization, quality and cost. That will enable them to see how well they’re doing compared with other organizations. PACT participants have the benefit of learning best practices from early adopters, which makes them able to learn and implement changes more rapidly.

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with physicians and in changes to employee health plans or commercial arrangements. We’re seeing employee premiums tied to health metrics, such as body mass index. Lower-cost premiums are offered to employees who meet healthy criteria or to those whose metrics are better than the previous year.

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

The imperative for connectivity:

WORKING TOWARD ACCOUNTABLE CARE

Introduction

In our fall 2012 Economic Outlook, member executives discussed physician involvement in supply-chain decision making as a means to bend the cost curve, a sentiment that has often been echoed. According to 29 percent of survey respondents, lack of willingness on the part of physicians and other providers is the greatest barrier to clinical integration for their organization (see Figure 1). That is followed distantly by difficulty in implementing cross-continuum electronic health records (EHRs) for 21 percent and a need for greater incentives (16 percent).

Due to rising healthcare costs, growing patient populations, and healthcare reform, there is an ongoing imperative to transform the way that patients receive care. Rather than the traditional acute care-focused structure, health systems are going beyond the hospital walls, breaking down silos, and building connectivity to improve quality, reduce costs, and address the larger needs of their patient populations. This article features survey data and interviews with member executives detailing how their health systems are building connectivity and integrating care across the continuum. The supply chain as an asset A major underpinning of accountable care and efforts to provide population-based healthcare is the need for broad collaboration.

“Many of the barriers to clinical integration that we’re seeing are a matter of getting out of our comfort zones,” says Tim Kirby, executive vice president of system alignment and integration, Methodist Health System (Dallas, TX). “Physicians have traditionally been trained to be independent. We’re now asking our physicians and clinicians to work as a team to manage patient health.”

Figure 1

St. Joseph, MO-based Heartland Health is also focusing on enhancing physician engagement. “We paired physicians with other leaders in the organization, so that physicians are at the table for all major organizational decisions. It has really helped us gain physician alignment,” says Mark Laney, MD and president and CEO. “In addition to adopting advanced technology products and moving toward more of a population-health, accountablecare payment model, dyad leadership is part of an ongoing process of helping our physicians, andoursystemasawhole,be moresuccessful.” Willingness from physicians to try new supplies is an indicator of successful collaboration among practitioners and supply chain management to meet systemwide goals. Many member health systems are undertaking larger-scale projects to reduce costs by targeting physician preference items (PPIs), including participation in various PPI-focused Premier collaboratives.

Barriers to achieving clinical integration

30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Lack of system- Lack of providers Lack of budget Difficulties in Need for greater Lack of wide education on to collaborate to create incentives to implementation of willingness on the benefits of with (e.g., rural integration cross-continuum encourage part of physicians markets) electronic health among providers clinical integration participation and providers

■ Top barrier

Other

■ Second biggest barrier

Source: Premier online survey for Economic Outlook Spring 2013 publication

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Providers’ willingness to evaluate costreduction options appears to be increasing: the percent of survey respondents who would “definitely” try a non-branded PPI increased 24 percent over the past three surveys to 26 percent in spring 2013 (see Figure 2). Methodist’s Kirby participated in Premier’s cardiac rhythm management (CRM) collaborative, a group of 65 health systems and hospitals that shared supply expense data to identify opportunities in resource optimization. In addition, he took part in

evaluate PPI changes and selection,” Kirby said. “If clinicians want to make any change that has a cost impact of $50,000 or greater, they have to go before this committee to get approval. “Through our ACO, we’re focusing on improving PPI outcomes while lowering costs, and we’re sharing those savings with our physicians. We’re also participating in Premier’s Partnership for the Advancement of Comparative Effectiveness Research (PACER), a collaborative of large, integrated delivery networks that evaluates clinical

each and every opportunity. Each dollar is important. We’ve looked at all of our external contracts, all consulting dollars, even down to what paper cups we use.” Many health systems’ supply chains are reducing costs by streamlining purchasing across all facilities through a centralized channel. Survey respondents report that 35 percent have centralized purchasing for all of their owned, leased, or managed and affiliate facilities (see Figure 3). Focusing on the supply chain and gaining

“Through our ACO, we’re focusing on improving PPI outcomes while lowering costs, and we’re sharing those savings with our physicians.” Tim Kirby, executive vice president of system alignment and integration, Methodist Health System

another collaborative to reduce PPI costs in spinal care. Since then, Kirby’s team developed a “hold the gain” committee that meets monthly to ensure they are maintaining or improving costs in those areas. “We also have a value analysis committee of clinical and materials managers that

and resource utilization data to optimize care paths and standardize the supply. We’re working to reduce costs by consolidating contracts to achieve better purchasing dynamics.” According to Dr. Laney from Heartland Health, “To survive and thrive in this environment, you really need to optimize

physician buy-in are important steps in cost reduction and standardization. Clinical integration isn’t just about working with doctors, though, says Methodist’s Kirby. “Today, it’s about integrating across the entire continuum of care. It’s not just clinical but also social, because managing the health of the population is so essential.”

Figure 2

51.5%

53.7%

49.0%

50.0%

52.3%

60.0%

Willingness to trial non-branded physician preference items

■ Spring 2012 ■ Fall 2012

19.4%

21.7%

24.2%

27.6%

19.2%

26.0%

19.6%

21.7%

30.0%

20.0%

ECONOMIC O U T LO O K

■ Fall 2011

Probably would not

0.0%

Might or might not

0.7%

Probably would

0.2%

Definitely would

0.7%

0.0%

2.4%

2.8%

3.6%

10.0%

■ Spring 2013

Definitely would not

Source: Premier online survey for Economic Outlook Spring 2013 publication

Figure 3

Does your health system have centralized purchasing across the continuum of care?

■ Yes, all OLM facilities and affiliates purchasing is done through one centralized channel 25.8% 34.8%

■ Yes, all OLM facilities purchasing is done through one centralized channel ■ No, alternate sites manage their own purchasing

39.4%

Source: Premier online survey for Economic Outlook Spring 2013 publication

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

40.0%

Incentives, progress toward integration According to Michelle Darnell, vice president of systems improvement, SSM St. Mary’s Good Samaritan Inc. (Mt. Vernon/ Centralia, IL), “Similar to many providers, the underpinning of our move toward greater clinical integration is our mission. We want to make sure we’re taking care of our patients in the best, most comprehensive way possible. That’s really the altruistic aspect of our incentive for clinical integration. It’s primarily mission-driven to improve care, but cost-avoidance is also a factor. Really, everyone’s trying to do the best they can for patients in the most economical way.” In Premier’s member survey, 74 percent of respondents cite outcomes-based measurements and 68 percent cite bonuses for achieving quality outcomes as top incentives to clinical integration (see Figure 4). “The overall need to improve the care of the communities we serve is always our main incentive to improving care delivery,”

Figure 4

says Kirby, “but we also see the writing on the wall and know payment will be based on what we accomplish and not just on what we do.” Similarly, one-third of survey respondents cite readmissions and infection penalties as incentives to create better integration. The majority of survey respondents (77 percent) believe their health systems are effective at providing care across the continuum (see Figure 5). Eric Bieber, MD and chief medical officer at University Hospitals (UH) in Cleveland, OH corroborates the need to look beyond acute care. “Healthcare providers have not been trained in patient-centered care environments; instead, we have lived in an acute, episodic environment and have been incentivized accordingly. We need to break down that mindset by driving out care variation, redundancy, and waste to best treat the patients we serve. ACOs help to bring into the crosshairs this need for an absolute focus on integrated care.”

Clinical integration is a work in progress. Health systems are striving to implement advanced technology and build new collaborations and partnerships to create a more patient-focused health system. “I’ve never heard a patient say, ‘My care was too good’ or ‘My surgery went too well.’ That’s because care simply can’t be too good. And that’s what makes healthcare today so exciting,” UH’s Bieber says. “It has been and will be a work in progress for a long time. People can’t work too closely together; the continuum of care can’t be too connected. And as healthcare becomes more and more complex, there will always be opportunities to enhance clinical integration, even for the delivery networks that are highly integrated.” Ferdinand Velasco, MD and chief health information officer at Texas Health Resources, Premier’s 2013 Richard A. Norling Excellence Award winner, agrees that a more integrated health system will ultimately benefit all patients. “A more integrated health system means that the care delivery

Incentives encouraging clinical integration

73.7%

Outcomes-based measurement for physicians

68.3%

Bonuses contingent on achievement of quality 32.7%

Penalties for readmissions and infections

29.8%

Bundled payments Common ownership of facilities

21.6%

Capitated payments

18.0% 13.2%

Antitrust waivers Other

0.5% 0.0%

10.0%

Source: Premier online survey for Economic Outlook Spring 2013 publication

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Figure 5

How effective do you believe your health system is in providing care across the continuum?

58.6%

60.0% 50.0% 40.0%

18.8%

15.2%

10.0% 0.0%

6.1% Very effective

ECONOMIC O U T LO O K

20.0%

Somewhat effective

Neither effective nor ineffective

Somewhat effective

1.4% Very ineffective

Source: Premier online survey for Economic Outlook Spring 2013 publication

How important is shared access to patient information between facilities for quality improvement initiatives to be effective?

Figure 6

80.0%

76.9%

70.0% 60.0% 50.0% 40.0% 30.0% 20.2%

20.0% 10.0% 0.0%

Very important

Somewhat important

2.5%

0.2%

Neither important nor unimportant

Somewhat unimportant

Very unimportant

Source: Premier online survey for Economic Outlook Spring 2013 publication

organization will be more intelligent in understanding the needs of patients. We’ll be able to better understand the factors that lead to poor health, why patients get readmitted to the hospital, and more. It helps us be more proactive in our outreach

to the community, so that we can provide better care at a lower cost.” One moving target for clinical integration is developing the technology and relationships to connect care among facilities and

among the community. Almost all of the survey respondents (97 percent) believe shared access to patient information among facilities is essential to successful quality improvement initiatives (see Figure 6).

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

30.0%

Figure 7

Does your health system have capabilities to share data across facilities in the continuum of care (e.g., among hospitals and long-term care facilities)?

7.5%

■ Yes ■ No 31.7%

■ Unsure 60.8%

Source: Premier online survey for Economic Outlook Spring 2013 publication

Dr. Bieber reiterates the imperative health systems face. “Everyone needs to work to better connect the dots. And we need to think about extended-care facilities that we don’t even own or operate – how do we get to appropriate data transfer and accountability among them?” Data sharing and HIT

Texas Health’s Dr. Velasco believes advanced technology has been an integral part of his system’s achievements, including recognition by Hospitals & Health Networks as a 2012 Most Wired Innovator and by U.S. News and World Report for being among the “most connected” systems in the U.S. “In terms of our intent to move toward clinical integration, Texas Health has a mission to improve the health of the people in the community we serve. Shifting our focus from acute care to populationhealth management has helped us understand and use technology to achieve clinical integration,” says Dr. Velasco. “We’ve been very aggressive and progressive in implementing a health information exchange (HIE) within our organization. Even before the HITECH ACT (legislation to expand adoption of health information technology), we were involved with many regional programs. One of the things that

Having the technology in place allows for further advancements in understanding a patient population.

“Courageous leadership is needed to overcome the inertia. You need leadershiponallsidesof the organization who know that healthcare needs to change. EHRs are foundational for that transition from acute caretopopulationhealth. To me, that’s the logic behind interoperability.” Ferdinand Velasco, MD, CHIO, Texas Health Resources

“We need to know everything we can about a patient’s care – what has gone on before and what’s coming up,” Dr. Bieber continues. “Otherwise, we have variation and redundancies that may degrade care quality and efficiency. The closer we can get to real-time information and get it in the hands of providers, the more likely the right things will be done and we won’t miss opportunities.” Diverse technologies are imperative in achieving true clinical integration. “Having a strong EHR program is foundational. Stage 1 of meaningful use – though it’s certainly not perfect – does set a floor from

Though the discussion surrounding healthcare technology has largely been about meeting meaningful use criteria, the technology necessary to thrive in this landscape goes far beyond EHRs.

ECONOMIC O U T LO O K

EHRs, in addition to other advanced datasharing technologies, create the means for health systems to monitor and manage their patient populations. Of our spring respondents, 61 percent currently have the capabilities to share data across facilities in their continuum of care (see Figure 7).

Dr. Bieber from UH agrees that health information technology (HIT) leads clinical integration. “Information is king, but it has to be usable in a way that impacts clinical function. HIT infrastructure is really the glue that holds clinical integration together.”

which we can build the full infrastructure needed to connect care across the continuum,” says Texas Health’s Dr. Velasco. The system achieved HIMSS Stage 7, the highest level of EHR adoption, at its newest hospital a few months ago and anticipates that all of its facilities will reach that designation by the end of the year.

Heartland Health has piloted and implemented several technologies to advance patient care. “We have a robust patient call center that’s run by nurses who can direct patients to the right type of care,” said Heartland’s Dr. Laney. “We’re advancing our use of telemedicine, especially with our rural and critical-access hospitals (CAH), where we’re experimenting with robots that we can place with an emergency patient. We’re also really gearing up with electronic visits.” Innovation in collaboration In addition to new technologies, health systems are engaging in programs with outside facilities, as well as advancing partnerships and collaborations within their communities, and on a broader landscape, ones that meet the challenges of population-health management. Keith Suedmeyer, director of social services, SSM St. Mary’s Good Samaritan, spoke of two of his organization’s nontraditional partnerships. “We’ve been having monthly meetings for a few years now with mental health professionals and other stakeholder providers in the community, including the public health department, to identify gaps in care. It’s also a great opportunity to network and better understand what services are being offered, and where.”

O UTLO O K • SPR I NG 2 0 1 3 |

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

“If you don’t have the data, or if it isn’t timely, then your response is not timely, and you’ll end up duplicating services and efforts. And even when providers are on the same EHR, there can be a lack of consistency in inputting and sharing data among doctors and providers. All of this compromises the validity and value of the data,” says Methodist Health’s Kirby.

we’ve found is that if a facility doesn’t have a good EHR, it really can’t move forward.”

SSM St. Mary’s is also working with the various nursing homes in its community to reduce readmissions by giving the nursing homes access to hospital data, such as radiology and other reports, and streamlining community-wide end-of-life care. “The hospital usually has an end-of-life discussion with patients and their families, and then the nursing home will have a separate conversation with them. This can lead to confusion over next steps, and patients can receive conflicting information. We’ve started having just one conversation that includes hospital and nursing home staff,” says Suedmeyer. “The various nursing homes compete for patients, but

Figure 8

data. We’re serving the same populations – why duplicate our efforts? The key to being successful in improving patient care and lowering costs is finding a way to be closer and more aligned with other providers in the area.”

the benefits of collaboration far outweigh the risk of sharing information.” Traditional competitors Methodist Health System and Texas Health Resources are also engaging in a non-traditional collaboration to better meet the needs of their Dallas-Fort Worth community. “Post-acute care in Dallas-Fort Worth costs $2,000 more per Medicare enrollee per year than the national average,” says Methodist’s Kirby. “Through community groups, we’re facilitating discussions on how to standardize post-acute care quality metrics so that all the local providers use the same metrics to track and report patient

According to Heartland Health’s Dr. Laney, “There are approximately six CAHs in our area – we represent a very large geographic area – and about four or five years ago we started working on patient records through our Lewis and Clark Information Exchange (LACIE). It’s been invaluable for us, from both a safety and cost standpoint, to know if patients have had recent CT scans or what medications they’re allergic to.

Time until joining or creating ACO (C-Suite respondents only)

25.0%

20.3%

21.0% 20.0%

18.8% 14.5%

15.0%

14.5% 10.9%

1.4%

After 2015

My health system will not be joining or creating an ACO in the foreseeable future

10.0% 5.0% 0.0%

We already have an ACO in place

By the end of 2013

By the end of 2014

Source: Premier online survey for Economic Outlook Spring 2013 publication

By the end of 2015

Earlier this year we shifted management of LACIE from Heartland to an open, independent collaborative of Kansas City-area healthcare providers. It’s a ‘cooperative competition’ model, where data will pass more easily, and systems will compete based on service rather than data silos. This will improve care, lower costs, and improve patient satisfaction.”

Health systems are building technology infrastructure, leveraging their supply chains, and improving alignment within their organizations, as well as with other stakeholders and their communities, to meet the demands of a quickly changing healthcare landscape. More than half of C-suite survey respondents (56 percent) report that their organizations will belong to an ACO of some kind by the end of 2014; 21 percent of respondents are already part of one. Fewer than 20 percent of C-suite respondents do not anticipate their organization will create or join an ACO in the foreseeable future (see Figure 8). Health systems are evolving to better meet the needs of their patients and their communities as a whole. Dr. Laney from Heartland Health offers a great example of this through the system’s Mosaic Life Care. “We looked internally at how we might improve ourselves for the future, and Mosaic’s what we came up with. It’s a more comprehensive, experience-based relationship with patients. It’s a health-

“We’re living in unique and interesting times where complex health systems are looking more broadly at synergies, so organizations that wouldn’t normally work together are doing just that” Eric Bieber, MD and chief medical officer at University Hospitals (UH) in Cleveland, OH

patient approach,’ based on our being a trusted friend and advisor to our patients. If we’re going to be an ACO, and they’re going to be responsible, accountable patients, then we need a real, personal relationship with them. And if we can do that in western Missouri, then that could be a model others could use across the country. “It’s a holistic, less expensive approach, meeting people where they are and helping them improve,” continued Dr. Laney, “We now have five clinics, and you won’t find waiting rooms at any of them. Instead, there’s a chef preparing healthy snacks, and we give patients a customized iPad with reading materials or games that are based on their preferences. It’s like walking into a coffee shop or book store, not an urgent care facility – people want to come here.”

Study Methodology

ECONOMIC O U T LO O K

Imperative for connectivity

After winning the 2009 Malcolm Baldrige National Quality Award, Dr. Laney and his team were deciding what to do next. “Healthcare reform was being discussed, healthcare costs were going through the roof, and we thought we could dramatically change the way we do healthcare. We realized we could develop a more ‘daily

going on in healthcare, and a response to the call to action of healthcare reform. Health systems are engaging all of their leaders – from technology, supply chain, practitioners, C-suite, and more – to create new models that elevate care delivery to provide more streamlined, coordinated and high quality care to their patient populations.

During winter 2013, Premier, in collaboration with Customer Care Measurement and Consulting LLC, commissioned an online survey of approximately 9,000 healthcare leaders across our membership, representing both acute and non-acute healthcare markets. The survey respondents (n=535) are representative of a cross-section of our membership across geographic area and organizational size and type. The majority of respondents fall within three title categories: C-suite (29 percent), service line or practice area manager (26 percent), and supply chain or materials managers (20 percent). Nearly one-third of respondents are part of multi-hospital systems or IDNs, and respondent organizations are equally representative of urban and rural areas. Premier healthcare alliance thanks these people for their contributions to this article: Eric Bieber, MD and chief medical officer, University Hospitals Michelle Darnell, vice president of systems improvement, SSM St. Mary’s Good Samaritan Inc. Tim Kirby, executive vice president of system alignment and integration, Methodist Health System Mark Laney, MD and president and CEO, Heartland Health Keith Suedmeyer, director of social services, SSM St. Mary’s Good Samaritan Inc. Ferdinand Velasco, MD and chief health information officer, Texas Health Resources

Heartland’s Mosaic Life Care program is an example of the major transformation O UTLO O K • SPR I NG 2 0 1 3 |

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

The current healthcare landscape necessitates adaptation. “We’re living in unique and interesting times where complex health systems are looking more broadly at synergies, so organizations that wouldn’t normally work together are doing just that,” says UH’s Dr. Bieber. “And as legislation continues, we’re going to have to be even more creative with these partnerships. Some of them would never have happened five or 10 years ago. But today they make much more sense and are beneficial for care providers, and more importantly, the patients we serve.”

based model that encompasses the holistic needs of our patients and works toward optimal health and wellness.”

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

CLINICAL INNOVATION IN PERCUTANEOUS

coronary intervention

With cardiac disease ranking as the leading cause of death in the United States,1 it comes as no surprise that cardiovascular centers remain a major contributor to the profit margins of most health systems, accounting for up to 40 percent of a hospital’s total revenue.2 Introduced in 1977, percutaneous coronary intervention (PCI), more commonly known as angioplasty, is a procedure often used to treat heart attacks and prevent symptoms of coronary artery disease.3 While the number of PCI procedures has declined in the past few years, approximately 600,000 cases are performed annually in the U.S.4

Steve Marso, MD, a physician at St. Luke’s Hospital Mid-America Heart &Vascular Institute and professor of medicine at the University of Missouri-Kansas City (MO), and John House, manager, interventional cardiology and imaging research, St. Luke’s Hospital Mid-America Heart & Vascular Institute, Kansas City, discuss clinical innovation in PCI in the Q&A below.

Using acute care data from a database maintained by the Premier healthcare alliance, Dr. Marso and his team conducted researchcomparingcostandqualityindicators of transradial (TRI) and transfemoral (TFI) approaches for percutaneous coronary intervention in the inpatient setting. Their analysis shows that a transradial approach can be more cost effective, provide better patient outcomes in specific PCI procedures, and make a same-day discharge more appropriate than the traditional transfemoral method. Their findings were presented in the American Heart Journal in November 2012.5

EO: How have coronary intervention methods changed in the past five years?

Steve Marso and John House: That’s definitely a moving target. The greatest change in the last few years has been in the vascular access approach, shifting toward transradial versus transfemoral interventions. The rate of change is high in Europe, with transradial interventions in about 50-70 percent of cases. There’s been much slower acceptance in the U.S. In 2010-2011, the frequency of transradial intervention here was about 7 percent and is currently 10-11 percent. Development in the stent market has been an interesting one to watch. We’re now in the third generation of drug-eluting stents (DES), which are safer and markedly less expensive than the first and second generations. Additionally, there has been remarkable innovation in advanced techniques in the last several years. For example, there are more procedures being performed to open chronic total occlusions (CTOs). CTOs are identified in approximately 10 percent of diagnostic coronary angiograms. As these techniques to improve CTO become more widely accepted, we could see growth in the number of PCI procedures being performed in the U.S. Of course, the other significant advance

in the field is in treating structural heart disease. Percutaneous valve replacement has been approved for use and is increasingly common in aortic valve replacement procedures done by interventional cardiologists.

EO: You mention that Europe has seen a much faster uptake of transradial intervention. Can you explain why that is?

Steve Marso and John House: It really comes down to physician preference. In Europe, pioneers in the interventional cardiology field have implemented the transradial approach in their practices and disseminated that knowledge. It’s clear that physician leaders have influenced the field in an effective way. The transradial intervention data demonstrates efficacy and now, with emerging cost considerations, there is another impetus to adopt TRI. In Europe, there’s also a genuine need to discharge patients on the same day, and transradial interventions really facilitate that by lowering bleeding risk, increasing patient comfort, and providing early ambulation. Physicians are much more comfortable sending patients home the same day, because of these lower risks. The U.S. is a little more varied in its teaching approach, and there’s a steep learning curve. Much of the trial data comes from Europe, so there’s a need for more cardiologists to implement the transradial approach in the U.S., which will spur further adoption. Sufficient evidence exists for physicians in the U.S. to be motivated to change the way they treat at least some of their PCI patients.

Steve Marso, MD, physician at St. Luke’s Hospital Mid-America Heart &Vascular Institute and professor of medicine at the University of Missouri-Kansas City, MO

John House, manager, interventional cardiology and imaging research, St. Luke’s Hospital Mid-America Heart & Vascular Institute,

EO: In practice today, what factors lead physicians to choose transradial interventions vs. transfemoral interventions?

Kansas City, MO

Steve Marso and John House: Physician preference is responsible for the slower

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growth of transradial intervention in the U.S., as doctors feel more comfortable and have more experience with the transfemoral procedure. The benefits of transradial intervention include higher patient satisfaction, increased comfort, and early ambulation. Although comfort and satisfaction are difficult to measure, patients really value more rapid recovery times and shorter hospital stays.

EO: Can you discuss the shift from the inpatient to outpatient setting for PCI over the last few years?

Steve Marso and John House: The shift to outpatient care certainly hasn’t been without controversy. The greatest driver

has been the Centers for Medicare & Medicaid Services (CMS) Recovery Audit Contractor (RAC) audits where it was expected that PCI, for the vast majority of patients, would be categorized as an outpatient procedure. Reimbursement is substantially less for outpatient care, compared to inpatient, so in order to compete financially, hospitals need to adjust to PCI outpatient care by reducing the length of stay. Until now, health systems have been coding PCI cases as outpatient while providing roughly the same care as when it was coded as an inpatient procedure. Going forward, health systems need to modify their staffing and other operations to transition PCI to a same-day discharge, so that they can recoup the dollars lost due to the shift in reimbursement.

EO: What are the key drivers and considerations in moving PCI to an outpatient setting?

Steve Marso and John House: The major consideration in moving patients from an inpatient to an outpatient setting is safety. While both TRI and TFI are suitable for the outpatient setting, transradial vascular access offers a number of advantages. These include patient safety, given that transradial access is associated with a lower access-site bleeding complication rate, and early ambulation. One of the inherent challenges of choosing an outpatient PCI-care pathway is accurately assessing patients’ procedural risk for important complications. Patients at very low or low risk for post-procedure complications are truly the cohort of individuals we should be targeting for same-day discharge. In our institution, we employ a number of risk-prediction models to assess the suitability of inpatient-versusoutpatient status for our PCI patients. Approximately 75 percent of our patients

are not high-risk. If a patient is at low or moderate risk of bleeding, and you use treatments associated with low risk, then you put more patients in the position to be same-day discharged. Since transradial interventions lower the risk of bleeding, it makes the decision to same-day discharge easier for physicians, and the ability to same-day discharge is what saves costs when you’re shifting PCI to the outpatient setting. Of course, it has to be balanced with providing the best quality care and the lowest risks.

EO: What is the overall outlook for PCI?

Steve Marso: I am truly optimistic about the future of interventional cardiology. PCI is a mature procedure with proven efficacy for a variety of clinical scenarios. Important advances continue in the field related to device technology and advanced techniques. We must strive to improve the PCI operational efficiency to retain its profitability for health systems while continuing to ensure we maintain or improve patient safety. References 1. CDC, Faststats, http://www.cdc.gov/nchs/fastats/lcod.htm. 2. Becker’s Hospital Review, October 10, 2012, http://www.beckershospitalreview.com/hospitalkey-specialties/the-state-of-hospital-service-linescurrent-challenges-future-directions.html. 3. “Angioplasty’s golden era may be fading,” USA Today, March 27, 2008. http://usatoday30.usatoday.com/news/health/2008-03-26-angioplasty-decline_N.htm. 4. Ibid. 5. Safley, DM, Amin, AP, House, JA, Baklanov, D, Mills, R, Giersiefen, H, Bremer, A, and Marso, SP. “Comparison of costs between transradial and transfemoral percutaneous coronary intervention: A cohort analysis from the Premier research database,” American Heart Journal, http://dx.doi.org/10.1016/j.ahj.2012.10.004.

“ Going forward, health systems need to modify their staffing and other operations to transition PCI to a same-day discharge so they can

recoup the dollars lost.” TRENDS IN COST A N D UTI L I Z ATI O N ECONOMIC O U T LO O K

– Steve Marso, M.D., physician at St. Luke's Hospital Mid-America Heart & Vascular Institute and professor of medicine at the University of Missouri-Kansas City

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Opportunity for PCI savings:

SPOTLIGHT ON PREMIER DATA > Historically, PCI has been performed as an inpatient procedure, but due to innovations in cardiovascular interventions, as well as improvements in determining a patientâ&#x20AC;&#x2122;s risk level prior to intervention, the Centers for Medicare & Medicaid Services (CMS) designation of PCI was changed to outpatient for the majority of patients. Since reimbursement is significantly less for outpatient care compared to inpatient care, the re-coding of a procedure by CMS is an impetus for hospitals to review, when clinically appropriate, the level of care provided for PCI patients, so that the hospital can operate as efficiently as possible. One of the inherent challenges of choosing an outpatient PCI-care

Figure 1

pathway is accurately assessing a patientâ&#x20AC;&#x2122;s procedural risk for significant complications. Research shows patients at a low or moderate risk for post-procedure complications such as bleeding can be targeted for same-day discharge, allowing for cost savings by shifting resources, such as staffing and other operations, to the outpatient level.1 Because each situation is different, providers should review their own practices and protocols to identify potential opportunities while maintaining care quality. Data from 351 Premier member health systems from 2009-2012 show an increase in PCI cases coded as outpatient, meaning that hospitals were able to provide

outpatient-level care for these patients (in particular, same-day discharge) (Figure 1). Outpatient PCI cases currently represent 30 percent of all PCI cases within hospitals in the cohort, up from 23 percent in 2009. Among the cohort of 351 hospitals, the total cost associated with PCI was $3.5 - $4 billion annually, with approximately $3 billion per year coded as inpatient. The unadjusted mean total hospital cost for patients undergoing PCI (2009-2012) was approximately $14,000 per case when the procedure was coded as inpatient, compared to under $10,000 when coded as outpatient (Figure 2).

Percent of PCI procedures coded as inpatient or outpatient

90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 2009

2010

Inpatient

2011

2012

Outpatient

Source: A database maintained by the Premier healthcare alliance Note: From 2009-2012, database contained between 195,000-230,000 inpatient PCI cases per year and between 65,000-84,000 outpatient PCI cases per year.

An outside analysis of 1.5 million patients undergoing PCI procedures published in the June 2010 edition of the Journal of the American Medical Association (JAMA), suggests 75 percent or more of the patients in the study had a low or moderate risk of bleeding complications, and could be safely managed with outpatient-level resources.2

outpatient-level resources, and coded as such.

Below is an estimation of the savings to the cohort of 351 hospitals if 75 percent of all PCI cases at low or moderate risk of bleeding were appropriately managed with

By maintaining the same number of total cases, the JAMA study implies that an average of 130,000 PCI cases per year would be potentially eligible for use of outpatient-level resources and same-day discharge in this cohort. In our dataset, we observed that approximately 59 percent of PCI inpatient cost was variable compared to approximately 55 percent for outpatient. For cases requiring inpatientlevel resources, added and thus variable cost included labor, additional use of

Figure 2

$14,000

References 1. Marso SP, Amin AP, House JA, et al. “Association Between Use of Bleeding Avoidance Strategies and Risk of Periprocedural Bleeding Among Patients Undergoing Percutaneous Coronary Intervention,” JAMA, doi:10.1001/jama.2010.708. 2. Ibid.

Average PCI cost per case, inpatient and outpatient

$14,194

$13,983

By shifting eligible, lower-risk patients to less resource-intensive outpatient care, there is a potential opportunity to impact $1.58 billion in cost over four years (Figure 3).

$14,060

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

$16,000

supplies and other overhead associated with length-of-stay.

$14,248

$12,000 $10,000

$9,730

$9,800

$9,381

$9,339

$8,000 $6,000 $4,000 $2,000 $2009

2010

■ Inpatient

2011

2012

■ Outpatient

Source: A database maintained by the Premier healthcare alliance Note: Cost per case is shown in constant dollars.

Figure 3

Potential savings associated with treating additional PCI patients with outpatient-level resources

Inpatient Outpatient TOTALS

2009-2012 Actual Potential # of cases Cost # of cases Cost 791,082 $6,586,164,182 272,539 $2,269,469,226 299,073 $1,573,699,082 817,616 $4,308,570,885 1,090,155 $8,159,863,264 1,090,155 $6,578,040,111

Cost savings $1,581,823,153

Source: A database maintained by the Premier healthcare alliance Note: Database did not break down PCI by transradial or transfemoral intervention. Facilities may not be able to transition 75 percent of PCI cases to outpatient setting, depending on population, risk of bleeding, or other factors.

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The cost of non-adherence:

A LOOK AT COMMCARE PHARMACY > An estimated one-third to one-half of all patients in the U.S. do not take their medication as it is prescribed.1 Nonadherence has been shown to result in $100 billion each year in excess hospitalizations alone,2 ignoring outpatient, rehabilitative, or pharmaceutical costs. It can lead to worse outcomes, higher healthcare costs, and higher utilization, especially for patients with chronic diseases.3

Adherence rates decline the longer a patient must take a prescription and are consistently lower for chronic-disease patients, compared to those receiving acute care. Approximately 75 percent of current healthcare spending is now directed toward chronic-disease care, making poor or non-adherence a significant impediment to improved health outcomes.4

Commcare, a Premier-owned specialty pharmacy, has found a means to signifi-

Figure 1

• Disease state progression and lab value monitoring, • Patient understanding of injection and administration methods, • Proactive management of adverse reactions and side effects, • Amplified patient/pharmacist/doctor communication and follow-up, and • Dedicated disease management service representatives and clinical personnel on-call 24/7.

The infection is associated with significant morbidity and mortality with traditional therapies; sustained virological response is achieved in less than 50 percent of cases.6 It is also a heavy economic burden, as new oral therapies come at a high cost. However, triple therapy, which includes one of two new oral drugs, is thought to improve outcomes in hepatitis C patients.7 Commcare has 203 patients who received treatment for hepatitis C in 2012. Approximately 16 percent are on dual therapy, while the remaining 84 percent receive triple therapy (Figure 1). A patient’s regimen is based on multiple factors, including viral genotype, prior failed therapies, co-infection, and other hepatic activity.

Hepatitis C case study An estimated 3.2 million people in the United States have hepatitis C, though most of them do not know they are infected and are not receiving treatment.5

Medication costs vary, depending on the therapy that a hepatitis C patient receives. The traditional regimen of Ribavarin and Pegylated Interferon, categorized as dual therapy, costs slightly more than $3,000

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

Especially in the move toward accountable care and population health management, finding ways to reduce non-adherence to medication and treatment protocols will be fundamental in helping health systems meet healthcare reform measures. In fact, a focus on adherence improvement could play a vital role in achieving many of the main objectives of healthcare reform, including improving care coordination, reducing readmissions, and moving toward outcomes-based payments.

cantly increase medication adherence by enrolling patients in robust disease/ patient management programs. While the programs provide additional patient touch points and counseling, Commcare’s initiatives revolve heavily around:

Distribution of patients by therapy type

Dual Therapy 16%

Triple Therapy 84%

Triple Therapy Victrelis 56%

Triple Therapy Incivek 28%

Source: Commcare claims database

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per month, while triple therapy can range up to more than $21,000 per month (Figure 2). As published in the American Journal of Managed Care in December 2012, the general populationâ&#x20AC;&#x2122;s rate of adherence on hepatitis C therapy is 64.6 percent.8 In a sample of 203 patients, 131 would be adherent to their drug therapy, based on the national average. At Commcare, however, the adherence rate is over 91 percent; 185 of their 203 hepatitis C patients have been 100 percent compliant since the start of therapy. In this cohort, 54 additional patients would be adherent to their hepatitis C therapy, compared to the national average.

Unlike many other treatment regimens, where patients continue where they left off if a prescription is skipped, hepatitis C is unique. If patients miss a refill in their six-month regimen, they must restart treatment from the beginning. A patient who misses month five must

Figure 2

start back at month one and incur five extra monthly prescription payments. Non-adherence is most common following the first month of drug therapy when patients become more aware of the high cost of treatment. Therefore, the lowest

Costs for hepatitis C drug therapy

Therapy types

Cost

Dual therapy

$3,185

Triple therapy (Victrelis)

$8,165

Triple therapy (Incivek)

$21,581

Source: Commcare claims database

Non-adherence is most common following the first month of drug therapy when patients become more aware of the high

cost of treatment. 40

cost for non-adherence would be if all 54 patients stopped taking their medication at month two, then restarted at month one and did not miss another month of therapy. This would result in at least one month of drug therapy wasted. Figure 3 shows the costs associated with one month of missed medication for 54 patients.

Astoundingly, this scenario is the most conservative estimate of savings through

Figure 3

There are an estimated 32,960 people currently being treated for hepatitis C in the U.S.9 Considering the national adherence average among hepatitis C patients, 8,752 of the 32,960 would be adherent. Expanded over this population, Commcare’s adherence rates, as compared to the national average, would result in a minimum savings of $130 million. References 1. Cutler, DM and Everett, W. “Thinking outside the pill box,” New England Journal of Medicine, http://www.nejm.org/doi/full/10.1056/NEJMp1002305. 2. Ibid. 3. “In chronic disease, nationwide data show poor

adherence by patients to medication and by physicians to guidelines,” Managed Care Magazine, http://www.managedcaremag.com/archives/0802 /0802.peer_evidence.html. 4. Cutler, DM and Everett, W. “Thinking outside the pill box,” New England Journal of Medicine, http://www.nejm.org/doi/full/10.1056/NEJMp100 2305. 5. “Hepatitis C FAQs,” Centers for Disease Control and Prevention, http://www.cdc.gov/hepatitis/c/cfaq.htm#cFAQ21 . 6. “Economic Burden and Current Managed Care Challenges Associated with Hepatitis C,” American Journal of Managed Care, http://www.ajmc.com/publications/supplement/2 012/ACE007_12dec_HepC/ACE007_12dec_Mathis_ S350to9. 7. Ibid. 8. “Economic Burden and Current Managed Care Challenges Associated with Hepatitis C,” American Journal of Managed Care, http://www.ajmc.com/publications/supplement/2 012/ACE007_12dec_HepC/ACE007_12dec_Mathis_ S350to9. 9. “HCV admissions rise while HIV ones fall,” Medpagetoday.com, http://www.medpagetoday.com/MeetingCoverage/IDWeek/35475.

Cost associated with one month of missed therapy for 54 hepatitis C patients

Therapy types

# of patients

Cost per patient

Total savings

16% on dual therapy

$3,185

$28,665

56% on triple therapy - Incivek

$21,581

$647,430

28% on triple therapy - Victrelis

$8,165

$122,475

Total cost for one month of missed drug therapy (n=54)

Figure 4

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

Programs that reduce medication nonadherence, especially for chronic diseases with high-cost drug therapies, are particularly important in minimizing unnecessary medical expense and waste in the healthcare system. As demonstrated in Figure 3, $798,570 is the actual savings through Commcare’s patient disease management efforts – approximately $15,000 per patient.

adherence. In reality, many of these patients would be non-adherent for more than one month or become non-adherent later in the treatment regimen (and need to retake several additional months of therapy instead of one). It also ignores inpatient hospital and outpatient costs incurred due to non-adherence.

$798,570

Cost associated with one month of missed therapy for all hepatitis C patients currently receiving treatment

Therapy types

# of patients

Cost per patient

Total savings

16% on dual therapy

1400

$3,185

$4,459,952

56% on triple therapy – Incivek

4904

$21,581

$105,833,224

28% on triple therapy - Victrelis

2448

$8,165

$19,987,920

Total cost for one month missed drug therapy (n=8,752)

$130,281,096

O UTLO O K • SPR I NG 2 0 1 3 |

Abstract The following abstract, developed by the Premier healthcare alliance, provides an overview of a study analyzing trends in cost and utilization. The full article is available to Premier health system members.

Resource utilization best practices:

DIAGNOSTIC IMAGING Concerns about the growth in imaging utilization also come from findings that cite large geographic variations in use across the U.S., with utilization approximately 50 percent higher in certain areas,2 and questionable clinical guidelines for various diagnostic procedures. These concerns underscore the need for more comparative-effectiveness research and clearly worded, evidence-based guidelines.

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

Diagnostic imaging has experienced an 85 percent increase in volume over the past decade,1 particularly in the use of advanced imaging procedures. There has been some debate in the healthcare community as to whether such steep growth is justified. Major concerns stem from the safety implications of increased patient radiation exposure.

To determine potential opportunities for improvement and cost savings, the Premier healthcare alliance examined imaging utilization among member hospitals. The analysis identified hospitals with the highest average imaging use and compared usage to a benchmark group for like patients. Our benchmark group was comprised of facilities with average imaging costs per case in the lowest 25 percent of all hospitals in the sample and lower-than-expected inpatient mortality rates, as well as lower-than-expected average length of stay. The study results are available to Premier health system members. Working collaboratively with practitioners and identifying physician champions is critical to successful imaging management. If opportunities for utilization improvement exist, collaborative resource utilization groups can implement evidence-based imaging protocols, provide education and clinical decision support tools to inform practitioners of protocols in real time, monitor utilization on an ongoing basis, and measure impact of improvement efforts. 1. Parker, Laurence, Levin, DC, Frangos, A, and Vijay Rao. â&#x20AC;&#x153;Geographic Variation in the Utilization of Noninvasive Diagnostic Imaging,â&#x20AC;? American Journal of Roentgenology (2010): 1034-1039. doi: 10.2214/AJR.09.3528. 2. Ibid.

O UTLO O K â&#x20AC;˘ SPR I NG 2 0 1 3 |

E C O N O M I C S ECONOMIC O U T LO O K

A conversation with Sarah Watt economic analyst, Wells Fargo Securities

1 Sarah Watt is an economic analyst with Wells Fargo Securities. Based in Charlotte, NC, she covers the U.S. macro economy, including the labor market, manufacturing sector and inflation trends. She regularly writes indicator reports, produces special commentary and contributes to the company’s Weekly Economic & Financial Commentary.

82 44

What is your estimate for GDP growth in the next 12 months?

The economy should grow around 1.6 percent in 2013. This is notably lower than the 2.2-percent pace we expect to see once we get GDP data for the fourth quarter. Real GDP growth appears to have slowed to a 1 percent rate during the final quarter of 2012, as businesses spending paused during the fiscal cliff negotiations. We expect this weakness will carry through to the first part of the year, with weak consumer spending early on due to the

expiration of the payroll tax holiday and increased tax rates on higher income earners. However, growth should pick up as the year progresses, with GDP increasing to a 2.4-percent pace by the fourth quarter of 2013. What impact will healthcare have on GDP growth? What other sectors will have the greatest impact on growth in the next 12 months?

A lot of the strength in healthcare can be seen in the sector’s employment growth, and that

continues to outpace the overall market. The December payroll data shows that the healthcare industry added nearly 340,000 new jobs in 2012, up from around 300,000 in 2011. We saw the strongest growth in outpatient care, which rose 6.1 percent, and home healthcare, which continues to increase at a rate higher than other areas of the industry. For example, employment within hospitals has increased only slightly less than 2 percent over the past year. Another area that will move the needle on GDP is housing. Construction spending for residential investment will increase 17 percent in 2013. We’re expecting housing starts (the number of privately owned new houses on which construction has been started) to increase more than 25 percent, and we’ll likely see increased resale activity as prices rebound and more traditional buyers come back into the market. This recovery in housing will have a large ripple effect throughout the broader economy, especially on the retail sector and other service industries linked to housing.

One area that will have a negative impact on GDP is government spending, due to delayed spending cuts in the debt ceiling negotiations. Most of this drag will come from the federal government; we’ve actually seen state and local government spending stabilize. Later in 2013, we’ll see local and state government spending actually give a bit of a boost to GDP, but that will be outweighed by the federal spending cuts. What do we see going on with the global economy in the next 12 months? What effect will the global economy have on the U.S. in the next 12 months?

We think the global economy is going to strengthen somewhat, but overall growth will still be weak by historic standards. The global economy will probably grow about 2.8 percent, compared to a historic average of 3.6 percent. This is a slight improvement over what we saw in 2012, but it’s still below trend.

China seems to have avoided a hard landing. Export growth has stabilized, the pace of industrial production is picking up, and inflation has come down to about 2 percent from approximately 4 percent one year ago. That’s allowed the authorities to loosen monetary policy a bit, which has improved lending. It looks like the economy will be a bit stronger this year, with GDP increasing about 8 percent. However, the return to double-digit GDP growth will remain elusive over the next few years as China shifts from an investment-led economy to more balanced growth that includes greater domestic consumption. Another area we’ll be watching closely this year is Europe. The continent is still struggling with the effects of the sovereign debt crisis, and it is now in a recession that will probably continue through the early part of this year. Growth for 2013 as a whole will likely even out to approximately 0.2 percent. Overall, we expect very sluggish growth in Europe that will weigh on economic activity in the U.S. and the global economy more broadly.

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Trade is the most direct link between the global economy and the U.S. Since the global economy will be growing at a faster rate than the U.S. in 2013, the U.S. should see net exports add to GDP. Historically weak global growth, however, will keep inflation tame as you won’t see outsized demand for commodities.

What changes do you expect to see over the next 12 months in the U.S. unemployment rate?

We expect the employment rate to stay essentially flat over the next 12 months. Weak GDP growth won’t create the demand needed to bring down the unemployment rate in a meaningful way. When looking at unemployment, the labor force participation rate is really the wild card. Typically in a recession, the labor force participation rate declines as workers get discouraged or go back to school, only to increase again when the economy starts to recover and job prospects improve. We really haven’t seen that yet in this cycle. Some of that is due to demographic trends, such as the baby boomers reaching retirement age, but we’re also seeing a decline in “prime age workers,”people between the ages of 25 and 54. It’s really anyone’s guess as to how many of those people come back into the workforce as the economy strengthens. We saw both the unemployment rate and the labor participation rate decline 0.7 percentage points from December 2011 to December 2012, indicating that there is a direct link between the two. Can you describe overall inflation projections for the next 12 months in the U.S. economy and what this may mean for healthcare?

Overall, the trend for inflation over the next year is going to be tame. We’re

looking at top-line inflation to rise approximately 1.8 percent, and core inflation, which excludes the more volatile components of food and energy, to also increase 1.8 percent. Inflation is at a comfortable point for monetary policy and the economy more broadly.

housing recovery, we’re seeing increases in rental prices. Homeownership is still very affordable, but we are seeing rental rates in the multi-family and apartment markets increasing, and that heavily impacts the rate of inflation, since shelter costs account for 30 percent of CPI.

The reason we’re still having such tame inflation right now is weak domestic demand – as evidenced by our expectation for a year of sub-2 percent GDP growth. Even though unemployment has come down, it’s still elevated above what economists consider the natural rate of unemployment, which is between 5.5 and 6 percent. Because there is such a high degree of labor market slack, there is still not that much pressure on prices. Also, global demand is weak, which will help to keep price growth low here in the U.S.

Medical inflation has followed a different trend. Historically, medical care inflation has outpaced broader inflation, and that should continue as medical care is much less price-sensitive than other goods. The aging population will only increase demand for medical care, and with increased demand you get increased price pressures. However, we should see the trend in cost increases stabilize this year, as a lot of healthcare companies are closely managing their expenses ahead of changes surrounding reimbursement rates and coverage rules due to the Affordable Care Act. This should help keep medical costs from really soaring in 2013.

There will be some areas of upward pressure. For instance, we’re still seeing some pressure on food prices from the drought this summer. Also, along with the

It’s likely we’ll see only moderate growth in commodity prices since the global economy still isn’t firing on all cylinders. This will keep demand on commodities from rising too rapidly, as there is still weakness in Europe and substandard growth here and in China. Of course with commodities, prices are always prone to event risks like we saw with the drought this past summer. We could see price pressures pop up due to unforeseen events. Oil prices are notoriously difficult to forecast, but they’ll gradually rise this year as the U.S. and global economies improve.

That assumes no major geopolitical issues arise that would increase risk for oil prices.

What is the impact of the Affordable Care Act (ACA) on the healthcare industry in the next 12 months?

The election confirmed that the ACA was going to move forward, so really, 2014 will be the big year for the Affordable Care Act. Because there are so many new regulations that need to be implemented, 2013 will be about preparing for those changes. There will be a lot of pressure on insurance providers to look at costs, given new rules regarding coverage and reimbursement.

E C O N O M I C S ECONOMIC O U T LO O K

What are your expectations for commodity prices in the next 12 months?

What is the expected impact of ACA initiatives (e.g., ACOs) on hospital profitability in the next 12 months?

Profitability is going to remain compressed as hospitals prepare for the new regulations. Depending on what happens with the debt dealandhowreimbursementstomedicalcare providers are structured, there’s a good chance that profits will be squeezed. However, hospitals have made a concerted effort to control costs, which will soften the blow. The good news is that utilization rates are stabilizing. Growth may still be limited as outpatient care gains momentum and employersponsored health plans move to cost-sharing programs that increase transparency about what procedures really cost. That could lead to a decrease in elective procedures.

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BEHIND THE

NUMBERS ECONOMIC AND SUPPLY CHAIN TRENDS IMPACTING OUR MEMBERS 48

Premier distributed an online survey to approximately 9,000 member health system leaders nationwide to solicit their perspectives on the healthcare supply chain – in particular, the impact of economic and industry trends. The survey (n=535) provided a wealth of data on the key objectives of the Premier healthcare alliance. Forecast growth in outpatient admissions

Figure 1

Three-quarters of respondents expect their inpatient admissions to remain static or increase in 2013, a finding that is similar to fall 2012 predictions.

E C O N O M I C S ECONOMIC O U T LO O K

With the shift toward population health management and accountable care, health systems are focusing on integrating the care continuum, including outpatient, rehabilitative, and home care. Improving the continuity of care will help health systems reach readmission goals as part of the Affordable Care Act.

As a result of a greater focus on non-acute care and changes in Medicare inpatient and outpatient designations,1 69 percent of respondents anticipate an increase in outpatient admissions in 2013, compared to the prior year. At the same time, 53 percent expect an outpatient increase of up to 5 percent, and 16 percent anticipate an admissions increase of more than 5 percent. Only 7 percent of respondents forecast a decrease in outpatients (see Figure 1).

Inpatient and outpatient admissions forecasts

100.0% 80.0% 60.0% 40.0% 52.7%

20.0% 0.0%

8.3% 15.8% Increase by more than 5%

41.4%

26.6%

24.2%

Increase by up to 5%

■ Inpatient

20.6% 6.0%

No change

Decrease by up to 5%

3.1%

1.3%

Decrease by more than 5%

■ Outpatient

Source: Premier online survey for Economic Outlook Spring 2013 publication

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Figure 2

Drivers of healthcare costs

2% 5%

■ Healthcare legislation and mandates

■ Overutilization of products and services

■ Labor costs

33%

■ Lack of clinical coordination of care

■ Misalignment of quality and payment incentives ■ Health information technology

■ Patient demand for healthcare services ■ Pharmaceuticals 11%

■ Medical devices

13%

■ New clinical technology/equipment

12%

Source: Premier online survey for Economic Outlook Spring 2013 publication

Figure 3

Top two drivers of healthcare costs

Drivers of healthcare costs Healthcare legislation and mandates

Spring 2013

Fall 2012

Spring 2012

48%

45%

51%

Overutilization of products and services

29%

33%

23%

Labor costs

23%

19%

21%

Misalignment of quality and payment incentives 22%

20%

17%

Lack of clinical coordination of care

22%

20%

17%

Patient demand for healthcare services

19%

22%

17%

Health information technology

15%

n/a

Pharmaceuticals

12%

14%

18%

New clinical technology/equipment

11%

Medical devices

Source: Premier online survey for Economic Outlook Spring 2013 publication

Regulation and overutilization remain biggest drivers of healthcare costs Legislation is the largest driver of respondents’ healthcare costs. One-third cite healthcare legislation as the top driver (see Figure 2), and nearly half report that it is one of the top two (see Figure 3). In the face of reimbursement cuts and other financial impacts of healthcare reform, hospital executives are engaging in various initiatives to improve quality of care while reducing system costs and waste. (See related “Perspectives” article in this issue.) In the same vein, and similar to responses in fall and spring 2012, 13 percent of respondents cite overutilization of products and services as the second biggest cost driver, followed by labor expenses.

Capital budgets and investments Capital budgets are increasing for 40 percent of 2013 survey respondents (see Figure 4). The percentage of respondents with increasing or stable capital budgets is relatively unchanged from this time last year (65 percent in spring 2012, compared to 63 percent in spring 2013).

E C O N O M I C S ECONOMIC O U T LO O K

Figure 4

The major shifts in responses for this question since last year include (see Figure 3): • Fewer respondents believe pharmaceuticals are a main healthcare cost driver than in the 2012 surveys; • Labor costs were ranked as one of the top three cost drivers in both spring 2012 and 2013 but not in fall 2012; and • More respondents believe misalignment of quality and payment incentives is a main cost driver than in 2012.

Change in capital budgets

30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Increased by 30% or more

Increased 10% to 29%

■ Fall 2011

Increased 1% to 9%

■ Spring 2012

No change

■ Fall 2012

Decreased 1% to 9%

Decreased 10% to 29%

Decreased by 30% or more

■ Spring 2013

Source: Premier online survey for Economic Outlook Spring 2013 publication

O UTLO O K • SPR I NG 2 0 1 3 |

Supply chain to target cost-savings goals and cost-reduction opportunities

Capital investment areas remained flat over the past 18 months, with 43 percent of budgets dedicated to IT and telecommunications – most notably in the area of electronic health records (EHRs) and other integrated technologies (see Figure 5). In moving toward meaningful use criteria, health systems are investing in IT first, followed by infrastructure.

To meet the demands of the current healthcare environment, 27 percent of respondents’ organizations are dedicating resources to EHR-specific IT investments for supply chain improvement (see Figure 6).

Figure 5

Product standardization is considered by 37 percent of respondents to be among the top two areas of resource dedication for supply chain improvement, while building relationships with physicians and clinicians is a key area of concern for 27 percent of respondents. An organization’s cost-savings goals appear to be a growing factor, as 35

Area of capital investment spend

IT and telecommunications

Infrastructure

Imaging equipment

Surgical suites/equipment

Other clinical equipment

Laboratory equipment

Other 0%

5% 10% ■ Spring 2013

15% 20% ■ Fall 2012

25% 30% ■ Spring 2012

35% 40% ■ Fall 2011

45%

Source: Premier online survey for Economic Outlook Spring 2013 publication

Figure 6

Areas of resource dedication for supply chain improvement TOP TWO AREAS

Area of resource dedication

Ranked first

Ranked second

Spring 2013

Fall 2012

Product standardization

18.0%

18.8%

36.8%

32.7%

IT investment – EHR-specific

26.6%

8.9%

35.5%

31.4%

Building relationships with physicians

10.3%

16.6%

26.9%

27.3%

Reducing costs for physician preference items

12.1%

12.6%

24.7%

27.2%

Value analysis

8.8%

13.5%

22.3%

27.2%

Reducing costs for commodity products

6.8%

8.9%

15.7%

12.4%

Data standardization

5.1%

8.2%

13.3%

11.6%

IT investment – non-EHR-specific

5.7%

4.4%

10.1%

12.0%

Integrating supply chain and revenue cycle systems

4.0%

5.3%

9.3%

11.6%

Automation

2.6%

2.7%

5.3%

6.6%

Source: Premier online survey for Economic Outlook Spring 2013 publication

percent of respondents list it as having the greatest impact on their supply chains, compared to 28 percent in fall 2012 (see Figure 7). Extending the supply chain across the continuum of care – for instance, through centralized purchasing – has the greatest impact for 15 percent of

engagement surrounding evidence-based decision making is the greatest healthcare trend impacting their supply chains, followed closely by a similar trend toward improved utilization management (see Figure 8).

respondents’ supply chains. The supply chain serves an important role in building efficiencies and reducing costs for improved quality and integrated care. Nearly half of respondents (49 percent) believe that physician and health system

Figure 7

Factors with the greatest impact on supply chain

Cost savings goals of the health system Integrating the supply chain across the continuum of care Value analysis process Drug shortages Medical device prices Healthcare information technology Commodity prices Comparative effectiveness data Other 5% 10% ■ Fall 2012

15% 20% ■ Spring 2013

25%

30%

35%

40%

E C O N O M I C S ECONOMIC O U T LO O K

Source: Premier online survey for Economic Outlook Spring 2013 publication

Figure 8

Healthcare landscape trends with greatest impact on organization TOP TWO AREAS

Healthcare landscape trends

Spring 2013

Fall 2012

48.7%

53.9%

Increased physician-health system engagement Focus on utilization management

44.2%

37.8%

Involvement in value analysis process

28.3%

30.3%

Movement for supply chain integration across health system

22.6%

19.5%

Population health management and coordination across continuum of care

18.6%

14.8%

Consideration of new supply chain metrics to reflect impact to care process

17.4%

13.4%

Consideration of supply chain contribution to patient-centered healthcare

8.9%

14.5%

Location and product identification standardization

6.8%

9.2%

Source: Premier online survey for Economic Outlook Spring 2013 publication

O UTLO O K • SPR I NG 2 0 1 3 |

About the survey In winter 2012-2013, Premier, in collaboration with Customer Care Measurement and Consulting LLC, commissioned an online survey of nearly 9,000 healthcare leaders across our membership, representing both acute and non-acute care. The survey respondents (n=535) included a cross-section of members across geographical area and

organizational size and type. The survey collected data on members’ perspectives on the healthcare supply chain, with a particular focus on related financial and economic industry trends.

practice-area managers/directors; and 20 percent were supply chain or materials’ managers. Urban and rural areas were equally represented. An overview of the respondent profile is below.

Approximately 85 percent of respondents represented acute care providers. Nearly one-third of respondents (30 percent) were C-suite; 26 percent were service-line or

Reference 1. “RAC Target: Inpatient vs. Outpatient Designation,” RAC Monitor, http://www.racmonitor.com/news/3-feature-aritcles/137-rac-target-inpatient-vs-outpatient-designation.

Organizational role of survey respondents

C-Suite

Office Service line or Supply chain practice area or materials administrator/ manager management manager/ director

5% 0.4%

2.1%

2.9%

Finance and/ Quality or accounting improvement

Physician

Other

Respondents by organization type

Senior-living facility

Surgery center

2% Multispecialty group practice

Academic medical center

Critical access hospital

Small hospital (less than 200 beds)

17%

Midsized Large hospital hospital (500 + beds) (between 200 & 500 beds)

17%

14%

Clinician

27%

30%

Figure 10

Multi-hospital system/IDN

5.4%

8.4%

20.3%

26.2%

29.3%

Figure 9

Singlespecialty group practice

Physicianowned specialty hospital

Other

AN U PDATE ON

hospital performance metrics Operating margins for acute-care hospitals have improved since 2007 and 2008, when they stood at less than 1 percent. Median operating margin increased 300 percent from 2007 to 2011 but decreased 31 percent in the first three quarters of 2012, compared to 2011.

Operating margin of acute care hospitals, 2008-2012 (Q3)

E C O N O M I C S ECONOMIC O U T LO O K

Figure 1

gap between the median and the first quartile expanded from 2008 to 2011 (reaching 6.5 percent in 2011), the firstquartile margins appear to have been hit harder in 2012, bringing the gap between the two to 5.7 percent last year.

Hospitals in the first quartile (top 25 percent) have seen significant improvement in operating margin, rising from 5.8 percent in 2008 to 8.6 percent in 2011. However, they saw a significant decrease in operating margin, to 7.1 percent, in the first three quarters of 2012. Though the

9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2008

2009 ■ Average

2010 ■ Median

2011

2012

■ 1st quartile

Source: A database maintained by the Premier healthcare alliance

O UTLO O K • SPR I NG 2 0 1 3 |

Profit per acute beds in service has returned to 2009-2010 levels for the first quartile, after seeing a nearly $30,000 increase in 2011 compared to 2010. Similarly, the median saw a 17 percent decrease in profit per acute bed in the first three quarters of 2012, compared to 2010-2011 levels. Regardless, the first quartile still largely outperforms both the median and the average.

Figure 2

2008 to 54 percent in 2012. As more care shifts to the outpatient setting, we will continue to see declines in inpatient revenue as a percent of gross patient revenue. Declines of approximately 5 percent have been seen in the median and first-quartile groups since 2007, though the median inpatient revenue has remained static as a percent of gross patient revenue since 2010.

Premier’s member survey showed that 35 percent of member health systems expect an increase in inpatient admissions in 2013, compared to 2012, while 68 percent of respondents expect an increase in outpatient admissions (see “Behind the Numbers” article in this edition). The decline in inpatient revenue persists as a percent of overall patient revenue, decreasing from 60 percent in

Profit and loss per acute beds in service, 2008-2012 (Q3)

$200,000 $180,000 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 2008

2009 ■ Average

2010 ■ Median

2011

2012

■ 1st quartile

Source: A database maintained by the Premier healthcare alliance

Figure 3

Inpatient gross patient revenue as a percent of gross patient revenue, 2008-2012 (Q3)

61.0% 60.0% 59.0% 58.0% 57.0% 56.0% 55.0% 54.0% 53.0% 52.0% 51.0% 2008

2009 ■ Average

2010 ■ Median

Source: A database maintained by the Premier healthcare alliance

2011 ■ 1st quartile

2012

Bad debt expense has grown in 2012 for the average, while decreasing slightly for the median and more significantly, for the first quartile. Following the first three quarters of 2012, the first quartile’s bad debt sits at its lowest point in five years.

compared to 2011 and 2010 levels. Though the first quartile saw the greatest increase in total operating expense as a percent of net patient revenue (NPR) in 2012, a 10 percent gap remains between the first quartile and both the median and average.

Total operating expense for the median and average remained relatively constant in the first three quarters of 2012,

Note: Data shown for 2012 does not include Q4. Some adjustments may be made in Q4 that will alter the overall

Figure 4

yearly numbers. Updated numbers will be in the fall 2013 edition of the Economic Outlook. Rich Westbay, program manager, SupplyFocus®, Premier healthcare alliance, contributed to this article.

Bad debt expense as a percent of net patient revenue, 2008-2012 (Q3)

9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2008

2009 ■ Average

2010 ■ Median

2011

2012

■ 1st quartile

Figure 5

E C O N O M I C S ECONOMIC O U T LO O K

Source: A database maintained by the Premier healthcare alliance

Total operating expense as a percent of net patient revenue, 2008-2012 (Q3)

100.0% 98.0% 96.0% 94.0% 92.0% 90.0% 88.0% 86.0% 84.0% 82.0% 80.0% 2008

2009 ■ Average

2010 ■ Median

2011

2012

■ 1st quartile

Source: A database maintained by the Premier healthcare alliance O UTLO O K • SPR I NG 2 0 1 3 |

PREMIERâ&#x20AC;&#x2122;SPATIENT VOLUMETRENDS These metrics are based on a sample of 332 healthcare facilities that have submitted three years of inpatient and outpatient data to a database maintained by the Premier healthcare alliance. In order to include data from 2012, yearly data is shown in fiscal years (July to June) rather than calendar years. The sample is representative of a cross-section of our membership that includes variation in geographic area and organizational size and type. This report identifies year-over-year (YOY) percentage changes in historical volumes for key data elements, such as inpatient and outpatient increases, surgery growth, and payor mix from July to June 2011 (FY2011) to the same period in 2012 (FY2012).

Figure 1 Y/Y Growth

FY2012 quarterly trends

Q3 2011

Q4 2011

Q1 2012

Q2 2012

FY2012

Inpatient

0.61%

2.29%

1.40%

3.45%

1.93%

Outpatient

2.39%

3.25%

3.63%

2.50%

2.94%

Total discharges

2.06%

2.62%

3.07%

1.86%

2.40%

Inpatient surgeries

1.63%

3.21%

1.45%

3.86%

2.54%

Outpatient surgeries

0.96%

0.88%

1.35%

1.57%

0.54%

Births

1.19%

2.79%

1.09%

2.88%

1.36%

Medicare discharges

3.51%

4.17%

5.86%

3.57%

4.27%

Medicaid discharges

0.09%

0.17%

0.29%

0.05%

0.07%

Self-pay discharges

1.82%

0.81%

1.17%

0.51%

0.25%

Managed care and other payor discharges

2.76%

3.47%

2.79%

1.71%

2.68%

Source: A database maintained by the Premier healthcare alliance Notes: Quarterly numbers show the percent change from the same quarter in the previous fiscal year. Annual totals represent the percent change overall in FY2012 compared to FY2011.

OF NOTE: • Inpatient volumes decreased 1.9 percent in FY2012 compared to FY2011. • Outpatient volumes for FY2012 increased 2.9 percent compared to FY2011. • Inpatient surgeries decreased 2.5 percent from FY2011. • Outpatient surgery volumes decreased 0.5 percent in FY2012 compared to FY2011, which was up a slight 0.3 percent YOY from FY2010. • Payor mix: Medicare and managed care volumes increased in FY2012. Medicare volume was up 4.3 percent for FY2012, compared to FY2011; managed care and other payor volume saw a 2.7 percent increase over FY2011. Medicaid discharges were nearly flat, at 0.1 percent higher than FY2011, while self-pay discharges decreased 0.3 percent over FY2011.

E C O N O M I C S ECONOMIC O U T LO O K

O UTLO O K • SPR I NG 2 0 1 3 |

Discharge trends

6.0%

Y/Y percent change

4.0%

2.0%

0.0%

-2.0%

-4.0% Q3 2010

Q4 2010

Q1 2011

■ Total discharges

Q2 2011

Q3 2011

■ Inpatient discharges

Q4 2011

Q1 2012

Q2 2012

■ Outpatient discharges

Source: A database maintained by the Premier healthcare alliance

Discharges by payor type

8.0%

Y/Y percent change

6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Q3 2010 ■ Medicare discharges

Q4 2010

Q1 2011

■ Medicaid discharges

Q2 2011 ■ Self-pay discharges

Source: A database maintained by the Premier healthcare alliance

Q3 2011

Q4 2011

Q1 2012

Q2 2012

■ Managed care and other payor discharges

Surgery and emergency department visits

8.0% 6.0%

Y/Y percent change

4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Q3 2010

Q4 2010

Q1 2011

■ Inpatient surgeries

Q2 2011

Q3 2011

Q4 2011

■ Outpatient surgeries

Q1 2012

Q2 2012

■ ED visits

Source: A database maintained by the Premier healthcare alliance

Average length of stay

E C O N O M I C S ECONOMIC O U T LO O K

3.56

1.0%

3.54 3.52

Y/Y percent change

0.5%

3.72 3.50

0.0%

3.48 3.46

-0.5%

3.44 3.42

-1.0%

3.40 3.38

-1.5% Q3 2010

Q4 2010

Q1 2011

■ Y/Y percent change

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

■ Average length of stay (days)

Note: Average length of stay includes only inpatient data; outliers have been excluded. Source: A database maintained by the Premier healthcare alliance

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Premier’s guide to economic indicators Price indexes: CPI, PPI and CMS marketbaskets

What price indexes are important in the healthcare industry? Industry stakeholders – including suppliers, healthcare systems, and the Centers for Medicare & Medicaid Services (CMS) – use three key price indicators when examining inflationary pressures in the marketplace: •The consumer price index (CPI), •The producer price index (PPI), and •The CMS marketbaskets. CPI and PPI measure the average change over time in the prices of fixed goods and services. The CPI is primarily used 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 it measures price changes reported by establishments at the wholesale, rather than the retail, level. While both indexes measure inflation, they differ in the goods and services eligible for inclusion.1 Economic indicators that are more specific to the healthcare industry are CMS marketbaskets, which measure how much more or less it would cost at a later time to buy the same mix of goods and services purchased during a base period. These

indicators reflect price inflation facing medical services providers.

respectively, in December 2012 compared to 2011.3

Each index is summarized here and is accompanied by recent relevant data that provide additional budgeting resources.

Producer price index

Consumer price index 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 for healthcare are the CPI for all urban consumers (CPI-U) and the CPI for medical care. Medical care is one of eight major CPI categories, and it has two classifications, commodities and services, with each containing several item categories (strata).2 The CPI-U was unchanged before seasonal adjustment from November 2012 to December 2012, while the all-items’ index increased 1.7 percent before seasonal adjustment for the 12 months from December 2011 to December 2012. Medical care CPI saw an overall unadjusted 3.2 percent increase from December 2011 to December 2012, but there was no change from November 2012 to December 2012. The categories of medical care commodities and medical care services increased 1.7 percent and 3.7 percent,

In contrast to CPI, the PPI measures price change from the perspective of the seller and includes the entire market output of U.S. producers. Since PPI captures price movement prior to the retail level, it 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 1.3 percent, on an unadjusted basis, for the 12 months that ended December 2012.5 The 12-month change from December 2011 to December 2012 for the net output of selected industries is: •Pharmaceutical and medicine manufacturing, 5.1 percent; •Medical equipment and supplies manufacturing, 1.2 percent; and •Surgical and medical instrument manufacturing, 0.2 percent.6 Additional information is available from the Bureau of Labor Statistics at www.bls.gov/CPI and www.bls.gov/PPI.

CMS marketbaskets The CMS marketbaskets update payments

and cost limits in multiple CMS payment systems, while individual marketbaskets provide a more accurate measure of their own inflation indexes. The: •Prospective Payment System (PPS) hospital marketbasket updates inpatient hospitals’ operating and outpatient PPS payments as well as cost limits for children’s hospitals, cancer hospitals, and religious, nonmedical healthcare institutions. •Skilled nursing facility marketbasket updates payments to skilled nursing facilities. •Home health agency marketbasket updates home health PPS payments. •PPS hospital capital marketbasket updates inpatient hospitals’ capital PPS payments. •RPL marketbasket updates inpatientrehabilitation, psychiatric, and long-term care PPS payments. •Medicare economic index is used with the sustainable-growth rate to update the physician fee schedule.7

The marketbasket levels and percentage changes are updated quarterly, with each new forecast containing an additional quarter of historical data.8 CMS projects payment updates for the coming fiscal year using a marketbasket containing the latest available data at the time the final regulation is published. This is based on the CMS fiscal year running from October to September. Once this update has been determined, it is generally not revised to include more recent data. However, because marketbasket data is updated quarterly, the current marketbasket may be different, depending on the variances in the forecast data and data currently available.9 The marketbasket of interest to most hospitals is the Inpatient Prospective Payment System (IPPS), which should closely approximate a hospital’s projected change in Medicare revenue. In FY2012, CMS revised its estimated marketbasket update for hospitals that report quality data to 3 percent. On August 1, 2012, CMS released its final rule for FY2013, stating that inpatient payments in the aggregate will increase 2.3 percent to reflect a marketbasket update of 2.6 percent.10 The key cost category in the index is compensation expense, which

includes labor and benefits and is weighted at 60 percent. The index also includes major purchasing categories, such as food, pharmaceuticals, blood, and equipment. Additional information is available from the Centers for Medicare & Medicaid Services at www.cms.gov/MedicareProgramRatesStats/05_MarketBasketResearch.asp. References 1. “PPI program spotlight,” Bureau of Labor Statistics, www.bls.gov/ppi/ppivcpi.pdf. 2. “Measuring price change for medical care in the CPI,” Bureau of Labor Statistics, www.bls.gov/cpi/cpifact4.htm. 3. “Consumer Price Index – December 2012,” Bureau of Labor Statistics, http:/bls.gov/cpi/cpid1212.pdf. 4. “Producer Price Indexes: program overview,” Bureau of Labor Statistics, www.bls.gov/ppi/ppiover.htm#Link6. 5. “Producer Price Index – December 2012,” Bureau of Labor Statistics, http://www.bls.gov/news.release/pdf/ppi.pdf. 6. “Producer Prices Indexes output of selected industries and their products,” Bureau of Labor Statistics, http://www.bls.gov/web/ppi/ppitable05.pdf. 7. “Medicare program rates and statistics,” Centers for Medicare and Medicaid Services, www.cms.gov/MedicareProgramRatesStats/05_ MarketBasketResearch.asp. 8. Centers for Medicare and Medicaid Services, http://www.cms.gov/MedicareProgramRatesStats/ downloads/mktbskt-pps-hospital-2006.pdf. 9. Ibid. 10. “FY2013 IPPS Final Rule includes 2.3 percent hospitalpaymentupdate,”AssociationofAmerican Medical Colleges, https://www.aamc.org/ advocacy/ washhigh/highlights2012/300648/ fy2013ippsfinalruleincludes2.3percenthospitalpaymentupdate.html. E C O N O M I C S ECONOMIC O U T LO O K

The marketbaskets are constructed from mutually exclusive spending categories, which use data collected from hospitals’ Medicare cost reports and corresponding price indexes. The overall hospital price index is the sum of each category’s product weight and relevant price index. The price indexes, or proxies, which are used to calculate the marketbasket, include data

from the Bureau of Labor Statistics (most commonly the producer price indexes).

CPI-U, Medical care CPI, and IPPS marketbasket rates (2005-2012) 5.0%

Annual percent change

4.0% 3.0%

■ ▼

▼ ■

■ ▼

■

▼

▼ ▼

▼ ■

2.0% 1.0% 0.0%

■ -1.0% 2005

2006

■ CPI-U

2007

Medical care CPI

2008

2009

2010

2011

2012

2013

▼ Medicare marketbasket - inpatient hospital

Note: Rates are current as of February 2013.

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Premier supply chain solutions Premier’s Medical-Surgical Inflationary Calculator A resource for proactively managing medical-surgical supply spend The Medical-Surgical Inflationary Calculator is a quick and easy-to-use resource designed to help members estimate Premier medicalsurgical supply spend. The calculator: > Compares Premier’s contractual price protection and suppliers’ price inflation estimates to deliver a detailed estimate of projected supply costs; > Prepopulates the spend profile from one SpendAdvisor® report and enables users to manually adjust for anticipated spend; > Compensates for off-contract spend with an optional SpendAdvisor report; > Alerts members to contract categories that will be renegotiated in the current year; > Provides aggregate inflation estimates by line of business; and > Analyzes spend by individual facility or IDN. The calculator can be found through Premier’s Supply Chain Advisor® site. For more information about the Medical-Surgical Inflationary Calculator, please contact the Premier Solution Center at solutioncenter@premierinc.com.

Premier’s Drug Budget Tool A resource for proactive drug expense management The Drug Budget Tool prepopulates profiles for analysis and enables users to evaluate their drug purchases. The tool: > Analyzes 92 percent of annual drug purchases; > Examines entire systems and multiple hospitals in a single SpendAdvisor report; and > Automatically fills in all of the application’s analytic cells. To learn more about the Drug Budget Tool, please contact Jerry Frazier, director of Premier’s Center for Evidence-based Pharmacy Practice, at jerry_frazier@premierinc.com.

Premier’s Supply Mix Index™ A methodology for calculating supply cost indexes for each Medicare Severity - DiagnosisRelated Group (MS-DRG). The Supply Mix Index methodology, which combines clinical and supply cost data from more than 370 hospitals, is designed to:

> Enable the calculation of a hospital’s Supply Mix Index based on the unique mix of services provided to patients. The Supply Mix Index can also be calculated across systems, within service lines, and at other levels within a system. > Be statistically sound. The MS-DRG Supply Mix Index weights are calculated using more than 4.4 million patient-level records from Premier’s QualityAdvisor™ database. > Demonstrate a more direct correlation to supply expense-per-patient case than does the Case Mix Index. Premier’s Supply Mix Index focuses on the supply cost within a case, while the Case Mix Index incorporates other significant, non-supply-related expenses. > Allow for cross-hospital comparisons of supply efficiency and intensity. Premier’s new methodology will initially be used in the executive-level reporting application of SupplyFocus® used by acute care facilities. SupplyFocus is also included with OperationsAdvisor®, Premier’s labor productivity and benchmarking product. To learn more about Premier’s Supply Mix Index, please contact Mark Hiller, vice president of innovative solutions, at mark_hiller@premierinc.com, or Richard Westbay, program manager, SupplyFocus, at richard_westbay@premierinc.com.

Inflation summary

Service line

Range of supplier inflation estimates: This figure shows the range of supplierreported inflation estimates for products within a service line. The range does not take into account Premier contract price protection or utilization data. Average of supplier inflation estimates: The supplier’s estimate of the average percent increase is based on a true average.

Range of inflation estimates

Projected Premier contract inflation estimates are calculated as follows: Pharmacy – Projections are derived from the Premier Drug Budget Development Tool. All others (except Foodservice) – Projections reflect the expected weighted average percent change in contract pricing for the existing contract portfolio as of February 1, 2013.

Average of inflation estimates

Projected Premier contract inflation estimates

0% -

5.0%

3.09%

0.57%

Cardiovascular Services

0% -

5.0%

2.05%

0.02%

Clinical Laboratory Services

0% -

7.0%

2.48%

1.01%

Facilities

0% - 15.0%

4.01%

1.74%

9.0%

3.80%

3.50%

Imaging

0% - 15.0%

2.84%

1.16%

IT / Telecommunications

0% -

5.0%

4.36%

0.07%

Materials Management

0% - 15.0%

4.21%

1.27%

Nursing

0% - 15.0%

4.56%

0.97%

Not applicable

3.94%

Foodservice

Pharmacy *

3.0% -

Surgical Services

0% -

12.%

3.55%

1.14%

Women and Children's

0% -

8.0%

0.52%

0.28%

E C O N O M I C S ECONOMIC O U T LO O K

Alternate Site Healthcare

*Pharmacy data derived from Premier's Drug Budget Development Tool Estimated inflationary changes are subject to change.

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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

global economy looking at the

The International Monetary Fund (IMF) projected a slight increase in global growth, from an estimated 3.2 percent in 2012 to 3.5 percent this year.1 Emerging markets will play a critical role, with China, India, and Brazil expected to contribute 50 percent of global economic growth in 2013, compared to approximately 25 percent prior to the financial crisis.2 The U.S., though it will return to near-record levels in 2013, will contribute only 10 percent to global growth this year. The Eurozone is unlikely to contribute at all.3 Global economic uncertainty will likely restrain increases in commodity prices in 2013. The sovereign debt crisis and other Eurozone weaknesses, along with substandard growth in the U.S. and China, will keep prices from rising too rapidly.4 Economists predict the U.S. gross domestic product (GDP) will increase by about 2 percent in 2013, though the fourth quarter of 2012 saw an unexpected 0.1 percent annualized contraction, primarily due to a continued decline in government spending and the effects of Hurricane Sandy.5 Because of this, the Federal Reserve extended the third round of quantitative easing – an approximate $85 billion per month bondbuying program – to keep interest rates low and encourage consumer spending.6 As consumer spending grows, demand for commodities typically increases as well, resulting in higher commodity prices.

As an example, copper ended the month of January with a near four-month high due to stronger U.S. economic data. U.S. job gains in the latter half of 2012 and entering 2013 have driven up demand for copper and other goods. Copper typically sees an increase in demand as unemployment decreases, since employed consumers tend to spend more on goods containing copper, such as cell phones and laptops.7 U.S. gasoline and crude oil prices are expected to flatten in 2013 and 2014, as growth in consumption is offset by increasing global supply. Plastic resin prices often align with petrochemical prices, since they are derived from crude oil and natural gas. Because of this, flattening gas and oil prices should result in flat or decreased plastic resin costs. Though synthetic rubbers are also derived from oil, competition for raw materials from the growing automotive manufacturing industry could drive up natural and synthetic rubber prices.8 Cotton prices continued to decline at the end of 2012. China began selling from its reserves in January, which could lead to drastically lower cotton demand. As cotton prices drop, many farmers have switched to other, more lucrative crops. A potential decrease in the cotton harvest could drive cotton prices back up, as could sustained stockpiling from China.9

A quick look at the last five years Commodity prices have decreased a slight 0.6 percent since January 2012, while remaining 3.2 percent above 2009 prices. However, prices are 5.9 percent lower than they were in July 2008, when the Thomson Reuters/Jefferies CRB Index hit its current five-year high of 473. References 1. “Recovery shows a soft spot,” Wall Street Journal, http://online.wsj.com/article/SB100014241 27887324156204578273611039517142.html?mod =WSJ_economy_LeftTopHighlights. 2. “Global Economy Watch – January 2013,” PricewaterhouseCoopers, www.pwc.com/.../publications/assets/global_economy_watch_jan_2013.pdf. 3. Ibid. 4. Sarah Watt, Wells Fargo Securities interview with author, January 7, 2013. 5. “GDP unexpectedly shrinks, decline seen temporary,” Reuters.com, http://www.reuters.com/article/2013/01/30/us-usa-economy-idUSBRE90T0752 0130130. 6. “Recovery shows a soft spot,” Wall Street Journal, http://online.wsj.com/article/SB100014241 27887324156204578273611039517142.html?mod =WSJ_economy_LeftTopHighlights. 7. “Copper ends near four-month high on stronger U.S. economic data,” Wall Street Journal, http://online.wsj.com/article/BT-CO-20130201711190.html?mod=rss_Commodities. 8. “Global Auto Report”, Scotiabank Group, http://www.gbm.scotiabank.com/English/bns_eco n/bns_auto.pdf. 9. “Cotton pushes higher on tepid Chinese sales,” Wall Street Journal, http://online.wsj.com/article/SB100014241 27887323968304578246104227741308.html?_nocache=1359751152120&user=welcome&mg=idws.j.

Thompson Reuters/Jefferies CRB Index

2008

2009

2010

2011

2012

2013

500 450 400 350 300 250 200 150 100 50 0

Jan 08

Jan 09

Jan 10

Jan 11

Jan 12

Jan 13

Source: Jefferies.com Note: The index is composed of 19 commodities: aluminum, cocoa, coffee, copper, corn, cotton, crude oil, gold, heating oil, lean hogs, live cattle, natural gas, nickel, orange juice, silver, soybeans, sugar, unleaded gas, and wheat.

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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 the risk associated with raw materials’pricing, healthcare facilities should: • Review categories that may be impacted by fluctuations in raw material costs; • Use the inflation tables in this publication to locate suppliers with firm pricing in a

category impacted by raw materials of interest; • Refer to the contract launch materials in Supply Chain Advisor® to identify a category’s lowest-cost provider; and • Reference the inflation tables to find suppliers that offer utilization-review programs.

Price increase risk High Moderate Low

Other 4.0% 4% Other Precious Metals 0.2% 0.2% Precious Metals Naturaland and Natural SyntheticRubber Rubber1% 1.0% Synthetic Plastic Resins Plastic12.0% Resins 12%

Energy Energy 36% 36.0%

Cotton 2% Cotton 2.0% Paper 2% Paper 2.0% Electronic Components3% 3.0% Electronic Components Organic Inorganic Organic and & Inorganic Chemicals 3% Chemicals 3.0% Base Metals 4% Base Metals 4.0%

Labor 33.0%

Labor 33%

Plastic resins Premier contract impact* Contrast media disposable injectors IV therapy products - sets and tubing Safety phlebotomy Can liners

*Refer to contract-specific price protection information in the inflation tables.

Labor Premier contract impact* PC hardware and software resellers Document management solutions Patient lifts and lateral transfer devices Radio-frequency identification asset tracking and management solutions

Energy Premier contract impact* Third-party freight managment Vascular compression therapy Room turnover products Patient beds, mattresses and therapeutic surfaces - rental

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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COPPER MARKET OVERVIEW Average Monthly Copper Prices (London Metal Exchange) 500 400 350 300 250

2010

2011

2012

2013

2009

cents/pound

450

Oct 09 Jan 10

Jan 11

Jan 12

Jan 13

200 150 100

Source: U.S. Geological Survey: Copper Statistics and Information

Copper market update The second half of 2012 saw the price of copper increase 4.30 percent, from $3.49/pound in late June, to $3.64/pound on December 31. During this six-month period, the price of copper ranged from a low of $3.29 to a high of $3.84. The International Copper Study Group estimates that 2013 will produce a global surplus of refined copper, breaking a three-year trend. The expectation is fueled by increased output from new and existing mines. Actual results will be influenced by economic factors that include a world economic slowdown or expansion; European Union sovereign debt issues; political transitions in the Middle East and North Africa; and lower production due to labor unrest, utility shortages, and capital deficits.1 Additional drivers for downward pressure on copper prices include an

expectation that the U.S. Federal Reserve may halt asset and bond purchases as early as this year; continuing geopolitical uncertainty and risk; declining growth rates in the world’s major economies; high debt levels; and long-term, unresolved fiscal and economic policy issues in the U.S. and Europe. These factors combine to drive economic, credit, and currency concerns and pressure global markets with short-term volatility in commodity, currency, equity, and bond markets.2 Catalysts for continued upward pressure on copper prices include recently reported positive economic data from the U.S. and China that support global markets and commodity prices. In addition, global central bankers continue to reiterate their willingness to provide additional monetary stimulus for the major global economies and currencies. These factors positively affect copper and other commodities.3

Although industry analysts are forecasting a copper supply surplus that would lead to a decrease in prices, the global economy is in a period characterized by loose fiscal policy and an unprecedented amount of monetary stimulus.4 Over the next two years, price fluctuations may be subject to forces greater than supply and demand, and the price of copper, among other commodities, may become irrationally overpriced if there are unintended consequences from the world’s fiscal policy decisions. References 1. "HCCE Copper Outlook Date: January 14, 2013," Honeywell Cable, www.honeywellcable.com/Pages/default.aspx. 2. Ibid. 3. Ibid. 4. “Recovery shows a soft spot,” Wall Street Journal, http://online.wsj.com/article/SB100014241 27887324156204578273611039517142.htm l?mod=WSJ_economy_LeftTopHighlights 5. "2012-10-ICSG_Forecast_Press_Release" International Copper Study Group, http://www.icsg.org/index.php/press-releases/viewcategory/113-forecast-press-release.

COPPER MARKET OVERVIEW

Projections for 2013 Impact on copper prices

Factor Global monetary stimulus

Comments Loose fiscal policy and unprecedented amounts of monetary stimulus in the world’s largest economies could place upward pressure on the price of copper.

Macroeconomic factors

Progress, or lack thereof, in the global economy will either bolster or hinder copper usage and production, leading to potential upward and downward pressure on prices.

Refined copper

The first global surplus of refined copper in three years will

production/U.S. surplus

place downward pressure on prices.5

Product categories with high copper content and 12-month price outlook

Price increase risk: ■ High

■ Moderate

■ ■ ■ ■ ■ ■

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

Construction services Energy efficiency services HVAC equipment, controls and services Ice machines and dispensers Maintenance, repair and operations Medical gas pipeline equipment, services and accessories ■ Low

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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

2012

2013

100

2010

cents/pound

200

Jan 10

Jan 11

Jan 12

Jan 13

50 0

Source: Cotton.org and Bloomberg.com Note: Index values were unavailable from June 23, 2010, through August 1, 2010, and again from June 10, 2011, through August 1, 2011, due to insufficient quotes from merchants.

Cotton market update Cotton prices return to more traditional levels As expected, cotton prices continued to decline in 2012 due to strengthening of the U.S. dollar. There was a 54 percent cost decrease from 2011, with an average 2012 cost of $0.89 per pound. November marked the lowest price of the year, closing at $0.81 per pound, a price not seen since February 2010. > China, which is believed to have almost half of the world's supply of cotton in its warehouses as of mid-2012, began selling reserves to domestic mills in January 2013, amid fear from traders that the auctions would crush demand for imported cotton.1

> The market also expects further cuts to U.S. cotton acreage, which was already forecast to fall 16 percent in the 2012-2013 marketing year that began in August. Better prices for soybeans and competing crops could push farmers to shift their plantings. In addition, poor growing conditions, such as another drought, could further curb the harvest.2 > Corn has recently become a key challenger for cotton acreage, especially in the United States, where ethanol fuel programs have allowed corn to command a higher market price than cotton.3 > Weak values may persuade farmers to switch to other crops, which could potentially erode record world inventories and provide price support.4

> Rising consumer demand and decreased planting acreage could drive cotton prices higher. References 1. “Cotton Pushes Higher on Tepid Chinese Sales,” WSJ.com, http://online.wsj.com/article/SB100014241278873239683045782461 04227741308.html. 2. Ibid. 3. “Global Cotton Executives Explore Factors Affecting Industry,” Cotton.org, http://www.cotton.org/news/releases/2012 /summla.cfm. 4. “Cotton prices to continue their decline, says ICAI,” Agrimoney.com, http://www.agrimoney.com/news/cottonprices-to-continue-their-decline-says-icac-5052.html.

COTTON MARKET OVERVIEW

Projections for 2013

Factor

Impact on cotton prices

Comments

Decreased cotton crops/

Global cotton production is forecast to be down from 2012, as more prof-

Weather conditions

itable competing crops crowd out cotton.*

China stockpiling

The potential remains for unexpected changes in China’s cotton import demand that could destabilize world commodity markets.*

Consumer demand

Consumer demand will be tied to the strength of the global economic recovery. Cotton prices are now at levels competitive with those of other fibers. Cotton demand will eventually increase.

* Source: USDA

Product categories with high cotton content and 12-month price outlook

Price increase risk:

■ High

■ Moderate

■ ■ ■ ■ ■

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

Bandages, dressings and gauze Lap sponges, or towels and specialty sponges Restraints and fall prevention Reusable textiles and textile services Advanced wound care

■ Low

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ENERGY MARKET OVERVIEW

[ OIL ]

[ GASOLINE ]

[ NATURAL GAS ]

The U.S. Energy Information Administration (EIA) expects that the Brent crude oil spot price, which averaged $112 per barrel in 2012, will fall to an average of $105 per barrel in 2013 and $99 per barrel in 2014. The projected discount of West Texas Intermediate (WTI) crude oil to Brent, which averaged $18 per barrel in 2012, falls to an average of $16 per barrel in 2013 and $8 per barrel in 2014, as planned new pipeline capacity lowers the cost of moving mid-continent crude oil to the Gulf Coast refining centers.

Total U.S. liquid fuels consumption fell from an average of 20.8 million bbl/d in 2005 to 18.6 million bbl/d in 2012. The EIA expects total consumption to rise slowly over the next two years to an average of 18.8 million bbl/d in 2014. This will be driven by increases in distillate and liquefied petroleum gas consumption, with flat gasoline and jet fuel consumption.

Natural gas working inventories, reaching record-high levels in early November, ended 2012 at an estimated 3.5 trillion cubic feet (Tcf), slightly above the same time in 2011. The EIA expects that the Henry Hub natural gas spot price, which averaged $4 per million British thermal units (MMBtu) in 2011 and $2.75 per million MMBtu in 2012, will average $3.74 per MMBtu in 2013 and $3.90 per MMBtu in 2014.

Source: U.S. Energy Information Administration

International crude oil market

World liquid fuels consumption grew by an estimated 0.9 million bbl/d in 2012 to reach 89.2 million

bbl/d. The EIA expects this growth to remain constant over the next year before picking up again in 2014, thanks to a moderate recovery in global economy. Consumption will reach 90.1 million bbl/d in 2013 and 91.5 million bbl/d in 2014. Non-OECD Asia is the leading regional contributor to the expected growth.

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

The EIA expects oil markets to loosen in 2013 and 2014, as increasing global supply more than offsets higher global consumption. Projected world supply will increase by 1 million bbl/d in 2013 and 1.7 million bbl/d in 2014, with most of the growth coming from outside the Organization of the Petroleum Exporting Countries (OPEC). North America will account

for much of this growth. Projected world liquid fuels consumption will increase by an annual average of 0.9 million barrels per day (bbl/d) in 2013 and 1.3 million bbl/d in 2014. Countries outside the Organization for Economic Cooperation and Development (OECD) are expected to drive this growth.

Reference 1. U.S. Energy Information Administration, http://www.eia.gov.

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ENERGY MARKET OVERVIEW

U.S. Gasoline and Crude Oil Prices Crude Oil Retail Regular Gasoline Price Difference

4.50

Forecast

3.50 3.00 2.50 2.00

2010

2011

2012

2013

2014

2015

1.50

2009

dollars per gallon

4.00

0 Jan 09

Jan 10

Jan 11

Jan 12

Jan 13

Jan 14

Jan 15

1.00 .50

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January 2013 Note: Crude oil price is average refiner acquisition cost. Retail prices include state and federal taxes.

Jan 12

Jul 12

Jan 13

Jul 13

Jan 14

2015

2014

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

2013

260 240 220 200 180 160 140 120 100 80 60 40 20 0

2012

dollars per barrel

West Texas Intermediate (WTI) Crude Oil Price

Jul 14

Jan 15

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January 2013 Note: Confidence interval derived from options market information for the five trading days ending January 3, 2013. Intervals not calculated for months with sparse trading in "near-the-money" options contracts.

ENERGY MARKET OVERVIEW

Projections for 2013 Factor

Impact on oil prices

Comments

Consumption growth

World liquid fuels consumption grew by an estimated 0.9 million bbl/d in 2012 to reach 89.2 million bbl/d. The EIA expects this growth to remain constant over the next year before picking up again in 2014, thanks to a moderate recovery in the global economy. Consumption will reach 90.1 million bbl/d in 2013 and 91.5 million bbl/d in 2014. Non-OECD Asia is the leading regional contributor to expected growth.

Political and production events that could impact oil prices

Although supply growth in the United States and Russia during 2012 outpaced the forecast at the beginning of the year, overall non-OPEC liquid fuels’production fell below the year-ago expectations. The EIA forecasts non-OPEC production to increase by 1.4 million bbl/d in 2013 and 1.3 million bbl/d in 2014. Assumptions about the mitigation of some existing political impediments to production and the rapid evolution of the North American oil industry pose considerable risks to the forecast. North America accounts for about two-thirds of the projected growth in non-OPEC supply over the next two years, based on increased production from U.S. tight-oil formations and Canadian oil sands. Unplanned production outages in non-OPEC countries declined to 0.8 million bbl/d in December 2012. This is the lowest level since January 2012, although still above the historical baseline that prevailed during the fourth quarter of 2011. Syria and the Sudans are currently the most significant sources of disruption to non-OPEC production. The EIA does not assume that a Syrian resolution will occur during the forecast period. Sudan and South Sudan must overcome political and technical obstacles before significant flows from the latter can be restarted. The EIA projects that Sudan and South Sudan together will produce 0.2 million bbl/d in 2013 and 0.4 million bbl/d in 2014.

OPEC production

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

The EIA expects OPEC members to produce at least 30 million bbl/d of crude oil over the next two years to accommodate the projected increase in world oil consumption and counterbalance supply disruptions. However, OPEC crude supply will decrease by 0.6 million bbl/d in 2013 and stay flat through 2014. Most of the 2013 decrease comes from Saudi Arabia’s response to non-OPEC growth and increasing production from some OPEC members such as Iraq, Nigeria, and Angola.

Source: U.S. Energy Information Administration

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

240

Commodity

220

Corn Soybeans Wheat Lean hogs Live cattle Sugar Coffee

200 180

2011

2012

2013

160

2010

2002-2004 = 100

260

Jan 10

Jan 11

Jan 12

Jan 13

140 120

Change last 12 months

Change last month

15% 20% 17% 0% -4% -21% -1%

7% 5% 2% 2% 3% -4% -31%

Source: CNNMoney.com. Price change shown is from 2/1/12 to 2/1/13 or 1/1/13 to 2/1/13.

100

Source: FAO.org

Food market update The U.S. drought The severe drought in the U.S. in the summer of 2012 will continue to impact food prices in 2013. Morgan Stanley estimates that the drought reduced GDP by 0.5 percent in 2012 and that estimate could grow in early 2013 if the drought persists.1 Last year, 80 percent of the country experienced drought conditions. The latest estimate is that 61 percent of the country is still experiencing a drought. Poor weather has led to increased prices for corn, wheat, and soybeans since 2012. Because corn is a feed stock for cattle and hogs, rising corn prices can also lead to increased meat costs. The USDA recently released a special report on the 2012 U.S. drought,2 summarizing the major impacts on food prices and consumers: > The largest impacts will likely be felt for beef, pork, poultry, and dairy (especially fluid milk) products. The full effects of the increase in corn prices for packaged and

processed foods (cereal, corn flour, etc.) will likely take 10-12 months to affect retail food prices. > The drought has the potential to increase retail prices for beef, pork, poultry, and dairy products throughout2013.Droughtconditions led to herd culling in response to higher expected feed costs, and this liquidation led to temporarily reduced prices for beef and pork in August and September. However, the October CPI report indicated that the liquidation’s impact has ended, with prices for beef and pork expected to increase through 2013. > Commodity prices are just one of many factors affecting retail food prices. Historically, if the farm price of corn increases 50 percent, then retail food prices, as measured by the Bureau of Labor Statistics (BLS) in the Consumer Price Index (CPI), increase by 0.5 to 1 percent. Commodities make up less than 15 percent of the average value of retail food purchases, so even if all commodity prices doubled, retail food prices would increase by no more than 15 percent.

U.S. food prices The USDA projects food prices will increase 3 - 4 percent in 2013, following inflation of 0.5 percent in 2012. The greatest increases are expected in the categories of dairy and fresh vegetables.3 Projected increases of 3.5 - 4.5 percent in dairy prices are attributable to the rising cost of feed. The USDA notes that dairy prices have already started to rise as high-cost products are entering the production supply chain. Fresh vegetable prices were quite low in 2012, due to an increase in production resulting from favorable growing conditions. References 1. Koba, Mark. “Drought Still Plagues US: Food Prices ‘Going Up.’ ” 1/11/13, CNBC, http://www.cnbc.com/id/100372886/Drou ght_Still_Plagues_US_Food_Prices_039Goin g_Up039. 2. “U.S. Drought 2012: Farm and Food Impacts,” USDA, http://www.ers.usda.gov/topics/in-the-news/us-drought-2012-farm-and -food-impacts.aspx#consumers. 3. “Food Price Outlook 2013,” USDA, http://www.ers.usda.gov/dataproducts/food-price-outlook/summaryfindings.aspx.

FOOD MARKET OVERVIEW Food Categories and 12-Month Price Outlook