Economic Outlook: Fall 2011

outlook economic

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

PHYSICIAN PREFERENCE

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BALANCING COST AND OUALITY

COMPARATIVE EFFECTIVENESS What it means, what it means for hospitals

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• 2 0 1 1 • A T W E LV E M O N T H OUTLOOK

WHAT TO WATCH

Physician preference trends impacting our members

COST AND UTILIZATION Elevating patient care at the right cost

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.

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.

The focus of this edition of the Economic Outlook is the physician preference market. The content that is included provides our readership with trends in purchasing behavior regarding physician preference items; strategies for managing the cost of physician preference items; and how shifts in the healthcare landscape, such as physician alignment, standardization and risk or gain sharing models are changing the utilization and purchasing practices of physician preference items.

We welcome your comments and questions. For additional information, please email economicoutlook@premierinc.com. premierinc.com/economicoutlook

PROPRIETARY AND CONFIDENTIAL. © 2011 By Premier Inc. All rights reserved.

This publication is provided to Premier alliance members for their internal business use only and may not be reproduced or disclosed by the member to any third party outside of its organization, with the exception of other Premier alliance members, without Premier’s prior written consent.

letter 04 EXECUTIVE LETTER

40 TRENDS IN COST AND UTILIZATION

Revolutionizing the physician preference marketplace: Devising better devices at better prices Mike Alkire, chief operating officer, Premier healthcare alliance

ELEVATING PATIENT CARE AT THE RIGHT COST....................................…… 40

features

A CONVERSATION WITH Tim Quinlan, economist for Wells Fargo......................................................... 44

06 PHYSICIAN PREFERENCE HOW HEALTH FINANCING POLICY SHAPES PHYSICIAN PRACTICE IN THE U.S.: Lessons from abroad Karen Davis, Ph.D., president, The Commonwealth Fund..................….…… 06

Abstracts of cost and utilization analyses conducted by the Premier healthcare alliance……......................................................................…................…42

44 ECONOMICS BEHIND THE NUMBERS: Financial and economic trends impacting our members..................... 48 Premier's patient volume trends...................................................................... 52 Premier’s guide to economic indicators……………........................................ 58 Premier’s supply chain solutions……………....................................……........... 60

CREATING A NEW TRANSPARENT MEDICAL DEVICE MARKETPLACE Wayne Oliver, vice president, Center for Health Transformation..….…..… 12

Premier’s inflation summary………..………………………….................…....…….... 61

COMPARATIVE EFFECTIVENESS RESEARCH: What it means, what it means for hospitals Lawton R. Burns, Ph.D., MBA, director, Wharton Center for Health Management and Economics, University of Pennsylvania..…..............…… 14

62 COMMODITIES OVERVIEW

INTEGRATING PHARMACISTS INTO NEW CARE DELIVERY MODELS WITH AN EYE ON CLINICAL PREFERENCE PHARMACEUTICALS Karen Bertch, Anne Jernigan, Christina A. Petrykiw Medication Management, Premier healthcare alliance.........................…… 19

Copper market overview……..……………...........................................………..........65

26 PERSPECTIVES WHAT TO WATCH: Physician preference trends impacting our members.……...................……26 EXECUTIVE SUMMARY AND KEY FINDINGS.……........................................…..28 PHYSICIAN PREFERENCE TRENDS IN COST AND REIMBURSEMENT...…37

COMMODITY PRICES IN FLUX IN 2012......….…............................................. 62 Minimizing raw materials risk.......................................................………...........64 Cotton market overview……………………………....................................……..........68 Energy market overview……………………………………………..................…….........72 Food market overview…………………………………………………………….................. 77 Plastic resins market overview…………………………………………….......….......... 80 Rare earth minerals market overview………….…………………….......…........... 82 Rubber market overview………....................………………………..................…....... 84 Steel market overview………...………….....….....................................…….............. 86

AN IN-DEPTH DISCUSSION Vanderbilt University Medical Center: Putting value analysis into action.……...........................................................................................................…..38

OUTLOOK LEADERSHIP

EDITORIAL STAFF

Managing director Mike Alkire, chief operating officer

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 smart marketing

Project directors Durral Gilbert, senior vice president, supply chain emerging services Amy Denny, vice president, contract management Neeta Kirpalani, manager, economic projects

Editorial support Amanda Forster, senior director, public relations Alven Weil, director, public relations

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Executive Letter Revolutionizing the physician preference marketplace: Devising better devices at better prices

Members of the Premier alliance, In the early 1990s, Wal-Mart became a powerhouse by using scale to wring out inefficiencies and unnecessary costs from its supply chain. More than any other company, Wal-Mart embraced the idea that innovation is not just about adding features or new technologies. Sometimes, in order to innovate and meet customer needs, you need to subtract.

Take, for example, deodorant. Several years ago, manufacturers of deodorant sold their products in a paper box. Then Wal-Mart posed a simple question: Why do we need the box? The boxes cost money to produce, made shipments heavier, destroyed millions of trees each year, weren’t a customer requirement and didn’t improve the effectiveness of the product.

So Wal-Mart decided to subtract. They informed their manufacturers to get rid of the boxes, and they did. Customers benefited from lower prices, and Wal-Mart was able to balance cost and quality while still meeting customer needs.

Just as Wal-Mart moved upstream in its supply chain, we in healthcare need to do the same. This will require providers to work more closely with medical device manufacturers on the front end of the

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innovation process so they’re developing new, cost-effective products that meet patient needs. But as happens all too often today, manufacturers research, design and price the products and devices that providers buy – with little to no input from the providers who are using them to care for their patients.

Clinical knowledge can’t just reside with physicians. It needs to travel between the people manufacturing goods, those buying them, and the physicians using them.

Clearly, physicians and other clinical experts need to be engaged in this process to develop the measurable, evidence-based specifications for new product designs based on the ability to improve outcomes.

One way to achieve this is through “sourcing to specification,” which flips the purchasing dynamic so providers aren’t just buying what is available. Instead, physicians and other clinical experts work to develop products that are often more cost-effective and optimized to produce the best outcome for their patient mix.

Consider an example from Cincinnati Children’s Hospital Medical Center. Statistics show that up to 65 percent of premature infants develop an infection during hospitalization because their skin and membranes are underdeveloped. Typically, that information would be collected by and reside with clinical teams in a hospital. They may use it to design new infection treatment protocols or process interventions.

But Cincinnati Children’s took a more proactive approach. They worked with a manufacturer to design a new positioner for their preemie population – one that would prevent the skin breakdowns that lead to infections from occurring in the first place by using new materials that are gentler on a baby’s skin. By bringing together clinicians and manufacturers to collaborate on design, a new product was created that reduced instances of skin breakdown by 68 percent. And this enhanced positioner is about a third less expensive than the old model.

The cost of innovation At the heart of the matter is the increasing concern over rising healthcare costs. It is

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estimated that the cost of implants and other physician preference medical devices accounts for 40 percent or more of the total cost of any procedure. Not surprisingly, the ability to provide high-quality, innovative healthcare in an environment of increasing implant and procedure costs is the subject of debate among health policy makers, payors, providers, physicians and medical device companies.

Every year, medical device companies introduce new models of pacemakers, artificial knees and spinal discs. And every year, these physician preference items are almost always introduced at higher prices, which erode hospital margins for these procedures.

As a part of this edition of the Economic Outlook, we examined a list of high-volume procedures that require the use of a prescribed physician preference item. As the table below shows, in each case the procedure costs more than the hospital is reimbursed by Medicare – and in some cases substantially more. For example, for every valve replacement performed, hospitals, on average, lose more than $14,500 per case. And for spinal fusion procedures, the loss exceeds $13,000 per case.

MS-DRG description

Difference between payment and cost

Cardiac valve replacements Spinal fusions Cranio surgery with implant Coronary bypass procedures Spinal procedures Cardiac defibrillator implants Hip/knee replacement procedures Bare metal stent procedures Cervical spinal fusions Drug-eluting stent procedures Back and neck procedures Cardiac pacemaker implants

$14,547 $13,092 $11,094 $10,682 $ 6,361 $ 6,299 $ 5,623 $ 4,679 $ 4,532 $ 4,131 $ 3,324 $ 3,288

There’s another point to be made about these losses. These are shortfalls in the Medicare payment rates, and Medicaid reimburses even less. Traditionally, the majority of these costs would be shifted over to private payors to make up the difference. But as our population continues to gray, we’re seeing an increase in Americans who are calling Medicare their primary insurance provider. In fact, our research shows that Medicare volume rose 3.6 percent from 2009 to 2010. And with reform, we can expect about 16 million additional people covered through the Medicaid program.

So, more and more of the hospitals’business is going to fall into this red zone. And there will be fewer and fewer people who can pick up the tab through private insurance.

The bottom line is that this is a bottom line issue, and it isn’t sustainable. Stakeholders involved in the delivery and financing of healthcare – the government, health plans, hospitals, physicians and payors – are examining ways to address the physician preference dilemma of balancing cost and quality.

On one hand, advances in implant technologies over the last few decades have revolutionized medical and surgical practice and improved the lives of millions of Americans. Innovations in cardiovascular and orthopedic devices, such as ventricular assist devices and hip and knee implants, have contributed to improved patient outcomes, prolonged implant survivorship and enabled both younger and older patients to live healthier, more productive lives.

But as is often the case across the healthcare system today, the innovation and purchasing processes are not nearly as efficient as they could – and should – be.

Across the industry, it was and often still is standard operating procedure for physicians to work directly with device companies, testing new products. Purchasing decisions are then made in an opaque marketplace, with little information about quality and cost – the two essential requirements for informed purchasing. The lack of transparency and wide variability in physician preference item costs across institutions are two of the most significant impediments toward achieving costeffective healthcare.

As discussed in this edition of the Economic Outlook, the Nashville, TN- based Vanderbilt University Medical Center (VUMC) developed a process to address the acquisition of new physician preference items.

Realizing how inefficient their existing process was, executives, physicians, medical directors and supply chain representatives at VUMC launched a committee to oversee the introduction or consolidation of new supplies, devices and technology. The committee is centered

around a formal request process, whereby physicians present in person – and without supplier sales representation – reasons as to why new products should be added to a contract. The process relies heavily on evidence-based, clinically sound, financially responsible methodologies.

By aligning physicians with administrative, supply chain and other leaders, and by taking a data-driven approach, VUMC is able to limit the acquisition of new products to just those where data proves that there is improved value.

In doing so, VUMC has saved close to $11 million in just over two years.

Revolutionizing innovation: Better care for less In addition to a lack of price transparency, hospitals also have difficulty keeping track of devices once they’ve been implanted in patients. Years after providers called for a universal bar coding system for medical devices, the Food and Drug Administration (FDA) is making glacial progress toward implementing a rule requiring the use of this now common tracking system, which has been in place in many other industries for more than 30 years.

Having the ability to track physician preference items at each touch point in the supply chain will ultimately help clinicians track their performance in patients. The FDA recently reported that adverse events associated with medical devices have more than tripled in the past decade to total approximately 200,000 per year, with nearly half of those events resulting in injury or deaths to the patients involved.

In recent years, there has been a steady drumbeat of “class 1” recalls by the FDA for devices whose defects could cause serious injury – 112 such recalls between 2005 and 2009 alone, according to a recent Institute of Medicine report.

So, how do we solve this dilemma of balancing cost and quality and still meet customer needs? How do we leverage the body of knowledge that’s being developed in the clinical care setting to develop solutions for patients?

We need to be coordinated in our goals, working together.

Healthcare is incredibly complex and growing more so every day. Today, we have 13,600 different diagnoses, 6,000 different drugs and 4,000 different medical procedures. Moreover, each provider uses their own judgment to determine how best to prevent illness and deliver high-quality care based on the incredible complexity of the science that has emerged in the last century.

But it’s important that we work in concert.

Dr. Atul Gawande, a well-known surgeon, writer, and public health researcher, has noted how hard it is to do this. Gawande says, “An actual system of care – a team of clinicians working across specialties, even facilities if necessary – is rare.” Having great components of care, Gawande suggested, is not enough. “We want the best drugs, the best devices and the best physicians, but we don’t often stop to ensure they all fit together. When you make a system where the pieces do fit together, it is better for patients and can be far less expensive.”

This is the future for our supply chain. One not based on building walls to keep us separate, but breaking down those walls and sharing to achieve mutually beneficial success. Like Cincinnati Children’s, we have to move farther up our supply chain, find the best ideas, learn how to make them reality and then scale them to reach providers across the nation.

By working together, we can create an information-rich environment for patients, physicians and hospitals – one that raises quality, lowers cost and guides industry’s innovation potential into the most productive channels.

These ideas aren’t revolutionary. In fact, they’re incredibly simple. But what they can achieve for healthcare and the physician preference marketplace is revolutionary.

Sincerely,

Mike Alkire Chief Operating Officer Premier healthcare alliance

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PHYSICIAN PREFERENCE ECONOMIC O U T LO O K

How health financing policy shapes physician practice in the U.S.:

Lessons from

abroad Karen Davis Karen Davis, Ph.D., is president of The Commonwealth Fund, a national philanthropy engaged in health and social policy research. Previously, she served as chairman of the Department of Health Policy and Management at The Johns Hopkins School of Public Health, where she was also a professor of economics. She was deputy assistant secretary for health policy in the U.S. Department of Health and Human Services from 1977-1980.

Prior to that, she was a senior fellow at the Brookings Institution, a visiting scholar at Harvard University, and an assistant professor of economics at Rice University. Among many other honors and awards, Dr. Davis received the AcademyHealth Distinguished Investigator Award in 2006 and was honored by the Institute of Medicine with the Adam Yarmolinsky Medal in 2007. She is on the board of directors of the Geisinger Health System and serves on the Panel of Health Advisors for the Congressional Budget Office.

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The United States health system is the most expensive in the world, but comparative analyses consistently show that the U.S. falls short of other countries on most dimensions of performance.1 Many of these shortcomings can be traced to health financing policies that foster fragmentation, encourage greater use of specialized care, and contribute to higher costs, especially in comparison to many other developed nations (Figure 1).2 Current fee-for-service methods of physician reimbursement are particularly problematic and reward providers for the volume of services they provide rather than the value they deliver, leading to potentially wasteful, unsafe, and expensive encounters for patients and their families.3 A recent Commonwealth Fund survey found more than half of American adults have experienced duplicative and disorganized care in the health system within the past two years. 4

ECONOMIC O U T LO O K

Dartmouth University indicates that physicians in certain high spending areas of the U.S. are delivering services, ordering tests, and performing procedures with little-to-no clinical benefit.

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PHYSICIAN PREFERENCE

Extensive and well-publicized work by researchers at

Such reimbursement methods are also driving substantial overuse of what has been termed “supply sensitive” care in the United States.5 Between 2000 and 2009, the cumulative volume of imaging services and tests per Medicare beneficiary increased by approximately 85 percent, while utilization of less intense evaluation and management services rose by 30 percent (Figure 2).6 Research suggests that differences in physician incentives, varying supply of medical resources and equipment, and lack of transparency are far more influential than informed patient choice for different treatment in many cases.7,8 Extensive and well-publicized work by researchers at Dartmouth University indicates that physicians in certain high spending areas of the U.S. are delivering services, ordering tests, and performing procedures with little-to-no clinical benefit.9,10 In high spending areas, devices

such as vena cava filters are used at more than twice the rate of low spending regions with no corresponding increase in overall healthcare quality.11

American primary care physicians report being able to receive any financial incentive to quality, compared to 50-89 percent in most other countries (Figure 3). 14

Our fragmented health financing policies are having other measurable impacts in many areas of physician practice. Commonwealth Fund surveys indicate that patient-physician relationships are less stable in the United States relative to other industrialized countries, with less than half of chronically ill Americans reporting receiving care from the same doctor or place for at least five years, compared to nearly 80 percent of those in Germany and the Netherlands.12 Just 26 percent of U.S. primary care physicians have advanced health information technology systems in their practice – a stark contrast to New Zealand, Australia and the United Kingdom, where upwards of 90 percent currently have high functionality.13 And only 36 percent of

The American system of healthcare finance also continues to disproportionately reward specialized services over high value preventive and primary care.

Disparities in the compensation of primary care practitioners and specialists remain relatively pronounced by international standards, with the average remuneration of American specialists 1.6 times that of a general practitioner in 2004.15 Likewise, the ratio of specialists to primary care doctors is vastly higher in the United States than in other nations, and American physicians prescribe more drugs, use more devices, and perform more specialized tests and procedures than their peers.16,17 The prices of these drugs, devices, and procedures are extremely high relative to international benchmarks.18

FIGURE 1: INTERNATIONAL COMPARISON OF SPENDING ON HEALTH, 1980-2009

Note: $US PPP = purchasing power parity.

Source: The Commonwealth Fund. OECD, "OECD Health Data: Health expenditure and financing", OECD Health Statistics, June 2011.

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ECONOMIC O U T LO O K

have experienced duplicative and disorganized care in the health system within the past two years.

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A recent survey found more than half of American adults

FIGURE 2: CUMULATIVE GROWTH IN VOLUME OF PHYSICIAN SERVICES PER MEDICARE BENEFICIARY, 2000-2009

Source: The Commonwealth Fund. Medpac, Health Care Spending and the Medicare Program, (Washington: Medpac, June 2011); Reinhardt U. Fees, volume, and spending at Medicare. New York Times (Published 24 December 2010).

FIGURE 3: DOCTORS CAN RECEIVE ANY FINANCIAL INCENTIVES

PERCENT WHO CAN RECEIVE ANY FINANCIAL INCENTIVES FOR TARGETED CARE OR MEETING GOALS*

100.0% 89%

81%

80% 70%

75.0%

65%

62%

58%

50.0%

50% 36%

36%

25.0% 10% 0.0% UK

NET

NZ

ITA**

AUS

CAN

GER

FRA

US

NOR

SWE

* Can receive financial incentives for any of six high patient satisfaction ratings, achieve clinical care targets, managing patients with chronic diseases comples needs, enhanced preventive care (includes counseling or group visits), adding nonphysician clinicians to practice and non-face-to-face interactions with patients.

Italy not asked non-face-to-face.

Source: 2009 Commonwealth Fund International Health Policy Survey of Primary Care Physicians

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ECONOMIC O U T LO O K

For example, the International Federation of Health Plans reports that average fees for an angiogram performed in the United States are more than twice that of the next highest country, Germany, and almost six times the comparable rate in Spain.

Changing how the nation pays for healthcare is critical to achieving the Triple Aim of improved population health, enhanced patient experience, and reduced healthcare costs. Moving away from fee-for-service reimbursement to primary care medical home payment, bundled payment, and salaried practice within integrated delivery systems are important strategies that, if properly coordinated and widely deployed, will encourage providers to assume more responsibility for quality and prudent use of resources.

Fortunately, innovative models that encourage greater accountability – including accountable care organizations, patient-centered medical homes, and value-based purchasing – are used and given high priority under the Patient Protection and Affordable Care Act. Further work is needed. Continuing to support the adoption of health information technology and the creation of health information exchanges will ensure physicians have access to important patient information as well as clinical decision support tools that promote the

delivery of evidence-based medicine.

Aligning physician interests with those of hospitals; negotiating prices for drugs, devices and physician-hospital services; and employing multi-payor payment models that magnify the effects of policies across different payors are all additional steps that leaders can take to create the incentives and capacity for all healthcare providers to achieve the Triple Aim and usher in a new era in American healthcare.

References 1 Davis K, Schoen C, Stremikis K. Mirror, mirror on the wall: How the performance of the US health care system compares internationally, 2010 update. New York: The Commonwealth Fund; 2010.

2 Shih A, Davis K, Schoenbaum S, Gauthier A, Nuzum R, McCarthy D. Organizing the US health care delivery system for high performance. New York: The Commonwealth Fund; 2008.

3 Guterman S, Davis K, Schoen C, Stremikis K. Re forming provider payment: Essential building block for health reform. New York: The Common wealth Fund; 2009.

4 Stremikis K, Schoen C, Fryer AK. A call for change: The 2011 Commonwealth Fund survey of public views of the U.S. health system. New York: The Commonwealth Fund; 2011.

5 Wennberg JE. Analysis: Time to tackle unwarranted variations in practice. BMJ 2011;342:doi:10.1136/bmj.d1513 (Published 17 March 2011).

6 Reinhardt U. Fees, volume, and spending at Medicare. New York Times (Published 24 December 2010).

7 Ketcham JD, Furukawa MF. Hospital-physician gainsharing in cardiology. Health Aff (Millwood).

2008 May-Jun;27(3):803-12.

8 Wennberg JE, Fisher ES, Skinner JS. Geography and the debate over Medicare reform. Health Aff (Millwood). 2002 Jul-Dec;Suppl Web

Exclusives:W96-114.

9 Fisher ES, Wennberg DE, Stukel TA, Gottlieb DJ, Lucas FL, Pinder EL. The implications of regional variations in Medicare spending. Part 1: the content, quality, and accessibility of care. Ann Intern Med. 2003 Feb 18;138(4):273-87.

10 Fisher ES, Wennberg DE, Stukel TA, Gottlieb DJ, Lucas FL, Pinder EL. The implications of regional variations in Medicare spending. Part 2: health outcomes and satisfaction with care. Ann Intern Med. 2003 Feb 18;138(4):288-98.

11 Fisher ES, Wennberg DE, Stukel TA, Gottlieb DJ, Lucas FL, Pinder EL. The implications of regional variations in Medicare spending. Part 1: the content, quality, and accessibility of care. Ann Intern Med. 2003 Feb 18;138(4):273-87.

12 Schoen C, Osborn R, How SK, Doty MM, Peugh J. In chronic condition: experiences of patients with complex health care needs, in eight countries, 2008. Health Aff (Millwood). 2009 JanFeb;28(1):w1-16. Epub 2008 Nov 13.

13 Schoen C, Osborn R, Doty MM, Squires D, Peugh J, Applebaum S. A survey of primary care physicians in eleven countries, 2009: Perspectives on care, costs, and experiences. Health Aff (Millwood).

2009 Nov-Dec;28(6):w1171-83. Epub 2009 Nov 2.

14 Schoen C, Osborn R, Doty MM, Squires D, Peugh J, Applebaum S. A survey of primary care physicians in eleven countries, 2009: Perspectives on care, costs, and experiences. Health Aff (Millwood).

2009 Nov-Dec;28(6):w1171-83. Epub 2009 Nov 2.

15 Fujisawa R, Lafortune G. The remuneration of general practitioners and specialists in 14 OECD countries: What are the factors influencing variations across countries. Paris: Organisation for Economic Co-operation and Development; 2008.

16 Squires DA. The U.S. health system in perspective: A comparison of twelve industrialized nations.

New York: The Commonwealth Fund; 2011.

17 Anderson GF, Squires DA. Measuring the U.S. health care system: A cross-national comparison.

New York: The Commonwealth Fund; 2010.

18 International Federation of Health Plans. 2010 comparative price report: Medical and hospital fees by country. London: International Federal of Health Plans; 2010.

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PHYSICIAN PREFERENCE

angiogram in the U.S. are more than twice that of the next highest country, Germany, and almost six times the rate in Spain.

The average fees for an

Creating a new transparent medical device marketplace Medicaid for the surgical procedure, including Wayne Oliver the cost of the medical device. Hospitals, Mr. Oliver is a vice president at the consumers and the Center for Health Transformation government have no which was founded by former idea whether the Speaker of the House, device, for example, Newt Gingrich. has been marked up hundreds of percentage points because there is no ability to comThe marvels of innovative science and pare it to what other hospitals pay for the technology are impressive. New drugs, new devices and new treatment therapies same products. are extending and enhancing the lives of Americans… particularly our senior population. And, wherever seniors gather throughout America, the current talk is about how those who once were in pain for years can now have routine knee or hip replacements.

Other medical devices such as pacemakers and stents are also extending the lives of and improving the quality of life for older Americans. As the first of 78 million baby boomers begin to retire this year, they will enroll in Medicare and many will have these procedures.

The problem is that the federal government is paying top dollar for anything from a titanium shoulder to a spinal implant. As every health system administrator will tell you, medical device manufacturers often have hospitals sign confidentiality agreements that make it impossible for hospitals to disclose or document the cost of devices in order to inject true price competition into the $153 billion medical device marketplace.

Hospitals then bill health insurance companies including Medicare and

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It is a practice that has to stop because it's contributing to the insolvency and unsustainability of the Medicare and Medicaid programs. If we want the programs to continue, then we have to bring crystal clear transparency into the pricing of these medical devices. At the least, the public should be able to see where the majority of their taxpayer dollars are going, and which companies are benefiting.

In the real world, the government knows exactly what it pays for everything from police cruisers to traffic lights. And, in the medical world, there is pricing and transparency in everything from ibuprofen to bed pans. But the cost of a pacemaker, a defibrillator, or other medical device is one of the few items in healthcare that is hidden from the consumer and the taxpayer.

Annemarie Bridy, a law professor at the University of Idaho has written extensively on the secrecy of cardiac device prices. In a recent article published in The Miami Herald, Professor Bridy stated, “Ultimately, this is driving up

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the costs of healthcare for everyone.

Taxpayers have a right to know how much they’re paying (for medical devices).”

A 2009 report by the McKinsey Global Institute found that hip implant costs are 60 percent higher in the U.S. than the United Kingdom, Germany, France and Italy; knee implant costs are 32 percent higher than in those countries. And with tens of millions of potential patients utilizing such devices annually, it is an enormous bill adding to our national debt.

In 2007, Iowa Senator Chuck Grassley and former Pennsylvania Senator Arlen Specter sponsored legislation to require the makers of medical devices such as pacemakers, artificial hips and stents to reveal their prices and stop requiring hospitals to sign non-disclosure contracts.

Currently, the average hip replacement procedure can cost about $50,000, which is a bundled cost for the surgery, hospital stay and the device. Medicare and Medicaid traditionally wind up paying 70 percent of the cost of a typical hip replacement.

Like pharmaceuticals, device manufacturers often market their products directly to clinicians. But unlike drugs, the prices of medical devices are not published and the market is far from transparent. This is not good for taxpayers, patients, employers and health insurers, including public assistance programs like Medicare and Medicaid.

In the physician preference market, an important way to bring down costs is to shed light on the price of medical devices and bring transparency to what is

charged to providers – and taxpayers.

Senators Grassley and Specter were on to something. That’s why Congress should pass legislation banning exclusivity agreements at hospitals that accept Medicare, Medicaid or any other government payments.

States and the federal government are already taking steps to make the cost of healthcare more transparent. More than 30 states including Florida, Georgia and Indiana are publishing healthcare data online for consumers to access. Health

insurers such as United, Aetna and WellPoint are also making healthcare pricing and quality information available on the web.

Most of this healthcare transparency is focused on total price and care quality related to hospitals, physicians and prescription drugs.

So we can shop – often online – and compare the price of a new car or a month’s supply of blood pressure medication or a pair of blue jeans. We also, as healthcare

consumers, can determine whether a generic drug or a brand name best serves our needs. But, we are hindered from comparing the quality, medical outcomes or price of an artificial hip or knee.

That just doesn’t seem right.

If we are ever going to create a true, dynamic, and robust market in healthcare, we need absolute price and quality transparency to drive competition, incentivize innovation and advance a patient-centered model of care.

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PHYSICIAN PREFERENCE

ECONOMIC O U T LO O K

Hospitals, consumers and the government have no idea whether the device, for example, has been marked up hundreds of percentage points because there is no ability to compare it to what other hospitals pay for the same products.

Comparative effectiveness research: What it means, what it means for hospitals

Lawton R. Burns Lawton R. Burns, Ph.D., MBA, is the chair of the Health Care Management Department, and also the James Joo-Jin Kim Professor, as well as a professor of healthcare systems at the Wharton School at the University of Pennsylvania. He is also director of the Wharton Center for Health Management and Economics.

Dr. Burns has served on the Governing Board of the Institute of Medicine (Health Services section) and serves on the editorial board of Health Services Research. He is a past member of the Grant Review Study Section for the Agency for Health Care Policy and Research. He is also a Life Fellow of Clare Hall at the University of Cambridge.

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Evolution of comparative effectiveness research Comparative effectiveness research (CER) has evolved gradually over time. CER has its roots in randomized controlled trials (initiated in the 1940s), technology assessment (1970s), outcomes research (1980s), evidence-based medicine (1990s), the Effective Health Care Program (Section 1013 of the 2003 Medicare Modernization Act, developed in 2005), the American Recovery and Reinvestment Act (2009), and most recently in the Patient Protection and

Study designs in CER and relevance for physician preference items (PPIs) CER studies can be undertaken in a multitude of formats. They can include systematic reviews of the literature (including meta-analyses), decision modeling studies, retrospective analyses of clinical data, prospective experimental and non-experimental studies, and pragmatic prospective head-to-head trials.

The study formats involve different tradeoffs in internal validity, generalizability, feasibility, time and cost.

CER research is seldom conducted on PPIs. For example, there are a limited number

of head-to-head studies of (1) alternative drugs – e.g., the Clinical Antipsychotic Trials of Intervention Effectiveness (CATIE) for antipsychotic medications, the Antihypertensive and Lipid-Lowering Treatment to Prevent Heart Attack (ALLHAT) trial of antihypertensive and lipid lowering medications; and (2) alternative medical devices and procedures – e.g., the Clinical Outcomes Utilizing Revascularization and Aggressive Drug Evaluation (COURAGE) trial comparing stains with PCI, the COMPARE trial evaluating different drug-eluting stents.1

ECONOMIC O U T LO O K

What is comparative effectiveness research?

Varying definitions of CER have been offered over the past few years by the Congressional Budget Office, the National Institutes of Health, the Medicare Payment Advisory Commission, the Agency for Healthcare Research and Quality, the Institute of Medicine, and the American College of Physicians. At the heart of CER is the conduct and synthesis of research that compares the benefits and costs of different treatment interventions for a given medical condition. This goes beyond the normal randomized controlled trial of a new drug versus a placebo. CER uses primary and secondary data to evaluate the relative effectiveness of two or more therapeutic treatments – e.g., a drug versus another drug, a device versus another device, a drug versus a device, a drug (device) versus a surgical or medical procedure, etc. – in realistic healthcare settings. Relative effectiveness is measured in terms of the differences in patient outcomes (morbidity, mortality, adverse events, quality of life, symptoms) and/or the differences in cost of the various interventions considered.

What is the overarching purpose that CER is designed to serve? CER is intended to help public and private sector payors “bend the trend” in healthcare costs – whether by informing supply chain management purchasing, reducing geographic variations, promoting evidence-based medicine, or increasing value-based purchasing. CER also aims to promote higher quality of care in addition to lower costs, and thereby increase the value of healthcare provided.

Why so little effort and attention here?

There are several general reasons and some reasons specific to devices. First, large manufacturers of incumbent products may resist CER since they stand losing market share if trial results are not favorable. Conversely, small manufacturers of potentially disruptive technologies typically lack the financial resources needed to conduct the trials. Second, CER trials are expensive and require a lot of patients using a lot of different products to detect important outcome differences among them, not to mention the time

For those interested, CER involves more than just research, however. CER also entails investments in human and scientific capital (training), data infrastructure (e.g., using electronic health records), and dissemination and translation of the results.

Such investments need to be targeted at priority patient populations, medical/surgical conditions, and types of interventions.

Interventions can go beyond treatments and products to also include behavioral changes, delivery system changes and prevention strategies. While drugs and devices require approval for market entry, procedures and behavioral changes and delivery system changes do not.

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Affordable Care Act (2010). All of these historical developments have contributed to what we now understand as CER.

At the heart of CER is the conduct and synthesis of research that compares the benefits and costs of different treatment interventions for a given medical condition.

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| PHYSIC IAN PR E FER ENC E PROPRIETARY AND CONFIDENTIAL. Š2011 by Premier Inc. All rights reserved.

Moreover, some of the products and therapies to be compared are at the heart of ongoing turf wars between specialists.

Thus, interventional cardiologists who implant drug-eluting stents compete with cardiac surgeons performing coronary artery bypass with graft. Recent vendorsponsored trials may show that the former outperforms the latter. Institutions that conduct CER need to be cognizant of the interests of competing specialists who use the technologies being evaluated, as well as their brand preferences.

CER advocates also need to recognize there are multiple determinants of treatment effectiveness. In addition to the choice of treatment option, treatments vary in effectiveness based on individual patient characteristics and delivery system characteristics. Right now researchers do not know the relative importance of these three sets of factors. Any CER study that is undertaken should endeavor to compare not only the relevant treatment options, but also to capture as much information as possible on the patient and the delivery setting. With the push for personalized medicine, there will be a need to study how treatments work in patient sub-populations and respond differently in different patient genotypes.

CER will also require some major balancing acts among the stakeholders in the healthcare system. As one example, payors want value (quality divided by cost) for their money; manufacturers, on the other hand, want money for the value they argue their products render. CER is necessary but not sufficient to satisfy both of these objectives. As another example, the U.S. has experienced an

unrelenting rise in national health expenditures over the last 60-70 years (roughly 2-3 percent above inflation). New technological advances and their widespread application to the population are the biggest drivers of these costs.3 Our nation has yet to figure out how to balance the seemingly limitless innovation in products and therapies with the increasingly constrained public and private payor budgets – other than letting providers at the bedside handle the rationing. CER may help providers in this difficult endeavor.

Finally, CER is designed to promote value in purchasing and yet should not dampen innovation. CER studies can have product winners and losers. Losing out in a CER study may retard innovation and entrepreneurship, may limit competition among vendors, and may inhibit diffusion of products that later prove valuable.

ECONOMIC O U T LO O K

Concerns with CER In addition to the time and cost issues, CER faces other hurdles and concerns.

Any new product or procedure is likely to be effective for some patient populations.

Very few are likely to be totally useless for everyone. It is well-known that most widely prescribed drugs have efficacy for perhaps half of the patients taking them.

This means there are no black-and-white answers for a given product. Any product evaluations will need to be conditional (e.g., value-added for certain patients but not all).

Two additional concerns are the costeffectiveness of CER and its track record.

A 2008 report by the Congressional Budget Office suggested that CER investments over time outweigh the modest savings in healthcare costs borne by the government. Studies that have analyzed the impact of CER in drug trials (e.g., CATIE, COURAGE) have found little impact on physician prescribing patterns.

This is due to the lack of consistency between the study findings and physicians’ clinical practice, physician skepticism about the CER results, and the absence of significant incentives to get physicians to change practice patterns. Indeed, implementation of CER results may be a murky black box: how to translate research evidence into practice. There is some evidence that clinicians do not always follow practice guidelines or prompts from clinical decision support systems for a host of reasons that are only vaguely understood.

Likely impact of CER on the industry Some general observations: CER will have two immediate effects. First, there will be heightened scrutiny of new medical technology, especially given its role in rising healthcare costs and the heretofore lack of requirement for data on product efficacy for approval. Payors and providers will increasingly gather comparative data on medical products and services that are used. Second, this scrutiny will issue forth in more research activity, more employment of CER-trained researchers, more monies budgeted for CER studies, and more scrutiny of the practices of physicians who employ these technologies.

There will be other effects as well. We are already seeing an effort to conduct new types of research (population health studies) using new types of databases (e.g., patient registries), such as Kaiser’s effort to monitor total joint replacements using its orthopedic registry. We will likely see more research conducted outside of academic settings in community hospitals and other ‘real world’ settings. We may also see rising demand for products deemed “winners” in these studies and falling demand for those deemed “losers,” although prior experience suggests that

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needed for patient enrollment and product evaluation. Third, CER studies sponsored by manufacturers are likely tainted by suspicions of bias and conflicts of interest, and hence might not be well- regarded by clinicians. With regard to medical devices specifically, new devices are evaluated primarily in terms of safety, not efficacy. Most new device approvals take the 510(k) premarket notification route (which requires only demonstrating substantial equivalence to another device already on the market) rather than the premarket approval route (which requires trials to demonstrate clinical safety and efficacy), and thus are subject to faster and less rigorous approval.2 The outcomes for some devices (e.g., hip implants) may not be observable in the short term, but rather require long-term patient follow-up. Finally, given the short product lifecycles in medical devices (18-24 months), CER findings are often outdated by the time they are published due to the release of a new generation product.

such market share shifts are slow to develop due to physician reluctance to change practice patterns.

Impact on suppliers: To prepare for this brave new world of CER, product manufacturers will likely devote more in-house attention to comparative research on their own products and those of their rivals.

Rather than let outside researchers develop such comparative evidence, vendors may seek to do this themselves (or at least have their own results with which to champion their products). The new “risk mitigation strategy” will consist of auditing the evidence for one’s products and those of competitors, monitoring what products are being targeted by payors for technology assessment and CER reviews, designing more rigorous research protocols, launching one’s own CER studies, gathering more outcomes data and data on more types of outcomes (e.g., safety, efficacy, quality of life, productivity, costs), and identifying patient sub-populations in which one’s products work particularly well. This will have the effect of diverting some monies that would have gone to sales and marketing and re-allocating them to additional R&D, thereby lengthening product development times.4 The CER scrutiny will certainly impel suppliers to clinically differentiate their products in verifiable ways, since CER findings have the potential to commoditize current PPIs. This may raise the innovation threshold for new projects undertaken by some suppliers and reduce incremental innovation projects. This is exacerbated by current changes in the regulatory environment whereby the FDA is raising requirements for 510(k) approvals. All these changes may disadvantage smaller startups (and the venture capitalists who fund them).

Impact on hospitals: Hospitals and other healthcare providers will likewise engage in more CER studies and develop/harness the information technologies needed to form the CER data infrastructure. These analyses can be applied to both products

18

as well as to hospital operations and the design of the delivery system. With regard to products, CER data can inform the deliberations of hospital value analysis teams who evaluate new products seeking to enter the hospital. The CER data can enrich the conversations between materials managers and the clinicians championing the use of particular PPIs, and thereby broaden clinicians’ participation in supply chain management activities. CER data can also be used to increase the hospital’s bargaining leverage with suppliers (both on the pharmacy side as well as materials management side). Hospital systems and group purchasing organizations can partner on product evaluations and trials, leveraging data across all member hospitals to compare product costs versus procedure and operating costs to identify sources of efficiency, and conducting head-to-head prospective studies. As one illustration, Wharton School researchers gathered and evaluated surgeons’ assessments of the ergonomic performance of suture and endomechanical products made by eight different vendors in animal labs housed in academic medical centers around the country. Surgeons were recruited from the member hospitals to participate in the trials.

Head-to-head comparisons documented the superior performance of one vendor over the others, with two additional vendors coming in second place at an acceptable level.5 With regard to hospital operations, CER might be applied to treatment delivery failures in such areas as fall prevention, patient flow management, computerized physician order entry systems, duplicate reading of imaging studies, and pharmacists’ participation on clinical rounds.

CER lessons The application of CER in the past has met with only mixed success. What needs to change going forward? Evidence on products and therapies needs to be gathered more frequently (i.e., across a variety of drugs, devices, procedures, etc.) and more

| PHYSIC IAN PR E FER ENC E PROPRIETARY AND CONFIDENTIAL. ©2011 by Premier Inc. All rights reserved.

quickly prior to widespread adoption to inform clinician decision-making. To implement CER, providers and payors will need to think about the incentives that physicians need in order to change their practice patterns. The topics selected for CER analysis should address major areas of cost in hospitals such as PPIs. Finally, differences in the sub-populations receiving the treatment (patient characteristics) and the context in which the treatments are used (delivery system characteristics) need to be measured to capture all of the drivers of treatment effectiveness.

CER that is “done right” will have timely evidence that is relevant to providers, patients, payors and vendors. It should address issues of “overuse,” “underuse,” and “misuse” of medical technology, all of which can harm quality of care and increase costs. Finally, CER should serve to enhance the practice of evidencebased medicine.

References: 1 McEvoy JP, Lieberman JA, Stroup TS, Davis SM, Rosenheck RA, Swartz MS, Perkins DO, Keefe RSE, Davis CE, Severe J, Hsaio JK for Catie Investigators. “Effectiveness of Clozapine, Olanzapine, Quetiapine and Risperidone in Patients with Chronic Schizophrenia Who Failed Prior Atypical Antipsychotic Treatment.” American Journal of Psychiatry. 163:600-610 (2006). ALLHAT Officers and Coordinators for the ALLHAT Collaborative Research Group. “Major Outcomes in High-Risk Hypertensive Patients Randomized to AngiotensinConverting Enzyme Inhibitor or Calcium Channel Blocker vs Diuretic.” Journal of American Medical Association 288: 2981-2997 (2002). Boden WE, O'Rourke RA, Teo KK, et al. “Optimal Medical Therapy with or without PCI for Stable Coronary Disease.” New England Journal of Medicine 356:1503-1516 (2007). Kedhi E, Joesoef KS, McFadden E, et al. “Second-Generation Everolimus-Eluting and Paclitaxel-Eluting Stents in Real-Life Practice (COMPARE): A Randomised Trial.”

Lancet 375: 201-209 (2010).

2 Kruger K. “The Medical Device Sector.” In Burns LR (Editor), The Business of Healthcare Innovation (Cambridge, UK: Cambridge University Press), Chapter 6 (2005).

3 Burns LR. “The Business of Healthcare Innovation in the Wharton School Curriculum.” In Burns LR (Editor), The Business of Healthcare Innovation (Cambridge, UK: Cambridge University Press), Chapter 1 (2005).

4 Kruger. “The Medical Device Sector.”In Burns LR (Editor), The Business ofHealthcare Innovation (Cambridge,UK: CambridgeUniversity Press), Chapter 6 (2005).

5 Burns LR, Lee JA, Bradlow ET, Antonacci AC. "Surgeon Evaluation of Suture and Endo-Mechanical Products."

Journal of Surgical Research. 141: 220-233 (2007).

Burns LR, Lee JA, Bradlow ET, Antonacci AC. "Assessment of Medical Devices: How to Conduct Comparative Technology Evaluations of Product Performance." International Journal of Technology Assessment in Health Care. 23(4): 455-463 (2007).

Anne Jernigan, Pharm.D., MBA, FACHE medication management consultant, Premier healthcare alliance Christina A. Petrykiw, Pharm.D, CDE clinical pharmacy specialist, director, Medication Management, Premier healthcare alliance Patient care practices are changing due to healthcare reform, which aims to improve quality and decrease costs. Clinical or physician preference pharmaceuticals

often constitute a significant percentage of drug budgets for healthcare organizations. While some may consider all pharmaceuticals to be clinical preference items, others label only brand name drugs as such. In 2010, approximately 78 percent of prescriptions were filled with generic medications; thus about 20 percent of preferred brand name pharmaceuticals have no generic equivalent available.1 Opinions vary among physicians regarding preferred pharmaceuticals. They often have a preference for a specific drug within a class of drugs due to familiarity from training or practice. Pharmacists, working in conjunction with physicians and other clinicians, use strategies to ensure appro-

ECONOMIC O U T LO O K

Karen Bertch, Pharm.D, FCCP director, pharmacy drug intelligence, Medication Management, Premier healthcare alliance

priate drug therapy is provided, including managing the use of preferred pharmaceuticals and providing direct patient care to ensure appropriate product use.

As processes of care and reimbursement span the continuum of care, healthcare organizations are more actively ensuring that their patients are: a) taking their medications properly, b) not prescribed redundant therapy, and c) benefiting from expensive drug therapy. Integrating the pharmacist into provision of direct care can facilitate improved utilization of clinical preference drugs that include high-priced, specialty pharmaceuticals.

As noted by L. David Harlow III, a director of pharmacy operations at Carilion Clinic,

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Integrating pharmacists into new care delivery models with an eye on clinical preference pharmaceuticals

“We increase physician efficiency and improve quality of patient care when we allow each care provider to play maximally to their strength, just as every member of the team contributes to a successful sports game, or every musician to a memorable performance at the symphony.” This article highlights pharmacists’ critical roles in patient care and clinical preference pharmaceutical decisions to demonstrate their contribution to the healthcare team across the continuum of care.

The pharmacist’s role in vetting clinical preference pharmaceuticals Beyond the purchase price, a critical determinant of drug expense is expert

physicians, patient care areas, or disease states and requires a non-formulary request to be approved by the Pharmacy and Therapeutics Committee chair, medical director or designee. All non-formulary requests are reviewed to determine whether a product should be added to the formulary, guidelines for use should be developed for a therapeutic class of drugs or a disease state, or whether an individual physician intervention is needed.4,5 Closed formularies help decrease costs associated with prescribed pharmaceuticals as exemplified by the Institute of Medicine’s conclusion that the Veterans Administration National Formulary saved at least $100 million over two years.6

management of drug selection and utilization for each patient. Although physicians are responsible for prescribing, pharmacists provide options and make recommendations for drug regimens.

Healthcare organizations use a formulary system process for ongoing evidence-based evaluation of medication use and to establish guidelines for optimal prescribing, dispensing, administration and monitoring of pharmaceuticals. A value analysis team or process is used to weigh improved outcomes against costs. After evaluation of therapies, the Pharmacy and Therapeutics Committee commits to one or two products or manufacturers to obtain lower prices.2,3 A closed formulary may restrict use of medications to specific

FIGURE 1. PRODUCT STANDARDIZATION PROCESS AT MARSHFIELD CLINIC

STANDARDIZATION PROCESS

GROUND WORK ESTABLISH: • Minimum Value Threshold • Authority • Physician Champions • Approval Process

PROJECT SELECTION Identify Potential Targets Screen for Feasibility Prioritize

• Appeals Process • Contracting Strategy w/ Legal Department

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| PHYSIC IAN PR E FER ENC E PROPRIETARY AND CONFIDENTIAL. ©2011 by Premier Inc. All rights reserved.

PRODUCT SELECTION PROCESS

IMPLEMENTATION & FOLLOWUP

Educate Stakeholders

Clinical Review

EDUCATION

Key Stakeholder Re-Education

Product Selection

• Performance Review

Request for Proposals

Contract Review

• Clinical Review

Announcement and Contract Award

• Implementation

• Appeals Review

• Newsletters

ECONOMIC O U T LO O K

Model of care/ reimbursement

Medical condition caused by or requiring medication use

Examples of selected clinician preference pharmaceuticals/products

Accountable care organization and medical home

Chronic disease management and comprehensive primary care across the continuum of care*

Atorvastatin (Lipitor®) for high cholesterol Pioglitazone (Actos®) for Type 2 diabetes mellitus

Hospital-acquired conditions

Catheter-associated vascular infections Catheter-associated urinary tract infections

Antibiotics Silver-coated catheters

Deep vein thrombosis (DVT) Pulmonary embolism (PE)

Low molecular weight heparin: Enoxaparin (Lovenox®) Direct thrombin inhibitors: Dabigatran (Pradaxa®)

Readmissions

Value-based purchasing

Signs of uncontrolled blood sugar

Insulin

Acute myocardial infarction

Bare metal and drug eluting stents (sirolimus [Cypher®] and paclitaxel [Taxus™]) Low molecular weight heparin Glycoprotein IIb/IIIa inhibitors (abciximab, eptifibatide, tirofiban) Statin therapy

Coronary artery bypass graft (CABG) surgery

Serine protesase inhibitor: Aprotinin injection Intravenous antibiotics (cefuroxizime) Statin therapy

Congestive heart failure

Medications, most of which are generic

Chronic obstructive pulmonary disease

Anticholinergics: Tiotropium (Spiriva®) Beta2-agonists: Levalbuterol (Xopenex®), arformoterol (Brovana®)

Pneumonia

Intravenous, then oral antibiotics Mechanical ventilation, nebulizer therapy

Percutaneous coronary interventions (PTCA)

Drug eluting stents

Hospital-acquired conditions

See above

Central line-associated blood stream infections Intravenous antibiotics Clostridium difficile and methicillin-resistant Staphylococcus aureus (MRSA) infections

Intravenous antibiotics

Immunization for influenza and pneumonia

Vaccines

Statin therapy for heart patients at discharge

Atorvastatin (Lipitor®)

Surgical site infections

Intravenous antibiotics

*Continuum of care incorporates acute care, chronic care, preventive services, home health/home infusion, nursing home, and end-of-life care.

Sarah Rall, Pharm.D., director of pharmacy purchasing and supply at Marshfield Clinic, a multispecialty medical group practice system in Wisconsin, notes that projects for formulary review are chosen in part based on financial impact to the system. Success, in part, depends on collaborative decision-making among physicians, pharmacy clinicians and administrators. Standardization of pharmaceuticals is considered only once clinical comparative information and financial components have been analyzed.

A 25-physician Drug Evaluation Committee reviews and approves all drugs based on pharmacists’ recommendations for place

in therapy that incorporates previously obtained physician input. A therapeutic interchange model was successful for determining which of six viscoelastic supplements should be used in the treatment of pain in patients with osteoarthritis of the knee who had not responded to other therapies. After establishing therapeutic equivalence and choosing Hyalgan® and Euflexxa® for use, contract negotiations resulted in a 33 percent decrease in acquisition price for the chosen products.

See Figure 1 for a graphic representation of the Marshfield Clinic process for standardizing products. The value of pharmacists’ services are being realized because

Marshfield Clinic achieves full attendance and physicians are asking to become part of the Drug Evaluation Committee.

The pharmacist’s role in improving medication use via direct patient care At least 75 percent of healthcare spending is devoted to the approximately 133 million Americans with chronic medical conditions, 61 million of whom have multiple chronic conditions.7 Many of the new care models, such as accountable care organizations and medical homes, achieve cost savings by keeping patients out of the hospital, shifting care to outpatient settings, and managing the patient through the OUTLO O K • 09.11 |

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TABLE 1. CLINICAL PREFERENCE PRODUCTS USED IN MEDICAL CONDITIONS ADDRESSED BY PROPOSED REIMBURSEMENT AND PATIENT CARE MODELS9-14

continuum of care. Pharmacists are ideally situated to help ensure appropriate medication use as patients transition through different care settings (Table 1).

The federal Patient Safety and Clinical Pharmacy Services Collaborative is currently identifying optimal pharmacy practice models and sharing templates and best practices for achieving optimal patient care outcomes.8 Economic evaluations of clinical pharmacy services have noted that for every $1 invested, approximately $5 is achieved in cost savings.15 Sarah Rall at Marshfield Clinic and Michael Evans, R.Ph., clinical coordinator of anticoagulation/medication therapy management services at Geisinger Health System in Pennsylvania, note that the biggest demonstration of pharmacists’ contribution in outpatient practices has been increasing demand for their services as they have helped improve outcomes.

At Marshfield’s Heart Failure Clinic, pharmacists meet each patient and provide follow-up. In Marshfield’s Diabetes, Lipid, and Anticoagulation clinics, pharmacists create the treatment protocols that are implemented by nurses – an efficient methodology given that 400,000 patients are seen annually with only seven clinical pharmacists on staff.

Pharmacists have successfully managed patients with chronic disease states under collaborative drug therapy models. In this practice model, qualified pharmacists independently initiate and modify medications under written protocols approved by physicians. As of 2008, at least 45 states allowed collaborative models in their Pharmacy Practice Acts (Figure 2).16-18 The Indian Health Service has used pharmacists to provide collaborative disease management since the 1960s for a number of health conditions.19-21 The Veterans Affairs medical centers have had pharmacist-run hypertension, lipid, and anticoagulation clinics for decades.

Demonstration projects have shown

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the efficacy of pharmacist-run federallyfunded diabetes management clinics in community health centers.22,23 The Asheville Project demonstrated the effectiveness of the pharmacist in improving outcomes in patients with diabetes for self-insured employers, a model that has been replicated in 10 major cities and is now used by state pharmacy associations.24 Pharmacists have identified 917 drug therapy problems (10.4 per patient) and resolved at least 80 percent of the issues within four patient encounters, saving an estimated annualized $1,123 per patient on medication claims and $472 per patient for medical, hospital, and emergency department expenses in a Medicaid demonstration project in federally qualified health centers.25 Geisinger’s pharmacist-run anticoagulation clinics experience 14,000 patient visits per month, decrease adverse bleeding events better than national benchmarks and have saved $1.5 million for 4,000 atrial fibrillation patients by preventing strokes.

At Carilion Clinic, pharmacy staff undergo Medication Therapy Management (MTM) Training from the American Pharmacists Association and certification as diabetes educators.28,29 Geisinger requires an in-house six-week training program with a certified practitioner and an internal exam. After achieving required practice hours, the pharmacists must also undergo national anticoagulation certification, and diabetes educator and advanced diabetes management certification.29-31 At Marshfield Clinic, clinical pharmacists must undergo an internal MTM curriculum and receive an MTM certificate or achieve board certification in pharmacotherapy.32

Facilitating pharmacist provision of patient care Although it is evident that pharmacists are well-trained and effective in providing patient care and 91 percent of new pharmacists desire patient care rounding and clinical activities, only approximately 38 percent of institutions provide these opportunities.26,27 Paradigm shifts may be needed to integrate pharmacists into direct patient care. Carilion Clinic and Marshfield Clinic have noted that physicians who are not used to collaborating with pharmacists and are unaware of the contributions pharmacists can make to patient care need the greatest paradigm shift.

The recent American Society of HealthSystem Pharmacists Pharmacy Practice Model Initiative Summit highlighted critical requirements, including technology and technician support, necessary to achieve optimal use of medications in hospitals and health systems.33 Recognition of pharmacists as providers by the Centers of Medicare & Medicaid Services would greatly facilitate pharmacists’ provision of and reimbursement for patient care in the outpatient setting.19 Lack of electronic health records and the inability to access laboratory, demographic, medication administration, pharmacy, and bedside monitoring data simultaneously hampers provision of efficient care.

Using technology for targeting interventions makes patient care more efficient, freeing the pharmacist to help more patients as noted by L. David Harlow III from the Carilion Clinic. Applying technology to improve work flow and coordination of patient care has resulted in cost savings of more than $1 million for Carilion Clinic.

Staff development and certification is facilitating retooling or preparation of pharmacy staff for newer roles in the changing healthcare environment. The training and credentials help pharmacists be recognized as a billable entity, unrelated to drug product dispensing.

In addition to the incorporation of technology, another key to success in integrating the pharmacist directly into patient care is the support of senior leadership. At Carilion Clinic, pharmacists’ contributions to improved outcomes and increased patient throughput are shared with the C-

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ECONOMIC O U T LO O K

Authorized

Allowed in institutional setting only

Not Allowed

Source: http://www.pharmacist.com/AM/Template.cfm?Section=Home2&CONTENTID=16882&TEMPLATE=/CM/ContentDisplay.cfm http://www.ashp.org/menu/News/PharmacyNews/NewsArticle.aspx?id=3568

UPDATE: Drug shortage crisis in American healthcare Over the last year, Premier has received many requests from alliance members asking for help to address record rates of drug shortages and the subsequent actions by “gray market” vendors to take advantage of this situation.

An August 2011 Premier analysis of unsolicited sales offers made by gray market vendors to hospitals shows that the average mark-up for drugs in shortage was 650 percent.1 The highest single recorded mark-up offered was 4,533 percent for a drug used to treat high blood pressure. According to an August 17, 2011, USA Today article, the drug in question is a blood pressure drug called labetalol which usually averages $25 per dose.2 As Premier Chief Operating Officer Mike Alkire suggests in the article, “hospitals have been asked to pay $1,200 for the drug.”

To help members avoid gray market vendors and identify safe, legitimate buying opportunities, Premier developed a series of recommendations for healthcare providers.3 When considering the use of a new supplier, hospitals should, at a minimum, follow these purchasing guidelines to help protect the hospital and patients from unintended harm.

This analysis follows a drug shortage survey and report presented in April’s Economic Outlook publication.4 Results from a similar survey from the American Hospital Association, American Society of Health-System Pharmacists and the University of Michigan Health System were released in July.5

As Alkire suggests in a recent opinion piece in The Charlotte Observer, an important way to stop price gouging is to address the drug shortages themselves. But as no one cause explains the issue altogether, no easy solution exists to address the problem.6 Premier is providing members with ongoing information to help ward off shortages before they occur, and advising on reputable sources to seek supplies when they do occur.

Premier is also working with suppliers and manufacturers to provide information based on member drug needs.

With two to three months of products in the supply chain, additional warning time could mitigate some of the damage.

References 1.http://www.premierinc.com/about/news/11-aug/GrayMarket/Gray-Market-Analysis-08152011.pdf 2.http://yourlife.usatoday.com/health/healthcare/story/2011/08/Dr ug-shortages-lead-to-price-gouging/50028148/1 3.http://www.premierinc.com/about/news/11-aug/Gray-Market/ Diagram-Recommendations-to-ensure-safe.pdf 4.http://www.premierinc.com/costs/economic-outlook/attachments/perspectives/Navigating-the-Drug-Shortage-Crisis.pdf 5.http://www.aha.org/aha/press-release/2011/110712-pr-rxshortage.html 6.http://www.charlotteobserver.com/2011/08/19/2537166/drugshortages-are-leading-to.html#storylink=misearch

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FIGURE 2: COLLABORATIVE DRUG THERAPY MANAGEMENT ACROSS THE UNITED STATES

suite and health system leadership. Sarah Rall from Marshfield Clinic has noted that having physician champions has been key. Once pharmacists establish credibility and build physician relationships, physician buy-in improves. At Geisinger Health System, Michael Evans has noted that one of the primary results of integrating pharmacists into direct patient care within their system has been patient satisfaction, followed by demonstration of improved clinical outcomes and decreased adverse events in pharmacist-run clinics.

Specialty pharmacy and continuum of care practice Specialty drugs account for more than 25 percent of the total pharmacy benefit drug spend and are forecasted to be more than 40 percent of spend by 2030.34 These highly complex, expensive clinical preference medications may possess significant side effect profiles. Premier’s Specialty Pharmacy Program, through Commcare, provides a “high-touch” patient care model focused on managing chronic patients’ specialty therapies to increase medication adherence, enhance wellness, improve outcomes, and ultimately improve the overall cost and quality of care. Specialty pharmaceuticals are self-administered by patients at home or administered in physician offices or home infusion ambulatory centers.

Specialty and home infusion pharmacists address care transition and medication reconciliation, ensuring that medications are used appropriately. They help reduce medication-related adverse events by helping patients manage their chronic conditions and adhere to complex medication regimens, and prevent lapses in continuity of care as well as hospital readmissions.34 Pharmacy benefit managers (PBMs) are outside administrators of prescription drug benefit programs. They deliver value to clients such as employers, health plans, government entities and unions by

24

offering a variety of programs tailored to meet clients’ cost containment, clinical support and service objectives. Today, more than 210 million Americans receive drug benefits administered by PBMs for Fortune 500 employers, Medicare Part D, and the Federal Employee Health Benefits Program. Pharmacists provide medication therapy management services under Medicare Part D and various local or regional/state plans.35,36 Drug utilization and targeted clinical disease management tools used by PBMs help improve physician prescribing and decrease medication errors, while improving patient compliance and health outcomes.37 Tools used by PBMs have been credited with slowing prescription drug spending from 5.3 percent in 2009 to 3.5 percent in 2010.38 Pharmacists implement a core set of services to manage the cost and utilization of prescription drugs, while improving the value of plan sponsors’ drug benefits. The Premier healthcare alliance and MedImpact Healthcare Systems have co-developed a unique PBM solution specifically tailored to meet the needs of our hospitals, health systems, and health plans.

standardize products, how you will implement your strategy, and how you will encourage physicians to cooperate with the chosen strategies?

• Have you determined whether you have an open or closed formulary?

• Do you have non-formulary request or prior approval authorization processes in place?

• Are you engaging physicians and pharmacists in your clinical preference management strategies?

• Once developed, are you monitoring purchase, usage, and reimbursement patterns for clinical preference items?

• Have you benchmarked your clinical preference item usage to other hospitals, within your system, ACO or medical home?

• Are you maximally using analytical tools available from your group purchasing organization or distributor for monitoring?

• Have you evaluated your use of specialty pharmacy items?

• Have you determined whether a PBM or mail-order would improve cost efficiencies and patient care due to clinical disease management tools that continuum of care practices use?

Conclusion and next steps Pharmacy practitioners can become an integral component of direct patient care models based on their training, knowledge, and collaboration with physicians and clinicians. Hospitals and health systems interested in the management of clinical preference pharmaceuticals should consider asking and evaluating the following:

Pharmacists in direct patient care to improve outcomes • Have you placed clinical pharmacists into direct patient care roles to improve medication utilization?

• Have you determined whether pharmacist collaborative drug therapy management or medication therapy management services would enhance provision of patient care in your practice?

• Have you used pharmacists to contribute in the development of disease state management protocols and guidelines?

• Have you assessed the training and capabilities of your pharmacy staff to ensure they are maximally capable to provide services required of them?

• Have you established training to help develop your pharmacy staff to contribute to their maximum capabilities?

• Have you identified barriers that hamper

Identification of patient needs • Have you assessed the patient care episode related to use of clinical preference products?

• Are you using a multidisciplinary team to evaluate that clinical care is being addressed in patient care episodes for specific disease states?

Standardization • Have you defined how you will

| PHYSIC IAN PR E FER ENC E PROPRIETARY AND CONFIDENTIAL. ©2011 by Premier Inc. All rights reserved.

shevilleproject.net/. Accessed 7/21/2011.

25. Smith M, Giuliano MR, Starkowski MP. In Connecticut: Improving patient medication management in primary care. Health Aff. 2011; 30:646-54.

Abstract available at: http://content.healthaffairs. org/content/30/4/646.abstract 26. Hertig JB, Kelley KA, Jordan TA, etal. Advancing the pharmacy practice model: survey of new practitioner attitudes and opinions. Hosp Pharm 2011;46:180-9, 195.

27. Pedersen CA, Schneider PJ, Scheckelhoff DJ. ASHP national survey of pharmacy practice in hospital settings: dispensing and administration – 2008. Am J Health-Syst Pharm 2009; 66:926-46.

28. American Pharmacist’s Association. Delivering Medication Therapy Management Serbvices in the Community. Available at: http://www.pharmacist.com/Content/NavigationMenu3/ContinuingEducation/CertificateTrainingProgram/DeliveringM edicationTherapyManagementintheCommunity/Delivering_Medicatio.htm. Access 7/5/11.

29. American Association of Diabetes Educators.

Certification. Available at: http://www.diabeteseducator.org/ProfessionalResources/Certification/.

Access 7/5/11.

30. National Certification Board for Anticoagulation Providers. Available at: http://www.ncbap.org/.

31. American Association of Diabetes Educators.

Board certified – Advanced diabetes management certification. Available at: http://www.diabeteseducator.org/ProfessionalResources/Certification/BCADM/.

32. American College of Clinical Pharmacy. Board Certification. Available at: http://www.accp.com/ careers/certification.aspx.

33. Proceedings of the Pharmacy Practice Model Summit: An invitational consensus conference conducted by ASHP and the ASHP Research and Education Foundation, November 7-9, 2010, Dallas, Texas. In: American Journal of Health-System Pharmacy, 2011 June 15;68 (12): 1079-1160. Available at: http://www.ajhp.org/content/68/12.toc.

34. Correia RJ. Oral oncology therapies: specialty pharmacy’s newest challenge. Specialty Pharmacy Times. 2011; 2(2): 10-12.

35. American College of Clinical Pharmacy. The Lewin Group. Medication therapy Management services: A critical review. May 17, 2005. Available at: http://www.accp.com/docs/positions/commentaries/mtms.pdf . Accessed 7/14/2011.

36. American Pharmacists Association and National Association of Chain Drug Stores Foundation. Medication Therapy Management in Pharmacy Practice: Core elements of an MTM service model. March 2008. Available at: http://www.accp.com/docs/positions/misc/CoreEl ements.pdf. Accessed 7/20/2011.

37. Wikimedia Foundation, Inc. Pharmacy benefit management. Pharmacy benefit management.

Available at: http://en.wikipedia.org/wiki/Pharmacy_Benefit_Management Accessed 7/5/2011.

38. PCMA: Study credits PBM tools with reducing prescription drug spending growth. July 28, 2011.

Available at: http://www.prnewswire.com/newsreleases/pcma-study-credits-pbm-tools-with-reducing-prescription-drug-spending-growth-12633 9943.html.

OUTLO O K • 09.11 |

ECONOMIC O U T LO O K

References 1. Johnson LA. Drug prices to plummet in wave of expiring patents. July 25, 2011. Available at: http://abcnews.go.com/Health/wireStory?id= 14149751.

2. Purchasing physician preference items: The search for a cure. July 18, 2007. In: Knowledge@W.P.Carey. Available at: http://knowledge.wpcarey.asu.edu/article.cfm?articleid=1446. Accessed 7/14/2011.

3. Using analytics to understand and control physician preference item spend. Available at: http://mobile.dimins.com/WP-PPI_Full_Doc.html.

Accessed 7/14/2011.

4. Chase KA. Medication Management. In: Introduction to hospital and health-system pharmacy practice. Part II: Managing MedicationUse. Pages 59-80. Available at: http://www.ashp.org/DocLibrary/Bookstore/P2371/P2371SampleChapter.aspx 5. American Society of Health-System Pharmacists.

ASHP guidelines on the pharmacy and therapeutics committee and the formulary system. Am J Health-Syst Pharm. 2008; 65:1272–83.Available at: http://www.ashp.org/DocLibrary/BestPractices/Fo rmGdlPTCommFormSyst.pdf 6. Executive summary. Summary and conclusions.

Page 3. In: Blumenthal D, Herdman R, eds. Description and Analysis of the VA National Formulary. VA Pharmacy Formulary Analysis Committee, Division of Health Care Services, Institute of Medicine; 2000, Available at http://www.nap.edu/openbook.phprecord_id=9879&page=3 7. Centers for Disease Control and Prevention.

Chronic diseases and health promotion. Available at: http://www.cdc.gov/chronicdisease/overview/ index.htm. Accessed 7/19/2011.

8. Patient Safety and Clinical Pharmacy Services Collaborative (PSPC). Available at: http://answers.hrsa.gov/app/answers/detail/a_id/ 1683/session/L3RpbWUvMTMwOTk3ODIzMS9zaWQvaVpTdUxqeWs%3D. Accessed 7/5/11.

9. Averill RF, McCullough EC, Hughes JS, et al. Redesigning the Medicare Inpatient PPS to reduce payments to hospitals with high readmission rates.

Health Care Financing Review, Summer 2009 30(4): 1-15. Available at: http://www.cms.gov/HealthCareFinancingReview/downloads/09SummerPg1. pdf. Accessed 7/5/2011.

10. U.S. Department of Health & Human Services.

Potential future measures for hospital value-based purchasing program. Available at: http://hospitalcompare.hhs.gov/staticpages/for-consumers/ value-based-purchasing.aspx. Accessed 7/5/2011.

11. American Academy of Family Physicians,

American Academy of Pediatrics, American College of Physicians, American Osteopathic Association.

Joint principles of the patient-centered medical home. March 2007. Available at: http://www.medicalhomeinfo.org/downloads/pdfs/jointstatement.pdf 12. Centers for Medicare and Medicaid Services.

CMS adds hospital acquired condition measures to Hospital Compare Website. Updated 4/1/11. Available at: http://www.cms.gov/HospitalQualityInits/06_HACPost.asp. Accessed 7/5/2011.

13. U.S. Department of Health & Human Services.

Hospital Compare. Available at: http://hospitalcompare.hhs.gov/. Accessed 7/5/2011.

14. Department of Health and Human Services.

Centers for Medicare & Medicaid Services.

Medicare Program; Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and the Long-Term Care Hospital Prospective Payment System Changes and FY2011 Rates; Final rule. Federal Register August 26, 2010 (75 (157): 50042-50677.

Available at: http://edocket.access.gpo.gov/ 2010/pdf/2010-19092.pdf . Accessed 7/5/2011.

15. Perez A, Doloresco F, Hoffman JM, et al. Economic evaluations of clinical pharmacy services: 2001-2005. Pharmacotherapy 2008;28(11): 285e323e. Available at: http://accp.com/docs/positions/whitePapers/EconEvalClinPharmSvcsFinalkjs edit-gts.pdf. Accessed 7/19/2011.

16. American Pharmacists Association. Collaborative Drug Therapy Management. Issue Brief. March 2008. Available at: http://www.pharmacist.com/ AM/Template.cfm?Section=Home2&CONTENTID=16882&TEMPLATE=/CM/ContentDisplay.c fm . Accessed 7/7/2011.

17. Alliance for Pharmaceutical Care. Collaborative drug therapy management: A coordinated approach to patient care. Available at: http://www.pharmacist.com/AM/Template.cfm?S ection=News_Releases2&Template=/CM/ContentDisplay.cfm&ContentID=11866. Accessed 7/7/2011.

18. American Pharmacists Association. Medication Therapy Management activities by state. Available at http://www.pharmacist.com/AM/Template. cfm?Section=MTM&CONTENTID=20470&TEMPLATE=/CM/HTMLDisplay.cfm. Access 7/7/2011.

19. Lamer CC. The future of clinical pharmacy services in the HIS. In: the HIS Primary care provider.

January 2005; 30(1):1-5. Available at: http://www.ihs.gov/Provider/documents/2000_20 09/PROV0105.pdf.

20. HIS National Clinical Pharmacy Specialist (NCPS). Available at: http://www.usphs.gov/corpslinks/pharmacy/clinpharm/certifications/in dex.html.

21. Indian Health Diabetes Best Practice. Pharmaceutical care. Revised April 2011. Available at: http://www.ihs.gov/MedicalPrograms/Diabetes/H omeDocs/Tools/BestPractices/2011_BP_PharmCare_508c.pdf 22. Shane-McWhorter L. Diabetes care in community health centers: A focus on health resources and services administration-funded clinical pharmacy demonstration projects. In: American Diabetes Association. Diabetes Spectrum. 2006 July;19(3):141-44. Available at: http://spectrum.diabetesjournals.org/content/19/3/141.full.

23. Leal S, Glover JJ, Herrier RN, et al. Improving quality of care in diabetes through a comprehensive pharmacist-based disease management program. Diabetes Care 2004;27(12):2983-2984.

Available at: http://care.diabetesjournals.org/content/27/12/2983.full.

24. The Asheville Project®. Available at http://thea-

25

PHYSICIAN PREFERENCE

your pharmacists and other providers from providing the most efficient patient care and medication utilization?

Have you identified solutions to help address these issues?

• Have you maximized technology and automation to free up pharmacists to provide patient care?

• Have you empowered your pharmacy staff?

• Have you evaluated outcomes of pharmacist-provided patient care services?

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

What to watch:

Physician preference trends impacting our members Physician preference items (PPI) or med ical devices constitute approximately 40 percent of a hospita l’s supply expense.1 And their demand is on the rise. In 201 0, the Freedonia Group released a study which forecasted the demand of implantable medical devices to reach approximat ely $49 billion by 2014.

This represents a $16 billion increase from 2009 (Figure 1).2 Much of this demand is expected to be driven by the development of next generation dev ices based on new technologies and improved materia ls. A key consideration in the physician preference market is the impact of these improvements on clinical outcomes, patient care and the overall cost to healthcare.

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| PERSPECTIVES PROPRIETARY AND CONFIDENTIAL. Š2011 by Premier Inc. All rights reserved.

OUTLO O K • 09.11 |

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Executive summary and key findings In an effort to understand the physician preference purchasing behavior and physician alignment priorities of our membership, Premier conducted an online survey of 13,000 healthcare leaders across the country to obtain their insights. The research included interviews with executives, supply chain experts and healthcare subject matter experts.

The survey yielded a wealth of perspectives on physician preference trends impacting our membership. > Respondents indicated that clinical outcomes and cost are the two most important factors influencing PPI purchasing decisions, followed by physicians’ past experience with suppliers or device manufacturers. > More than 70 percent of respondents would consider a trial of a non-branded physician preference item that demonstrated the same or better clinical outcomes as a branded PPI. > When asked about their physician acquisition priorities, survey respondents indicated that primary care, orthopedics and cardiology are their organizations’ top clinical practice targets for the acquisition of physicians. > Of those respondents who have a value analysis process in place at their organizations, 79 percent consider the process for procuring physician preference items to be either somewhat effective or very effective. > Three components of value analysis stood out as important for those organizations that had identified their value analysis processes as very effective: 1) the process is supported by a skilled data analyst; 2) the process is applied to every physician preference item; and 3) members/ contributors receive an orientation training in the value analysis process.

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| PERSPECTIVES PROPRIETARY AND CONFIDENTIAL. ©2011 by Premier Inc. All rights reserved.

Upon further examination, it was determined that 27 percent of the total surgical supply cost for MDC 5 was attributed to DRGs 227 and 247, cardiac defibrillator implantation and drug-eluting stent procedures, respectively. Approximately 55 percent of the total surgical supply cost

for MDC 8 was attributed to DRGs 460 and 470, spinal fusion and hip and knee joint replacement procedures, respectively (Table1).

Additionally, out of more than 740 MSDRGs, the top 10 accounted for almost 30% of inpatient supply expense. MS-DRG 470 (major joint replacement or reattachment of lower extremity without major complications or comorbidities) accounted for the greatest percentage of total supply cost in the analysis (Figure 3).

The cost pressures put forth by aspects of regulatory changes accompanied by utilization changes will encourage many healthcare organizations to reevaluate the balance of cost and quality for their physician preference items.

Bozic explains, “The impact of medical devices on clinical outcomes is sometimes measured over a period of years and even decades. Since we can’t wait 10 years to decide whether something is effective, measuring the impact of these innovations and quantifying that impact can be very difficult.”

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

A key consideration of the expected growth of PPI is its contribution to the nearly $3 trillion healthcare industry. A recent research analysis using Premier’s Supply Mix Index methodology confirmed that, for many hospitals,

a large percentage of inpatient supply cost resides in the cardiovascular and orthopedic clinical practice areas. A comprehensive research process using 3.7 million patient records across 244 hospitals from a database maintained by Premier was used to analyze inpatient supply costs by major diagnostic categories (MDC). The results found that 54 percent of the overall inpatient supply cost resides in the circulatory (MDC5) and musculoskeletal (MDC8) categories (Figure 2).

ECONOMIC O U T LO O K

According to Dr. Kevin J. Bozic, an orthopedic surgeon and professor at the University of California, San Francisco, who has written about the impact of artificial joints on healthcare costs, “There have been quite a few incremental steps taken with medical device innovations in the field of total joint arthroplasty, with the goal of improving patient outcomes.

However, there have been surprisingly few examples where those incremental changes have resulted in significant improvements in patient care.”

FIGURE 1: IMPLANTABLE MEDICAL DEVICES - FORECASTED DEMAND COMPARISON ■ FORECASTED DEMAND FOR 2009

■ FORECASTED DEMAND FOR 2014

DEMAND IN $ BILLIONS

60 49.3

50 40 32.8

30

26

20

16.9

12.3

17.6

10

3.6

5.7

0% ORTHOPEDICS

CARDIO

OTHER

TOTAL

Source: Freedonia Group

FIGURE 2: PERCENT OF OVERALL INPATIENT SUPPLY COST BY MAJOR DIAGNOSTIC CATEGORY (MDC)

30.0%

27.8%

27.4%

25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

6.6%

5.9%

4.3% 0.1%

0.4%

2

3

1

2.3% 4

5

6

7

1.2%

1.8%

9

10

8

Note: MDC 5 = Diseases and disorders of the circulatory system MDC 8 = Diseases and disorders of the musculoskeletal system and connective tissue

Source: Premier’s Supply Mix Index and a research database maintained by the Premier healthcare alliance

TABLE 1: MAJOR SURGICAL SUPPLY COST DRIVERS FOR MDC 5 AND MDC 8 MS-DRG

TITLE

% of supply cost by surgical MS-DRG

MDC 5 Diseases and disorders of the circulatory system

227

Cardiac defib implant w/o card cath w/o mcc

12

247

Perc cardio proc w/ drug-eluting stent w/o mcc

15

MDC 8 Diseases and disorders of the musculoskeletal system and connective tissue

460

Spinal fusion except cervical w/o mcc

17

470

Major joint replacement or reattachment of lower extremity w/o mcc

39

Source: Premier's Supply Mix Index and a research database maintained by the Premier healthcare alliance

30

| PERSPECTIVES PROPRIETARY AND CONFIDENTIAL. ©2011 by Premier Inc. All rights reserved.

FIGURE 3: PERCENTAGE OF OVERALL SUPPLY COST BY MAJOR DIAGNOSTIC CATEGORY (MDC)

■ PERCENT OF TOTAL SUPPLY COST

■ CUMULATIVE SUPPLY COST

40.0%

80.0%

35.0%

70.0% 60.0% 50.0%

30.0% 20.0%

10.3% ■

27.4% ■

26.3% ■

30.0% 25.0% 26%

14.9% ■

20.0%

ECONOMIC O U T LO O K

40.0%

21.5% ■

25.1% ■

29.4% ■

15.0% 10.0% 0.5%

10.0%

0.0%

0.0% MDC 08 DRG470

MDC 08 DRG460

MDC 05 DRG247

MDC 05 DRG277

MDC PRE DRG3

MDC 08 DRG473

MDC 05 DRG249

MDC 18 DRG871

MDC 06 DRG329

MDC 05 DRG234

ALL OTHER DRGs

Source: Premier's Supply Mix Index and a research database maintained by the Premier healthcare alliance

Factors influencing the purchase of physician preference items Premier’s physician preference survey examined the factors influencing PPI purchasing behavior and the willingness of members to trial non-branded physician preference items.

When asked to rate the influence of specific factors on their organizations’ purchasing behavior for PPI, respondents indicated that clinical outcomes and cost are the two most important factors influencing PPI purchasing decisions, followed by physicians’ past experience with suppliers or device manufacturers (Table 2).

“To gain physician buy-in and promote clinical integration, it is essential to have

actionable data that they can relate to, appreciate and respect,” says Richard Bankowitz, MD, enterprise-wide chief medical officer for Premier. “These findings emphasize the importance of analyzing clinical and financial data that can be used to measure outcomes associated with devices.”

Given the importance of cost in PPI purchasing decisions, it was essential to analyze the perceived purchasing behavior of commoditized higher end products. Premier’s survey findings indicated that more than 70 percent of respondents would consider a trial of a non-branded physician preference item that demonstrated the same or better clinical outcomes as a branded PPI. The

TABLE 2: TOP 5 FACTORS INFLUENCING THE PURCHASING BEHAVIOR OF PHYSICIAN PREFERENCE ITEMS 1. Clinical outcomes associated with the use of the product 2. Cost of the products 3. Physician's past experience/familiarity with suppliers 4. Results of your organization's value analysis process 5. Preference of physician (affiliated with, but not employed by hospital or hospital-owned practice)

results were consistent for both clinical and non-clinical respondents. Of the clinical and C-suite respondents, more than 75 and 80 percent, respectively, were willing to trial a non-branded PPI (Figure 4).

In several categories, Premier has contracted with suppliers that offer a lower cost option to the entrenched market leaders. In one example, Premier contracted with NuBone LLC in the bone tissue and synthetic implant category.

NuBone LLC introduced its StemVie™ Biphasic Synthetic Bone Graft product earlier this year.

In lieu of the use of bone morphogenic protein (BMP), NuBone advocates an alternative approach that is less than one-fifth the cost of BMP. While hospitals may not be able to eliminate all use of BMP, reviewing opportunities for reduction of this expensive product could yield significant savings.

NuBone has found that it is important to have a surgeon to champion their product within the hospital. “The supply side managers of many Premier providers have expressed keen interest in finding less costly solutions to bone grafting with

Source: Premier healthcare alliance Economic Outlook physician preference survey, June 2011

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

18.6% ■

23.6% ■

28.4% ■

FIGURE 4: WILLINGNESS TO TRIAL NON-BRANDED PHYSICIAN PREFERENCE ITEMS ■ TOTAL

■ CLINICAL

■ NON-CLINICAL

■ C-SUITE

% RESPONDENTS (N=496)

60% 50% 40% 30% 20% 10% 0% DEFINITELY WOULD

PROBABLY WOULD

MIGHT OR MIGHT NOT

PROBABLY WOULD NOT

DEFINITELY WOULD NOT

Source: Premier healthcare alliance Economic Outlook physician preference survey, June 2011

expensive recombinant proteins,” says Brian Kane, NuBone’s director of market development. “But this is a strong surgeon preference category and needs at least one surgeon in each institution willing to champion the evaluation of an alternative approach in order for it to gain a foothold.”

category, the physician is the key stakeholder in the purchasing decision.

Dr. Jeffrey Weinberg, associate professor at The University of Texas MD Anderson Cancer Center, suggests that having physician buy-in and ownership in the development and implementation of

In the orthopedic trauma category, DeRoyal, a contracted supplier with Premier, offers significant savings in both top-line price and utilization opportunities. According to the company’s CEO, Brian DeBusk, Ph.D, MBA, “There is huge variation in the tech-

methodologies for the purchase and utilization of PPI presents one of the greatest opportunities for success.

“Physicians are much more responsive to change when the impetus for change

In addition to physician involvement, engagement of the C-suite is critical to

is a commodities tier of products within orthopedic trauma where hospitals could achieve savings with no impact to the surgeon or patient. And in some cases a simpler, lower-cost construct is actually clinically superior.”

32

Three years ago, Dr. Weinberg; Lisa McMillian, manager of materials utilization; and Corliss Denman, director of perioperative operations, established the Perioperative Enterprise Value Analysis Team at MD Anderson. While initially met with some resistance, the systematic approach, which includes a clinician representative from every surgical discipline, has been very successful in achieving economies of scale and reducing waste at the organization.

“Surgeons weren’t fully aware of which supplies were billable and which were not,” Denman said, “For instance, we were experiencing double digit waste in the OR. Now, through increased awareness, a push for transparent information and a focus on waste reduction, our waste is less than a tenth of a percent.” Since its implementation, the process has also improved contract compliance and led to the standardization of capital equipment.

nology of products in this category. There

DeRoyal's ultimate goal is to help hospitals mainstream implants into their ordinary purchasing stream to rationalize the largest component of implant cost – sales and marketing expense. DeRoyal has learned that in the orthopedic trauma

comes from their peers, rather than an administrator or non-clinician,” Dr. Weinberg said.

| PERSPECTIVES PROPRIETARY AND CONFIDENTIAL. ©2011 by Premier Inc. All rights reserved.

According to Premier’s president and CEO Susan DeVore, “To successfully address new reimbursement models set forth by reform legislation, physicians and hospitals will need to become more tightly integrated. This includes the development of physician compensation models that share risk and uphold better clinical and financial outcomes.”

When asked about physician employment at their organizations, more than 75 percent of respondents indicated that up to 50 percent of physicians are employed by their organizations through hospital owned practices (Figure 5).

When asked about their physician acquisition priorities, survey respondents indicated that primary care, orthopedics and cardiology are their organizations’ top clinical practice targets for the acquisition of physicians (Table 3).

FIGURE 5: PHYSICIAN EMPLOYMENT THROUGH HOSPITAL OWNED PRACTICES

% RESPONDENTS (N=496)

Physician and hospital alignment The past 50 years in medicine have brought forth a number of competing interests. Conflicting relationships between physicians and manufacturers, manufacturers and hospitals, and physicians and hospitals have been the result of cost shifting, misaligned financial incentives, and a lack of data-driven methodologies. Today, as healthcare continues to experience the reverberations of the worst recession in a quartercentury and moves towards delivery models that better reflect integrated systems of care, hospitals and physicians must work to align based on a mutual collaboration of resources and outcomes.

Premier’s physician preference survey examined the physician employment and acquisition trends of our membership.

However, among physicians, the need for alignment varies widely. A recent PricewaterhouseCoopers study indicated that two-thirds of cardiology specialists are interested in hospital employment as compared to only 48 percent of primary care physicians and 45 percent of all other specialists. Among specialties, orthopedics is the least interested in being employed by hospitals.3 Cardiology, in particular, has been impacted by deep Medicare reimbursement cuts. CMS has projected a 13 percent decrease in Medicare payment rates for cardiovascular services over the next four years.4 A study by the American College of Cardiology found that 39 percent of cardiology practices were considering selling to a hospital system.5

ECONOMIC O U T LO O K

Glennon also acknowledged the importance of key stakeholders working together. “Traditionally, these types of efforts will fail without leadership, physician engagement, and dedication to open communication.”

benefit of economies of scale, as well as increased bargaining power with suppliers and payors.

25% 20%

23.7% 20.2%

18.9%

15%

12.6%

11.3%

10% 5%

8.9% 4.5%

16.9

0% 0%

1-10%

11-25%

26-50%

51-75%

76-99%

100%

PERCENTAGE OF PHYSICIANS EMPLOYED BY THE ORGANIZATION THROUGH HOSPITAL OWNED PRACTICES Source: Premier healthcare alliance Economic Outlook physician preference survey, June 2011

TABLE 3: PHYSICIAN ACQUISITION PRIORITIES BY PRACTICE TYPE 1

2

3

4

5

Primary Care

12%

6%

24%

23%

34%

Mean 3.61

Orthopedics

18%

6%

18%

28%

30%

3.46

Cardiology

26%

8%

17%

22%

27%

3.17

Note: 1 = not a priority; 5= high priority Source: Premier healthcare alliance Economic Outlook physician preference survey, June 2011

In addition to shared incentives, hospitalphysician alignment brings with it the

OUTLO O K • 09.11 |

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

driving change in PPI purchasing behavior, says Timothy K. Glennon, vice president of clinical resource management, GNYHA Services, Inc. “To change the purchasing practices specific to physician preference items, the first thing we recommend is teaching and preaching Csuite involvement and support,” said Glennon. “These decisions can’t be managed from the middle – there are simply too many challenges that need to be addressed by executives.”

Value analysis: data-driven decision making In order to reduce costs and change physician practice patterns, hospitals will have to work together with doctors to successfully implement standard practice guidelines.

Dr. Atul Gawande, a well-known surgeon, writer and public health researcher, addressed this phenomenon during his recent Harvard Medical School commencement speech. He explained that we’re no longer in an era where doctors can “hold all the information patients need in their heads and manage everything themselves.”

Modern medical work now often requires multiple clinicians, often from different specialties, dividing tasks and frequently basic, proven steps in care are missed.

Judgment is needed but so is discipline and coordination. Today, “medicine’s complexity has exceeded any one physician’s individual capabilities.”

Gawande argued that success in healthcare requires “the ability to get colleagues along the entire chain of care functioning like pit crews for patients.” Included in this approach is the belief that basic components of care should be standardized by clinical teams. Gawande also believes that teams should follow their local data and refine their standards and protocols according to what the data reveals about their organization’s performance. Results-driven design is an essential capability for teams that want to lead healthcare transformation. The utilization of scientific methodology is operationally prudent and provides teams with the ability to devise long-term solutions designed to improve patient care.

be able to show them how their performance compares to others.”

For the introduction of new medical supplies, including physician preference items, many healthcare organizations have implemented value analysis processes. Though established in the 1940s, results and success vary widely among organizations.

Mike Alkire, Premier’s chief operating officer, notes, “As healthcare facilities struggle to face the challenges of today’s economy, value analysis is evolving as a structured, coordinated effort between purchasing and clinical end-users to take a 360-degree view of their supply and equipment requirements” (Figure 6).

Premier’s physician preference survey examined the value analysis processes and trends of our membership.

FIGURE 6: HEALTHCARE VALUE ANALYSIS FRAMEWORK

A collaboration between Clinical, Finance and Supply Chain

CLINICAL (Product knowledge & evaluation)

FINANCE (Cost-Benefit knowledge)

SUPPLY CHAIN (Vendor management & contracting knowledge)

VALUE ANALYSIS TEAMS (Review & Evaluation)

Source: Association of Healthcare Value Analysis Professionals

When respondents were asked to comment on their organization’s execution of its value analysis process, the top five components identified included (Table 4): 1) incorporates cost/pricing data; 2) decisions are shared with physicians;

“You must have data to influence physicians – benchmarking data that gives them the ability to compare their results to their peers, both locally and nationally,” says Alex Rodriguez, MD, MBA, FACC, senior advisor at Nexera Inc. and an expert on value analysis programs. “By nature, physicians are competitive, so it’s key to

34

3) uses an approach with input from clinical and business stakeholders; 4) rationale for decisions are documented; and 5) features product quality data.

The results from this question were cross-correlated with the results from the overall effectiveness of value analysis to identify key drivers of value analysis effectiveness.

| PERSPECTIVES PROPRIETARY AND CONFIDENTIAL. ©2011 by Premier Inc. All rights reserved.

FIGURE 7: OVERALL EFFECTIVENESS OF VALUE ANALYSIS PROCESS ■ OVERALL

■ C-SUITE

■ MATERIALS MANAGERS / SUPPLY CHAIN DIRECTORS

60%

ECONOMIC O U T LO O K

40% 30% 20% 10% 0% VERY EFFECTIVE

SOMEWHAT EFFECTIVE

NEITHER EFFECTIVE NOR INEFFECTIVE

SOMEWHAT INEFFECTIVE

VERY INEFFECTIVE

Source: Premier healthcare alliance Economic Outlook physician preference survey, June 2011

TABLE 4: APPROACHES TAKEN IN VALUE ANALYSIS PROCESS FOR PPI

QUESTION: Using a scale of “never” to “always”(1=never; 5=always), please indicate how your organization typically performs its value analysis process for PPI in each of the following areas Mean Score

Key Driver of Overall Value Analysis Effectiveness (high correlation with effectiveness self rating)

Significant Variance (> 1) Between Response for those with Effective Process vs. those with Less Effective Process

Incorporates cost / pricing data

4.53

Decisions are shared with physicians

4.33

Use an approach with input from clinical and business stakeholders

4.13

Decisions / rationale for decisions are documented

4.08

Features product quality data

4.05

X

Makes use of data/adheres to a fact-based approach

4.00

X

Uses clinical outcome data

3.97

Decisions are followed through on / enforced

3.95

X

Is supported by / engages C-level executives

3.83

X

Adheres to a formal step-by-step process

3.79

X

Is supported by a skilled data analyst

3.52

X

X

Is applied to every physician preference item

3.41

X

X

Members / contributors receive an orientation training in value analysis process

3.27

X

X

Suppliers are invited to contribute their perspectives / opinion

3.25

Uses a formal tool / product to assist with the value analysis process

3.18

Source: Premier healthcare alliance Economic Outlook physician preference survey, June 2011

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

% RESPONDENTS

50%

Of those respondents who have a value analysis process in place at their organizations, 79 percent consider the process for procuring physician preference items to be either somewhat effective or very effective (Figure 7).

In addition, these three key components of value analysis stood out as important for those organizations that had identified their value analysis processes as very effective: a) the process is supported by a skilled data analyst; b) is applied to every physician preference item; and c) members/contributors receive an orientation training in the value analysis process.

FIGURE 8: KEY COMPONENTS TO SUCCESSFUL VA MODEL

> Executive engagement and participation > Physician engagement and participation > Stakeholder engagement and participation > Goal alignment and linkage to strategy/vision > Structured process to secure data > Project management to define timelines > Use of benchmarking tools and information > Tool(s) to trend, track and document outcome > Systematic process to communicate results to all levels of organization > Access to staff with deep analytical and clinical skill sets Source: Association of Healthcare Value Analysis Professionals

A recent study conducted by the Association of Healthcare Value Analysis Professionals (AHVAP) confirms the importance of having data analysts involved in the process. In 2011, 36 percent of respondents indicated that they have at least one senior analyst dedicated to value analysis with advanced analytical skills.

According to Cindy Christofanelli, RN, MSN, CMRP, corporate director of supply chain management at SSM Health Care, critical components for a successful value analysis program include administrative support and involvement; followed by a structured and defined process; stakeholder and physician engagement; and proper tracking and communication of results. Christofanelli serves on the board of directors of AHVAP and encourages organizations looking to improve their processes and results to follow the organization’s recommended key success factors (Figure 8).

Premier has developed an alliance-wide, evidence-based value analysis approach and best practice assessment that capitalizes on member data and clinician support.

Premier works closely with clinicians in our member hospitals to define clinical and sourcing requirements. Our best practice assessment is a three-pronged framework that analyzes an organization’s strategy

36

FIGURE 9: PREMIER'S VALUE ANALYSIS MATURITY FRAMEWORK Strategy and Alignment 3.0 LEVEL OF MATURITY 5 = Best Practice 4 = Advanced 3 = Intermediate 2 = Fundamental 1 = Little/None

Outcomes and Effectiveness 2.8

and alignment, structure and process, and outcomes and effectiveness in its value analysis approach (Figure 9).

Premier’s dedication to value analysis is further demonstrated by the recently established Value Analysis Advisory Council. The council is composed of members who are committed to providing constructive feedback on Premier’s approach to driving value analysis best practices for the alliance.

One of the cornerstones of Premier’s value analysis initiative is an innovative software solution - ValueAdvisor®. “ValueAdvisor provides a robust feature set which supports many of the key success factors to value analysis, thereby enabling members to optimize the evaluation of physician

| PERSPECTIVES PROPRIETARY AND CONFIDENTIAL. ©2011 by Premier Inc. All rights reserved.

Structure and Process 3.6

preference items,” said Dale Newman, RRT, MBA, product director with Premier.

Of note, ValueAdvisor focuses on four key areas to support members: • Streamlining workflow: Automating and streamlining activities to reduce cycle time.

• Collaboration: Leveraging best practices among alliance members to rapidly take advantage of potential cost savings and quality improvements.

• Resource integration: Centralizing access to information to facilitate informed decisions, enable organization-wide communication and drive standardization.

• Monitoring and measuring results: Enabling organizations to set goals, and measure and report on results to define and achieve improved outcomes.

$

Physician preference trends in cost and reimbursement

To get a better understanding of the implications of these cost increases on our nation’s not-for-profit hospitals, we examined a list of 12 high-volume procedures that require the use of a prescribed physician preference item.

The average total cost per case involving these high-volume procedures was compared to the final average base payment received from Medicare.

The analysis shows that, in each example, the case involving the high-volume procedure costs more than the hospital is reimbursed by Medicare. Overall, the hospitals analyzed are losing $1.82 billion annually in Medicare reimbursement across these procedures due to the rising cost of these cases coupled with reductions in Medicare reimbursement rates. This represents 30 percent of the overall $6.08 billion cost across these categories.

MS-DRG description

Difference between payment and cost

Total payment shortage n=323

$14,547 $13,092 $11,094 $10,682 $ 6,361 $ 6,299 $ 5,623 $ 4,679 $ 4,532 $ 4,131 $ 3,324 $ 3,288

-$186,087,901 -$ 45,679,618 -$ 25,670,498 -$259,144,659 -$ 25,202,867 -$ 80,451,223 -$665,884,086 -$ 79,251,165 -$ 85,538,997 -$220,320,958 -$ 74,995,386 -$ 72,809,465

Cardiac valve replacements Spinal fusions Cranio surgery with implant Coronary bypass procedures Spinal procedures Cardiac defibrillator implants Hip/knee replacement procedures Bare metal stent procedures Cervical spinal fusions Drug-eluting stent procedures Back and neck procedures Cardiac pacemaker implants

ECONOMIC O U T LO O K

But while the new models usually arrive with a higher price tag, there is often little data to suggest it is a clinicial improvement over the incumbent.

Reimbursement shortfalls for PPI-sensitive DRGs

Source: A research database maintained by the Premier healthcare alliance

For example, the hospitals analyzed lost on average $14,547 for each of the 12,792 cardiac valve replacements performed in 2010 for a total loss of approximately $186,087,901.

This report includes changes in data elements, such as the average cost per case and the number of discharges for key MS-DRGs relevant to the physician preference market. Case costs were measured as the cost to the facility using costs reported from the facilities financial accounting systems and thus it should be noted that variations in reporting exist across facilities.

Costs per case were averaged by DRG across all cases for all facilities to normalize reporting variances. Included are DRGs

specific to the cardiovascular, orthopedic and neurological clinical practice areas.

The metrics reported are based on a sample of 323 healthcare facilities that have submitted both inpatient and outpatient data to a database maintained

by Premier over a two-year time period (2009 and 2010). Procedure costs include the PPI utilized, operating (labor and supply costs) and capital payments.

Hospital representation: Bed Size <10042%; 100-299 – 31%; 300-499 – 17%; 500-749 – 7%; >750 – 3%. Urban – 77%; Rural – 23%. Region: Northeast – 10%; South – 44%; Midwest – 19%; West – 27%.

References 1. Schneller, E.S., and L. Smeltzer. 2006. Strategic Management of the Health Care Supply Chain. San Francisco: Jossey-Bass.

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

Every year, medical device companies introduce new models of pacemakers, artificial knees, spinal discs and other physician preference items and these items are often at higher prices. Hospitals already spend $17.4 billion annually on physician preference items (PPIs), which account for 40 percent or more of the total cost of a given procedure.1

Premier Fall 2011 Economic Outlook

An in-depth discussion Vanderbilt University Medical Center: Putting value analysis into action

Nashville, TN based Vanderbilt University Medical Center (VUMC), a comprehensive healthcare facility dedicated to patient care, research and biomedical education, has adopted an effective, data-driven value analysis process that is driving results and improving patient care.

According to George E. DeLong Jr., VUMC’s chief supply chain officer and associate hospital director, “Across the industry, it was and often still is standard operating procedure for physicians to work directly with device companies, testing new products. They reach out to supply chain leaders, suggesting these new products are needed even though there is little to no data around their ability to improve patient outcomes. In many cases the hospital still purchases the product, and at list price. Clearly this process is ineffective.”

MEOC REQUEST PROCESS completes request form STEP 1 >> Physician/clinician Department Chair and Administrator representative approve the request

is placed on the MEOC committee agenda within 30 days STEP 2 >> Request Sourcing Officer researches & analyzes requests; puts presentation together for meeting in conjunction with physician/clinician

In 2008, DeLong worked alongside executives, physicians, medical directors and supply chain representatives at VUMC to launch the Medical Economics Outcomes Committee (MEOC), a clinicallydriven committee which he chairs.

The MEOC oversees the introduction or consolidation of new supplies, devices and technology within VUMC. The committee is centered around a formal request process, whereby physicians present in-person – and without supplier sales representation. The process relies heavily on evidence-based, clinically sound, financially responsible methodologies.

38

| PERSPECTIVES PROPRIETARY AND CONFIDENTIAL. ©2011 by Premier Inc. All rights reserved.

presents requests to the MEOC committee STEP 3 > Physician/clinician and answers committee member questions

STEP 4 > MEOC committee discusses the request and votes accordingly If request is denied, requestor may appeal to the Steering STEP 5 >Committee for review

Impact to operational expense

Existence of like technology

Impact to revenue

Existence of a current contract

Impact to quality indicators such as decreased LOS

Proposed pricing

Decreased mortality/morbidity

Impact to overall cost per case

Impact to the community

Marketing

Academic innovation

“VUMC’s goal is to provide the highest quality medical care, and we are constantly searching for new technologies that can help us do that,” said Dr. William T. Obremskey, MD, MPH, associate professor of orthopaedic surgery and rehabilitation at VUMC and MEOC supply chain medical director. “But it’s important to question whether or not these new technologies are truly improvements. As a committee, we are looking for improved patient outcomes and efficiencies and the data to back them.”

Key components of request process presentations include data specific to clinical efficacy, quality of care and safety, as well as comparisons of new technology versus those in existence. Contract pricing and reimbursement comparisons are also taken into consideration.

As a result of their efforts, MEOC initiatives have saved VUMC close to $11 million in just over two years. This includes a $2.6 million savings in the total joint category,

which equates to 38 percent of total spend within that category.

Both DeLong and Obremskey credit physician alignment and leadership, and a data-driven process as the main drivers of the product standardization that has led to cost and quality improvements.

Said DeLong, “We’ve seen firsthand how these types of processes can save health systems money that can then be reinvested into programs and services to better treat the patients they serve.”

Study methodology In summer 2011, Premier, in collaboration with Customer Care Measurement and Consulting LLC, commissioned an online survey of 13,000 healthcare leaders across our membership, representing both the acute and non-acute care healthcare markets. The survey respondents (n=739) were representative of a cross-section of our membership across geography and organization type and size. The survey

ECONOMIC O U T LO O K

Evidenced based medicine reporting clinical outcomes

collected data on members’ perspectives on factors influencing the purchase of physician preference items and organizational strategies, such as value analysis and pricing, used for PPI. As part of our research, Premier interviewed healthcare leaders and external subject matter experts in an effort to examine best practices used and actionable results obtained in the purchase of PPI. References 1. “The Healthcare Imperative: Lowering Costs and Improving Outcomes: Workshop Series Summary”.

National Institutes of Health, 2010. http://www.ncbi.nlm.nih.gov/books/NBK53933/# ch5.s43 (accessed 8/12/11) 2. Implantable Medical Devices: US Industry Study with Forecasts for 2014 & 2019. The Freedonia Group Study #2595; April 2010.

3. http://www.pwc.com/us/en/pressreleases/2010/Health-reform.jhtml. (Accessed 8/30/2011).

4. “Behind the Numbers: Medical cost trends for 2011.” PricewaterhouseCoopers’ Health Research Institute. June 2010. http://www.pwc.com/us/en/healthindustries/publications/behind-the-numbers-medical-cost-trends-2011.jhtml. (Accessed 8/30/2011).

5. Ibid

’’

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

ELEMENTS CONSIDERED IN THE DECISION PROCESS

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

E

LEVATING PATIENT CARE AT THE RIGHT COST Efforts to improve patient care while addressing rapidly rising healthcare expenditures are at the forefront of priorities for legislators, healthcare providers and physicians. As hospitals prepare for the expansion of care and reimbursement rate reductions, every product and service used for patient care should be evaluated to determine if the overall cost elevates the quality of care.

While most healthcare advances, including drugs and devices, must meet regulatory thresholds of efficacy to successfully enter the market, it is important for providers to place a new emphasis on measurable evidence of effectiveness.

Most organizations aim to use the right product at the right time for the right episode of care. However, hospitals and clinicians must ensure that each patient gets the most effective care every time.

which specific products and interventions are most effective for specific patient populations and to validate that higher cost products and procedures are justified by improved outcomes.

In order to take a more proactive and preventative approach aimed at providing high quality care for patients, hospitals should establish a process whereby they regularly analyze utilization patterns and clinical outcome data as they emerge.

Practices and processes should then be changed accordingly. This shift in policy and research methodology could have a profound impact on the healthcare system.

The studies highlighted in the following pages provide a data-driven approach to evaluating the costs and quality outcomes for several products and procedures used in patient care.

The goal of utilization analysis coupled with resource optimization is to learn

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OUTLO O K • 09.11 |

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ABSTRACTS The following abstracts provide an overview of studies conducted by the Premier healthcare alliance that analyze trends in cost and utilization. The full articles are available to Premier members.

Blood utilization: Effective use of a scarce commodity Carole Gilroy, RN, MSN, MBA vice president, Premier Performance Partners supply chain service line leader The effective use of blood and blood products can best be described as the transfusion of blood and blood products to treat a medical condition that leads to morbidity and mortality that cannot be

42

managed by other means. Transfusions of blood and blood products carry the risks of adverse reactions that cause acute and long-term consequences, delay recovery, and transmit transfusion transmissible infections. Because blood and blood products are scarce commodities, unnecessary transfusions can lead to shortages that make blood products unavailable for those who need them, such as for patients who are actively bleeding. Finally, the inappropriate utilization or overutilization of blood and blood products reduce their long-term availability, which ultimately results in inflated supply costs for products

| TR EN DS I N COST AN D UTI LIZATION PROPRIETARY AND CONFIDENTIAL. Š2011 by Premier Inc. All rights reserved.

and services. This analysis used a collaborative methodology to study the cost and utilization of blood and blood products for a subset of Premierâ&#x20AC;&#x2122;s membership. The blood products analyzed were red blood cells, plateletpheresis, plasma, and cryoprecipitate. Areas of focus for the analysis included blood product utilization by blood product category and blood conservation strategies. Further, a thorough review of the literature was conducted to identify evidence-based and leading practices for blood product use, engaging physicians, and implementing practice changes.

especially in the ED environment. Fueling this perception are concerns over CT use contributing to the rising cost of healthcare, as well as concerns over excessive radiation exposure, especially in pediatric patients who are more susceptible to radiation harms and are more likely to live long enough to suffer the consequences.

David A. Natale director, contract management, Premier healthcare alliance Eric M. Johnson senior analyst, operations and performance management, Premier healthcare alliance The introduction of computed tomography (CT) in the mid-1970s was arguably one of the most significant clinical technology breakthroughs of the 20th century. As the technology improved and applications expanded over the past 35 years, the reliance on CT scanning as a diagnostic tool greatly increased â&#x20AC;&#x201C; and no one area has seen faster and greater growth than the emergency department (ED). However, this rate of growth has contributed to a growing perception that CT is over-used,

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

Computed tomography (CT) utilization in emergency departments

This study aims to provide an analysis of CT utilization in emergency department settings for different patient populations using comprehensive clinical data from a database maintained by Premier. It covers the period 2006 through 2010, and the results are assessed in light of the various regulatory actions that have recently been enacted to impact the use of CT scanning.

No attempt is made in this study to draw conclusions about the appropriate use of CT scanning, as the study does not address clinical pathways or outcomes associated with the scans.

escalating. Bacterial resistance patterns to antimicrobials have steadily risen over the last several decades. To improve patient outcomes, many hospitals have embraced a concept called antimicrobial stewardship to track resistance patterns and optimize antibiotic use. The primary goal of stewardship is to optimize clinical outcomes while minimizing unintended consequences of antimicrobial use. A secondary, but equally important goal is to efficiently use health system resources without adversely impacting the safety and quality of patient care. This article provides pharmaceutical and other healthcare leaders with the goals and benefits of an antimicrobial stewardship program and a framework for its successful implementation.

Bugs vs. Drugs Leveraging antimicrobial stewardship to fight the battle Rick Knudson, PharmD, BCPS director, pharmacy consulting, Premier healthcare alliance Jessi Stout, PharmD senior clinical consultant, Premier healthcare alliance Since the early 1940â&#x20AC;&#x2122;s when penicillin was first introduced for therapeutic use, the battle for supremacy between bacteria and antibiotics has been continuously

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

A Conversation With Tim Quinlan economist for Wells Fargo

We are seeing a great deal of pricing volatility in commodities, such as cotton, heavy metals, food and oil. Do you anticipate this volatility to persist and, if so, will you see more pressure on soft commodities or hard commodities? When do you forecast that commodity prices will start to stabilize?

1

If you take a look at the Thomson Reuters/ Jefferies CRB index, which is the benchmark index that we often reference for commodities, you’ll see that commodity prices have experienced a great deal of volatility in the last couple of years. Between 2009 and 2010, the index dropped to a low of 200 and between 2008 and 2010, has seen an increase of 84 percent in the span of two years – an increase of staggering proportions. On an aggregate

82 44

basis, these inflationary pressures have constrained corporate profits. The good news, however, is that the CRB index peaked at the end of April of this year and since then has come down approximately 16 percent. It went from a level of 370 to 311, where it is currently maintained.

If we take a deeper look at specific commodities, most commodities can be broken down into those which grow and those which are mined. And while commodity prices have been on the decline, we’re not going to see prices come down to 2009 levels. Copper is down by 23 percent.

Aluminum is down by 20 percent.

Cotton has been especially volatile in the last couple of years. From the spring of 2009 to the height of cotton prices earlier this year, in April, we have experienced a

| ECONOMIC ECONOMICSI NSIGHTS PROPRIETARY AND AND CONFIDENTIAL. CONFIDENTIAL. ©2011 ©2011 by

by Premier Premier Inc. Inc. All All rights rights reserved. reserved.

PROPRIETARY

full doubling of cotton prices. Between March 2009 and April 2011, cotton prices have been up by about 130 percent. That’s a staggering rate. However, from its high on April 6, cotton prices have been on a steady decline and are now down 28 percent. I expect that we won’t see the same pace of cotton price increases as we have in the last couple of years, but pricing is not expected to match the lows seen in early 2009.

Our expectation is that hard commodities, such as copper and iron ore, will experience upward pricing pressure resulting from strong infrastructure growth in emerging markets, such as China and Brazil. Soft commodities, such as cotton and soybeans, are more susceptible to changes in weather conditions and will experience more incremental growth in pricing.

THOMSOM REUTERS/JEFFERIES CRB INDEX

Source: www.jefferies.com Note: The index is comprised 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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Do you anticipate that the Fed will institute another quantitative easing (QE3) policy?

What have been the results from QE2 on commodity prices and other economic trends?

2

The Fed did not embark on another round of quantitative easing, but instead chose to pursue a flattening of the yield curve through the so-called ‘Operation Twist.’ A steeper yield curve typically signals that investors anticipate economic growth to increase. The flattening that we have seen in the wake of the Federal Open Market Committee meeting suggests that market expectations for growth are diminished.

Essentially, the Fed will shift $400 billion of shorter-term securities to the long end of the yield curve between 6 and 30 years.

The intended effect is to lower long-term interest rates to reduce borrowers’ financing costs, especially in the mortgage market where many Adjustable Rate Mortgages are determined by a fixed spread above the 10-year Treasury bond. In an unanticipated move, the Fed announced it would reinvest interest and principal from mortgage-related and

Agency debt in mortgage debt. Prior to this announcement, the Fed had been winding down its holdings of mortgagerelated debt and reinvesting interest and principal in Treasurys. This latest move should keep the size and composition of the Fed’s balance sheet at roughly the same levels, with around $1 trillion in mortgage and Agency debt. In addition, the Committee reiterated its commitment to keeping the fed funds rate exceptionally low though mid-2013 (0-25 basis points).

The Committee’s decision drew dissent from the same Fed Bank presidents that objected to the explicit date for keeping the fed funds rate at exceptionally low levels. Given the current level of dissent and the recent rise in the inflation rate, the bar for another round of quantitative easing is very high and we do not expect another round of quantitative easing in the near term.

While there was some suggestion that QE2 contributed to the run-up in commodity prices, it is important to note that ultimately, the two biggest factors impacting commodity prices are a) the value of the dollar, since most commodities are traded in U.S. dollars, and b) global

demand for commodities. We do not anticipate that there will be a lot of volatility in the dollar in the next 12 months. Global demand in emerging markets will continue to be the primary driver of price growth.

When do you estimate that the U.S. economy will see growth of 2 to 2.5 percent again? What sector of the economy (or single factor) do you anticipate will have the largest impact on this growth?

3

Our baseline forecast for GDP for 2011 is 1.6 percent and for 2012 is 1.3 percent.

When we look at aggregate consensus forecasts, we’re looking at 2013 before we see growth of 2 to 2.5 percent in the U.S. economy. The Congressional Budget Office is projecting growth of 2 to 2.5 percent for their long-term projections.

However, I’m a little less convinced. I think that until we can drive down unemployment and increase personal consumption, which is a big driver of growth, our growth rate will remain relatively flat.

TREASURY YIELD CURVE 3.5 3.0

■

2.5

INTEREST RATE

2.0

■

1.5

■

1.0

■

0.5 0

■

1 MO

■

■

■

3 MO

6 MO

1 YR

■ 2 YR

■ 3 YR

5 YR

-0.5 -1.0 MATURITY

Source: www.treasury.gov Note: Updated 9/26/2011

46

■

| ECONOMICS PROPRIETARY AND CONFIDENTIAL. ©2011 by Premier Inc. All rights reserved.

7 YR

10 YR

20 YR

30 YR

A factor that will have a significant impact on growth in the U.S. economy is construction and housing, comprised of growth in the commercial real estate and residential construction markets. By the end of 2012, we have projected residential construction to grow by 7.5 percent and 8.5 percent for Q3 and Q4, respectively.

The residential real estate market has slowed so dramatically in the last couple of years that the base for growth is set low.

Given the importance of unemployment on healthcare’s payor mix ratios, what changes do you expect to see over the next 12 months in the unemployment rate? What signals are companies looking for in the macroeconomic environment before they increase hiring?

4

According to the Bureau of Labor Statistics (BLS), the healthcare sector in the United States is responsible for approximately 14.3 million jobs. When this figure is drilled down to the individual occupation level, such as a nurse, physician or

laboratory technician, it is estimated that healthcare holds 10 of the 20 fastest growing occupations. Overall, the healthcare industry in the United States is very important for the employment outlook and for driving job growth. The BLS, for example, estimates that the healthcare industry will add approximately 3.2 million jobs to the U.S. economy between now and 2018.

Undoubtedly, the unemployment rate in the United States is at a historic high.

One of the primary considerations for increased job growth in the U.S. is to bring down the current unemployment rate.

And a primary driver of jobs is small businesses. My dad was a small business owner and he was always proud when he could bring a new employee on board. But small businesses are not going to hire individuals permanently until they can justify enough growth to keep that person on their payroll.

So the real question at hand is: are small businesses at that point? One key metric to analyze is temporary hiring, which has

stagnated as of late. Average hourly earnings growth has also slowed in the last few months. Initial jobless claims are still moving in the right direction; however, recent weeks’ data has been choppy. Claims continue to hover above 400,000, which is still not at a level that’s supportive of real strong job growth. For the next several quarters, we are predicting unemployment to remain anchored at roughly 9 percent, largely driven by participation in the labor force. While we do expect employers to continue to add to payrolls, we do not anticipate that they will be hiring at a brisk enough pace to significantly bring down unemployment. Changes in unemployment will be largely driven by growth of production and changes in U.S. consumption.

Tim Quinlan is an economist for Wells Fargo.

Based in Charlotte, NC, he provides analysis and commentary on U.S. business spending as well as macroeconomic developments in foreign economies. His commentary is often cited in the Wall Street Journal, New York Times, USA Today, and Financial Times. He is also a frequent guest on Marketplace on National Public Radio.

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

A FACTOR THAT WILL HAVE A SIGNIFICANT

IMPACT ON GROWTH IN THE U.S. ECONOMY IS CONSTRUCTION AND HOUSING...

OUTLO O K • 09.11 |

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2012 Behind the numbers financial and economic trends impacting our members In an effort to understand the impact of economic and industry trends on our membership, Premier conducted an online survey of 13,000 healthcare leaders across the country to obtain their insights on financial priorities and challenges impacting their organizations in the next year. The survey yielded a wealth of perspectives on the key objectives of the Premier healthcare alliance.

Cost savings is a focus for 2012 When asked to select the factor that is expected to have the greatest impact on their supply chains in the next 12 months, C-suite survey respondents indicated

48

that cost savings goals and healthcare information technology are top priorities for their organizations.

C-suite survey respondents also indicated that, on average, their organizations are looking to reduce expenses in the next year by $15.5 million for large hospitals (>500 beds), $3.5 million for medium hospitals (200-500 beds), and $3.4 million for small hospitals (<200 beds).

healthcare leaders were asked to quantify the change in their capital budgets since last year, 69 percent of survey respondents indicated that their capital budgets remained flat or had increased from the prior year. Overall, this figure is comparable to survey results from spring 2011 and fall 2010 when 72 and 69 percent, respectively, indicated that capital budgets were stable or increasing.

Capital budgets begin to plateau Healthcare organizations are facing significant cost constraints and reimbursement pressures. When

When respondents were asked where the largest capital investments will be made in their organizations in the next 12 months, the results clearly indicated that

| ECONOMICS PROPRIETARY AND CONFIDENTIAL. Š2011 by Premier Inc. All rights reserved.

AREA WITH GREATEST IMPACT ON THE ORGANIZATION'S SUPPLY CHAIN (C-SUITE) 0%

5%

10% 15% 20% 25% 30% 35%

COST SAVINGS GOALS OF THE ORGANIZATION HEALTHCARE INFORMATION TECHNOLOGY VALUE ANALYSIS PROCESS INTEGRATING THE SUPPLY CHAIN ACROSS THE CONTINUUM OF CARE PATIENT SAFETY/INFECTION PREVENTION INITIATIVES SPECIALTY PHARMACEUTICAL EXPENSES COMMODITY PRICES COMPARATIVE EFFECTIVENESS DATA

■ LARGE (> 500 BEDS)

■ MIDSIZE (200-500 BEDS)

■ SMALL (< 200 BEDS)

50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0%

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

% RESPONDENTS WHO KNOW THEIR ORGANIZATION’S ANNUAL COST SAVINGS GOAL

FORMAL GOAL FOR ANNUAL COST SAVINGS BY HOSPITAL SIZE

10.0% 5.0% 0.0% < $500,000

$500,000 $1,000,000

$1,000,001 $5,000,000

$5,000,001 $10,000,000

> $10,000,001

CHANGE IN CAPITAL BUDGET SINCE LAST YEAR

5.0%

6.0% 9.0% 5.0%

10.0%

25.0% 22.0% 24.0%

■ FALL 2011

11.0% 15.0% 12.0%

15.0%

14.0% 16.0% 18.0%

20.0%

9.0% 7.0% 10.0%

25.0%

27.0% 26.0% 28.0%

■ SPRING 2011

30.0%

9.0% 5.0% 3.0%

PERCENTAGE OF RESPONDENTS

■ FALL 2010

0.0% DECREASED BY 30% OR MORE

DECREASED 10-29%

DECREASED UNCHANGED INCREASED 1-9% 1-9%

INCREASED 10-29%

INCREASED BY 30% OR MORE

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| ECONOMICS PROPRIETARY AND CONFIDENTIAL. ©2011 by Premier Inc. All rights reserved.

Capital injections into infrastructure changes are also an investment priority for next year, with 28 percent of respondents indicating infrastructure as a focus for their organizations in 2012. Thirty percent of C-suite respondents indicated that their organizations are growing through construction of new hospitals, centers and/or practices.

20.0% 10.0%

9.9% 11.0% 5.0%

30.0%

11.0% 9.0% 18.0%

40.0%

2.5% 3.0% 1.0%

50.0%

■ NON-ACUTE

27.5% 28.0% 27.0%

60.0%

■ ACUTE 49.0%

49.2% 49.0%

■ OVERALL PERCENTAGE OF RESPONDENTS

As part of the concept of accountable care, and as a best practice overall, providers are using HIT to connect clinical data across hospitals and non-acute care settings. The data is specific to a patient’s medical history – for example, medication allergies and previous medical procedures – and ensures that the best possible care is received without duplication of effort.

Systems such as Geisinger Health System and Summa Health System have made significant investments in HIT and are successfully integrating clinical data across their organizations.

FORECASTED CHANGE IN 2012 PATIENT ADMISSIONS/VOLUMES

0.0% INCREASE

BY MORE THAN 5%

INCREASE 1-5%

Patient admissions on the rise When asked to quantify their forecasts for 2012 patient admissions as compared to 2011, 60 percent of survey respondents indicated that they expect patient admissions to increase next year.

Approximately 50 percent of both the acute and non-acute care sectors expect admissions to increase by up to 5 percent.

Strong growth in the non-acute care sector is evidenced by the 18 percent of respondents who expect that patient volumes in this sector will increase by more than 5 percent.

NO CHANGE

DECREASE 1-5%

DECREASE

BY MORE THAN 5%

About the survey In summer 2011, Premier, in collaboration with Customer Care Measurement & Consulting LLC, commissioned an online survey of 13,000 healthcare leaders across our membership, representing both the acute and non-acute healthcare markets.

The survey respondents (n=739) were representative of a cross-section of our membership across geography and organization type and size.

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

2012

information technology (IT) and telecommunications will be the focus for capital spending.

AREAS WHERE LARGEST CAPITAL INVESTMENT WILL BE MADE NEXT YEAR

IT & COMMUNICATIONS

40%

INFRASTRUCTURE

28%

SURGICAL SUITES

10%

IMAGING EQUIPMENT

10%

OTHER CLINICAL EQUIPMENT

7%

LABORATORY EQUIPMENT

2%

OTHER

3%

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Premierâ&#x20AC;&#x2122;s Patient Volume Trends This report includes changes in historical volumes for key data elements, such as inpatient and outpatient growth, surgery growth and payor mix. The metrics that are reported below are based on a sample of 323 healthcare facilities that have submitted both inpatient and outpatient data to a database maintained by Premier over a two-year time period: Q1 2009 to Q4 2010. The sample is representative of a cross-section of our membership across geography and organization type and size.

The data is reported as year-over-year percentage changes for 2010 on a quarterly basis (Figures 1 and 3).

Median values were also calculated and reported as part of the comparative analysis methodology (Figure 2).

52

OF NOTE > Inpatient volumes for 2010 decreased 0.7 percent as compared to 2009 volumes. > Outpatient volumes for 2010 decreased 0.4 percent as compared to 2009 volumes. > Inpatient and outpatient surgery volumes increased by 1.9 and 2.4 percent, respectively, for 2010 as compared to 2009. > Payor mix: Medicare volume was up 3.6 percent for 2010 as compared to 2009; Medicaid was 1.5 percent higher; managed care volume decreased by 7.4 percent; commercial indemnity was up 5.1 percent; self pay was up 1.6 percent; and other pay was flat at 0.0 percent. > Average length of stay decreased 0.9 percent for 2010 as compared to 2009.

| ECONOMICS PROPRIETARY AND CONFIDENTIAL. Š2011 by Premier Inc. All rights reserved.

FIGURE 1: 2010 QUARTERLY TRENDS

Y/Y Growth

Q1:10

Q2:10

Q3:10

Q4:10

2010

Inpatient Outpatient

-0.5% 0.0%

-0.7% 0.1%

-0.8% -0.2%

-0.9% -1.5%

-0.7% -0.4%

2.4% 2.4%

2.1% 2.7%

1.9% 3.6%

1.4% 0.9%

1.9% 2.4%

Births -3.0% Emergency department visits -0.9% Observation visits 1.5%

-3.2% -0.4% 2.7%

-3.1% -1.3% 0.5%

0.2% -2.8% 0.3%

-2.3% -1.3% 1.3%

Medicare Medicaid Managed care Self pay Commercial indemnity Other pay

2.9% 3.1% -6.2% 1.9% 2.6% 1.8%

3.8% 2.7% -7.8% 2.0% 7.9% 1.0%

4.0% 1.2% -7.3% 2.6% 5.5% -1.0%

3.7% -0.7% -8.2% -0.3% 4.3% -1.6%

3.6% 1.5% -7.4% 1.6% 5.1% 0.0%

Average length of stay

-0.7%

-1.2%

-0.1%

-1.6%

-0.9%

Inpatient surgeries Outpatient surgeries

Source: A database maintained by the Premier healthcare alliance

FIGURE 2: 2010 QUARTERLY MEDIAN TRENDS

Q1:10

Q2:10

Q3:10

Q4:10

Inpatient Outpatient

-0.7% 0.7%

-1.1% -1.1%

-1.1% -1.2%

-1.3% -1.0%

1.1% 3.0%

1.4% 2.5%

1.4% 2.1%

1.2% 1.0%

Births -3.7% Emergency department visits -1.2% Observation visits 1.2%

-4.0% -0.8% 4.8%

-4.4% -1.3% 2.4%

0.3% -3.5% 5.4%

Medicare Medicaid Managed care Self pay Commercial indemnity Other pay

1.1% 3.5% -6.0% 0.7% -3.4% -1.2%

2.2% 3.5% -6.0% 0.4% -3.9% -0.5%

2.6% 2.0% -6.2% 0.1% -2.7% -1.1%

3.5% -0.8% -4.9% -1.4% -1.3% -1.4%

Average length of stay

-0.9%

-1.4%

-0.5%

-1.7%

Inpatient surgeries Outpatient surgeries

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

Y/Y Growth

Source: A database maintained by the Premier healthcare alliance

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FIGURE 3: 2010 QUARTERLY TRENDS

INPATIENT AND OUTPATIENT VISIT ■ INPATIENT

■ OUTPATIENT

■ INPATIENT MEDIAN

■ OUTPATIENT MEDIAN

0.2% 0.0% Y/Y GROWTH

-0.2% -0.4% -0.6% -0.8% -1.0% -1.2% -1.4% -1.6% Q1:10

Q2:10

Q3:10

Q4:10

SURGERY GROWTH ■ INPATIENT SURGERIES

■ OUTPATIENT SURGERIES

■ INPATIENT SURGERIES MEDIAN

■ OUTPATIENT SURGERIES MEDIAN

4.0%

Y/Y GROWTH

3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.5%

Q1:10

Q2:10

Q3:10

Q4:10

BIRTH GROWTH ■ BIRTHS

■ BIRTHS MEDIAN

1.0% Y/Y GROWTH

0.0% -1.0% -2.0% -3.0% -4.0% -5.0% Q1:10

Q2:10

Source: A database maintained by the Premier healthcare alliance

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| ECONOMICS PROPRIETARY AND CONFIDENTIAL. ©2011 by Premier Inc. All rights reserved.

Q3:10

Q4:10

ED VISIT GROWTH ■ EMERGENCY DEPARTMENT VISITS

■ EMERGENCY DEPARTMENT VISITS MEDIAN

0.0% -1.0%

Y/Y GROWTH

-2.0% -3.0% -4.0% -5.0% Q1:10

Q2:10

Q3:10

Q4:10

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

■ OBSERVATION VISITS

■ OBSERVATION VISITS MEDIAN

7.0%

Y/Y GROWTH

5.0% 3.0% 1.0% 0.0% -1.0% -3.0% -5.0% Q1:10

Q2:10

Q3:10

Q4:10

Source: A database maintained by the Premier healthcare alliance

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CHANGES IN PAYOR MIX ■ MEDICARE ■ SELF PAY

■ MEDICAID ■ COMMERCIAL INDEMNITY

■ MANAGED CARE ■ OTHER PAY

9.0% 7.0% Y/Y GROWTH

5.0% 3.0% 1.0% -1.0% -3.0% -5.0% -7.0% -9.0% Q1:10

Q2:10

Q3:10

Q4:10

CHANGES IN PAYOR MIX - MEDIAN VALUES ■ MEDICARE ■ SELF PAY

■ MEDICAID ■ COMMERCIAL INDEMNITY

■ MANAGED CARE ■ OTHER PAY

9.0% 7.0% Y/Y GROWTH

5.0% 3.0% 1.0% -1.0% -3.0% -5.0%

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

-7.0% -9.0% Q1:10

Q2:10

Q3:10

Q4:10

CHANGES IN AVERAGE LENGTH OF STAY ■ AVERAGE LENGTH OF STAY

■ AVERAGE LENGTH OF STAY MEDIAN

0.0% Y/Y GROWTH

-0.5% -1.0% -1.5% -2.0% -2.5% -3.0% Q1:10

Q2:10

Q3:10

Q4:10

Source: A database maintained by the Premier healthcare alliance

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Premier Guide to Economic Indicators Price indexes: CPI, PPI, and CMS marketbaskets What price indexes are important in the healthcare industry?

Three key price indicators considered by industry stakeholders, such as suppliers, healthcare systems, and Centers for Medicare & Medicaid Services (CMS), when examining inflationary pressures in the marketplace include the consumer price index (CPI), producer price index (PPI), and the CMS marketbaskets.

CPI and PPI are both economic indicators that measure the average change over time in the prices of fixed goods and services. A primary use of the CPI is to compare a household’s cost for a specific basket of finished goods and services with the cost of the same basket during an earlier benchmark period. The weight given to each basket item is fixed. The PPI uses a similar benchmark approach, but instead it measures price changes reported by establishments at the wholesale level rather than at the retail level. While both indices are measures of

PPI = > Raw Materials > Manufacturer > Wholesaler > Distributor

inflation, they differ in the goods and services eligible for inclusion.1 Economic indicators that are more specifically used within the healthcare industry are CMS marketbaskets. CMS uses the marketbaskets to measure how much more, or less, it would cost at a later time to purchase the same mix of goods and services as purchased during a base period. These indicators reflect price inflation facing providers in the provision of medical services.

Below is a brief summary of each index and recent relevant data that aim to provide member organizations with additional resources for budgeting purposes.

How are these indexes calculated?

Consumer price index (CPI) The CPI measures price change from the consumer’s perspective and includes

CPI = > Retailer > Consumer

goods and services purchased for personal consumption by urban U.S. households.

While there are many categories within the CPI, the two most commonly used in healthcare are the CPI for all urban consumers (“CPI-U”) and the CPI for medical care. Medical care is one of eight major categories in the consumer price index. There are two medical care classifications, medical care commodities (MCC) and medical care services (MCS), each containing several item categories (strata).2 The CPI-U increased 0.4 percent in August 2011, and increased 3.8 percent before seasonal adjustment for the 12 months from August 2010 to August 2011. The categories of medical care commodities (MCC) and medical care services (MCS) increased 3.0 and 3.3 percent, respectively, during this same time period.3 Producer price index (PPI) In contrast to CPI, PPI measures price change from the perspective of the seller and includes the entire market output of U.S. producers. PPI captures price movement prior to the retail level. Therefore, PPI 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 6.5 percent for the 12 months ended August 2011. The 12-month change from August 2010 to August 2011 for the net output of selected industries is: pharmaceutical and medicine manufacturing, 3.9 percent; medical equipment and supplies manufacturing, 1.1 percent; and surgical and medical instrument manufacturing, -0.7 percent.5 Additional information may be obtained from the Bureau of Labor Statistics at www.bls.gov/CPI and www.bls.gov/PPI

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

to closely approximate a hospital’s projected change in Medicare revenue.

CMS revised its estimated marketbasket update for hospitals that report quality data in FY 2012 from 2.8 percent in the proposed rule to 3.0 percent in the final ruling, effective October 1, 2012.

It is important to note that the key cost category in the index is compensation expense, which includes labor and benefits and is weighted at 60 percent.

However, the index also includes major purchasing categories, such as food, pharmaceuticals, blood and equipment.

The marketbasket levels and percent changes are forecasted quarterly, with each new forecast containing an additional quarter of historical data.7 CMS sets payment updates prospectively for the following fiscal year using a forecasted marketbasket containing the latest available data at the time the final regulation is published. Once this update has been determined, it is generally not revised for more currently available data.

However, because marketbasket data is updated quarterly, the current marketbasket may be different depending on the differences in forecasted data and data currently available.8

Additional information may be obtained from the Centers for Medicare & Medicaid Services at www.cms.gov/MedicareProgramRatesStats/05_MarketBasketResearch.asp References: 1. www.bls.gov/ppi/ppivcpi.pdf 2. www.bls.gov/cpi/cpifact4.htm 3. www.bls.gov/cpi/home.htm 4. www.bls.gov/ppi/ppiover.htm#Link6 5. www.bls.gov/ppi/ 6. www.cms.gov/MedicareProgramRatesStats/05_ MarketBasketResearch.asp 7. http://www.cms.gov/MedicareProgramRatesStats/downloads/mktbskt-pps-hospital2006.pdf 8. Ibid

The marketbasket of interest for most hospitals is the Inpatient Prospective Payment System (IPPS), which is expected

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 are weighted using data collected via hospitals’ Medicare cost reports and corresponding price indices. The sum of the products of each category weight and corresponding price index gives the overall hospital price index. The price indices, or price proxies, used in calculating the marketbasket include Bureau of Labor Statistics (BLS) data, most commonly the producer price indices (PPI).

CPI-U, MEDICAL CARE CPI, AND IPPS MARKET BASKET RATES 2005-2012 5.0%

Annual percent change

4.0%

3.0%

■ ▼

▼ ■

▼ ■

■ ▼

■

▼ ▼ ■

2.0%

▼

▼

1.0%

.0%

■

-1.0% 2005

2006

■ CPI-U

2007

Medical Care CPI

2008

2009

2010

2011

2012

▼ Medicare Market Basket - Inpatient Hospital

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59

Premier supply chain solutions Premier’s Medical-Surgical Inflationary Calculator

Premier’s Supply Mix Index

A resource to help proactively manage medical-surgical supply spend in 2011-2012

A methodology to calculate supply cost indexes for every Medicare Severity - Diagnosis-Related Group (MS-DRG).

The Medical-Surgical Inflationary Calculator is a quick and easy resource designed to help members estimate Premier medical-surgical supply spend during their budgeting process. The calculator: > Compares Premier contractual price protection and supplier price inflation estimates to deliver a detailed estimate of projected supply costs. > Prepopulates your spend profile from one SpendAdvisor® report and enables you to manually adjust for expected changes in spend. > Alerts members to contract categories that will be renegotiated in the current year. > Provides aggregate inflation estimates by line of business. > Analyzes spend at the individual facility or IDN level. > Allows for the option to analyze off-contract spend.

The calculator is located on Premier’s Economic Outlook website (premierinc.com/economicoutlook). If you would like to learn more about the Medical-Surgical Inflationary Calculator, please contact the Premier Solution Center at solutioncenter@premierinc.com.

Premier’s Drug Budget Tool A resource to help navigate the way to proactive drug expense management in 2011-2012 The Drug Budget Tool v. 5.6 saves time and money by prepopulating your profile for analysis and enabling you to analyze your drug purchases. The tool is designed to: > Analyze 90 percent of your annual drug purchases; > Allow you to analyze entire systems as well as multiple hospitals from one SpendAdvisor report; and > Automatically fill in ALL the analytic cells of the tool.

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

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

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| ECONOMICS PROPRIETARY AND CONFIDENTIAL. ©2011 by Premier Inc. All rights reserved.

The Supply Mix Index methodology combines clinical and supply cost data from more than 700 hospitals. The methodology is designed to: > Enable the calculation of a hospital’s Supply Mix Index based on the unique mix of services the hospital provides 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 were calculated using more than 3.7 million patient level records from a database maintained by Premier. > Demonstrate a more direct correlation to supply expense per patient case than does Case Mix Index (CMI). Supply Mix Index is built based on the supply cost within a case. Case Mix Index, on the other hand, incorporates other significant case costs outside of just supplies. > Allow for cross-hospital comparisons of supply efficiency, and is useful in comparing a hospital’s “supply intensity” to that of other hospitals.

Premier’s Supply Mix Index methodology is first being employed in the executive level reporting application of SupplyFocus®, to which acute care facilities submit data quarterly. SupplyFocus is also included with OperationsAdvisor®, Premier’s labor productivity and benchmarking product.

If you would like to learn more about Premier’s Supply Mix Index methodology, please email Mark Hiller, vice president of innovative solutions, at mark_hiller@premierinc.com.

Inflation summary

Range of inflation estimates: These figures show the range of supplier reported inflation estimates for the various products within a service line.

The range does not take into account Premier contract price protection or utilization data.

Projected Premier contract inflation estimates are calculated as follows: Pharmacy – projections are derived from the Premier Drug Budget Development Tool

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

All others (except Foodservice) – projections reflect the expected weighted average percent change in contract pricing for the existing contract portfolio as of 10/1/2011

RANGE OF INFLATION ESTIMATES

AVERAGE OF INFLATION ESTIMATES

PROJECTED PREMIER CONTRACT INFLATION ESTIMATES

Alternate Site Healthcare

0% - 12%

3.28%

0.00%

Cardiovascular

1% - 15%

3.06%

0.03%

Clinical Laboratory Services

0% - 9%

3.00%

1.05%

Facilities

0% - 15%

6.00%

1.94%

Foodservice *

1.5% - 8%

Not Applicable

Not Applicable

Imaging

0% - 15%

4.14%

0.63%

IT / Telecom

0% - 6%

2.36%

0.23%

Materials Management

0% - 15%

4.53%

1.81%

Medical Surgical Distribution

0% - 6%

3.00%

Not Applicable

Nursing

0% - 15%

4.00%

1.08%

-2.5% - 12.4%

4.29%

2.90%

Surgical Services

0% - 15%

3.76%

0.60%

Women & Children's

0% - 10%

3.62%

0.23%

Pharmacy **

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

SERVICE LINE

* Foodservice estimate extracted from Bureau of Labor Statistics ** Pharmacy data derived from Premier's Drug Budget Development Tool Estimated inflationary changes are subject to change.

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61

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

2012 FLUX COMMODITY PRICES in

Supported by fears of a weakening dollar, robust growth in emerging economies, and weather-related supply disruptions, economists have indicated that pricing swings for commodities are expected to continue for producers and consumers in 2012.

Earlier this year, the United States economy experienced the steepest oil price declines in more than two years, accompanied by a plunge in the pricing of other commodities, such as cotton, sugar and copper. Farmers around the globe are yielding more sugar and cotton, easing concerns about shortages that had pushed prices up dramatically last year. Cheaper raw materials remove some pressure on companies to increase prices and on consumers still struggling with high unemployment.

62

| COMMODITI ES OVERVI EW PROPRIETARY AND CONFIDENTIAL. Š2011 by Premier Inc. All rights reserved.

Still, even with the recent price declines, commodities from oil and copper to cotton and wheat remain far more volatile than they were a year ago.

Commodities investors and analysts predict that the global demand for natural resources, such as heavy metals and oil, remains robust, which will likely keep prices from falling dramatically or reaching significant lows in 2012.

The following pages include market overviews for several key commodities that play a significant role in the healthcare supply chain. Included are the primary drivers impacting raw material pricing, supply and demand projections for 2012, and a 12-month price outlook for specific Premier product categories.

CHANGE IN PRICE IN 2011

{

{

20%

{

13%

{

19%

{

2%

{

44% 107%

GOLD

SILVER

wheat

COPPER

COtton

OIL

Source: CNNMoney.com. Price change shown is from 9/12/10 - 9/12/11.

OUTLO O K • 09.11 |

63

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

recommended that healthcare facilities: •Review categories that may be impacted by fluctuations in raw materials.

•Use the inflation tables in this publication to identify suppliers with firm pricing in a category impacted by raw materials of interest.

•Refer to the contract launch materials in Supply Chain Advisor® to identify a category’s low-cost provider.

•Evaluate utilization opportunities.

Reference the inflation tables to identify suppliers that offer utilization review programs.

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

Electronic Components Premier Contract Impact* Computed radiography Printer, copiers, facsimiles IV therapy products – large volume, PCA syringe pumps with pump specific sets Surgical endoscopy and video equipment

Energy Premier Contract Impact* Specialty distribution – laboratory and/or research products Clinical reference laboratory testing services Medical / surgical distribution

Natural and Synthetic Rubber Other 4% 5%

Energy consists of: • Fuel/Transportation (82%) • Crude Oil (17%) • Natural Gas (1%)

Cotton 5%

Energy 28% Paper 2%

Organic and Inorganic Chemicals 7%

Precious Metals 1% Price Increase Risk High Moderate Low

Electronic Components 7%

Base Metals 9% Base Metal consists of: • Steel (62%) • Copper / Brass (20%) • Aluminum (15%) • Nickel (2%) • Other (1%)

Plastic Resins 19% Labor 13%

Base Metals Premier Contract Impact* Construction services HVAC equipment, controls and services Surgical instruments Orthopedic total joint implants *Refer to contract specific price protection information in the inflation tables.

64

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Plastic Resins Premier Contract Impact* Suction canisters, yankauers & tubing Custom procedure trays/packs, gowns & related products Standard and safety hypodermics IV therapy products– sets and tubing

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

CENTS/LB

AVERAGE MONTHLY COPPER PRICES (LONDON METAL EXCHANGE)

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

Copper market update

copper include the earthquake and tsunami in Japan, potential labor and union strikes, political disturbances in the Middle East and North Africa, changes in trade and monetary policies and uncertainty in demand for the China-dominated Asian markets. 3

FIGURE 1: DOMESTIC COPPER USE

Electronics 20%

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

Copper will continue to escalate in price through 2011 and into 2012 as demand outpaces production and stockpiles dwindle.2 China is still the dominant consumer of copper, but may have some competition as Japan recovers from the tsunami and earthquake of March 2011 and begins to require copper resources for infrastructure rebuilding and construction.3 Risk of resource depletion is minimized by globally dispersed production with mines located in Chile, the U.S., Peru, China, Indonesia, Australia, Russia and Canada.4 > The global growth in copper demand for 2011 is expected to exceed the global growth in production by 380,000 tons.3 > China continues to dominate as the world’s largest consumer of copper due to investments in the power industry, which accounted for 50 percent of

China’s consumption in 2010.5 > Additional demand may be required

by China as the government invests in infrastructure projects and affordable housing.4 > Other economic factors influencing the supply and potential deficit in

Transportation Equipment 12%

Construction 49%

Consumer Products 10% Industrial Equipment 9%

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65

COPPER MARKET OVERVIEW PRODUCT CATEGORIES WITH HIGH COPPER CONTENT AND 12-MONTH PRICE OUTLOOK

■ ■ ■ ■ ■ ■

Construction services Energy efficiency services HVAC equipment, controls and services Ice machines and dispensers Maintenance, repair and operations Medical gas pipeline equipment, services and accessories Price increase risk: ■ High

> The US ranks third in copper consumption. The domestic use of copper is as follows: 49 percent of copper and copper alloys are used in building construction; 20 percent in electronic products; 12 percent in transportation equipment; 10 percent in consumer and general products; and 9 percent in industrial equipment and machinery (Figure 1).6

■ Moderate

■ Low

References: 1. Bloomberg Businessweek. “The Great Copper Heist.”November 24, 2010.

2 Copper Investing News. Copper 2011 Price Outlook 3 International Copper Study Group, April 2011 4 Copper Investing News. The Top 10 Copper Producing Countries.

5 Copper Connects Team. Copper May Extend Rally to Record on China Demand.

Retrieved from http://www.copperconnects.com 6 U.S. Geological Survey, Mineral Commodity Summaries, January 2011.

7 Zeiler, D (2011). Antimicrobial Copper Could Save Thousands of Lives, Billions of Dollars. Retrieved from http://www.copperconnects.com

PROJECTIONS FOR 2012

Factor

Impact on copper prices

Demand outpaces production

Comments The global growth in copper demand for 2011 is expected to exceed the global growth in production by 380,000 tons.3

Asian demand

China is still the dominant consumer of copper, but Japan may require resources as recovery and rebuilding efforts are underway due to the devastation of the tsunami and earthquake.3

Market uncertainty

Other economic factors influencing the demand and possible deficit in copper include potential labor and union strikes in copper producing countries, political disturbances in the Middle East and North Africa and changes in trade and monetary policies.3

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COPPER MARKET OVERVIEW

? ? ? ? ? ? ? ? ? ? ?

DID YOU KNOW?

A study released in July 2011 indicates that based on a four-year trial, copper has antibacterial properties and can kill most of the microorganisms on its surface within two hours. The study conducted in the intensive care units of three U.S. hospitals showed a

40 percent decrease in the risk of patient infection through the use of copper on frequently touched hospital items such as bed rails, IV poles, tray tables and nurse call buttons. Ions released from copper penetrate the cell walls of microbes disrupting their ability to function and reproduce. Given that surface contaminants can account for up to 80 percent of patient infections, the use of copper or a copper alloy has the potential to reduce infection rates and the associated costs of those infections to healthcare. The reduction in infections can also transcend beyond the hospital walls through the use of antimicrobial copper on surfaces in public buildings such as schools, offices and restaurants to potentially prevent the spread of the influenza and other infections among the general public.7

WANT TO KNOW MORE? 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

Please visit www.coppertouchsurfaces.org.

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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.

U.S. CENTS/LB

COTTON “A” INDEX

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

WORLDWIDE COTTON STOCKS-TO-USE RATIO

60

54%

53%

50%

50 40

49%

55%

45%

38%

38% 36%

37%

30 20 10 0 2002/2003

2003/2004

2004/2005

2005/2006

Source: USDA, Cotton Inc. (E) = Expected

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2006/2007

2007/2008

2008/2009

2009/2010

2010/2011

2011/2012 (E)

COTTON MARKET OVERVIEW Cotton market update Cotton prices peak in early 2011 Cotton prices reached record highs in early 2011 with the Cotton A Index peaking at $2.43 on March 7.

However, beginning in mid-May, prices began a steep downward trend and shed 53 percent from the peak price, averaging $1.14 in August.

The decline in cotton prices in May accompanied a general decline in the commodities markets as investors exited commodities contracts due to concerns about slower domestic and global economic growth.

While experts vary on their estimates for average cotton prices in the 2011/2012 crop year, most agree that it is unlikely that cotton prices will return to pre-2010 levels and will likely not fall below $1 per pound in the short term. Morgan Stanley forecasters predict cotton prices will average $1 per pound in the 2011/2012 crop year and $0.80 per pound in the 2012/2013 crop year.1

> GLOBAL COTTON PRODUCTION – The U.S. Department of Agriculture (USDA) estimates global production for 2011/2012 to be 7 percent higher than 2010/2011 production.

Record high prices in 2010 and 2011 led many farmers to increase acreage devoted to cotton. China and India, the world’s first and second largest cotton producers, are expected to increase production by 12 and 7 percent, respectively.

In the U.S., the world’s third largest cotton producer, acreage devoted to cotton has increased 25 percent over the 2010/2011 crop year. However, cotton production is expected to decline 8 percent in 2011/2012 due to drought conditions in Texas.

Texas’ cotton acreage represents 52 percent of U.S. total cotton acreage.

According to a recent Barron’s article, “West Texas, which accounts for a third of U.S. production, is mired in a severe drought. Add the flooded farmland along the Mississippi, and lower output from the world’s top cotton exporter looks likely, especially because the problems have occurred at what should be the height of the planting season.”2 > GLOBAL COTTON DEMAND – Global cotton consumption is expected to rise 1 percent in 2011/2012 as compared to 2010/2011. This level

of consumption reflects no growth in consumption for the world's three largest consumers - China, India and Pakistan. The USDA cites surplus yarn stocks and polyester substitution as two factors that will mitigate consumption growth in the next crop year.3 In March, China announced that it would buy cotton for a temporary reserve from September 2011 through March 2012. While the size of the reserve was not announced, “the new price level means that China intends to keep domestic prices high for at least another season to encourage cotton production,” said Terry Townsend, executive director of the International Cotton Advisory Committee, in an interview with the Financial Times.4 “However, this price will also ensure that textile mills in China do everything possible to move to polyester.”

OUTLO O K • 09.11 |

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

Fundamental supply and demand are the key factors that will influence the price of cotton in the coming year:

While experts vary on their estimates for average cotton prices in the 2011/2012 crop year, most agree that it is unlikely that cotton prices will return to pre-2010 levels and will likely not fall below $1 per pound in the short term.

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COTTON MARKET OVERVIEW

PRODUCT CATEGORIES WITH HIGH COTTON CONTENT AND 12-MONTH PRICE OUTLOOK

■ ■ ■ ■ ■

Bandages, dressings and gauze Lap sponges, OR towels and specialty sponges Restraints and fall prevention Reusable textiles and textile services Advanced wound care Price increase risk: ■ High

■ Moderate

■ Low

PROJECTIONS FOR 2011 Factor

Impact on cotton prices

Comments

Increasing global production

2011/2012 production up 7% *

Higher estimated stocks (inventories) for 2011/2012

Stocks/use ratio expected to be 45%, up from 38% in 2010/2011.*

Demand from emerging markets

Unknown impact from China’s program to rebuild inventory levels.

Consumer demand in China, Brazil and India dependent upon economic growth.

U.S. dollar exchange rate

Since world cotton prices are denominated in U.S. dollars, a stronger dollar can push down prices, while a weaker dollar can support higher prices.

* Source: USDA

References 1. Bloomberg.com. “Morgan Stanley Cuts Cotton Price Forecast 15% on Bigger Acreage”. 5/26/11. http://www.bloomberg.com/news/2011-0526/morgan-stanley-cuts-cotton-price-forecast-15-on-bigger-acreage.html (accessed 7/15/11).

2. Barrons.com. “Cotton’s Temporary Trimming”. 5/21/11. http://online.barrons.com/article/SB50001424052970203869804576327362083435884.html (accessed 7/15/11).

3. U.S. Department of Agriculture. “Cotton and Wool Outlook”, 7/13/11. http://www.cottonusa.org/files/economicData/CWS-07-13-2011.pdf (accessed 7/13/11).

4. Financial Times. “China to build cotton reserve to encourage output”. 3/30/11. http://www.ft.com/intl/cms/s/0/2919b04e-5af5-11e0-a29000144feab49a.html#axzz1T7iPeELy (accessed 7/25/11).

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Q&A

COTTON MARKET OVERVIEW

Q&A WITH JON DEVINE economist with Cotton Incorporated

Why have cotton prices fallen so sharply in recent months?

After rising sharply due to short supply and strong demand, demand weakened and cotton prices have fallen sharply over the past several months. In more recent trading, prices have stabilized, but there are some questions regarding the drop in demand that are important to the future direction of prices – notably when demand might resurface and how strong it might be once it returns.

Is there risk that cotton prices will rise again?

Supplies remain relatively tight, so an upswing in demand could be expected to bring prices higher. With the extreme drought in Texas, and over 50% of U.S. cotton acreage in Texas, the U.S. crop is in the worst state since the USDA

Aside from mills, Chinese reserves could prove to be another source of demand in coming months. The Chinese government operates a reserve system to help stabilize prices.

When prices are low, the government makes purchases to get more money to farmers. When prices are high, they release cotton from reserves to help mills. With the increases in price last year, the government sold a million tons (4.6 million bales) from their reserves. It is widely thought that there is little cotton left in Chinese reserves following those sales. China is expected to enter the market as a buyer once prices fall below a threshold level. A few months ago, the Chinese government announced that it would make purchases roughly equivalent to the world price level (A Index) – a little below 120 cents/lb. This should equate to a level of NY futures prices somewhere around 100 cents/lb.

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 increase in cotton prices last fall and winter increased the likelihood that retailers will raise prices in coming months. Given that retailers were anticipating that they would increase prices, and that consumer demand might weaken response to these higher prices, order volumes for cotton goods were lower throughout the spring. Another reason that demand for cotton may have slowed is fiber substitution, with alternative fibers, such as polyester, being substituted for cotton due to higher cotton prices. There is some evidence that this has taken place in U.S. textile import data over the past few months. A final reason why prices may have fallen so steeply is that there was little incentive to book orders when prices were falling. If prices are following a downward trend, there is incentive to delay orders to take advantage of cheaper prices in the future.

Now that prices appear to have formed a bottom, more buyers may enter the market.

began keeping crop condition records in 1986. With the exception of Pakistan, which is expected to suffer losses due another flood this year, growing conditions in most countries outside the U.S. have been pretty good. Due to last year’s higher prices, there was a 7% increase in the number of cotton acres expected to be harvested across the globe this season, and it is expected that the 2011/2012 crop will be the largest ever. However, that harvest will not be available until late in the fall. If demand picks up before then, any upward movement in prices could be expected to be larger than it would be if the increase in demand occurred after the harvest was completed.

With the Chinese government looming over the market as a large potential buyer, these price levels could serve as a price floor throughout the 2011/2012 crop year. As a result, it could be expected that prices will continue to trade well above their long-term historical averages between 60 and 80 cents/lb. However, with the evidence that higher prices dampened demand over the past several months, it also appears unlikely that prices could approach the peaks they achieved last spring.

OUTLO O K • 09.11 |

71

ENERGY MARKET OVERVIEW

In June, the International Energy Agency (IEA) announced it would release 60 million barrels of oil from its strategic reserves, hoping to ease pressures on world crude oil prices. In early July, prices quickly rebounded above pre-announcement levels due to growing uncertainty over world crude oil consumption and economic growth, continued concern over oil supply disruptions, and estimates of OPEC spare production capacity, among other factors. Declines in global economic growth forecasts are easing some of the upward pressure on 2012 oil price estimates.

Previous outlooks of $108/bbl have been reduced slightly to $103/bbl, but the ongoing uncertainty in global supplies is expected to outpace any downward pressures that slower demand may have on oil prices.

[ OIL ]

[ GASOLINE ]

[ NATURAL GAS ]

Gasoline prices fell slightly from their 2011 peak of $3.97/gal in May to $3.71/gal in August. Prices are projected to continue to fall as refiners shift production from summer-grade gasoline to lower-cost wintergrade gasoline. Forecasts for Q4 2011 indicate average prices to be around $3.47/gal.

As Japan continues to recover from the March earthquake and subsequent nuclear outages, increased demand for natural gas as a replacement fuel for electric power generation is expected to drive higher liquid natural gas prices around the world. Total U.S. consumption is expected to decline slightly in 2012 due to reduced forecasts in heating degree-days in the Midwest and West.

Source: U.S. Energy Information Administration

Crude oil and gasoline market update The crude oil price outlook remains uncertain. Among the major uncertainties that could push oil prices above or below forecasts are: A) risk of additional supply disruptions in producing regions, such as possible unrest in

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Sudan; B) the willingness and ability of key OPEC member countries to increase and sustain higher production in response to the global increase in oil demand; C) the rate of global economic growth; and D) fiscal issues facing national and sub-national governments.

Source: U.S. Energy Information Administration

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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OUTLO O K • 09.11 |

ENERGY MARKET OVERVIEW

DOLLARS PER GALLON

US GASOLINE AND CRUDE OIL PRICES

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

DOLLARS PER BARREL

WEST TEXAS INTERMEDIATE (WTI) CRUDE OIL PRICE

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

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ENERGY MARKET OVERVIEW The continued growth in global consumption of crude oil and liquid fuels will come largely from China, Brazil and the Middle East over the next two years.

MARKETED ENERGY USE IN NON-OECD ECONOMIES BY REGION, 1990-2035 ■ NON-OECD EUROPE AND EURASIA

■ AFRICA

■ CENTRAL AND SOUTH AMERICA

HISTORY

■ MIDDLE EAST

■ NON-OECD ASIA

PROJECTIONS

500

QUADRILLION BTU

400 300 200 100 0 1990

1995

2000

2007

2015

2020

2025

2030

2035

Source: EIA, International Energy Statistics database (as of November 2009), www.eia.gov/emeu/international.

Projections: EIA, World Energy Projection System Plus (2010).

WORLD MARKETED ENERGY USE BY FUEL TYPE, 1990-2035 ■ LIQUIDS

■ COAL

■ NATURAL GAS

■ RENEWABLES

HISTORY

■ NUCLEAR

PROJECTIONS

250

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

QUADRILLION BTU

200 150 100 50 0 1990

2000

2007

2015

2025

2035

Source: EIA, International Energy Statistics database (as of November 2009), www.eia.gov/emeu/international.

Projections: EIA, World Energy Projection System Plus (2010).

OUTLO O K • 09.11 03.11 |

69 75

ENERGY MARKET OVERVIEW

PROJECTIONS FOR 2012

Factor

Impact on oil prices

Comments

Increasing demand from

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

emerging economies

continue to increase, and slowing growth in non-OPEC supply will maintain upward pressure on oil prices.

Political events that could cause

Ongoing uncertainty concerning the availability of exports from Iran, as

temporary supply disruptions

well as recent political unrest in Egypt and other African nations. The recent civil uprisings and lack of political stability in Egypt and Libya are also contributing to increased prices due to supply disruptions. Lingering fear over this unrest spreading across the region continues to complicate production capacity forecasts.

OPEC (Organization of the

OPEC surplus capacity is expected to increase slightly from 3.4 million

Petroleum Exporting Countries)

bbl/day at the end of 2011 to 3.6 million bbl/day in 2012.

Source: U.S. Energy Information Administration

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

FAO FOOD PRICE INDEX

Source: FAO.org

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

Live cattle 22%

Soybeans 34%

Sugar 20%

Lean hogs 13%

Coffee 41%

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

Corn 49%

Global food prices The United Nation’s Food and Agriculture Organization’s food price index peaked in February 2011. The index has declined slightly since February, reflecting the pullback seen in prices for most food commodities. Despite declines in recent months, nearly all food commodities are still up dramatically over the last 12 months.

According to a recent Reuters survey, “Many analysts say the era of cheap food may well be over as rising crop production struggles to keep pace with soaring global demand, particularly from the mushrooming middle-class populations of developing nations such as China and India.”1

Source: CNNMoney.com. Price change shown is from 9/14/10 - 9/14/11.

OUTLO O K • 09.11 |

77

FOOD MARKET OVERVIEW FOOD CATEGORIES AND 12-MONTH PRICE OUTLOOK

Industry inflation forecasts Category

Subcategory

Q1 2012

2012

-0.30% Poultry Whole Birds 23.60% Poultry Breasts 25.20% Poultry Wings 6.10% Beef Ribeyes 0.00% Beef Rounds 1.10% Pork Bellies/Bacon 2.50% Pork Hams 6.00% Pork Loins -0.40% Pork Butts -0.10% Pork Spare Ribs -11.50% Dairy Cheese -19.90% Dairy Butter 3.00% Oils and Shortening 8.00% Potatoes Frozen 0.00% Beverages Juice and Juice Bases Beverages Drinks, Drink Bases/Mixes, Other 0.00% Beverages Soda, RTD and Fountain Syrup 5.00% 0.00% Beverages Coffee 5.00% Beverages Tea 5.00% Beverages Hot Cocoa 1.00% Bakery Breads and Rolls 1.00% Bakery Desserts 5.00% Produce Vegetables - Lettuce/Salads 5.00% Produce Vegetables - Potatoes 5.00% Produce Vegetables - Tomatoes 4.00% Produce Vegetables - Onions 5.00% Produce Vegetables - Other 5.00% Produce Fruits - Citrus 5.00% Produce Fruits - Melons 8.00% Produce Fruits - Grapes 3.00% Produce Fruits - Bananas 6.00% Produce Fruits - Berries 3.00% Produce Fruits - Apples 5.00% Produce Fruits - Avocados 5.00% Produce Fruits - Other 4.50% Tomatoes Canned 0.50% Fruits Canned 3.50% Apple Products Canned-(including sauce) 0.00% Fruits Frozen 2.00% Vegetables Frozen 1.00% Seafood Shrimp, Value-Add 1.00% Seafood Shrimp, Non-Value-Add 1.00% Seafood Fish, Value-Add 1.00% Seafood Fish, Non-Value-Add 1.00% Seafood Other, Value-Add 1.00% Seafood Other, Non-Value-Add

1.80% 22.80% 25.30% 4.80% 1.20% 1.80% 2.00% 0.50% -2.50% -4.50% -11.10% -19.60% 4.00% 12.00% 7.00% 5.00% 5.00% 5.00% 5.00% 10.00% 2.50% 2.50% 3.00% 3.00% 5.00% 4.00% 5.00% 5.00% 5.00% 5.00% 5.00% 6.00% 5.00% 8.00% 5.00% 4.50% 5.00% 5.00% 5.00% 4.00% 2.00% 3.00% 3.00% 3.00% 2.00% 2.00%

■ = > 5% Source: U.S. Foods Commodities Department

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■ = 0.1% - 4.9%

■ = < 0%

Impact on contract pricing (year average)

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

FOOD MARKET OVERVIEW The United Nations has reported that food production must increase 70 percent by 2050 in order to feed the world’s estimated 9 billion people. Kanayo F. Nwanze, president of the International Fund for Agriculture Development, stated that “food price crisis, food price hikes or food price volatility is not just a simple consequence of shortage of food because of weather conditions and climate change. A primary cause is we’ve disinvested in agriculture over the decades.”2 The food product experiencing the biggest price increase is corn. Corn prices have increased steadily for the last three years driven by strong demand from ethanol producers.

The U.S. Department of Agriculture (USDA) recently reported that for the first time, “U.S. ethanol refiners are consuming more domestic corn than livestock and poultry farmers... underscoring how a governmentsupported biofuels industry has contributed to surging grain demand.”3

Midwest during the remainder of July and into August and September 2011.”5 References 1. Reuters.com. “Food inflation in focus amid lofty crop price outlook”. http://www.reuters.com/article/2011/07/2 5/us-markets-grains-pollidUSTRE76O43220110725 (accessed 7/25/11).

2. Bloomberg.com. “Food Prices to Stay High Amid Underinvestment, Climate Change, IFAD Says”. http://www.bloomberg.com/news/201107-25/food-prices-to-stay-high-amid-underinvestment-climate-change-ifad-says.ht ml (accessed 7/27/11).

3. Financial Times. “US ethanol refiners use more corn than farmers”. 7/12/11. http://www.ft.com/intl/cms/s/0/77dfcd98ac9f-11e0-a2f300144feabdc0.html#axzz1T7iPeELy (accessed 7/15/11).

4. Farm Foundation. “Issue Report: What’s Driving Food Prices in 2011?”. http://www.farmfoundation.org/webcontent/Whats-Driving-Food-Prices-in-20111742.aspx?z=85&a=1742 (accessed 7/27/11).

5. USDA. “Food Price Outlook 2011 and 2012”. 7/25/11. http://www.ers.usda.gov/briefing/cpifoodandexpenditures/consumerpriceindex.htm (accessed 7/27/11).

What’s Driving

FOODin 2011 PRICES A report from the Farm Foundation titled “What’s Driving Food Prices in 2011” identifies five key factors shaping current food prices. The report is available to download at http://www.farmfoundation.org/.

• Demand shocks in corn and soybeans. The biofuel industry’s demand for corn has grown rapidly in recent years. The Chinese government has increased imports of soybeans in order to build stocks.

• Market inelasticity. Food prices have become less responsive to changes in supply and demand. “As demand becomes more inelastic, responses to any real or perceived supply shock become more volatile. Inelastic supply affects future price expectations and adjustment.”4 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

U.S. food prices The USDA projects food prices will increase 3-4 percent in 2011, and 2.5-3.5 percent in 2012. Food inflation was 0.8 percent in 2010, the lowest rate of inflation in the last 18 years. The USDA’s Food Price Outlook for 2011 and 2012 states that “while many inflationary pressures that drove prices up in 2011 are not expected to intensify and may even decrease in 2012, retailers have been slow to pass on cost increases to date. Price levels in 2012 will hinge significantly on weather conditions in the American

• Weather and grain stocks. Poor weather conditions in recent years have led to reduced stocks, particularly for corn and soybeans.

• Chinese policies. China accounts for 57 percent of world soybean imports. Its policy to build soybean stocks has supported rising prices.

• Macroeconomics. “A weak dollar means commodity prices seem less expensive for those countries whose currency prices have appreciated relative to the dollar.”4

OUTLO O K • 09.11 |

79

PLASTIC RESINS MARKET OVERVIEW

CENTS/LB

HDPE PRICE TREND

Source: PlasticsNews.com Note: Price represents U.S. market prices in cents per pound for prime resin.

Plastic resins market overview The year 2011 has proven to be volatile for the plastics resins market.

Rapid increases in the first half of the year were followed by subsequent declines in pricing. Global economic uncertainty, including inflationary pressures on other commodities, such as crude oil and energy, has led to significant swings in the resin market, which will likely continue in the next few months.

80

PRODUCT CATEGORIES WITH HIGH PLASTIC RESIN CONTENT AND 12-MONTH PRICE OUTLOOK Custom procedure trays/packs gowns & related products Can liners IV therapy products - sets and tubing Contrast media injectors disposables Price Increase Risk: ■ High

Plastic resins market update

and a shift from crude oil to natural gas, will continue to significantly impact plastic resin pricing. Other factors include, but are not limited to, exchange rates, weather patterns, geopolitical events and threats of war or political instability.

The first half of 2011 experienced an 18 percent increase in the price of polypropylene, followed by a sharp 10 percent decrease.1 Because plastic resin is derived from crude oil and natural gas, its pricing often aligns with the market swings of these key commodities. A number of factors, including global economic instability

> NATURAL GAS VS. CRUDE OIL – A factor that may affect the longerterm prices of polypropylene is the use of lower-priced natural gas over crude oil resulting from a growing demand for ethylene derivatives.

Ethane derived from natural gas produces less propylene than crude oil, tightening the supply of

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■ Moderate

■ ■ ■ ■

■ Low

polypropylene. Due to abundant production, the price of natural gas is expected to remain relatively low.2 A switch back to crude oil is unlikely because of high switching costs.3 > CRUDE OIL VOLATILITY – Unlike natural gas prices, which are expected to remain low, the uncertain global economy has proven to net unpredictable crude oil prices.

As a commodity that is so greatly impacted by the traditional forces of supply and demand, yet complicated by global politics, crude oil’s heavy influence on plastic resin production will result in uncertainty in pricing.

PLASTIC RESINS MARKET OVERVIEW > GLOBAL ECONOMIC CONCERNS – Global economic struggles have dampened the growth in crude oil demand. China, who had been leading the growth in oil consumption in recent years, has seen a reduction in their use of oil, indicating a weakening in the manufacturing sector.4 While overall growth expectations for crude oil have declined, the growth in demand from emerging economies is expected to counter decreases in demand seen elsewhere.5 > DOMESTIC UNCERTAINTY – As the world’s largest consumer of oil, economic challenges in the U.S. have led to unpredictable consumer demand for 2012.6 Analyst predictions that the U.S. economic recovery is losing momentum has led to increased oil supplies and lower prices.

References 1. www.theplasticsexchange.com 2. “U.S. Energy Information Administration Short-Term Energy Outlook August 8, 2011 release,” www.eia.gov 3. Esposito, Frank. “PP prices ready to surge as supplies ebb.” Plastics News. Pg. 1 Vol. 22.

January 17, 2011.

4. “OPEC sees growing world oil demand, despite economic doldrums,” The Washington Post with Bloomberg Business, August

9, 2011, www.washingtonpost.com 5. “U.S. Energy Information Administration Short-Term Energy Outlook August 8, 2011 release,” www.eia.gov 6. “OPEC sees growing world oil demand, despite economic doldrums,” The Washington Post with Bloomberg Business, August 9, 2011, www.washingtonpost.com 7. “U.S. Energy Information Administration Short-Term Energy Outlook August 8, 2011 release,” www.eia.gov

PROJECTIONS FOR 2012

Factor

Comments The acquisition cost of crude is expected to rise from an average cost of

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

Oil prices

Impact on plastic resin prices

$100 per barrel in 2011 to $107 per barrel in 2012. This expected increase may be impacted by a weaker economic recovery.7

Demand from emerging

Some moderate demand has been seen from Latin America. Strong ur-

economies

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

Shrinking supplies

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

OUTLO O K • 09.11 |

81

RARE EARTH MINERALS MARKET OVERVIEW

Re Rare Earth

Rare earth minerals are a group of 17 elements that have become critical in high-tech manufacturing. Rare earth minerals are used in manufacturing cell phones, television screens, wind turbines, hybrid car engines and fluorescent lighting. In healthcare, rare earth minerals are used in the manufacture of CAT scans, MRIs, digital X-rays and lasers.

Rare earth mineral deposits are widespread. However, it is costly to mine and process them. The U.S. was once the leader in producing these elements, but the last rare earth mine in the U.S. was closed in 2002 due to competitive pressure from China. Until then, U.S. production met not only domestic demand, but most of the world’s demand for rare earth minerals. At the time, the transition of production to China was not cause for concern “as usage of these metals was low and supplies seemed assured from an undeveloped China that was content to export raw materials.”1 China now produces more than 90 percent of the world’s rare earth minerals. With the rapid growth of

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China’s domestic high-technology manufacturing sector, China has cut exports of these critical minerals. In 2010, China cut rare earth exports by 40 percent and has declared its intent to build a strategic reserve of the metals. A recent Financial Times article stated that “as China cuts further export quotas – this year’s overseas sales license is 4.5 percent lower on an annualized basis than last year’s and more than 40 percent below the 2009 quota – global demand for the metals has been growing.”2 The U.S. Congressional Research Service estimates global consumption at 124,000 tons in 2010 growing to 180,000 tons by 2012.

In 2011, exports from China are projected to be below 30,000 tons.3 As a result, in recent months prices for rare earth minerals have skyrocketed. Prices for many minerals are up more than 100 percent in the last six months. Statistics documented by the Financial Times show that while exports of rare earth metals from China have decreased 50 percent in the last year, the value of those exports has increased almost tenfold in the last year.2 The amount of rare earth minerals in most products in the healthcare setting is so small that product prices will not be significantly impacted.

Manufacturers will likely face margin pressure as a result of rare earth mineral cost increases, but consumers will likely not notice the impact as only trace amounts are used in most high-tech products.4 The exception seems to be the

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lighting industry where rare earth phosphors may account for up to 50 percent of the total cost of fluorescent lamps and where most manufacturers are pushing to pass price increases on to end users.

The forecast for rare earth prices will depend on how quickly production of other sources of rare earth metals can be brought online. China has announced a five-year plan for rare earths that includes higher environmental standards, the closure of illegal mines, and consolidation of producers – actions that may further reduce exports and support high prices. Meanwhile, many companies are working to increase production of rare earth minerals outside of China, including the world’s largest rare earth refinery slated to open this year in Malaysia.

References 1. Dobski, Daniel. “Huge Price Increases Underway from Lamp Manufacturers: The impact of rare earth metals shortages.”

RenewableEnergyWorld.com, 7/11/11. http://www.renewableenergyworld.com/re a/news/print/article/2011/07/huge-price-increases-underway-from-lamp-manufacturers-the-impact-of-rare-earth-metals-shortage s (accessed 7/27/11).

2. Hook, Leslie. “Chinese rare earth metals prices soar.” FinancialTimes.com, 5/26/11. http://www.ft.com/intl/cms/s/0/751cab5a87b8-11e0-a6de00144feabdc0.html#axzz1T7iPeELy (accessed 7/27/11).

3. Mines Magazine. “Sourcing Rare Earths and Critical Minerals” 2011 Spring, Feature Stories. http://minesmagazine.com/?p=1737 (accessed 7/27/11).

4. Bradsher, Keith. “Supplies Squeezed, Rare Earth Prices Surge”. The New York Times, 5/2/11. http://www.nytimes.com/2011/05/03/business/03rare.html?pagewanted=all (accessed 7/27/11).

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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OUTLO O K • 09.11 |

NATURAL AND SYNTHETIC RUBBER MARKET OVERVIEW

PRICE CHANGE PERCENTAGE

PRICE CHANGE PERCENTAGES SINCE JULY 2009 FOR LATEX, RUBBER, AND OIL

Source: www.propurchaser.com

Natural and synthetic rubber market overview

Natural and synthetic rubber market update

There are two main types of rubber: natural and synthetic. Natural rubber (NR) is derived from latex sap extracted from a rubber tree, and synthetic rubber (SR) is synthesized from chemicals from petroleum refining. Natural rubber latex and synthetic nitrile butadiene rubber (NBR) have significant use in the healthcare industry for exam and surgeon gloves. Manufacturing is centralized in Asia, attracted by the local availability of raw materials, production facilities and skilled labor at lower costs.

Several important trends are expected to impact natural and synthetic rubber pricing in 2012:

> Automotive sector growth: Almost 60 percent of global rubber consumption is from the world’s tire manufacturing industry, with the remainder serving many industries, including transport, construction, healthcare, mining, etc. The healthcare sector competes for rubber feedstocks not only with tire production, but also for hoses, seals and grommets used in cars.

North America's Scotiabank Group forecasts that global automotive sales will PRODUCT CATEGORIES WITH HIGH RUBBER CONTENT AND 12-MONTH PRICE OUTLOOK climb to more than 60 million units this year, Exam gloves ■ marking a 5 percent inSurgeon gloves ■ crease on 2010 figures.

There will be around Price Increase Risk: ■ High ■ Moderate ■ Low 1.4 billion cars on the

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roads by 2020, 50 percent more than today, according to a report from CEIC, Bloomberg and Erste Group Research. In China alone, there will be 120 cars per 1,000 inhabitants by the end of the decade, up from 40 cars per 1,000 people today. > Butadiene (BD) prices, demand and manufacturing capacity: Nitrile rubber (NBR) is composed of more than 65 percent butadiene (BD). BD prices have increased 464 percent since May 2009. The largest single use for BD is in the production of styrene butadiene rubber (SBR) in automobile tires. Prices and demand are increasing and supply is constrained. Currently there is not enough investment in additional manufacturing capacity to keep up with global demand. > Natural rubber latex supply tightens: Global supply of natural rubber will remain tight until 2018

NATURAL AND SYNTHETIC RUBBER MARKET OVERVIEW as growers fail to match rising demand from tire and glove makers.

According to Jom Jacob, a senior economist at the Kuala Lumpurbased Association of Natural Rubber Producing Countries, a large number of active rubber trees which were planted during the 1980s will be uprooted between 2012 and 2018, reducing the total area of plantations worldwide.

Rubber tree farmers delayed cutting down trees and replanting to take advantage of recent high prices.

It takes five to eight years for a rubber tree to mature to the girth at which it can be tapped, and its economic life will then be 20 to 30 years.

> Global demand for rubber: According to the International Rubber Study Group, global rubber consumption reached 24.4 million tons in 2010, 14.8 percent higher than in 2009, reflecting a strong recovery in the demand for vehicles and tires. Global rubber demand is forecast to reach 26.1 million tons in 2011 and 27.5 million tons in 2012. > Currency exchange rates: The U.S. dollar continues to weaken against the Chinese yuan and Malaysian ringgit. As a result, healthcare products such as exam and surgeon gloves manufactured in Asia are imported into the U.S. at higher costs versus five years ago.

PROJECTIONS FOR 2012

Factor Automotive sector growth

Impact on rubber prices

Comments Healthcare products using natural and synthetic rubber compete with the growing automotive sector for raw material supplies.

Butadiene (BD) prices, demand

Prices and demand are increasing and supply is constrained.

and manufacturing capacity A large number of active rubber trees will be uprooted between 2012 and

tightens

2018, reducing the total area of plantations worldwide.

Currency exchange rates

The U.S. dollar continues to weaken against the Chinese yuan and

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

Natural rubber latex supply

Malaysian ringgit.

Crude oil prices

The two monomers used for nitrile gloves (butadiene and acrylonitrile) are derived from oil.

References 1. International Rubber Study Group (IRSG): http://www.rubberstudy.com/storyofrubber.aspx 2. ibid 3. Synthetic rubber demand bounces back; ICIS.com 29 July 2011 4. Rubber Supply Tightness Lasting Until 2018 May Raise Costs for Tiremakers; Supunnabul Suwannakij; July 20, 2011: http://www.bloomberg.com/news/2011-07-20/rubber-supply-tightness-lasting-until-2018-may-raise-costs-for-tiremakers.html 5. International Rubber Study Group (IRSG): http://www.rubberstudy.com/natural.aspx 6. International Rubber Study Group (IRSG): 11 March 2011 www.rubberstudy.com

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STEEL MARKET OVERVIEW Steel market update > World crude steel production for the first half of 2011 was 757.8 million tons, or 7.6 percent higher than the same period in 2010. Every major steel-producing region showed increased production.1 > There was an 8 percent increase to 128 million tons in June 2011 (year over year) in world crude steel, based on the production for the 64 countries reporting to the World Steel Association.2 > The U.S. produced 7.2 million tons of crude steel in June 2011, or an increase of 1.7 percent when compared to June 2010.3 > China’s crude steel production for June 2011 was 59.9 million tons, or an increase of 11.9 percent when compared to June 2010.4 > In the European Union, production increased 0.2 percent (to 3.9 million tons) in

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Germany, 15.2 percent in Italy (to 2.6 million tons), 4.5 percent in Spain (to 1.5 million tons), and -6.1 percent in France (to 1.4 million tons).5

PRODUCT CATEGORIES WITH HIGH STEEL CONTENT AND 12-MONTH PRICE OUTLOOK Surgical instruments

■

(includes laparoscopic and reposable) Surgical blades Patient lifts and lateral transfer devices Orthopedic total joint implants Open heart disposable supplies

■ ■ ■ ■

> A 5.9 percent Price Increase Risk: ■ High ■ Moderate ■ Low increase (to 1,359 million 13 percent to 90.5 million tons in tons) in world steel demand is ex2011, due to the new fiscal policy pected in 2011, following a 13.2 perinitiatives that gave boost to activicent growth in 2010.6 ties in the industrial and energy markets, though construction > China’s apparent steel use is remains at depressed levels.8 expected to increase 5.0 percent in 2011, following a 5.1 percent increase in 2010. Due to the Chinese government’s efforts to cool down the overheating economy (especially in the real estate market), Chinese demand for steel will likely decrease in the later part of 2011.7

> The world's steel producers are increasing production despite softer demand, pushing down prices.9 Steel prices are expected to slip by 3 percent in 2011, after an increase of more than 30 percent last year.10

> Steel demand in the U.S. has rebounded and is forecast to grow

> However, U.S. steel prices are expected to remain high due to limited output.

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STEEL MARKET OVERVIEW

PROJECTIONS FOR 2012

Factor Growth in the auto sector

Impact on steel prices

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

Demand from China

As the Chinese government attempts to scale back the economy (especially the real estate market), Chinese demand for steel will likely decline and prices will decrease.

Lukewarm demand in the U.S.

U.S. demand for steel is forecast to grow, due to new fiscal policy initiatives, despite a depressed real estate market. Limited output may keep prices high.

References 1. “June Crude Steel Production,” World Steel Association, 20 Jul. 2011 http://worldsteel.org/?action=newsdetail&id=333 2. Ibid 3. Ibid 4. Ibid 5. Ibid 6. “World Steel Short Range Outlook,” World Steel Association, 18 Apr. 2011 < http://www.worldsteel.org/?action=newsdetail&id=322> 7. Ibid 8. Ibid 9. “Steel Price Softens as Supply Solidifies,” Wall Street Journal, 11 Apr. 2011< http://online.wsj.com/article/SB1000142 4052748704587004576240972787552288.html> 10. “Test of Metal,” The Economist, 25 Jan. 2011 <http://www.economist.com/blogs/theworldin2011/2011/01/rising_price_metal>

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