Economic Outlook | Fall 2014 Edition by Premier, Inc.

STRATEGIC LEADERSHIP FOR FINANCIAL AND CLINICAL HEALTHCARE EXECUTIVES • A TWELVE MONTH OUTLOOK • FALL 2014

L A T L A N T E N M E A M D L U N A R U T T F INS EN M U N te O o M teptso prom

ECONOMIC OUTLOOK

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T W E LV E M O N T H O U T LO O K

h t l a e h l a i c n a n fi

| FA L L 2 0 1 4

Reaching for Sustainable Savings

Best Practices in Value Analysis

Identifying Hospital-Wide Harm

OUTLOOK LEADERSHIP

MANAGING DIRECTOR Kayla Sutton

EDITORIAL STAFF

E XECUTIVE SPONSORS Mike Alkire, chief operating officer Durral Gilbert, president, supply chain services Amy Denny, vice president, strategy, supply chain services A special thanks to Tina Harlan, Carl Johns, Eric Johnson, Becky Leavitt, Traci McCoy, Janelle Powers, Acacia Strachan, Rich Westbay, Jeff Willink and Laura Yandell for their contributions to this edition of the Outlook.

DESIGN AND PRODUCTION Chris Cardelli, director, creative services Sung Ginader, project manager, creative services Dave Dixon, senior graphic designer, creative services EDITORIAL SUPPORT Amanda Forster, vice president, public relations Bryan Alsop, senior manager, corporate communications

LETTER 01

EXECUTIVE LETTER

Sustainability as a system Mike Alkire, chief operating officer / Premier, Inc.

FEATURES | TACKLING TOTAL COST

04 CLIMBING HIGH: REACHING FOR LONG-TERM, SUSTAINABLE SAVINGS

PERSPECTIVES 28 Fundamental, instrumental, monumental

TRENDS 40 Protecting reimbursement through CLABSI zero tolerance 43 The outcomes of adherence: HIV care 46 Hospitals poised for economic recovery 49 Success Story: PREZIO Health

10 HIDDEN VALUE: BEST PRACTICES IN VALUE ANALYSIS

16 CAPITALIZING ON EQUIPMENT PLANNING AND PRICE TRANSPARENCY

ECONOMICS 52 A conversation with an economist 57 Behind the numbers 64 An update on hospital performance metrics 69 Patient volume trends 73 Premierâ&#x20AC;&#x2122;s supply chain solutions 74 Inflation summary 75 Success story: ScriptPro

22 IDENTIFYING HOSPITAL-WIDE HARM

COMMODITIES 78 Minimizing raw materials risk 80 Copper market overview 82 Cotton market overview 84 Energy market overview 86 Food market overview 90 Plastic resins market overview 92 Natural and synthetic rubber market overview 94 Steel market overview 96 References

About the cover The business of healthcare is changing and healthcare executives are looking beyond short-term fixes to determine both large and small drivers of long-term financial sustainability. The supply chain has long gone after the low-hanging fruit of cost reduction, but now health systems and other stakeholders must climb high in the trees to identify sustainable savings. This edition of the Economic Outlook highlights the fundamental, instrumental and, often, monumental steps that healthcare stakeholders are taking to achieve long-term financial health.

About the publication The Economic Outlook is Premierâ&#x20AC;&#x2122;s flag-

Due to interest from our membership and

ship publication that highlights emerging

the industry, beginning in 2013 we ex-

economic and industry trends impacting

panded our Outlook series to include two

our membership and shaping the health-

new publications. The Quality Outlook,

care landscape. As an important thought

released annually during the summer,

leadership resource, the publication pro-

provides thought leadership focused on

vides strategic insight to financial, clinical

clinical trends, performance improvement,

and supply chain healthcare executives

and best practices in safety and quality

across the country.

of care. The Industry Outlook, released annually during the winter, highlights

A key aspect of the long-term strategy for

one specific macro-level trend impacting

the Outlook is to collaborate with inter-

healthcare stakeholders and examines that

nal and external subject matter experts

trend across the supply chain.

to build consensus from diverse points of view. The publication harnesses the

The content in this edition is intended

expertise of our network of healthcare

to help our readership better understand

leaders to illuminate best practices and

the implications of healthcare reform and

strategies needed to drive performance

provide insights into existing and evolving

improvement. We strive to provide our

opportunities for healthcare stakeholders

members and healthcare organizations

to improve connectivity and patient care

with valuable, timely information and

in a newly-shaped marketplace.

business intelligence derived from the industryâ&#x20AC;&#x2122;s most progressive participants.

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

EX E C U TI V E LE TTER

Sustainability as a system

health systems in the future. Instead, we’re looking beyond the traditional institutions, processes and people to initiate more radical transformations. To fundamentally change the way we operate today, we must focus on a future state of total cost management, where health systems won’t buy a supply, perform a procedure or admit a patient unless that course of action is proven to yield a better, more cost-effective outcome. At the core of this ability lies reliable, actionable information. In 2011, Atul Gawande wrote “The Hot Spotters” for The New Yorker magazine. He discussed how providers and public health officials are using data in new ways to:

MEMBERS OF THE PREMIER ALLIANCE,

• Pinpoint the super-users of healthcare resources, • Uncover the root causes of their usage patterns, and • Target these specific populations with individualized interventions designed to improve overall health.

ack Welch once famously said, “You can’t grow long term if you can’t eat in the short term.” He

In the process, the organizations profiled in the article reported

wasn’t talking about healthcare, but the lesson

decreases of 15 percent or more in emergency room use and

certainly applies.

savings in excess of 25 percent just by targeting a few dozen of these super-users.

America’s health systems have never faced more financial threats. The Medicare Payment Advisory Commission estimates

While these savings are good for national and state healthcare

that current federal reimbursements are inadequate for the

budgets, they don’t always flow to the hospitals and health

level of care provided, underpaying providers by 6 percent or

systems that are driving the change. But the interesting lesson

more. At the same time, providers are challenged with changes

about these hot spotters is that we can also use data to pinpoint

related to payment penalties in the Affordable Care Act, as well

the super-users of supplies – to find the expense outliers in

as cost pressures resulting from growing uncompensated care,

any given facility and to address the root causes of unjustified

bad debt and sequestration cuts. Even as payments shrink,

variation at the department and even practitioner level. Then we

demands to spend are rising, as health systems support the

can target these areas as opportunities for improvement.

expensive adoption of electronic health records, medical homes and clinically integrated networks.

Just a couple of examples illustrate how this approach can generate significant savings.

A discussion of financial sustainability is certainly timely if we want to ensure that short-term priorities do not damage

Western Maryland Health System (Cumberland, MD) used

long-term value and that providers can deliver high-quality,

data to pinpoint variation in its use of physician preference

affordable services in the new reality of austerity funding.

items, specifically identifying outlier cases that had a negative impact on costs. Hospital leaders discovered that physicians

Given the financial outlook, it is unlikely that focusing solely on

were using a wide range of total joint replacement supplies,

improving healthcare supply efficiencies will lead to sustainable

thereby preventing savings that could be realized by aggregating OUTLOOK

QTR 4.14

EX E C U TI V E LE TTER

Sustainability as a system

purchasing volume to get a better price. By standardizing

This work is a thorny process, as it breaks through the realm

around a limited number of product choices, the system saved

of supply chain management to quickly become a relationship

$1.3 million and reduced unnecessary variation in clinical

and a culture issue. It involves difficult conversations with

practice for 500 different orthopedic procedures.

physicians, as well as large-scale changes to the macro environment. But with real information, physicians will start

Similarly, Cincinnati-based Mercy Health used data to compare

to think of themselves not as solo practitioners but as doctors

its performance to peers in the level of care provided to patients,

operating in a web of professional standards that influence

diagnostic procedure rates, and blood/medication/supply use.

their daily decisions. And as that happens, we can begin to

Mercy found $22 million in spend outliers and was able to

improve outcomes.

crosscheck cases against clinical outcomes to determine that many of the extra dollars spent did not lead to better results.

Sustainability is defined as a system that is supported to the point where it can maintain its own viability. We can get there

Mercy engaged its physicians to jointly design and help

in healthcare, but only by leveraging improved, evidence-

implement improved processes to optimize resource use and

based data and information to fundamentally change the way

reduce clinical variation. In particular, Mercy created new

we operate. Given the financial imperatives that are driving

protocols for blood use to conform to emerging evidence. The

providers to do much more with much less, itâ&#x20AC;&#x2122;s time to harness

hospital also did away with the practice of standing orders to

what we know can build a path to a better future.

prepare blood before surgery, since many bags went unused and were simply thrown away. Information can shine a light on variation and make it much

â&#x20AC;&#x201C; MIKE ALKIRE Chief operating officer

/ Premier, Inc.

harder for waste to hide. Armed with proper data, health systems can uncover cases where supplies are wasted or processes are broken. Only then can they begin the work of change.

With real information, physicians will start to think of themselves not as solo practitioners but as doctors operating in a web of professional standards that influence their daily decisions.

FEATURES Climbing high: Reaching for long-term, sustainable savings, 4 Hidden value: Best practices in value analysis, 10 Capitalizing on equipment planning and price transparency, 16 Identifying hospital-wide harm, 22

REACHING

CLIMBING HIGH:

FOR

LONGTERM,

SUSTAINABLE

SAVINGS

FEATURES

T P E

Durral R. Gilbert President, supply chain services / Premier, Inc.

Focusing on price When we think of supply chain and materials management, we typically think of Durral R. Gilbert leads Premier’s core supply chain business, which includes sourcing, contract management, operations and business analytics. Durral also oversees Premier’s integrated pharmacy offerings. These encompass specialty pharmacy, pharmacy beneﬁt management and direct sourcing businesses.

negotiating lower pricing on the products healthcare providers routinely use. Supply chain cost reduction has largely focused on identifying the low-hanging fruit – the obvious places where a provider is being charged too much – and bringing these costs down. Facing mounting ﬁ nancial pressures, it’s clear that our health systems cannot achieve the savings they require by focusing solely on price. Getting a reduction in purchase price of a product by 2-3 percent, while it can be meaningful to supply

Durral, who joined Premier in 2006,

budgets, is not going to deliver enough long-term impact to ﬁnancial health that

previously served as senior vice president

many health systems need. While it remains necessary to get the best pricing on

of supply chain emerging services. With

items a health system needs to treat its patients, we have to pay more attention to

more than 25 years of experience in

the appropriate use of products and supplies.

business operations, procurement and risk

In the evolving reimbursement environment that we’re in, we must be able to

management, Durral has held leadership

continually evaluate how we deliver care. In some cases, we may discover that items

positions at BDS Management, Marsh,

or supplies providers have used for years are not actually necessary for appropriate

LearningStation and Wachovia Securities.

care delivery. An example is the silver-coated catheter, which Premier data has

A native of North Carolina, Durral earned an MBA in ﬁnance and international business from Duke University and a BA in economics and accounting from the University of North Carolina at Chapel Hill where he was inducted into the school’s Order of the Golden Fleece.

demonstrated has less medical necessity than traditionally thought, and when inappropriately used, may add cost without necessarily improving outcomes. This trend can also be seen for physician preference items, such as high-cost cardiovascular or orthopedic implants. Many of these items are preferred simply because of doctors’ familiarity, or the appeal of “innovation,” even though options with better outcomes and lower cost may be available. SYMMEDRx, Premier’s proprietary physician preference, price benchmarking and surveillance program, helps to illuminate where this can occur by providing transparent price benchmarks

OUTLOOK

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around functionally equivalent

opportunity, and the growing focus on

current vendors and other industry

products – products that can

purchased services is demonstrating

benchmarks, Premier was able to help

provide the same outcomes but at

this need. Purchased services, long

St. Luke’s consolidate from 32 vendors

signiﬁcantly different prices.

viewed as an opportunity to rein in

to nine, saving 25 percent on annual

pricing disparity, is clearly in the

cleaning service costs in ﬁve months.

Using SYMMEDRx, Tri-State Memorial Hospital, a critical access

bull’s-eye for materials executives

facility in Clarkson, WA, saved nearly

and health systems. When asked

Transitioning to utilization

$1.4 million on orthopedic implants by

to identify the top areas of focus

Though the focus on price has, and will

identifying pricing anomalies across

for total cost reduction, 62 percent

continue, to reap great reward for health

functionally equivalent products.

of respondents to our semiannual

systems, current ﬁ nancial pressures in

SYMMEDRx was able to provide a clear

Economic Outlook survey cited

the healthcare environment demand

comparison of traditional versus newly

purchased services. Since contracts

that we ﬁ nd ways to further remove

introduced products and their wide-

for purchased services are often

cost. Unlike the traditional focus on

ranging prices, which Tri-State was able

negotiated locally, the terms, conditions

single product price-point reduction,

to tackle from a pricing perspective.

and rates can vary tremendously

resource utilization aims to determine

The cost savings achieved by Tri-State

and can be difficult to manage.

how product usage can be standardized

allowed the system to maintain its

In addition, purchased services

total joint replacement service critical

typically are not contracted from

to the Medicare population it serves.

a central source within the health

between physicians or facilities for the same procedures. Premier’s Partnership for

system, as they are in supply chain, and

Advancement of Comparative

ASCEND® collaborative, commitment

since services run the spectrum from

Effectiveness Review (PACER) takes

and standardization can drive great

IT to laundry and linen and to lawn

traditional supply chain management

savings. In this highly committed

care, it can be increasingly difficult

a step further by bringing a wide range

collaborative, members receive not only

for hospitals to determine if they are

of data benchmarks and stakeholders

tiers and prices speciﬁcally negotiated

getting the right price for comparable

together, including clinicians and supply

for them, but also benchmarking

services. Premier’s newly launched

chain managers, to look at product

metrics to help them identify additional

program around purchased services

outcomes with product price. In 2013,

supply chain and operations cost

now offers consulting, accounts payable

PACER compared clinical outcomes

savings opportunities, as well as

categorization, custom contracting and

and product options for drug-eluting

engage in knowledge-sharing with

price benchmarking to help members

stents. Through the active discussion

other members and industry experts.

identify and realize large-scale savings

and sharing of best practices between

As of July 2014, approximately 485

on purchased services. Moreover,

PACER members, the cohort was

U.S. hospital members, representing

we help health systems implement

able to determine that many of the

approximately $9.79 billion in

a streamlined process for managing

supply options were not clinically

committed annual supply chain

these contracts throughout their

differentiated, suggesting a new

purchasing volume in ﬁscal year 2013,

organizations in a continuous way.

contracting opportunity existed. Within

Further demonstrated by Premier’s

identiﬁed approximately $250 million

Working with Premier Performance

the ﬁ rst 10 months of implementation

in additional savings, compared to their

Partners, St. Luke’s University Hospital

of the new contracts, participants

U.S. hospital peers not participating in

Network in Bethlehem, PA learned

saved $3.15 million while maintaining

ASCEND since its inception in 2009.

it was using 32 different vendors

the same or better clinical outcomes.

Standardizing the process for

for cleaning services across its 150

By connecting supply chain data with

managing cost reduction is another

sites. By comparing pricing across

clinical outcomes data, the clinical and

FEATURES

T P E

materials executives were able to dispel the preference “myths” that existed within the member organizations, demonstrating that by moving beyond price alone, changes in product mix added additional ﬁ nancial savings to their health systems. As demonstrated by PACER members, moving the needle on individual procedures, services or supplies is part of the process of total cost reduction; however, the objective is much larger

The future of total cost management lies in the promise of using even more expansive data to bridge what have long been gaps between supply chain, labor, capital and clinical management for health systems.

than incremental progress. Through our ongoing interaction with healthcare executives, we know that providers

have previously focused on getting

basis) with the same or better patient

are not just aiming to survive in the

the best price on items they already

outcomes. That analysis suggested an

new environment – although that may

use, now the focus has shifted – and

average identiﬁed savings opportunity

be their short-term goal. They are

rightly so – to resource utilization

of $1.06 million per hospital.

positioning themselves to thrive in this

of those products. This means we’re

environment of pay-for-value. And, in

asking the right questions but with a

variation in blood use across their

order to thrive, we need to transform

greater effort to get after the answers:

facilities by physician, procedure and

collectively many of the traditional

• Are we using the right products at

diagnosis, Premier helped them reduce

practices we have leveraged in the past. In addition to supplies, labor and capital expenditures have always been targets in the effort to reduce health systems’ total costs. When executives want to reduce spending,

the right times for the right patients? • Do we need all of the supplies we purchase? • Can we consolidate suppliers for the same products? • Do additional supplies improve

Assisting our members in identifying

this excess spending from $1.06 million to $324,000 per facility in 2013, with further reduction to $284,000 in spring 2014. Inova Health System in Falls Church, VA, using Premier’s data, set new protocols and policies around blood

the biggest opportunities usually lie

outcomes?

use to lower usage to a level consistent

in labor, the largest area of expense

For the past few years, Premier

with top performance. With trusted and

for health systems, followed by supply

has worked with our members to

actionable data, as well as these new

chain. Reducing labor expense, though,

drive resource optimization in

protocols, Inova successfully reaped

no longer rests solely in how many

areas where cost reduction has

$2 million in annual, sustainable savings.

full-time employees an organization

been historically unrealized. Blood

employs. Especially as health

utilization is a good example of this.

systems consolidate and expand,

In 2012, an analysis from

Innovating toward total value Although short-term ﬁ nancial

labor cost reductions are more about

Premier’s expansive quality database

viability can be enhanced through

staffi ng efficiency and skill mix than

demonstrated unjustiﬁed variation

price negotiation, standardization

about compensation rates and

in blood product use. Top performers

and resource utilization efforts,

employee counts.

used approximately 325 fewer units

long-term ﬁ nancial sustainability

of red blood cells each year than

requires health system executives to

the average (on a case mix-adjusted

innovate away from the traditional

Supply chain is no different. While the CFO or supply chain leader may

OUTLOOK

QTR 4.14

FEATURES

T P E

business views that have existed for

to provide opportunities to access

widely across four key areas – supplies,

hospitals. The supply chain has long

this data and get our members to that

radiology, lab and pharmacy – in order

harvested the low-hanging fruit, but

next horizon of innovation faster.

to examine “total” cost per procedure.

now we must climb high in the trees.

Once outcomes are compared across

The future of total cost management

Targeting four high-cost MS-DRGs

products for the same procedure,

(227, cardiac deﬁbrillator implant;

lies in the promise of using even more

variation in care is the next frontier.

247, percutaneous cardiovascular

expansive data to bridge what have long

In 2012, Premier, in collaboration

procedure; 460, spinal fusion; and

been gaps between supply chain, labor,

with member executives from Banner

470, major joint replacement), we

capital and clinical management for

Health (Phoenix, AZ), Bon Secours

found that variation in the average

health systems. Transparency helps

Health System (Marriottsville,

inpatient cost per case was signiﬁcant.

spur that knowledge gain. At Premier,

MD), Carolinas HealthCare System

through our various performance

(Charlotte, NC), and Saint Francis

variation in average inpatient cost

groups and collaborations, and

Health System (Tulsa, OK), leveraged

for MS-DRG 470 among a subset of

with our supply chain, quality and

data from Premier’s QualityAdvisor™

physicians and health systems. It

population health tools, we’re able

and SpendAdvisor™ tools to look

also shows year-over-year change

Fig.1

Figure 1 illustrates the incredible

Average inpatient cost per case by physician, MS-DRG 470 (major joint replacement or reattachment of lower extremity without complications)

$45,000 $40,000 $35,000 $30,000 $25,000

Source: A database maintained by Premier, Inc.

CY2013 average cost per case

$20,000 $15,000 $10,000 $5,000 $0 $0

$5,000

$10,000

$15,000

$20,000

$25,000

CY2012 average cost per case

$30,000

$35,000

$40,000

$45,000

FEATURES

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in cost. Where each dot represents

instead of focusing on increasing sales.

(Cleveland, OH) says, “We need to

a single physician (and like-colored

Working with Covidien speciﬁcally

break down the traditional acute

dots represent physicians within

on the 220 commodity SKUs it has

mindset by driving out care variation,

the same health system), we can see

contracted through Premier, Fairview

redundancy and waste to best treat the

that the range of cost per procedure

is using benchmarking data to look

patients we serve. ACOs help to bring

represented a variance of 40 percent

at line-by-line product usage against

into the crosshairs this need for an

around the median. Further, from the

drivers of activity, such as surgery

absolute focus on integrated care.”

line that slices the graph diagonally,

volume, patient days and adjusted

we can see for each physician whether

acute discharges. Looking at variation

comprehensive hospital collaboratives

his or her respective cost per case

this way allowed Fairview to develop

in the country, leverages the power of

improved from 2012 to 2013.

procedural best practices where they

partnership to improve performance

hadn’t previously existed and set

across quality, cost and accountable

we see that there is broader possibility

standards. Covidien is at risk in terms

care to deliver better outcomes and

to reduce cost, and working with

of ensuring the health system stays

lower costs. Despite longstanding

our members, both cost reduction

within these total cost boundaries, and

skepticism that high-quality care can,

and better clinical outcomes can

has transitioned from being a vendor

in fact, lower the cost of care, QUEST

be achieved by identifying where

to being a partner in cost reduction.

has demonstrated just that. Since 2008,

When we look at the data this way,

unjustiﬁed variation exists. What

These types of strategic partnerships,

Premier’s QUEST®, one of the most

QUEST members have prevented 46,851

we can learn from this illustration is

becoming more common among

readmissions and 147,864 inpatient

three-fold: there is signiﬁcant variation

healthcare stakeholders, align

deaths, while saving $12.5 billion.

in cost (not all of this variation can

with the industry’s move toward

likely be attributed to varying patient

managing total value.

populations for this DRG), there have

Population health and accountable

The business of healthcare is clearly changing, in large part because the system has gotten too fragmented and

been successes in reducing cost, and

care initiatives will continue to bring

expensive to maintain. Although the

signiﬁcant opportunity remains.

about non-traditional partnerships

current environment offers challenges

that can drive innovation. Like the

for all stakeholders to bend the cost

attention is how Fairview Health

Fairview example, these initiatives

curve in a long-term, meaningful

Services (Minneapolis, MN) is

can produce incentives for health

way, it more importantly gives us

addressing cost in the context of

systems to work with payers differently

an opportunity to make optimal

expanded risk-based relationships.

than they have in the past, which in

use of new and exciting incentives,

Fairview, which we highlighted in

turn can change how all stakeholders

partnerships, data and technology.

the spring 2014 Economic Outlook,

are incentivized to do business.

Another innovation that deserves

is a great example of a member using

Accountable care incentives also spur

The supply chain has long been about harvesting the low-hanging fruit of cost

innovative supply chain strategies that

supply chain advancements, such as the

savings, but to transform the business

align with the organization’s goals.

integration of clinical, supply chain and

of healthcare and realize the long-

Following a transition into risk-based

ﬁ nancial data. A clinically integrated

term, sustainable fruit of our efforts,

payer models for care delivery, such as

supply chain helps ensure that supply

Premier and our members must climb

the Pioneer ACO program, Fairview

decisions have the support of the

higher in the trees to drive total value.

began discussions with suppliers about

clinical team, and patients ultimately

changing its supply chain model. It

receive high-quality, low-cost care.

looked for suppliers who were willing to go “at risk” to optimize utilization

As Eric Bieber, MD, the chief medical officer at University Hospitals

OUTLOOK

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Hidden value

Best practices in value analysis for total cost reduction

FEATURES

T P E

any patients believe it’s in their best

Areas of inﬂuence for value analysis programs

interests to use the most expensive

medical products and services available. However, hospital administrators and Contracting

clinicians don’t necessarily agree with that premise. With today’s smaller careful decisions about how to spend limited funds. When it comes to

on ati eg

Sta tion iza ard nd

proﬁt margins, hospitals must make

Cap ital ag gr

product choice, how do healthcare leaders balance cost and quality?

able to provide the best possible mix of

tec hn ol r e vi e w o gy

world of healthcare depends on being

Value analysis

ion I nf or m at y g te c h n ol o

Thriving in the new value-based

New

quality and affordability. Value analysis can play a critical role by ensuring that physicians and clinicians have

access to the right product at the right

rch

ase

d se

time at the right price. Value analysis

rvice

i on t z at U ti li g e m e n a man

programs can improve the purchasing process and ensure product and service availability at the lowest total cost. In short, they support quality patient care in a ﬁscally responsible manner. Creating processes and policies

these needs and choose the products

objective process for providing an

centered on product introduction

and services to be examined using

evidence-based methodology to evaluate

and review is paramount.

the value analysis process.

Value analysis is a systematic,

current and emerging technologies in

Top-performing hospitals track

order to reduce or manage expenses.

savings and quality gains through

The value analysis process

This is done by considering alternate

metrics agreed upon by their executive

First and foremost, value analysis is a

products, services and practices which

management. Value analysis teams

team-based effort that involves a wide

meet, but do not necessarily exceed, the

(VATs), which use clean, real-time cost

range of professionals, stakeholders and

clinical and end-user’s speciﬁcations

and quality data to track these metrics,

experts who leverage their combined

while maintaining or improving the

have shown savings of 30 to 50 percent

knowledge to evaluate products,

safety and quality of patient care.

on individual commodity groups.

services and technologies. The most

VATs look beyond price to identify

effective teams often go through

Foundations of value analysis

the functional and quality-related

value analysis training. Healthcare

The foundation of value analysis

needs of users. Collaboration with

organizations that invest in this

is its methodology and procedure.

clinical staff helps VATs understand

training receive a minimum of 100:1

FEATURES

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Fig.1

The value analysis process

Audit process

TIPS FOR BUILDING TRUST WITH STAKEHOLDERS Product opportunity

Solicit input from physicians, Implementation

Gather data

Final negotiation

Evaluate opportunity

Clinical trial or approval

staﬀ, subject matter experts and other stakeholders.

Clearly communicate each step of the process.

Preliminary negotiations

Be responsive to all involved.

return on investment for their efforts.1

VATs should:

Successful VATs also have the support

• Consider existing issues and opportunities;

of a C-level executive and a dedicated

• Review literature and current contracts;

project manager who makes the team’s

• Conduct data and benchmark analyses;

progress visible to all stakeholders.

• Identify internal and external key

Value analysis (see Figure 1) begins with deﬁ ning a product opportunity. The amount of available data and organizational needs

stakeholders; • Analyze product information and pricing; and

Personally explain each change.

• Determine relevant GPO affiliations

determine the product, service or

and distribution relationships.

process most suitable for analysis.

Areas for analysis include vendors,

While the subject of the analysis

Listen attentively and invite diﬀering opinions.

standardization opportunities, contract

can vary greatly, here are certain

pricing, quality or safety issues, new

best practices to be followed before

technologies, product inefficiencies or

starting any value analysis project.

waste, and changes in practice regulations.

Focus on safety; cost savings will follow.

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Fig.2

Number of value analysis teams per program Once the team makes its decision, it must create an implementation plan, communicate the plan to the appropriate parties, educate clinical

staff or others who will be affected, and ﬁ nalize the transition. Only then can VATs evaluate the original project goal and success indicators to determine

23%

how outcomes should be measured. While cost savings can be reviewed on a quarterly basis, quality measures, such as infection reduction rates, may require

71%

ongoing monitoring by quality teams.

Reaching full potential A survey of Premier members showed that more than 90 percent of responding hospitals have one or more VATs established to aid in contract and product decisions (see Figure 2). More than one VAT

No value analysis program

One VAT Source: Premier, Inc. value analysis survey

Although respondents represent both stand-alone and multi-hospital systems, there was no correlation in bed size or number of facilities to the number of VATs at each entity. Still, all entities

Healthcare organizations are

members stay engaged and understand

consistently had 10 or more members

continually looking for ways to

the importance of the value analysis

representing multiple departments

make improvements as quickly and

process and their role within it.

on their VATs. Most respondents (87

efficiently as possible. Identifying and

Once the required information

percent) indicated their VATs had

deﬁ ning the level of effort required

is available, stakeholders begin

from clinical staff can expedite

discussions. These can increase

decision-making and allow for more

buy-in as all participants are

committed to establishing VATs, a few

rapid realization of cost savings.

heard, concerns are presented and

facilities have yet to implement all value

collaborative decisions are made.

analysis best practices. According to the

Successful value analysis depends upon the commitment of key

Remember that balanced decision-

support from the C-suite. While most respondents have

survey, more than 95 percent of facilities

stakeholders, including clinical and

making does not necessarily mean

required from two to six months to

non-clinical content experts, supply

giving equal weight to each piece

make a product conversion, with most

chain managers and executive leaders.

of information. For instance, the

of these hospitals in the higher range.

Getting the right people involved can be

balance between clinical outcome and

Ideally, VATs should be able to complete

challenging, so it’s important that team

ﬁ nancial impact may be uneven.

contract throughput in 30 days or less.

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When it comes to value analysis, survey respondents frequently cited poor communication, process non-compliance, and difficulty VATs. To overcome these issues,

including those who may be located

Overall, most facilities have not yet

off-site and clinicians who may have

fully operationalized the value analysis

competing priorities;

process. To reap the beneﬁts of value

• Educate members about cost-beneﬁt

with conversion as obstacles for

analysis and available analytical tools; • Prohibit staff, doctors and vendors

organizational leaders must:

from working around the value

• Ensure VAT members communicate

analysis process;

analysis, existing VATs may need to reevaluate their approaches to make sure they follow suggested guidelines and meet organizational needs. In contrast to traditional price-

effectively within their facility so

• Eliminate delays in decision-making;

based value analysis, evidence-based

that decisions reach patient-facing

• Provide evaluation forms for

value analysis uses a clinically driven

care staff; • Be certain the right people are

feedback; and • Standardize across multiple

involved in the value analysis process,

service lines.

process for evaluation based on clinical effectiveness, operational impact, patient safety and cost. Value analysis teams drive meaningful change by identifying products to standardize or convert and ensuring that new

Guiding principles of value analysis

items are properly vetted. Using value analysis at its best – whether to address

SELECT multidisciplinary team members. SELECT products and services to promote the highest standard of care at the lowest cost. EVALUATE the clinical and ﬁnancial impact of requests for product and equipment reviews.

product use/standardization or crafting meaningful contracts with vendor partners – will provide healthcare organizations with the structure they need to face the challenges of an ever-changing healthcare landscape.

ESTABLISH trial criteria and monitor all trials. SELECT the safest and most-effective product. REVIEW the routine use of high-volume or expensive products and recommend alternatives for standardization or product restriction. EVALUATE products and equipment based on how they affect quality of patient care, patient and staff safety, pricing, and contract compliance.

The primary contents of this article appeared in the summer 2014 Value Analysis Guide published by Premier’s Value Analysis Council. Premier members can access a full version of the guide via PremierConnect®.

CONSIDER cost avoidance as well as revenue enhancement. ESTABLISH/IMPROVE relationships with departments to identify new opportunities. ENGAGE physician advocates and vital stakeholders. REFERENCE

DEVELOP a method for capturing and tracking value analysis cost savings, process improvements and revenue enhancements.

“Strategic Value AnalysisTM: 10 Best Practices in U.S.,” The Strategic Value Analysis in Healthcare, 2014. http://www.strategicva.com/Best-Practices/HospitalValue-Analysis- 10-best-practices:-in-USA.htm.

OUTLOOK

QTR 4.14

FEATURES

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Bob Yancy Vice president, equipment planning and sourcing / Premier, Inc.

Capitalizing M

technician or a CFO, chances are that

among the most

you act as a technology buyer for your

asset-intensive

health system and have asked, or been

structures built.

asked, questions similar to these:

Today’s health systems are bristling

• What do we invest in and when?

Bob Yancy founded MEMdata in 2000 to

with some of the latest equipment

• Should we wait until a later generation

assist hospitals in equipment planning and

technology available – not just in the

procurement. Today the company serves medical facilities in 42 U.S. states, Canada, Mexico and South Korea. Yancy, who is also chairman of the board for Baylor Scott & White Hospital in College Station, TX, and was appointed to the Texas Statewide

patient care realm, but also in IT,

technology comes out? • What acquisition method should be

telecommunications, plant and building

used (residual value lease, capital

controls, HVAC, life safety, and a host

lease, ﬁ nancing or outright purchase)?

of other capital asset categories.

• How do we provide and pay for maintenance?

Rick Perry, has a Bachelor of Science degree

Understanding the technology landscape

every capital equipment category, it

from Texas A&M University.

Whether you are a biomedical engineer,

is important to understand ongoing

a materials manager, a radiologic

trends and developments in technology

Healthcare Coordinating Council by Governor

edical facilities are

While no one can be an expert in

on equipment planning and price transparency

FEATURES

T P F

and to use that knowledge to inform and advise purchasing decisions. Statistics have shown over time that the average acute care hospital spends approximately $40,000 per licensed bed annually on new equipment. This means that the average critical access hospital budgets and spends roughly $1 million per year on equipment, while a teaching system with 1,000 licensed beds will spend approximately

Although the capital continuum is complex and evolving, two Premier members have developed approaches for managing these challenges and creating their own best practices. St. Joseph’s Healthcare System (Paterson, NJ) typically found the planning and evaluation stages of the capital continuum to be most challenging

$40 million each year. While these

to manage. For Doctors Community Hospital (Lanham-Seabrook, MD), it was the

numbers may vary dramatically in

evaluation and maintenance aspects that were problematic, since management

challenging ﬁscal times, with cutbacks

did not have a process in place to evaluate pricing and equipment speciﬁcations.

and capital freezes, it is a fair bet that

However, both members have worked to overcome these issues. St. Joseph’s

once the capital freeze is lifted, acute care medical facilities simply increase their technology investments to make up for deferred capital investments.

now has a very disciplined approach that requires its senior management to review all capital requests and determine how capital resources will be used. The initial emphasis is on patient needs, followed by return on investment. Other best

Essentially, these investments can

practices developed by St. Joseph’s include obtaining competitive bids through an

only be deferred for so long. Post-

outside source on all capital purchases over $10,000 and requiring business plans

recession trends indicate hospitals are

for each item costing more than $50,000. Additionally, Jack Robinson, St. Joseph’s

once again investing in new facilities

chief ﬁnancial ofﬁcer, recommends “replacing the capital budget wish list with an

and equipment, albeit cautiously.

ongoing dynamic process that addresses capital needs as they occur and is based

Why is this? What compels acute care medical facilities to continually invest in new technology? The answer is simple. Technology is constantly improving and at a rapid pace.

on sound investment return guidelines.” At Doctors Community Hospital, the team enhanced its capital and equipment planning processes by incorporating capital into its budget software, segregating purchases by quarter and engaging MEMdata.

These advances in technology drive improvements in patient care and enhance the patient experience. essentially double every year for at

century later, affecting software and

Gordon E. Moore made a startlingly

least a decade. While it was met with

electronic devices across the entire

accurate prediction regarding the

some skepticism at the time, Moore’s

technology spectrum. Thousands

advancement of technology. Now

prediction has been incredibly accurate.

of electronic devices and medical

known as “Moore’s Law,” Moore’s

Processing power, however, did not

In 1965, Intel Corporation co-founder

technologies, along with their

observation was as simple as it was

stop doubling every year after that

memory capacity, sensors, displays

profound. In layman’s terms, Moore

initial decade. Rather, it continues

and camera pixels, are all improving

predicted that computing power would

to grow exponentially almost half a

exponentially while rendering

FEATURES

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It is critically important to capitalize on increasing technological capabilities while capturing ever-declining, best-in-class prices.

proposal (eRFP) process that routinely captures pricing from all qualiﬁed vendors and their best pricing at the moment of acquisition. This eRFP process and the data it yields now help to inform, advise and empower Premier members at the point of transaction during technology acquisitions. St. Joseph’s Healthcare System (Paterson, NJ), a Premier member and MEMdata customer, engaged MEMdata to support its procurement process. This

earlier technology increasingly less

original cost. Price analytics tell us that

includes identifying potential suppliers,

useful and ultimately obsolete.

for every year since launch, the 64-slice

developing required speciﬁcations,

CT has dropped a whopping $155,000 in

and obtaining competitive bids

While technology evolves, prices decline

price even as the technology has vastly

for each capital equipment item

improved. Perhaps no other technology

purchased. For larger projects,

Consider a time when you bought

in healthcare more dramatically

St. Joseph’s also uses MEMdata’s

an electronic device, only to see

reﬂects the concept of advancing

equipment planning process, which

a newer, cheaper model appear

technology with declining prices.

has resulted in both timely project

shortly thereafter. While this can

For technology buyers everywhere,

completion and cost control.

be frustrating, it gives us insight

the importance of this concept cannot

into a pleasant technology surprise:

be overstated. Whether you are

MEMdata customer, Doctors

prices typically go down.

purchasing cellphones, CT scanners,

Community Hospital (Lanham-

or ﬂat screen displays, the concept is

Seabrook, MD), engaged MEMdata

was introduced into the U.S. market

the same. It is critically important to

to support its capital budget process

with incredible fanfare, sparking

capitalize on increasing technological

and help with a surgical services

the “slice wars.” Hospitals across

capabilities while capturing ever-

construction project. Although

the country had speedier, higher-

declining, best-in-class prices. This can

Doctors is in the early stages of both

resolution CT imaging available for

be challenging, though, since pricing

projects, Kenyetta Keys, director of

the tidy sum of approximately $2.1

for medical technology is not always

material management at Doctors,

million. Hospitals raced to replace

as transparent as for other products.

expects positive results. And Jack

To address this need, MEMdata

Robinson, chief ﬁ nancial officer at

For example, in 2004 the 64-slice CT

single-slice and dual-slice scanners. Now fast forward one decade later

Another Premier member and

(an acronym for Medical Equipment

St. Joseph’s, praised MEMdata’s

and buy a 64-slice CT. What will you

Management Data) was formed in 2000

equipment and vendor knowledge.

pay? Today, fair-market value for that

and grew to serve medical facilities in

“It has helped greatly in determining

64-slice machine is approximately

42 U.S. states, Canada, Mexico, and

potential suppliers and ensuring

$550,000, and you’ll receive much

South Korea before being acquired

a truly competitive procurement

higher-resolution imagery and less

by Premier in early 2014. MEMdata

process, which enables us to maximize

radiation for roughly 25 percent of the

developed an electronic request for

our capital investment impact.”

OUTLOOK

QTR 4.14

FEATURES

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THE

CAPITAL

CONTINUUM

David Simpson, director, equipment planning and technology services, Premier, Inc.

Although the capital equipment procurement process is often a primary focal point, the other stages of the capital continuum – from planning and evaluation to disposition – are equally important. Here are key principles and best practices for managing this continuum based on MEMdata’s experience.

PLANNING AND EVALUATION

high or unrealistically low budgetary estimates. Over- or under-allocation of expected costs can mean critical patient care assets get omitted or

PLANNING – Equipment, interior design, furniture, low-voltage/IT

insufﬁcient funding is available to procure the full budgetary list.

planning, and dietary/kitchen planning are all vital support components

INTER-OPERABILITY PLANNING – Technological advances have

to the planning of capital equipment. These services should be directly

allowed more and more equipment to communicate with other modalities.

contracted to ensure your interests are best served.

Determining what brands and models will work with each other can save

INVENTORY AND CONDITION OF EXISTING CAPITAL ASSETS –

both time and resources.

It’s hard to know what a facility needs if you don’t know what it already has. Many organizations make the mistake of assuming their biomedical maintenance and IT inventories are adequate. Actually, a full and

PROCUREMENT

complete inventory of all asset types, including items such as furniture, waste cans, and janitors’ carts, is needed.

RESEARCH – Once a decision has been made to purchase an item, due

TECHNOLOGY ASSESSMENT – Technology is evolving at an ever-

diligence is important. The range of available technology should be identiﬁed

increasing rate. With each passing year, newer, faster and more advanced

as well as the full ﬁeld of manufacturers and distributors. Price intelligence

features render some equipment obsolete. Continually staying aware

and benchmarking should also be used to ensure competitive bids.

of and familiar with new technology is a key aspect of best serving the

PAYMENT OPTION EVALUATION – When making a purchase, especially

patient community.

a large one, all payment options (ﬁnancing, lease, purchase, etc.) should

CAPITAL BUDGET DEVELOPMENT – A capital budgeting process must

be considered. Each of these options comes with a variety of terms and

be consistently followed across all departments and must avoid artiﬁcially

conditions that must be evaluated to suit individual needs.

FEATURES

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MAINTENANCE PREVENTIVE MAINTENANCE – A good preventive Procurement

maintenance plan can keep your equipment running smoothly and simultaneously eliminate costly repairs and lengthy downtime. SERVICE – Proper service tracking is a best practice often overlooked. This involves maintaining good records

Disposition

Planning and evaluation

to ensure service contracts are current and cover only Deployment

equipment still in use. Contracts should be structured to deliver maximum value for minimum cost. These contracts should also be directly tied to equipment warranty periods. RECALL TRACKING – The FDA issues numerous recalls throughout the life of a piece of equipment. Many times, facilities know about them only when they are announced

Maintenance

by the manufacturer as part of a Class I recall. It’s also important to be aware of Class II and III recalls, which can still impact patient care despite causing no lifethreatening issues.

NEGOTIATION – Because technology is constantly changing and prices for

DISPOSITION

equipment often decline, it is imperative to conduct a full market competitive bidding process before buying. Price information, including price benchmarks

DATA REMOVAL – In today’s technology-based environment, simply

and market analysis, must be used during this stage.

disposing of equipment does not ensure data security. Proper steps must be taken to ensure HIPAA compliance. DE-INSTALLATION – When equipment is de-installed, its disposition

DEPLOYMENT

must not impact any other equipment. Many assets are in fact systems of equipment, requiring a complex, phased de-installation from multiple areas.

INSTALLATION – Installation would seem to be a very straightforward

DISPOSITION EVALUATION – Once the decision is made to remove or

function, but that is not always the case; steps can be overlooked. In addition to

replace an asset, there is still the question of what to do with it. Often it is

bringing a new asset online, it’s important to ensure it is fully compatible and

ﬁscally advantageous to move the item to another department or satellite

functioning with other equipment to which it is connected.

location. Other times, the asset may be sold to another health system or

TRAINING – Even after purchasing state-of-the-art technology, staff members

medical practice, recycled or disposed.

may not know how to use it well enough to realize its beneﬁts. Proper training for all features is a must in order to optimize the new equipment.

Although the capital continuum is complex, Premier is now better positioned

TESTING AND CERTIFICATION – These processes go hand-in-hand with

as a result of the MEMdata acquisition to support members and provide

the installation of new equipment. After proper installation, some equipment

solutions to address this challenging space. Through price benchmarking,

still requires testing and calibration to function properly. State and/or

best-in-class equipment pricing and equipment planning expertise, Premier

federal regulations often require ofﬁcial certiﬁcation before the equipment is

is armed and able to address the capital continuum in a new and more

deemed patient-ready.

meaningful, effective way.

OUTLOOK

QTR 4.14

Identifying hospital-wide harm associated with

increased cost,

length of stay,

in U.S. hospitals

There is ample research that demonstrates widespread and sometimes unjustified variation in the quality and cost of healthcare. Almost 15 years ago, the Institute of Medicine (IOM) published To Err is Human: Building a Safer Health System, which estimated that preventable medical errors caused 98,000 inpatient hospital deaths each year in the United States.1

and mortality

FEATURES

T P E

hile variation can

Since current measures of

and type from critical access hospitals to large academic medical centers.4

be an indication

complications are narrow in scope,

of tailoring care

focusing on these measures alone may

to speciﬁc patient

not be sufficient to fully evaluate a

diagnoses, researchers considered

needs, there are events, including

hospital’s quality of care. To develop

conditions to be potential inpatient

development of inpatient complications,

a new, more robust measure, Premier

complications if they were not present

which represent unacceptable

examined more than 5.5 million

on admission and the secondary

variation. The unjustiﬁed variation

de-identiﬁed ICD-9-coded discharge

diagnosis did not occur post-admission.

caused by inpatient complications

abstracts from approximately 530

Complications were grouped into

may be due, in part, to lack of standard

inpatient facilities. These were part of

clusters of similar ICD-9 codes that

processes and failure to adhere to

our database for federal FY2013. These

were pre-determined by clinical review

evidence-based protocols. Focus on

spanned 47 states and ranged in size

to be like groupings of diagnoses.

Looking speciﬁcally at secondary

this has grown signiﬁcantly of late, with increased payment penalties for hospital-acquired conditions (HACs). Still, it’s not enough. “Considerable

Fig.1

Process for evaluating complications

work remains to ensure that patients are safe every day and in every place where they receive healthcare,” noted Carolyn Clancy, MD, and former director of the U.S. Agency for Health Care Research and Quality (AHRQ).

Present on admission?

Not a complication

Yes

Creating a new measure of potential inpatient complications

No Yes

Not a complication

Cluster like groupings of ICD-9 codes

One important area in eliminating unjustiﬁed variation within the

Comorbid condition?

healthcare system has been reducing preventable complications, especially those associated with higher costs, mortality rates, and length of stay. To that end, Premier undertook a study

Clinical panel review

in 2013 with the goal of developing a method to identify a broad set of potential inpatient complications (PICs).

Statistical signiﬁcance analysis

Based on nearly six million ICD-9coded hospital discharge records, the study analyzed the clinical association

Include severe harm occurring too rarely to evaluate

Potential inpatient complication

of these complications with increased costs, mortality risk, and length of stay. 3

OUTLOOK

QTR 4.14

FEATURES

T P F

SINCE THE IOM’S PUBLICATION, hospitals and other care providers have been leading efforts to better measure, report and prevent harm events. Similarly, the government has worked to shift public policy, using ﬁnancial leverage to boost the quality of care received in the nation’s hospitals. Well-known examples include:

The Centers for Medicare & Medicaid Services (CMS) original payment policy related to hospital-acquired conditions (HACs) In FY2009, CMS implemented a HAC payment policy that does not allow certain Medicare inpatient conditions – such as blood incompatibility and manifestations of poor glycemic control – to qualify for higher diagnosis-related group (DRG) payments.

Payment adjustment for HACs Beginning in FY2015, hospitals scoring in the top quartile for the rate of HACs as compared to the national average will have their inpatient Medicare payments for all discharges reduced by 1 percent.

Hospital Value-based Purchasing (VBP) Program VBP reduces operating payments under Medicare’s inpatient hospital prospective payment system (IPPS) to all hospitals by 1.25 percent in FY2014 and 1.5 percent in 2015. These funds will be used to make incentive payments to hospitals that meet designated performance standards in quality, including infection prevention.

Partnership for Patients Through Partnership for Patients, hospitals can work with Hospital Engagement Networks to receive free education and best practices on harm prevention. The goal is to reduce total harm events by 40 percent by the end of 2014.

Medicare Shared Savings and Pioneer ACO programs Although not explicitly tied to harm prevention, hospitals participating in the Medicare Shared Savings and Pioneer ACO programs share in savings if they can reduce spending below historical benchmarks. Since complications can add signiﬁcant costs, hospitals that are better able to prevent adverse events are more likely to reach spending targets to share savings.

FEATURES

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A clinical panel reviewed each cluster

Complications that were associated

measures, including reimbursement.

to ensure it covered the majority of

with an increased length of stay

cases and various care specialties.

included Clostridium difficile enteritis,

conducted a secondary analysis of our

In addition, a small set of conditions,

which occurred in more than 19,000

high-impact PICs to identify those

where incidence was too low to evaluate

cases and was associated with an

that are high volume, high cost, and

statistically, was included because the

average addition of 4.88 days to the

potentially addressable through the

clinical panel deemed those conditions

patient’s stay. Respiratory complications

use of evidence-based best practices.

to be signiﬁcantly harmful events.

were associated with signiﬁcant

Using these methods, the panel

With this in mind, Premier

To develop this list, we examined

increases in cost; respiratory failure

and prioritized the complications

identiﬁed 138 condition clusters. These

affected more than 119,000 patients and

that were associated with the greatest

include 22 that overlap with CMS

was associated with an increased length

increases in mortality, because a greater

payment-targeted HACs (see Figure 1).

of stay of more than 2.12 days. Similarly,

potential for death indicates added

a complication of pneumonia was

severity to patients. We subsequently

analyzed to deﬁ ne “high-impact”

associated with increased length of stay

prioritized conditions that were

complications based on conditions

of more than three days, and ventilator-

ﬁ rst associated with increased costs

that were associated with:

associated pneumonia added 4.78 days.

and, secondly, by those that affected

Clusters were further

• Signiﬁcantly increased inpatient mortality; • Increased costs by at least 20 percent; and • Increased length of stay by 18 percent or more.

Fifty-ﬁve complications had a

length of stay. We also prioritized

statistically signiﬁcant association with

conditions that overlap with federal

increased costs, while complications

policies, as these have reimbursement

that had the largest association with

implications and can harm patients.

increased total costs were those

We further narrowed the list to

that occurred more frequently and

identify advanced-stage conditions,

had a large marginal cost per case.

as these are likely the culmination of

Developing a prioritized approach to ﬁghting complications

Common complications associated

multiple, lower-level complications

with large increases in total costs

and are less addressable by hospital

Of the 86 high-impact PICs, 22 were

included respiratory failure, which

clinical staff (see Figure 2).

signiﬁcantly associated with mortality.

alone increased costs by more than

However, the relative impact on

$940 million. Other complications

certainty the incidence of these PICs

mortality varied. Gastrointestinal

associated with excessive costs were

that might be prevented, the list

ulceration/hemorrhage was associated

acute renal failure (adding nearly

provides a starting point for facilities to

with an increased mortality of 1.4

$490 million), sepsis ($330 million)

begin addressing the three important

percent, while cardiac arrest was

and hypotension ($200 million).

outcomes: measures of cost, mortality

associated with an increased mortality

Evaluating unjustiﬁed variation

Although we cannot say with

and length of stay. Some conditions may

of 41 percent. Other complications that

amid a total, hospital-wide approach to

be secondary to other, more proximal

increased mortality rates included coma

quality requires looking at a broad set of

events (respiratory failure can be

(20 percent), septic shock (16.9 percent),

complication measures. However, more

secondary to pneumonia, for example),

cardiogenic shock (16.1 percent)

focused efforts can be useful in targeting

but if the PICs identiﬁed here can be

and iatrogenic pituitary disorder/

complications that are likely to have the

signiﬁcantly reduced, we anticipate

diabetes insipidus (15.6 percent).

largest simultaneous impact on multiple

dramatic changes in outcomes.

OUTLOOK

QTR 4.14

FEATURES

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Fig.2

Top 10 PICs most likely to affect mortality, length of stay, cost and reimbursement

MORTALITY

LENGTH OF STAY

COST

Marginal effect

Total potential deaths

Marginal effect

Total potential days

Marginal effect

Total potential cost

Acute renal failure

143,682

0.019

2,730

1.78

255,312

$ 3,410

$ 490,000,000

Hypotension

119,324

0.013

1,551

0.58

69,474

$ 1,640

$ 200,000,000

Respiratory failure

119,017

0.138

16,424

2.12

252,133

$ 7,860

$ 940,000,000

Sepsis/bacteremia*

51,424

0.013

669

2.34

120,102

$ 6,390

$ 330,000,000

Aspiration pneumonia

32,292

0.013

420

2.66

85,929

$ 5,390

$ 170,000,000

Acute myocardial infarction

20,016

0.038

761

1.49

29,867

$ 5,290

$ 110,000,000

Gastrointestinal (GI) ulceration and hemorrhage

19,254

0.014

270

1.72

33,031

$ 3,550

$ 68,000,000

Cerebral infarction

13,294

0.048

638

2.75

36,524

$ 7,100

$ 94,000,000

Pulmonary embolism*

8,757

0.046

403

2.67

23,340

$ 5,070

$ 44,000,000

Ventilator-associated pneumonia

2,501

4.78

11,959

$ 16,980

$ 42,000,000

Source: Federal FY2013 data pulled from Premier research database.

Number of cases

PIC

*Conditions that overlap with federal policies

Future methodology to include causal chains

addressable and critical to preventing

the importance of a particular

severe secondary conditions. After

complication by quantifying the

A signiﬁcant limitation of our

testing, we plan to adapt this to

impact against other outcomes

methodology is that it did not attempt to

the ICD-10-CM nomenclature.

(mortality, cost and length of stay).

model a causal chain. For instance, some

Even with these current

of the acquired complications that had

limitations, the Premier method

a high association with mortality, such

for identifying complications

as cardiac arrest, typically represent

could assist hospital leaders with

the ﬁ nal common pathway of a cascade

prioritization and help them focus

of complications and harm events.

quality improvement efforts by:

In order to be actionable, the

• Broadening hospitals’ ability to

methodology must isolate events

identify and then address care

that occur earlier in the chain, so

processes that may lead to or

that evidence-based practices can be

contribute to complications;

applied to prevent an adverse outcome.

• Improving identiﬁcation of those

To address this limitation, Premier is

hospitals that do or do not perform

conducting additional research that

well on a wide range of measures;

will group complications into plausible causal chains, thus narrowing the list of complications to those that are

• Reducing the arbitrary nature inherent in narrow measures; and • Helping hospitals evaluate

REFERENCES 1.

Institute of Medicine, To Err is Human: Building a Safer Health System, Washington, DC: National Academies Press, 2000. 2. C. Clancy, “Patient Safety: One Decade After To Err Is Human,” Am J Med Qual 24 (November/December 2009): 525-528 3. R.A. Bankowitz , B. Doyle, M. Duan, E. Kroch, J. Martin, “Identifying Hospital-Wide Harm: A Set of ICD-9-CMCoded Conditions Associated With Increased Cost, Length of Stay and Risk of Mortality,” Am J Med Qual (September 30, 2013). [Epub ahead of print]. 4. Ibid.

PERSPECTIVES Fundamental, instrumental, monumental, 28

L A T L A N T E N M E A M D L U N A R U T T F INS EN M U N te O o M teptso prom S

h t l a e h l a i c n a n fi

PERSPECTIVES

Collaboration, buy-in opens savings door

traditionally high-rated trends as well,

and a focus on appropriate use

specifically uncompensated care, which

of products and services.

Since spring 2012, respondents to

plunged as a top survey issue for 45

Premierâ&#x20AC;&#x2122;s semiannual Economic

percent of respondents in spring 2012

executives view as emerging industry

Outlook survey repeatedly cited

to only 16 percent in the current survey.

trends? The fall survey spotlights

reimbursement cuts as the top

Uncompensated care, also known as

changing payment models, a movement

healthcare trend impacting health

charity care, has long been a drain on

from acute to non-acute care, and

systems. Interestingly, reimbursement

hospital financials. However, a recent

transparency of pricing. Changing

cuts remains in the number one

report showed that uncompensated

payment models, such as Value-

slot in Premierâ&#x20AC;&#x2122;s fall 2014 survey

care has declined roughly 30

based Purchasing, affect not only the

despite dropping from 76 percent

percent for states that expanded

bottom line, but also require health

to 55 percent since spring 2012, a

Medicaid compared to an increase in

systems to reevaluate their processes

probable indication that executives are

uncompensated care for those states

of delivering care. This reevaluation

identifying other influential trends on

that did not expand. The fall 2014

could include resource use and value

the healthcare landscape (see Figure 1).

What areas do Premier healthcare

survey also shows two other areas

analysis initiatives, a movement from

Healthcare organizations appear

with decreased impact: meeting health

acute to non-acute care, consolidation,

to be feeling fewer effects from other

information technology requirements,

and other new processes or programs

Fig.1

Healthcare trends with greatest impact on organization in the next 12 months

Fall 2014

Spring 2014

Fall 2013

Spring 2013

Fall 2012

Spring 2012

Reimbursement cuts

55%

64%

69%

79%

74%

76%

New care delivery models

31%

28%

36%

37%

29%

Health information technology requirements

21%

23%

24%

31%

n/a

Changing payment models

19%

n/a

Consolidation among health systems

18%

19%

17%

23%

24%

18%

Uncompensated care

16%

24%

21%

36%

39%

45%

Movement from acute to non-acute care

10%

n/a

Focus on utilization of products and services

12%

11%

21%

22%

23%

Employer health benefits/insurance exchanges

18%

17%

22%

16%

Transparency of pricing (e.g., payer, provider and supply chain)

n/a

Advanced data analytics (excluding EHR)

n/a

Comparative effectiveness research

10%

n/a â&#x20AC;&#x201C;Response options were not provided during the survey indicated. Source: Premier online survey for Economic Outlook fall 2014 publication

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PERSPECTIVES

T F

intended to better align health system

of supply chain management, the system

joining ASCEND, and focusing on some

incentives with new payment models.

was pursuing a goal to reduce costs

areas of physician preference, like CRM,

to ultimately achieve profitability on

all helped make a big impact.”

Chasing the break-even point

Medicare rates. All departments were

Many health systems are also

responsible for part of the goal, with

respondents also cited these areas

addressing shrinking reimbursement

Neikam’s supply chain team pledging

of cost reduction to meet Medicare

by identifying unjustified variation

to reduce $40 million in expenses.

reimbursement rates (see Figure 2):

in cost or process. These initiatives,

Thanks to a series of initiatives,

• Resource utilization in

often termed “Medicare break even”

Neikam’s team implemented $28 million

because of their impetus to get

of that goal in just over one year.

costs to Medicare break-even levels,

supplies (71 percent); • Staffing and labor efficiency

“We looked at various ways of

in nursing (57 percent);

aim to reduce total organizational

strategically partnering to lower expenses

costs across supply chain, labor,

aggressively and systematically,” says

capital, and clinical management.

Neikam. “Premier’s GPO, experience and

For example, when Charlie Neikam

More than half of survey

consulting expertise has been invaluable

• Resource utilization in purchased services (56 percent); and • L ength of stay (52 percent). Neikam notes that utilization,

joined Inova Health System (Falls

in helping us achieve results thus far.

like unjustified variation in cost and

Church, VA) in 2012 as its vice president

Converting various contracts to Premier,

process, is another top priority at Inova.

Fig.2

Areas of cost reduction to meet Medicare reimbursement rates

Resource utilization - supplies

Staffing/labor efficiency - nursing

Resource utilization - purchased services Source: Premier online survey for Economic Outlook fall 2014 publication

Length of stay

Staffing/labor efficiency - physicians

Level of care

Staffing/labor efficiency - outsourcing

10%

20%

30%

40%

50%

60%

70%

80%

PERSPECTIVES E

Fig.3

T C

Factors with greatest impact on supply chain in the next 12 months

Fall 2014 Spring 2014

Cost savings goals of the health system

Fall 2013 Spring 2013 Fall 2012

Reductions in overutilization/ variation in care

Implementing healthcare information technology

Integrating the supply chain across the continuum of care

Drug shortages

Source: Premier online survey for Economic Outlook fall 2014 publication

Comparative effectiveness/ value analysis research

Medical device prices

Commodity prices

10%

15%

20%

25%

30%

35%

40%

OUTLOOK

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PERSPECTIVES

T F

Fig.4

Top two areas of inefficiency within organization

Inadequate care coordination (e.g., fragmented transitions, delays in treatment, readmissions)

Administrative complexity

Inefficient labor costs

Overutilization of diagnostic tests, procedures and therapeutic interventions Source: Premier online survey for Economic Outlook fall 2014 publication

Product selection

Pharmaceutical selection and utilization

Complications of care (e.g., adverse events, hospital-acquired conditions)

Inappropriate level of care 0%

10%

20%

30%

40%

50%

“Utilization will be very important

physician leadership from William

for our bundled payment and disease

Jackson, MD, and the availability of

added two hospitals, many physician

state-specific programs. In total joints,

benchmarking data. “We needed first

offices, and other facilities over the past

we’ve done a great job with implant

to determine where variation existed,”

two years, leaders quickly identified

pricing, et cetera, so the next step is

Neikam says. “Then, once protocols for

the benchmarking and consolidation of

looking at all of the other products

blood use were changed, we needed data

purchased services as a prime area of

that are used in these procedures and

to track and normalize our progress.”

opportunity to reduce costs. Working

trying to optimize utilization overall.

Like Inova, St. Luke’s University

When you look at the whole episode of

Health Network (Bethlehem, PA) has

different vendor contracts and service

care, the data is really important.”

searched for ways to reduce costs.

specifications for cleaning services

Executives set up different committees

across the organization. Within five

success with blood utilization,

across the organization to look at total

months, St. Luke’s consolidated to nine

implementing $2 million in savings

cost reduction in purchased services,

vendors with annual savings of almost

annually, largely due to excellent

supplies, labor and other priority areas.

25 percent. Thanks to standardized

Inova recently achieved impressive

Acknowledging that St. Luke’s had

with Premier, St. Luke’s found 32

PERSPECTIVES E

Fig.5

T C

Top two tactics to improve supply chain

Fall 2014 Supply chain integration to align with clinical care, revenue capture and IT across facility/health system

Spring 2014 Fall 2013 Spring 2013 Fall 2012

Increased physician-health system engagement across clinical and supply chain operations

Focus on waste management (e.g., resource utilization)

Centralized purchasing

Comparative effectiveness/ value analysis research

Population health management and care coordination across the continuum Source: Premier online survey for Economic Outlook fall 2014 publication

Use of new supply chain metrics/processes

Location and product indentification standardization (e.g., GLN and GTIN)

10%

20%

30%

40%

50%

60%

OUTLOOK

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PERSPECTIVES

T F

contract language, internal staff reduced billing and processing time as well. Kevin Hines, associate vice president

and in consultation with Premier. “Value analysis is an area where we have faced our greatest challenge,

respondents, followed by administrative complexity, 44 percent, and labor costs, 35 percent (see Figure 4).

of network materials management

but in 2012, all of our institutions

at St. Luke’s, recognizes the value

aligned under Premier’s GPO. That’s

Knowledge earned, then learned

of data and process to long-term

given us an enormous opportunity

The top two tactics survey respondents

success. “Making savings sustainable

to address our clinical enterprise.”

use to improve their supply chain

is really about making informed

The UT Alliance aims to save between

are supply chain integration (to

decisions,” he says. “It’s important

$100 and $125 million in the next five

align with clinical care, revenue

to have enough time for evaluation

years on supply chain initiatives alone.

capture, and IT across facility or

and to get physicians engaged, so that the changes you make stick.” Hines and his team regularly conduct

health system) and physician-health

Overuse, variations lift costs

system engagement. Two years ago, 20

Cost savings goals remain the top factor

percent of respondents cited supply

“look-backs” after 60, 90, and 120

with the greatest impact on supply

chain integration as a tactic compared

days post-implementation of new cost

chain decisions over the next year.

to 37 percent currently. Physician-

reduction ventures. “If there were

However, the percentage of respondents

health system engagement has gone

projected savings or specific outcomes,

citing cost savings goals as the top

in the opposite direction, falling from

such as infection rates, staffing

factor declined from 34 percent in the

54 percent of respondents in fall

overtime, or cost reductions, we look

spring to 22 percent in the current

2012 to 37 percent (see Figure 5).

back to ensure those improvements

survey. Reducing overuse or variation

were achieved and sustained.”

in care is the second most cited factor

as a tactic to improve supply chain

impacting supply chain, according to 20

may be a result of the front-end

percent of respondents (see Figure 3).

work necessary to compel physician

Similar to Inova and St. Luke’s, the UT System Supply Chain Alliance is routinely isolating and pinpointing

The size of a hospital appears

The drop in physician engagement

involvement. Forging those initial bonds

total cost reduction initiatives.

somewhat related to the emphasis

with providers and physicians is a big

The UT Alliance, a seven-year-old

on reducing overuse within a health

hurdle, supply chain executives report.

joint purchasing collaborative that

system: 25 percent of respondents

includes the six University of Texas

from large hospitals state this is the

and physicians contributed to Charlie

academic health centers and nine

area of greatest focus, compared to

Neikam’s success within Inova Health

academic institutions, is no stranger to

21 percent from midsized and 20

in fast-tracking supply chain priorities.

reaping the benefits of collaboration.

percent from small facilities. Small

“Our supply chain initiatives needed

Since its inception, the alliance has

hospitals were more than twice

to be strategically aligned with our

driven more than $100 million in

as likely to cite implementation of

executives’ initiatives, so one of the

savings through cost reduction.

healthcare information technology

first things I did when I came in

(e.g., EHR systems) compared

was present a strategic plan to the

alliance’s director, “Our purpose is to

to both midsized and large

President’s Council,” Neikam recalls.

identify, implement and realize savings

hospitals, likely due to the resource

from specific projects. We launched

requirements of implementation.

According to John Joshua, the

an initiative in February to establish

Inadequate care coordination,

Engagement with senior leaders

“I had a lot of success at previous organizations by forming relationships with our providers and other leaders.

a system-wide clinical value analysis

such as fragmented transitions

Finding physician champions, getting

framework under the endorsement

or readmissions, is the top area of

physicians engaged and learning

of our health institution presidents

inefficiency for 47 percent of survey

their concerns, debriefing wins and

PERSPECTIVES E

UT System Supply Chain Alliance

Alliance Operating Committee CPOs

External GPO Mngt.

Affiliate Program

Business Intelligence & Information Exchange

eCommerce Mngt. Collaborative Framework

Optimizing the P2P Process

Share Best Practices Compare Org. Budget & HUB Structures Administration Legislative Monitoring

Purchasing Council

T C

UT Shared Services Executive Committee CBOs

Strategic Services Group

Strategic Sourcing & Contract Administration

HUB Program & Outreach

Spend Councils

Clinical Value Analysis Facilities

IT Research

Business Administration

GOVERNANCE STRUCTURE Creating collaboration among institutions that

How was collaboration achieved? John Joshua, director,

previously operated as completely distinct, autonomous

credits the early creation of a structure for mitigating peoples’ natural

organizations with little or no communication was the

resistance to change. “We worked diligently to set up a governance

biggest challenge facing the UT System Supply Chain

structure, a management process, and a strategic sourcing process

Alliance when it formed in 2007.

that involved all of the appropriate individuals and stakeholders and gave them ownership in the process. It organically drove change.” Educating everyone about the alliance and its purpose was another initial challenge. By working with the system chancellor, the presidents at each institution, C-suite leaders, and many supply chain and subject matter experts, Joshua and his team built a collaboration framework that eased concerns about change and bolstered teamwork.

OUTLOOK

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PERSPECTIVES

T F

challenges, and tapping the right people to serve on committees are all instrumental to ensuring successful initiatives.” To spotlight its successes, Inova developed internal commercials to educate and engage staff. John Joshua, director of the UT Alliance, agrees that organizational culture can be the biggest obstacle

“...Finding physician champions, getting physicians engaged and learning their concerns, debriefing wins and challenges, and tapping the right people to serve on committees are all instrumental to ensuring successful initiatives.”

to sustaining progress. “Academic medical centers are different than other

Charlie Neikam, vice president of supply chain management, Inova Health System

health systems in that what drives distinguished faculty here is access to new technology and products and

says Hines. “B. Braun, for example,

the freedom to do what they see fit.

is helping us look at utilization by

a top tactic for supply chain

In addition, the facilities within our

combining its data and our data to

improvement among 27 percent of

alliance operate autonomously, so it’s

find opportunities to improve process

respondents, remained fairly static

very important for leadership to take

with IV pumps. Working together

since last year. Respondents who

ownership in terms of the necessity

creates a more collegial relationship,

have fully implemented centralized

for these types of initiatives.”

and it’s a win-win. We win on pricing

purchasing capabilities rose from 47

and process improvement, and

percent to 50 percent, while those

stakeholders is a key first phase

they’ve created a model that could

without any centralized capability

when developing a value-analysis

be replicable with other IDNs.”

fell from 12 percent to 10 percent.

Communicating with disparate

process, Joshua says. “It’s a feet-on-

Methods used to improve their

Centralized purchasing capabilities,

A growing percentage of respondents

the-ground process of education and

supply chains vary significantly based

dedicated top resources to product

awareness through a host of forums,

on the size of respondents’ hospitals,

standardization since fall 2012, rising

groups, and subgroups within the

likely because of available resources

from 33 percent to 44 percent. EHR-

clinical and research enterprise.”

and best return on investment.

specific IT investments are the prime

Supply chain integration, the top

focus for 33 percent of respondents (see

Luke’s supply chain success, says Kevin

tactic among all respondents, is used

Figure 6). Reducing costs for physician

Hines, the health network’s associate vice

more frequently at large hospitals

preference items, always a challenge

president. “The C-suite is represented

than midsized and small ones.

in supply chain improvement, is one of

Engaging leadership also boosted St.

within the value analysis steering

Physician-health system engagement,

the top two efforts to receive the most

committee, and network presidents and

the second most cited tactic, appears

resources for 30 percent of respondents.

nursing executives are largely involved in

more popular at midsized hospitals,

Value analysis, which saw a decline

supply chain initiatives, making it easier

probably because larger hospitals

in resource dedication in the past two

to implement and sustain large changes.”

engaged provider leadership earlier

years, is rising again, while dedication to

and now maintain those relationships,

data standardization continues to climb.

St. Luke’s has benefited from other partnerships, too. “We’re looking at

whereas midsized hospitals may be

different partners we can collaborate

beginning these engagements, and small

the next 12 months varies among

with, like Premier and our suppliers,”

hospitals may not have started yet.

respondents from IDNs versus

EHR resource investment over

PERSPECTIVES

Fig.6

Top two areas of resource dedication for supply chain improvement

Fall 2014 Spring 2014

Product standardization

Fall 2013 Spring 2013 Fall 2012

IT investments - EHR-specific

Reducing costs for physician preference products

Building relationships with physicians/clinicians

Comparative effectiveness/ value analysis research

Reducing costs for commodities products Source: Premier online survey for Economic Outlook fall 2014 publication

Data standardization (e.g., standardization of item masters and accounting systems across facilities)

IT investments - non-EHR-specific

10%

20%

30%

40%

50%

OUTLOOK

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PERSPECTIVES

T F

non-IDNs. While 40 percent of non-

also important for choosing priorities

drives prioritization. “We first look at

IDN respondents cite it as one of their

and having successes last long term.

the cost-benefit analysis, both in the

top two areas of resource dedication

Collaboration among administration,

short term and long term, and then

for supply chain improvement, only

clinical staff and supply chain is a great

try to benchmark both internally

27 percent from IDNs say the same,

achievement for St. Luke’s. It’s going to

and externally. Then we drive

likely because IDNs were earlier to

take all of us in the same boat, rowing

consensus through the value analysis

implement. Size comparisons show

in the same direction, to accomplish

framework and within the alliance.

similar evidence: 44 percent of small

our goals in healthcare reform.”

The method of ranking priorities

hospitals are dedicating resources

Inova prioritizes its initiatives

is self-driven if we engage clinical

to EHR-specific IT investments

by return on investment, volume of

leadership early in the ownership

compared to 32 percent of midsized

business, and level of support, says

process. I really believe it results in

and 22 percent of large hospitals.

Neikam, the system’s vice president of

the best decisions in terms of what

Respondents from IDNs are

supply chain management. “Our value

should be pursued, when, and how.”

dedicating more resources to reducing

analysis process is physician-led, so

physician preference costs (36 percent)

when we’re evaluating projects, I will

continue to offset financial pressures

and data standardization (21 percent)

speak with the physician champion

by identifying supply chain and other

than non-IDN respondents (24 percent

at the facility with the most volume.

operational improvements that open

and 12 percent, respectively).

For instance, our Fairfax hospital has

different doorways to long-term savings

the highest concentration of cardiac

sustainability. They are examining

Prioritizing new pathways

care. When we wanted to embark on

unjustified variation in costs and

At a time when health systems

cost reduction in cardiac care, the

processes, reducing overutilization,

face both financial pressures and

physician champion in cardiology

integrating their supply chains with

changing care delivery environments,

from Fairfax helped me determine

other key areas, improving stakeholder

providers are often overwhelmed

which other physicians to include

engagement, and more. The balance is

by competing demands that can

in the value analysis process.”

a delicate one as older savings patterns

strain limited resources. For example, St. Luke’s is

The UT Alliance’s director John Joshua agrees that cultural buy-in

Hospital and healthcare executives

dim, and newer trends and challenges appear on the healthcare landscape.

participating in the bundled payments demonstration with CMS, and its total cost reduction initiatives are often

“It’s going to take all of us in the same boat, rowing in the same direction, to accomplish our goals in healthcare reform.”

developed based on those bundles, says Hines, its associate vice president. “We chose to participate in 32 bundled payments, primarily in cardio and ortho, so we centered some of our major cost reduction initiatives in areas of cost like total joints and spine. If we

Kevin Hines, associate vice president of network materials management,

can get under the bundled payment

St. Luke’s University Health Network

threshold, then we can share in the savings, and that’s a good motivator.” Hines continues, “Collaboration is

REFERENCE 1. Dee Mahan and Andrea Callow, “Expanding Medicaid Contributes to a Decline in Hospital Losses on Charity Care,” Families USA, July 23, 2014, http://familiesusa.org/blog/2014/07/expanding-medicaid-contributes-decline-hospital-losses-charity-care.

TRENDS Protecting reimbursement through CLABSI zero tolerance, 40 The outcomes of adherence: HIV care, 43 Hospitals poised for economic recovery, 46 Success Story: PREZIO Health, 49

TRENDS

T E

s the Centers for Medicaid & Medicare Services (CMS) continues to implement changes to

reimbursements, it will now impose larger penalties on acute facilities for failure to meet various quality metrics. Bonuses disappear, reimbursements

BEST PRACTICES IN CENTRAL LINE INSERTION AND MAINTENANCE5 Insertion: 1. Document the date, location, and start and end time of insertion.

decrease and penalties increase for

2. Give the reason for central line insertion.

the facilities that fail to see improved

3. Document hand hygiene procedure.

results as part of the new Hospital-

4. Maximize sterile barrier precautions for both patient and provider.

acquired Condition Reduction Program

5. Ensure masks are available for providers assisting with insertion.

(HAC-RP).1 Under this pressure,

6. Prepare the skin with chlorhexidine.

hospitals are trying to eliminate the costly boomerang effect of the hospital-acquired condition (HAC). Some of the most prevalent but most preventable HACs, central line-

7. Document the insertion site and type of catheter used. 8. Document the dressing type used. 9. Follow with a chest X-ray to document proper placement. 10. Submit insertion provider procedure notes.

associated bloodstream infections (CLABSIs), result in thousands of deaths

Maintenance:

annually and add billions of dollars in

1. Review central line necessity proactively on a daily basis.

costs to the U.S. healthcare system.2 In 2011, the Centers for Disease Control and Prevention (CDC) estimated that CLABSI results in an average $16,550

2. Remove lines promptly once the clinical condition warrants. 3. Inspect the central line site and dressing daily, monitoring for changes

to dressing integrity.

in additional cost of care per episode. 3

4. Clean injection ports with chloraprep (or 2 percent chlorhexidine in

Costs per episode fluctuate based on

the underlying patient condition or

5. Ensure the patency of central lines by flushing after every use.

70 percent alcohol) before accessing.

primary diagnoses; therefore, reported cost per episode varies greatly. Although many states are making progress in CLABSI reduction, and

actually reported experiencing CLABSI

peripherally inserted central catheters

the nation is on track to meet CLABSI

increases between 2011 and 2012.

(PICCs)/central venous lines, and for

reduction goals established by the CDC

CMS’ Partnership for Patients

people responsible for surveillance and

National Healthcare Safety Network

released an evidence-based care bundle

control of infections in the hospital

(NHSN), some continue to struggle.

for central line management, addressing

outpatient and home care settings.

In the CDC NHSN’s closing report of

key areas of risk identified by the CDC.

These people can dramatically reduce

2012, 16 states were considered to be

Standardized care is mandatory for

the occurrence of CLABSI by:

underperforming compared to national

healthcare professionals who insert

• Maximizing barrier precautions

rates. Of those underperformers, some

intravascular catheters, including

during central line insertion;

OUTLOOK

QTR 4.14

TRENDS

T F

• Preparing the skin for insertion with chlorhexidine; • Selecting the preferred subclavian site for catheter insertion; and • Reviewing line necessity daily and promptly removing unnecessary lines.

change protocols to get different – and

be an effective driver of change that

better – results. But many still wonder

will be sustainable in the long term.

if facilities can really reach a HAC

Cape Fear’s results illustrate just

rate of zero. According to recently

one of many instances of improvement.

published efforts, it is possible.

Premier’s 450-member Partnership for

Cape Fear Valley Health System

Patients Hospital Engagement Network

(Fayetteville, NC) recently reached

met its 40 percent improvement

a major milestone in HAC reduction,

goals of reducing CLABSI in small

model, CLABSI is just one of the

achieving zero episodes of CLABSI

hospitals, the PICU/NICU, and

conditions under surveillance within

for a full year. For Cape Fear, “getting

ICU and wards. Premier’s QUEST®

the Affordable Care Act’s HAC reduction

to zero” involved delving into change

collaborative has also shown amazing

program, which goes into effect

theory models, followed by careful

progress, with a recently reported

October 1, 2014. The program requires

definition of goals, creation of inner

overall 84 percent reduction in

CMS to reduce hospital payments

leadership committees to fuel

CLABSI from 2010 to Q4 2013.12

by 1 percent for hospitals that rank

enthusiasm and accountability, and

The time has come for hospitals

in the lowest-performing 25 percent

eventually, a framework for change

to implement sustainable change.

where it pertains to HACs. Under the

that resulted in a full culture shift

However, even minor change can take

Hospital Value-based Purchasing

and sustainability of success.10

major effort, and many times, additional

In the new pay-for-performance

Program, Medicare will adjust a

Increases in daily monitoring

short-term cost. In the ever-changing

portion of payments to hospitals based

and a system for feedback were also

landscape of healthcare reimbursement

on how well they compare to other

implemented to provide guidance and

and reform, implementation of best

hospitals and how their performance

receive input from staff.11 Cape Fear’s

practices surrounding the critical areas

improves from a set baseline.

success shows how a programmatic

of PICC and central venous access

Due to overlap of the ACA’s new

approach, instead of mere changes

can result in improvement in patient

HAC reduction program, along with

to individual staff procedures, can

outcomes and long-term cost savings.

penalties already in place, hospitals can be penalized up to three times for the same infection. Penalties

REFERENCES

for readmissions, HACs and failure

1. Integrated Launch: CVA & PICC; Associated Healthcare Complications and Purchasing Trends, (Premier, Inc. 2014), slides. 2. C enters for Disease Control and Prevention, s.v. “Central Line-associated Bloodstream Infections: Resources for Patients and Healthcare Providers,” http://www.cdc.gov/HAI/bsi/CLABSI-resources.html (accessed 2014). 3. C enters for Disease Control and Prevention, “Vital Signs: Central Line--Associated Blood Stream Infections – United States, 2001, 2008, and 2009,” Morbidity and Mortality Weekly Report (Washington, DC: GPO, March 4, 2011), http://www.cdc.gov/mmwr/ preview/mmwrhtml/mm6008a4.htm. 4. C enters for Disease Control and Prevention, s.v. “National and State Healthcare Associated Infections,” http://www.cdc.gov/HAI/ pdfs/progress-report/hai-progress-report.pdf#page=3. 5. A gency for Healthcare Research and Quality, “Selected Best Practices and Suggestions for Improvements.” AHRQ Quality Indicators Toolkit (July 2012). http://www.ahrq.gov/professionals/systems/hospital/qitoolkit/qiroadmap.html. 6. N aomi P. O’Grady, M.D, et al. and the Healthcare Infection Control Practice Advisory Committee, Guidelines for the Prevention of Intravascular Catheter-Related Infections, 2011, http://www.cdc.gov/hicpac/pdf/guidelines/bsi-guidelines-2011.pdf. 7. P remier Inc., “Reimbursement and Quality,” https://www.premierinc.com/wps/portal/premierinc/public/transforminghealthcare/ influencingpolicy/reimbursement (accessed 2014). 8. A rkansas Foundation for Medical Care (AFMC), Understanding the Hospital-Acquired Condition (HAC) Program, http://qio.afmc. org/LinkClick.aspx?fileticket=8PsE9YwcHy0%3D. 9. C enters for Medicare and Medicaid Services, “Quality Initiatives - General Information,”http://www.cms.gov/Medicare/QualityInitiatives-Patient-Assessment-Instruments/QualityInitiativesGenInfo/index.html. 10. J an Mathews, RN, BSN, MPHA, CPHQ, NEA, BC (Corporate Executive Director of Nursing Quality and Safety at Cape Fear Valley Health), “Getting to Zero; Decreasing CLABSI” (June 2014). 11. Ibid. 12. P remier, Inc., “QUEST members improve performance, avoid deaths and reduce costs,” https://www.premierinc.com/wps/portal/ premierinc/public/transforminghealthcare/collaboratingforresults/quest.

to reduce the occurrence of HACs now present a financial triple threat to underperforming hospitals.7 Changes in procedure and use of best practices will facilitate needed improvements and reduce costs. CMS is looking to clinicians and administrators to lead HAC reduction efforts by nurturing team-based, empaneled approaches to care and reduce unnecessary procedures.8 As penalties increase for facilities that fail to reach these standards, clinicians

ccording to the Centers for Disease Control and Prevention (CDC), more than 1.1 million people in

the United States are living with HIV. The estimated incidence of HIV has remained stable in recent years, with about 50,000 new infections annually.1 Specialty pharmacies play a pivotal role in improving healthcare outcomes and lowering costs for these patients through clinical management and adherence programs. Unfortunately, non-adherence to prescription medications is an ongoing problem that adds up to $105 billion each year in total costs. It also leads to worse clinical outcomes for patients with chronic diseases.2 The good news is that antiretroviral therapy is now recommended for all HIV-infected individuals. Adherence to the therapy is particularly important if a patient is to receive full benefits of treatment. These include: • Sustainable suppression of viral replication; • Decreased CD4 count; • Prevention of viral resistance; and • Slowed disease progression.

OUTLOOK

QTR 4.14

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Multiple studies have shown a

medication reviews for possible drug

was 95.3 percent. Commcare’s

significant association between poor

interactions or contraindications;

HIVAssist population had a total

adherence to antiretroviral therapy

•E nhanced communications among

and virologic failure.

3,4

Researchers

have found that patients may become non-adherent to antiretroviral therapy for reasons such as:

patients, pharmacists and physicians; •F inancial assistance (copayment and manufacturer assistance); and •D edicated clinical pharmacist on

• Confusion regarding

call 24/7.

of 177 patients with an average MPR of 96.5 percent. A prospective analysis assessed antiretroviral adherence in HIV-infected patients and found the mean adherence rate nationally was 80.7 percent.10

complicated regimens with

Managing higher-need HIV patients

Costs of therapy

• Undesirable side effects; and

Those who are new to antiretroviral

Antiretroviral therapy continues

• High medication costs.

various dosing schedules;

therapy, those with a change in

to be expensive, and studies have

The costs due to non-adherence for

antiretroviral regimens, and existing

shown that patients report the high

HIV/AIDS alone were reported as $1.8

patients with compliance scores that

cost of medication as a major barrier

billion in 2010. Studies suggest that

fall below a threshold MPR of 95 percent

to adherence. Estimates indicate

adherence rates of at least 90-95 percent

are enrolled into HIVAssist. Those

that the average annual cost of

are required to achieve an optimal

individuals receive high-touch services

HIV care was $23,000 in 2010, and

clinical and virologic response.

such as calls from clinical pharmacists:

lifetime HIV treatment costs were

•P rior to starting treatment and two

predicted to average $379,668.11

6,7,8

Conversely a lower medication possession rate (MPR) – an indicator of

weeks later to assess medication

adherence – is associated with higher

adherence, tolerability and

stratified based on CD4 cell count, costs

rates of detectable viremia and

address any patient concerns.

dramatically increased in those in the

development of drug-resistant

•E ach month for the first year of

HIV strains.

Commcare Specialty Pharmacy

However, when patients were

lower CD4 stratum (counts less than

treatment.

50). Total mean annualized costs were:

Recently, HIVAssist started

• $40,678 for those with CD4

has found a way to significantly

monitoring viral load and CD4 cell

improve medication adherence for

counts. Clinical pharmacists work

its HIV population by enrolling

closely with prescribers to assess the

patients in the company’s HIV clinical

need to add or delete prophylaxis for

management program, HIVAssist.

opportunistic infections. To date,

Clinical pharmacists who manage this

the clinical pharmacists have made

program have received their American

more than 233 clinical interventions.

Academy of HIV Medicine (AAHIVP)

All clinical services have led to

certification. The HIV Management

achievement of successful therapeutic

counts greater than 500.12

Program provides patients with:

outcomes and high adherence scores.

Greater costs among those in

• Counseling on importance of

cell counts less than 50; • $26,011 for those with CD4 cell counts between 51-200; • $19,565 for those with CD4 cell counts between 200-350; • $16,859 for those with CD4 cell counts between 351-500; and • $16,614 for those with CD4 cell

A comparison of 3,471 patients

the lower CD4 groups were due to

compliance and administration

receiving antiretroviral treatment

higher inpatient, outpatient, and

of antiretroviral therapy;

for HIV from January 2013 through

emergency expenses as well as non-

June 2014 shows the mean medication

HIV medication and tests. However,

(MTM) services, including disease

adherence rate for the overall HIV

antiretroviral costs were actually lower

state education and comprehensive

population within Commcare

in those groups due to non-adherence.

• Medication therapy management

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Fig.1

Inpatient and outpatient costs per adherence level

Adherence

Inpatient and outpatient costs

1st quartile

100%

$5,243

2nd quartile

96.2 – 98.4%

$6,175

3rd quartile

82.0 – 91.3%

$7,488

4th quartile

20.2 – 65.0%

$8,211

Source: E. Gardner, M. Maravi, C. Rietmeijer, et al., “The Association of Adherence to Antiretroviral Therapy with Healthcare Utilization and Costs for Medical Care,” Appl Health Econ Health Policy 6, no. 2-3 (2008): 145-155.

With high overall adherence rates,

an effort to improve clinical outcomes

that can help with treatment and

Commcare’s patient population could

and increase medication adherence.

related issues. These advanced support

be expected to have a higher CD4 cell

Dedicated advocates also work for

services have been shown to reduce

count, thus reducing overall costs.

patients and their families, identifying

costs while improving outcomes.

Another study reviewed adherence to

and contacting appropriate agencies

antiretroviral therapies and associated healthcare costs. When stratified based on four six-month adherence percentage groups, statistically significant differences were evident in the number of hospitalizations, annual emergency room visits, and inpatient and outpatient costs (see Figure 1).13 As the chart shows, patients in HIVAssist likely spend $2,036 less on inpatient and outpatient treatment over the course of a six-month period. Among the 177 HIVAssist patients, this could result in as much as $720,744 in annual savings for inpatient and outpatient costs compared to the national adherence average among HIV patients. Commcare has skilled employees who are responsible for providing patients with financial assistance in

REFERENCES 1. Centers for Disease Control and Prevention, HIV/AIDS Surveillance Report, http://www.cdc.gov/hiv/surveillance/resources/ reports/2010report/index.htm (Accessed July 14,2014). 2. IMS Institute for Healthcare Informatics, Avoidable Costs in U.S. Healthcare, June 2013. 3. R. Gross, B. Yip, V. Lo Re, et al., “A Simple Dynamic Measure of Antiretroviral Therapy Adherence Predicts Failure to Maintain HIV-1 Suppression,” J Infect Dis 194, no.8 (2006 Oct 15): 1108-14. 4. C. K. Fairley, A. Permana, T. R. Read, “Long-term Utility of Measuring Adherence by Self-report Compared with Pharmacy Record in a Routine Clinic Setting,” HIV Med 6, no. 5(2005):366-69. 5. Michael P. Ho, C. L. Bryson, and J. S. Rumsfeld, “Key Issues in Outcomes Research: Medical Adherence,” Circulation (American Heart Association) 119 (2009): 3028-3035. doi: 10.1161/CIRCULATIONAHA.108.768986, http://circ.ahajournals.org/ content/119/23/3028.full. 6. D. R. Bangsbeg, “Less Than 95% Adherence to Nonnucleoside Reverse-Transcriptase Inhibitor Therapy Can Lead to Viral Suppression,” Clin Infect Dis 43, no. 7 (2006):939-941. 7. D. L. Paterson, S. Swindells, J. Mohr, M. Brester, R. Vergis, C. Squier, et al., “Adherence to Protease Therapy and Outcomes in Patients with HIV Infection,” Ann Intern Med 133 (2000): 21-30. 8. A. L. Gifford, J. E. Borman, M. J. Shivley, B. C. Wright, D. D. Richman, S. A. Bozzette, Predictors of Self-Reported Adherence and Plasma HIV Concentrations in Patients on Multidrug Antiretroviral Regimens,” J Acquired Immune Defic Syndr 23 (2000):386395. 9. C. H. Hinkin, D. J. Hardy, K. L. Mason, S. A. Castellon, et al., “Medication Adherence in HIV-infected Adults: Effect of Patient Age, Cognitive Status, and Substance Abuse,” AIDS 18, Supplement no. 1 (2004): S19-S25. 10. J. Goldman, R. Cantrell, L. Mulenga, et al., “Simple Adherence Assessments to Predict Virologic Failure Among HIV-infected Adults with Discordant Immunologic and Clinical Responses to Antiretroviral Therapy,” AIDS Res Hum Retroviruses 24, no 8, (Aug 2008): 1031-1035. 11. Centers for Disease Control and Prevention, HIV Cost-effectiveness, http://www.cdc.gov/hiv/prevention/ongoing/ costeffectiveness (accessed July 14, 2014). 12. K. Gebo, J. Fleishman, R. Conviser, et al., “Contemporary Costs of HIV Health Care in the HAART Era,”AIDS 24, no.17 (Nov 2010): 2705-2715. 13. E. Gardner, M. Maravi, C. Rietmeijer, et al., “The Association of Adherence to Antiretroviral Therapy with Healthcare Utilization and Costs for Medical Care,” Appl Health Econ Health Policy 6, no. 2-3 (2008): 145-155.

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QTR 4.14

s the impact of healthcare

from the recession, with signs that

records (EHRs), advanced data

reform begins to

growth in the first quarter of 2014 is

analytics and telecommunications.”4

take shape, industry

expected to continue through next year.2

But as more of the country’s population

experts and analysts

The Wall Street Journal reported

acquires and uses insurance coverage,

are projecting increased spending on

a “rush of newly insured patients”

hospitals themselves will likely increase

healthcare services. Economic recovery

as a key driver of increased hospital

spending in a variety of areas.

and the influx of newly insured patients

income. “People are getting more back

For health systems, properly

are expected to increase hospital use

surgeries, seeking maternity care, and

forecasting future utilization and

and subsequent healthcare spending.

showing up at emergency rooms more

spending is crucial to financial

frequently, executives say, boosting

viability and long-term sustainability.

income for hospital operators.”

By leveraging data maintained by

Modern Healthcare recently reported predictions that healthcare

spending will grow at a rate that is

Results from the semiannual

more than double that of inflation.1

Economic Outlook C-suite survey

spending trends over the last three

The article, which cited an analysis

indicate nearly half (47 percent) of

years to help predict upcoming needs.

by the Health Research Institute of

respondents plan to make HIT their

From 2012 to 2013, the total number

PricewaterhouseCoopers (PwC),

largest capital investment over the

of patient visits increased by 1.4 percent

projects that healthcare is recovering

next year to include electronic health

among our members. In the second

Premier, one can view hospital

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Fig.1

half of 2013, total patient visits grew

Actual and forecasted gross patient revenue

by 2.5 percent over the same sixmonth period in 2012 (see â&#x20AC;&#x153;Patient Volume Trendsâ&#x20AC;? in this edition).5

$25.5

During that time, the number of discharges with a primary payer designated as self-pay decreased

Dollars (in billions)

$25.0

by 2.3 percent. This trend is likely to continue as more patients are covered under insurance

$24.5

exchanges and other incentives. Key hospital financial metrics $24.0

illustrate similar trends towards healthier hospital economics. Using three years of data maintained by

$23.5 2012

2013

2014

2015

of 2015, we can see how many financial indicators may change. Gross patient

Linear (total)

Total

Premier, and trending growth to the end

revenue has been positive since the second quarter of 2012. Using a linear regression, we see that if the trend Fig.2

Actual and forecasted net patient revenue as a percentage of gross patient revenue

continues, gross patient revenue could see growth in excess of 26 percent in the fourth quarter of calendar year 2015 compared to the fourth quarter

40%

of calendar year 2012 (see Figure 1). Increased hospital use and revenue does not translate to loosening

35%

budgets or less diligent financial management. As illustrated in the Hospital Performance Metrics

30%

article in this edition, Premier data illustrates top performers are 25%

experiencing five-year highs in operating margins and profit per acute bed in service. As reimbursement

20% 2011

2012

2013

Total

Median

2014

Linear (total)

2015

cuts loom, hospitals must continue to drive improved profit margins. Profit improvement is also demonstrated by calculating net patient revenue as a percentage of

OUTLOOK

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Fig.3

Average total net patient revenue and total operating expense by hospital size

Hospital size

Critical access (<25 beds)

Small (26 – 200 beds)

Medium (201 – 500 beds)

Large (>500 beds)

Metric

Slope of quarterly average

Net patient revenue

82,939

Total operating expense

187,849

Net patient revenue

59,017

Total operating expense

8,885

Net patient revenue

244,915

Total operating expense

188,530

Net patient revenue

1,216,179

Total operating expense

770,802

Net patient revenue slope/ total operating expense slope 0.44

6.64

1.30

1.58

gross patient revenue (see Figure 2).

though most dramatically for smaller

quality of care. Although healthcare

This ratio represents a directional tie

sites (see Figure 3). The quarterly run

has experienced a prolonged period of

to profit margin. As the percentage

rate for net patient revenue for small

economic challenge, there are several

decreases, the amount of gross revenue

hospitals was more than six times

indicators and industry analyses

flowing to the bottom line increases.

greater than total operating expense.

pointing toward financial sustainability

This performance may also suggest

Critical access facilities could feel

in the acute-care segment. Only time

gains in reducing bad debt and charity

tougher financial strains going forward,

will tell, as the effects of healthcare

care, secondary indicators of economic

even with the projected economic

reform continue to play out. In the

growth. Increased revenue, particularly

recovery, as total operating expense

short term, hospitals are poised for

for not-for-profit facilities, could

is outpacing net revenue growth.

healthier bottom lines and spending

help to offset large capital purchases

Hospital executives must continue

driven by increased patient use,

that hospitals have previously put

to become more efficient in cost

which will potentially lead to more

off during tighter budget cycles.

management while maintaining

resources and capital spending.

Information was evaluated by bed size, average net patient revenue, and total operating expense to calculate quarterly results between 2011 and 2013. Quarterly numbers were also generated and compared to show growth. On average, net patient revenue grew faster than total operating expense for small, midsized and large hospitals,

REFERENCES 1. P aul Demko, “Healthcare Spending Set to Spike by 6.8% in 2015, Report Predicts,” Modern Healthcare, June 24, 2014, http:// www.modernhealthcare.com/article/20140624/NEWS/306249942&utm_source=AltURL&utm_medium=email&utm_ campaign=am?AllowView=VXQ0UnpwZTVEUGFhL1IzSkUvSHRlRU92alVnZEErSmY=&mh. 2. “ Slight Uptick in Expected Growth Rate Ends Five-Year Contraction,” PWC, http://www.pwc.com/us/MedicalCostTrend. 3. C hristopher Weaver, “Hospitals Cash In on the Newly Insured,” The Wall Street Journal, August 4, 2014, http://online.wsj.com/ articles/hospitals-cash-in-on-the-newly-insured-1407196639. 4. “ Providers Increasingly Dissatisfied with EHRs Despite Heavy Investments, According to Premier, Inc. C-Suite Survey,” Premier, Inc., June 2, 2014, https://www.premierinc.com/wps/portal/premierinc/public/newsandevents/newsreleases/newsreleases/ premier-economic-outlook-csuite-survey-6-2-14. 5. Database maintained by Premier, Inc. (512 hospitals submitting patient level data over three-year period).

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SUCCESS STORY

Supporting patient safety while lowering the total cost of ownership for surgical instruments and endoscopes

onprofit Banner Health is headquartered in Phoenix, AZ and is recognized as a top

health system in the country for the clinical quality consistently provided to patients in the 25 hospitals that it operates. Banner’s mission, “To make a difference in people’s lives through excellent patient care” has helped it grow to service nearly 300,000 members in seven states. It encompasses a fully integrated system that now includes significantly expanded services through Banner Health Network and Banner Medical Group. As a nonprofit, Banner must manage every dollar to support the work it does delivering world-class patient care. Banner Health has partnered with PREZIO Health and its Total Cost Management program due to PREZIO’s documented commitment to provide significant savings on the true costs of owning and maintaining handheld surgical assets. As Frank Cabrera, senior director of clinical engineering, commented, “The consolidation of service for endoscopes (flex/rigid) and instruments is a first for any clinical engineering

OUTLOOK

QTR 4.14

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department as far as I am aware. Using

•B uilding a customer-defined and

Greg Bright, PREZIO Health vice

Banner Health’s bandwidth to drive

dedicated loaner pool for high-

president of operations and business

operational efficiencies was the catapult

volume, critical need items;

development, further added, “The

in which this was to be obtained. This is, in fact, very much aligned with President and CEO Peter Fine’s vision of leading through innovation

•C reating and staffing a Surgical Instrument Service Lab on

proud to have been selected as a

premises at Banner Health;

partner and honored to assist Banner

•P roviding educational in-

by decreasing our operational service

services that support Banner’s

expense. A win-win for all involved.”

processing improvements and

PREZIO Health is committed to

help reduce overall mishandling

accepting primary responsibility for

of surgical instrumentation

addressing the issues that elevate

and equipment with the goal of

repair costs. By combining informatics,

reducing total repair volume;

education, and ISO-certified repair

accredited continuing education

in-service processes, PREZIO

units (CEUs) to Banner Health

Health has reduced the frequency of

member staff aimed at improving

required repair and/or replacement

the care and handling of surgical

of Banner’s instrumentation and

instrumentation and equipment;

spend in excess of 15 percent. Working alongside Banner Health’s

For information on PREZIO Health and Total Cost Management programs please visit PREZIOHealth.com

•P roviding a web-based company portal in order to enhance the efficiency by which demand

technology management team to

service events are identified

garner a thorough understanding of its

and assets expedited; and

mission, goals and needs resulted in a

Health deliver patient care.”

•D elivering IAHCSMM- and CBSPD-

with intensive care and handling

reduced Banner’s prior year’s overall

entire team at PREZIO Health is

•P roviding actionable intelligence

customized Total Cost Management

and reporting on the services

program consisting of the following:

provided through PREZIO

• Establishing best-in-class ISO-

Health’s information technology

certified surgical instrument and

platform as well as a commitment

equipment preventative maintenance

to scheduled Quality Partnership

and repair processes, ensuring patient

Reviews (QPRs) to enhance and

safety and physician satisfaction;

improve customer satisfaction. THIS ARTICLE IS A PAID ADVERTISEMENT. This article was not written by Premier and is not an endorsement by Premier.

ECONOMICS A conversation with an economist, 52 Behind the numbers, 57 An update on hospital performance metrics, 64 Patient volume trends, 69 Premierâ&#x20AC;&#x2122;s supply chain solutions, 73 Inflation summary, 74 Success story: ScriptPro, 75

ECON OMI CS 2 0 1 4

A CONVERSATION

with ILIR HYSA Economist, Moody’s Analytics

Ilir Hysa is an economist with Moody’s Analytics who covers U.S. healthcare, as well as state, and regional economies. He also participates in housing modeling and international forecasting; contributes to the company’s Regional Financial Review publication; and writes blogs and commentaries for Moody’s Analytics’ Dismal Scientist website. He received

What is your estimate for gross domestic product (GDP) growth in the next 12 months? What sectors will have the greatest impact on growth? Following a disappointing first quarter and some weakness in the second quarter, GDP is anticipated to grow 1.7 percent this year. Growth should accelerate to 3.7 percent in 2015. Factors that stalled growth this year were severe winter temperatures across the U.S., continued slack in the labor market, and pent-up demand in housing. Recent employment numbers, however, suggest that the U.S.

his PhD in economics from the Graduate

economy is gathering some momentum and economic activity should be much

Center of the City University of New York.

stronger by early 2015. With improving private balance sheets and flowing credit, consumer spending will comprise the largest share of the economy. Consumer spending and fixed investments are expected to grow the most in the next 12 months.

What role do you think healthcare will play in overall GDP growth? Broader health insurance coverage under the Affordable Care Act (ACA) has been increasing demand for health services, and this will be reflected in the 2014 GDP. Significant impact is likely to be felt when the Quarterly Services Survey data are incorporated in the third quarter GDP estimates later this fall.

ECONOMICS

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What changes do you expect to see over the next 12 months in the U.S. unemployment rate? How will unemployment impact the healthcare industry (if at all)?

“

Recently reported employment

economic reasons” – increased by

numbers indicate that

275,000 in June, an indication that the

economic activity is accelerating, driving the unemployment rate

labor market has a long way to go. Joblessness in general and long-

further down. Assuming that there

term unemployment in particular will

will be no significant fiscal drag on the

hinder overall spending, including that

economy and that the Fed manages

associated with healthcare. This is an

to keep interest rates relatively

issue, especially for states that opted

low, the U.S. will reach its full

out of the Medicaid expansion program,

employment (an unemployment rate

as the decision created a coverage gap

of 5.4 percent) by the end of 2016.

for low-income households that could

Meanwhile, the labor market

neither afford a plan on the exchange

still has hurdles to overcome. For

nor qualify for federal subsidies. As

instance, the number of involuntary

a result, healthcare consumption

part-timers – what the Bureau of

among that group will be limited,

Labor Statistics calls “part-time for

undermining overall industry growth.

A source of weakness for the healthcare industry stems

In some cases, hospitals get further undermined by what

from the adverse effect of uncompensated care on hospital

is reported as bad debt – those patients who possibly could

financials. Uninsured low-income Americans in states that

afford care but do not pay. All these difficulties have limited

opted out of the Medicaid expansion program continue to seek

short-term industry growth, resulting in muted hiring.

care by visiting emergency rooms, and such care, if unpaid, gets recorded as charity care in hospitals’ balance sheets.

The healthcare industry accounts for 13 percent of total national employment. Based on the June release of the

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Bureau of Labor Statistics (BLS), the industry contributed only 7 percent of all jobs created that month. While ambulatory care services, nursing, and residential care facilities are showing some action, hospitals are suffering. Until recently, hospital jobs amounted to 4 percent of total national employment. Now, they contribute only 3 percent. Moreover, though hospitals constitute one-third of total healthcare employment, according to the June BLS employment report, the sector created only 2,000 jobs in June – about 10 percent of newly created jobs in healthcare. Once some of the difficulties fade, and more newly insured Americans begin making use of coverage, the demand for healthcare services will grow. Industry hiring should pick up early next year and beyond. Overall, performance of the healthcare sector remains closely linked to implementation of the Affordable Care Act.

Can you describe overall inflation projections for the next 12 months and what this may mean for healthcare? What are your expectations for commodity prices?

The Federal Reserve has reduced its assetbuying program from $85 billion to $35 billion per month so far this year. How will this and other monetary policies impact the U.S. economy in the next 12 months?

We expect the consumer price index (CPI) to grow approximately 2 percent this year and slightly faster next year. However, the personal consumption expenditure (PCE) deflator may be a more accurate measure of healthcare inflation going forward. It includes healthcare spending by employers and government, whereas the CPI tracks out-of-pocket expenses only. The difference between

What effect will the global economy have on the U.S. economy in the next 12 months?

what the CPI and the PCE measure is likely to become

Global economic activity is strengthening, following a slow

more noticeable as some Americans currently enrolled

start to the year. As a result, output growth will gather

in an individual plan decide to join an exchange.

more momentum and reach trend sometime in 2015.

The producer price index (PPI) is expected to grow

World GDP growth is expected to accelerate to about 3.5

slightly faster than CPI, encouraging stronger economic

percent in 2015 and 2016, up from 2.8 percent this year.

activity by early 2015, as producers have better capacity

Economic growth in China is softening, and authorities

utilization rates. Such improvements are underway,

may implement a more defined stimulus focused on

but we should see a clearer picture next year.

infrastructure if growth weakens below the government’s

Commodity prices are subject to geopolitical risks

7.5 percent target in the second half of 2014. Long term,

to global oil supplies, and such risks are on the rise. A

Chinese policymakers are likely to tolerate slower growth

greater global demand, underpinned by the continued

as the economy gradually transitions to a more sustainable

industrialization of emerging economies and accelerating

growth path. We expect a steady deceleration, which should

economic activity in the U.S., will neutralize the effect

not adversely affect the U.S. economy in the short term.

of surging U.S. oil production on global prices.

ECONOMICS

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“

The strong payroll growth reported in recent months is likely to make

the Federal Reserve reconsider the timing of its monetary policy

stabilization. Should strength continue, the Fed may further contract its balance sheet and terminate its reinvestments by early 2015. However, it’s unlikely we’ll see any sudden changes. The June Federal Open Market Committee meeting provided some insight into a couple of lingering questions, including when quantitative easing will end and whether the Fed is switching its policy rates. At this point, it seems like policymakers are comfortable with announcing a $15 billion reduction in quantitative easing in October, which will result in the program ending this year. Still, the central bank’s balance sheet will approach $4.5 trillion, or 26 percent of nominal GDP. The bank will likely adopt a corridor system for interest rates, setting both a ceiling and a floor for the benchmark rate, as other global central banks do. It’s unclear at this point what the market reaction would be in that case.

The same cannot be said about Europe, however. With the exception of the U.K. and Germany, growth in the rest of Europe remains subdued, and a prolonged weakness has huge

are making use of their insurance coverage by getting regular checkups in outpatient settings. • T he Centers for Medicare and Medicaid Services’ newly

implications for the U.S. economy. Weak consumer demand

adopted “Two-Midnight Rule” is intended to cut down on

and fear of deflation may prompt the European Central Bank

the practice of holding patients for an extended period of

(ECB) to consider further easing of the monetary policy.

time for procedures that could be treated less expensively through outpatient procedures. When the CMS discovers

What inpatient or outpatient trends have you seen, and how do you expect these trends to continue in the next 12 months?

“suspect” inpatient visits, it withholds future payments of

Both inpatient and outpatient services are still below their

away from patient care and are a burden to the hospital.

historical trends, but the latter is faring better than the former.

Overall, the rule is prompting hospitals to be more careful in

Outpatient services are growing more than inpatient services

deciding whether or not to admit patients.

for several reasons: • P reviously uninsured individuals, who now can see a doctor before becoming very ill and going to an emergency room,

equivalent value to the hospital. While there is an appeal process, the administrative costs of the appeal take money

• A crackdown on excessive risk-adjusted, 30-day readmission rates for Medicare patients is also likely to adversely impact inpatient services.

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According to recent reports, more than 8 million Americans have signed up for insurance plans through the marketplace exchanges. In fact, it’s estimated that 60 percent of these 8 million are newly insured, meaning that they did not have insurance before the roll out of the exchanges. What impact will the exchanges have on overall healthcare spending in the next 12 months?

“

The newly enrolled individuals will make use of their insurance coverage and add to

overall healthcare spending by the end of the year. Over a million (28 percent) of them are

between 18 and 34, the age group most needed for diversifying the risk in insurance pools. Optimal risk-sharing estimates suggest the young and healthy, also known as the “invincibles,” should account for 35 percent of the newly insured. A less favorable mix may not result in the administration’s anticipated eventual premium decline, but it should still allow the market to work as intended. While the exact path premiums will follow in the next few years remains less certain, the volume of healthcare services will clearly grow, especially as economic activity picks up pace and incomes improve.

There have been mixed reports regarding whether healthcare spending is rising or falling. What are your forecasts, both short term and long term, for healthcare spending and what are the major factors impacting that forecast?

quarter of 2014, we find that healthcare spending growth in that six-month period is 1.9 percent. That is in line with the average growth recorded in the last three years. Because of various measures put in place, the healthcare spending path will look as follows:

It’s important to first note that while broader access to

• In 2014, federal spending for Medicare, Medicaid,

healthcare is an important goal of the ACA legislation,

the Children’s Health Insurance program (CHIP),

historical data suggest that cost of delivering care, not

and the exchange subsidies will amount to 4.8

enrollment, drives healthcare spending growth for the

percent of GDP, according to the nonpartisan

most part.

Congressional Budget Office (CBO).

While the significance of the reported healthcare spending decline of 1.4 percent is open for debate, there is no doubt that short-term healthcare spending growth does not vary much from what we have seen in recent years. In fact,

• Medicare spending is projected to increase from 3.5 percent of GDP in 2014 to 5.7 percent in 2039. The CBO expects spending growth will be slower beyond this point. • A ssuming implementation of the ACA gets completed

if we average out the healthcare spending growth of 5.4

as planned, the main healthcare cost driver in the

percent recorded in the last quarter of 2013 and the first

years to come will be the aging population.

ECONOMICS

ECONOMICS ECON OMI CS 2 0 1 4

T E

BEHIND THE NUMBERS Financial and economic trends impacting our members

egislation remains the top driver of healthcare costs for those responding to our semiannual Economic Outlook survey (see Figure 1), with 39 percent selecting it as most important compared to 52 percent in spring 2012. Reform mandates and initiatives â&#x20AC;&#x201C; such as meeting Meaningful

Use requirements, creating more patient-centered infrastructures, and tracking performance â&#x20AC;&#x201C; required some initial high-cost investments that health systems have made (or have planned to make) since 2012. The percentage of respondents who cited labor costs, which rose from 24 percent to 38 percent in spring 2014, dropped to 31 percent in this survey. Labor, typically the highest actual expense for a health system, has greater variability when facilities are consolidating and trying different staff incentive models to align with health system goals. Meanwhile, 24 percent of respondents said managing chronic, high-use patients (a new response option in the fall 2014 survey) was a top cause of healthcare costs. Only 5 percent of patients account for nearly half of all healthcare expenditures.1 These patients, with multiple chronic diseases, use healthcare services at a much higher rate than average. Population health and accountable care initiatives are targeting these patients as a way to reduce reliance on emergency and acute-care facilities.

OUTLOOK

QTR 4.14

ECONOMICS

T F

Fig.1

Top two drivers of healthcare costs (all respondents)

Healthcare legislation and mandates

Fall 2014 Spring 2014

Labor costs

Fall 2013 Spring 2013

Managing chronic, high-use patients

Fall 2012 Spring 2012

Health information technology

Pharmaceuticals Misalignment of quality and payment incentives

Source: Premier online survey for Economic Outlook fall 2014 publication

Lack of clinical coordination of care Overutilization of products and services Unjustified variation in care

New clinical technology or equipment Quality and safety improvement efforts Medical devices

10%

20%

30%

40%

50%

60%

Note: Responses that appear blank were not response options during the applicable survey fielding period.

shortage of medical professionals

in each region – Northeast and Mid-

may be influencing rising labor costs

A shortage of medical professionals

within their organizations: 68 percent

Atlantic, Southeast, Midwest and

and greater variability in predicting

say they have shortages of primary care

West – said they have a shortage

labor expenses. A market in which

physicians; 44 percent, shortages of

of primary care physicians.

there is a shortage means that health

specialty physicians; and 18 percent,

systems may be paying substantial

shortages of nurses (see Figure 2).

overtime to maintain the appropriate skill mix within their systems. Approximately four in five respondents have experienced a

There is minimal variation in the

Size of hospital has little influence on shortages of primary care physicians. However, the shortage of specialty

availability of medical professionals

physicians was inversely related to size

across different regions of the country.

of hospital, with 63 percent from small

More than 60 percent of respondents

hospitals reporting a shortage compared

ECONOMICS

T E

Fig.2

Shortage of medical professionals (C-suite only)

70% 68% Source: Premier online survey for Economic Outlook fall 2014 publication

60% 50% 40%

44%

30% 20% 18%

10% 0% Primary care physicians

Fig.3

Specialty physicians

Nurses

Changes in capital budget since previous year (C-suite only)

40%

Fall 2014 Source: Premier online survey for Economic Outlook fall 2014 publication

30%

20%

10%

0% Increased by 30% or more

Increased by 10% to 29%

Increased by 1% to 9%

No change

Decreased by 1% to 9%

Decreased by 10% to 29%

Spring 2014 Fall 2013 Spring 2013 Fall 2012 Spring 2012 Fall 2011

Decreased by 30% or more

OUTLOOK

QTR 4.14

ECONOMICS

T F

to 32 percent at large facilities. This

(see Figure 3). However, 38 percent,

the biggest area of capital investment,

could be a result of greater recruitment

almost 20 percentage points higher

with 47 percent of respondents

competition from larger hospitals.

than in the spring, expected flat capital

reporting it as the biggest area of

budgets. Capital budgets remain

spend (see Figure 4). Investments

rebounded slightly compared to the

tight due to demands of healthcare

in infrastructure remain the second

fall 2013 survey, with 65 percent of

reform, EHR implementation,

largest area of capital expense, although

respondents forecasting increased

and lower reimbursements.

it continues to fall slightly from its

Respondentsâ&#x20AC;&#x2122; capital budgets

or flat budgets this year compared to

IT and telecommunications, which

last. That was up from 61 percent in

encompasses EHR systems and

the spring and 58 percent one year ago

advanced data analytics, continues to be

Fig.4

peak in the spring 2013 survey. Many more respondents appeared to be investing in imaging equipment this

Area of largest capital investment (C-suite only)

Fall 2014

IT and telecommunications

Spring 2014 Fall 2013 Spring 2013

Infrastructure (e.g., construction)

Fall 2012 Spring 2012

Imaging equipment

Surgical suites or equipment Source: Premier online survey for Economic Outlook fall 2014 publication

Other clinical equipment

Laboratory equipment

Other

10%

20%

30%

40%

50%

60%

ECONOMICS

T E

Fig.5

Current investment in EHR (C-suite only)

45% 41% Source: Premier online survey for Economic Outlook fall 2014 publication

40% 35% 30%

27%

26%

25% 20% 15% 10%

5% 0% ≤ $10 million

Fig.6

$10 million – $25 million

$25 million – $50 million

≥ $50 million

EHR satisfaction (C-suite only)

5.8% 11.6%

17.4%

Very satisfied Somewhat satisfied Neither satisfied nor dissatisfied

14.0%

Somewhat dissatisfied Very dissatisfied 51.2% Source: Premier online survey for Economic Outlook fall 2014 publication

OUTLOOK

QTR 4.14

ECONOMICS

T F

year, as the percentage of respondents

The primary reasons for EHR

The majority (74 percent) were

dedicating the most capital to imaging

dissatisfaction were:

C-suite, supply chain, materials

rose to 12 percent from only 7 percent

•S ystem performance not as promised

management, service line or practice

in the spring. Surgical, imaging and

or expected (73 percent);

area executives. Figures shown

laboratory equipment expenditures

•L ack of technical support (35 percent);

denoting “C-suite only” include only

typically come in waves, as a result of

• I nsufficient or poor data from

those replies from the 36 percent of

older equipment needing replacement. While the majority (88 percent) of respondents said their organizations

EHR provider (27 percent); and •R eturn on investment lower or longer than expected (23 percent).

had fully operational electronic

respondents who identified themselves as C-level or president of acute-care organizations. Slightly more than half (52 percent) came from a multi-

health record (EHR) systems, ongoing

About the survey

hospital system or integrated delivery

investments will likely be necessary to

In summer 2014, Premier, Inc., in

network (IDN). Urban and rural areas

maintain or enhance capabilities. Stage

collaboration with Customer Care

were almost equally represented,

of implementation and total cost for

Measurement and Consulting LLC,

and there were approximately equal

EHR varied greatly depending on health

commissioned an online survey of

numbers of respondents from the

system size, with 41 percent saying they

approximately 9,500 healthcare

following geographic areas: Northeast

have invested more than $50 million

leaders across our membership. We

and Mid-Atlantic; Southeast;

in an EHR system (see Figure 5).

included both the acute and non-

Midwest; West (includes Southwest,

acute healthcare markets. The survey

Northwest and West Coast). An

percent) have spent less than $10 million

Approximately one-quarter (26

respondents (n=387; response rate=4

overview of the respondent profile

or between $10 million and $25 million

percent) encompassed members across

is shown in Figures 7 and 8.

(27 percent). Very few (6 percent) have

geographical area and organizational

invested between $25 and $50 million.

size and type. The survey collected

Satisfaction with EHR systems has

data on members’ perspectives

risen significantly since the spring

about the healthcare supply chain,

2014 survey. At that time, 59 percent

population health management, quality

of respondents indicated some level of

incentives, and financial and economic

satisfaction with their EHR system, with

trends impacting the industry.

30 percent reporting dissatisfaction. In the current survey, 69 percent said they were satisfied, and only 17 percent noted dissatisfaction (see Figure 6).

REFERENCE 1. T he High Concentration of U.S. Health Care Expenditures: Research in Action, Issue 19. June 2006. Agency for Healthcare Research and Quality, http://www.ahrq.gov/research/findings/factsheets/costs/expriach/index.html

ECONOMICS

T E

Fig.7

Role of survey respondents

C-suite and president Source: Premier online survey for Economic Outlook fall 2014 publication

Service line or practice area manager/director Supply chain and materials management Non-C-suite administrator Finance and accounting Physician/clinician Quality improvement Other 0%

Fig.8

10%

15%

20%

25%

30%

35%

40%

Types of respondent organizations

Large hospital (more than 500 beds) Midsized hospital (between 200 and 500 beds) Small hospital (less than 200 beds) Ambulatory or outpatient center Source: Premier online survey for Economic Outlook fall 2014 publication

Critical access hospital (less than 25 beds) Multi-specialty group practice Surgery center Senior living facility Single-specialty group practice Physician-owned specialty hospital Other 0%

10%

15%

20%

25%

35%

30%

OUTLOOK

QTR 4.14

ECON OMI CS 2 0 1 4

AN UPDATE

ON HOSPITAL PERFORMANCE

METRICS

oody’s recently

bed in service. The top quartile saw a 42

reported median 2013

percent increase in profit per bed in the

operating margins

past five years (from $68,859 to $97,801).

among approximately

Top quartile hospitals make more than

200 not-for-profit hospitals fell in 2013

three times as much profit per acute

to 2.2 percent. That comes on the heels

bed in service as the average and nearly

of a year where expenses outpaced

seven times as much as the median.

revenue. Premier’s analysis of 455 facilities shows a similar dip in median

grew for the average and median

operating margins, to 1.6 percent

hospitals from 2009-2013, the median

overall, although the information is

and average saw decreases in profit

through CY2013 compared to Moody’s

per bed from 2012 to 2013. Overall, the

September 30 year-end.

median saw a 14 percent increase in

Revenues were impacted by a variety of factors in 2013, including reimbursement cuts and harsh winter

Gross inpatient revenue as a percent

expenses such as large-scale

as a result of ACA incentives. These

investments in HIT and infrastructure

incentives encourage health systems to

continue to grow.

prevent readmissions and emergency treatment while changing payer

care hospitals have remained static

reimbursement for several procedures

since 2009, according to an analysis of a

from inpatient to outpatient. As a

Premier database (see Figure 1). While

percentage of all patient revenue,

median and average operating margins

inpatient procedures currently account

fluctuated in the past five years, finishing

for 45 percent on average, down from 50

2013 very slightly above 2009 levels,

percent of gross patient revenue in 2009

top quartile performers have grown 36

(see Figure 3). Similar dips were seen across the

among those hospitals increased from

median and top quartiles. Gross

6.8 percent in 2009 to 7.3 percent in 2011,

inpatient revenue accounted for

ending 2013 at 9.2 percent.

52 percent of total patient revenue in

One explanation for growing

bed grew 28 percent (see Figure 2). of total patient revenue has declined

percent since 2009. Operating margins

ECONOMICS

profit per bed, while average profit per

weather across the U.S. Meanwhile,

Average operating margins for acute-

While profit per acute bed in service

2009 for the median and 60 percent for

operating margins among the top

the top quartile, falling to 48 percent

quartile is an increase in profit per acute

and 56 percent in 2013, respectively.

ECONOMICS

T E

Fig.1

Operating margin of acute care hospitals

10%

Source: A database maintained by Premier, Inc.

0% 2009

2010

Top quartile

Fig.2

2011

2012

Median

Average

2013

Profit per acute bed in service

$100,000

Top quartile

$90,000

Median

$80,000

Average

$70,000 $60,000 Source: A database maintained by Premier, Inc.

$50,000 $40,000 $30,000 $20,000 $10,000 $0 2009

2010

2011

2012

2013

OUTLOOK

QTR 4.14

ECONOMICS

T F

Fig.3

Gross inpatient revenue as a percentage of gross patient revenue

70% 60% 50% Source: A database maintained by Premier, Inc.

40% 30% 20% 10% 0% 2009

2010

2011

Top quartile

Fig.4

2012

Median

2013

Average

Supply expense per CMI-adjusted acute discharge (SEpCAAD)

$1,250 $1,200 $1,150 $1,100 Source: A database maintained by Premier, Inc.

$1,050 $1,000 $950 $900 $850 $800 2007

2008

2009

2006 median

2010

2011

Average

Note: Dollars are adjusted to inflation using medical care CPI.

2012

Median

2013

ECONOMICS

T E

Fig.5

Bad debt expense as a percentage of net patient revenue

10%

Source: A database maintained by Premier, Inc.

0% 2009

2010

Top quartile

Fig.6

2011

2012

Median

2013

Average

Total operating expense as a percentage of net patient revenue

100%

95%

Source: A database maintained by Premier, Inc.

90%

85%

80% 2009

2010

Top quartile

2011

Median

2012

2013

Average

OUTLOOK

QTR 4.14

ECONOMICS

T F

Outpatient discharges continue to

•T he popularity of high-deductible

compared to 98 percent for the median

see volume growth, and in a survey of

insurance plans can increase bad debt

and average. The top quartile has also

Premier members, nearly 60 percent

in cases where the copayment is too

seen the most progress in decreasing

of respondents anticipated outpatient

high to be affordable in the instance of

operating expenses over the past five

admissions to grow this year compared

acute or emergency care.

years, dropping from 93.2 percent in

to last. Nearly one-fifth of respondents

•H ealth systems in states that

2009 to 90.8 percent in 2013.

predicted outpatient admissions would

expanded Medicaid coverage have

increase more than 5 percent.

seen earlier, more rapid decreases in

Notes

charity care than those that chose not

The cohort used for this analysis

on Medicare reimbursement rates,

to expand.

includes 455 acute-care facilities within

minimizing unnecessary costs that do

Total operating expense as a

Premier’s membership. If comparing to

As health systems work to break even

not improve clinical outcomes becomes

percentage of net patient revenue was

previous editions, please note that the

increasingly important. Figure 4 shows

flat for the median from 2009-2013.

cohort is updated to include all facilities

that supply expense per CMI-adjusted

The average saw a slight increase,

with full data within the database for

acute discharge (SEpCAAD) for both

from 97.9 percent to 98.3 percent of

the timeframe evaluated.

the average and median has fallen since

net patient revenue, from 2012 to

2007. Adjusting for inflation, the average

2013, though 2013 rates are slightly

deducting bad debt from gross patient

supply expense fell more than $200 per

below 2009 rates (see Figure 6).

revenue to arrive at net patient revenue.

CMI-adjusted acute discharge from a

Operating expense accounts for

Bad debt calculations are achieved by

In previous editions of the Economic

high of $1,227 in Q4 2007 to $1,004 in

approximately 91 percent of net patient

Outlook, bad debt was deducted from

Q4 2013. SEpCAAD for the median fell

revenue among top quartile hospitals

net patient revenue.

from a high of $1,174 to $962 over the same time period. Bad debt expense as a percentage of net patient revenue has remained flat for the median, average, and top quartile since 2009. While median and average bad debt sits at 7.3 percent and 8.7 percent, respectively, bad debt makes up only 4.7 percent of net patient revenue among the top quartile (see Figure 5). Payer mix plays a large role in bad debt, as does location. Changes to insurance coverage have influenced bad debt in a few ways: • Coverage expansion efforts (e.g., Medicaid expansion, individual mandate and coverage inclusion for preexisting conditions) largely decrease charity care and bad debt.

REFERENCES 1. “Announcement: Moody’s: Preliminary Medians for Not-For-Profit Hospitals Show Expenses Growing Faster Than Revenues,” Moody’s, April 23, 2015, https://www.moodys.com/research/Moodys-Preliminary-medians-for-not-for-profit-hospitals-show-expenses--PR_297735. 2. Medicaid Expansion Cutting Bad Debt, Charity Care,” RevCare, June 6, 2014, http://www.revcare.com/archives/5067.

ECON OMI CS 2 0 1 4

PATIENT VOLUME

hese metrics are based on a sample of 512 healthcare facilities that submitted three years of inpatient and outpatient data to a database maintained by Premier. The sample, which accounts for 182.8 million patient discharges, represents a cross-section of our membership that

includes variations in geographic area as well as organizational size and type. This report identifies year-over-year (YOY) percentage changes in volume for key

data elements such as inpatient and outpatient discharges, surgery growth, and payer mix from CY2012 to CY2013. In line with discharge data from 2013, outpatient visits are anticipated to continue

TRENDS

growing for the majority of respondents to our semiannual Economic Outlook survey: 73 percent of C-suite respondents forecast an increase in outpatient visits next year compared to this year. Only 4 percent of C-suite respondents expect decreases in outpatient visits next year. While 32 percent of C-suite respondents predict flat inpatient admissions next year, nearly half (49 percent) predict a decrease in inpatient admissions.

Fig.1

2013 quarterly trends

YOY growth

Q2 2013

Q3 2013

Q4 2013

CY2013

Inpatient

-2.22%

-0.84%

-1.36%

-3.48%

-1.98%

Outpatient

-0.49%

1.63%

4.32%

1.74%

1.79%

Total discharges

-0.67%

1.38%

3.73%

1.21%

1.41%

Inpatient surgeries

-3.72%

-1.54%

-1.90%

-2.26%

-2.36%

Outpatient surgeries

-2.95%

-0.31%

0.35%

-0.58%

-0.86%

Births

-1.09%

1.00%

-0.38%

0.60%

0.03%

Medicare discharges

1.26%

4.59%

6.50%

4.54%

4.22%

Medicaid discharges

0.26%

1.15%

3.12%

-1.31%

0.79%

Self-pay discharges

-4.06%

-3.65%

-1.80%

0.47%

-2.27%

Managed care and other payer discharges

-1.80%

0.15%

3.15%

0.06%

0.38%

Source: A database maintained by Premier, Inc.

Q1 2013

Notes: Quarterly numbers show the percentage of change from the same quarter in the previous calendar year. Annual totals represent the percentage of change overall in 2013 compared to 2012.

OUTLOOK

QTR 4.14

CHANGES OF NOTE 2%

INPATIENT VOLUME decreased

1.4%

FY2012

1.8%

FY2013

OUTPATIENT VOLUME increased

INPATIENT AND OUTPATIENT SURGERIES decreased in 2013 compared to 2012

DISCHARGES OVERALL increased

Discharges in all public or private payer categories (Medicare, Medicaid and commercial) were up in 2013

2.6%

Fig.2

SELF-PAY DISCHARGES 2011

1.7%

SELF-PAY DISCHARGES 2012

SELF-PAY 2.3% DISCHARGES 2013

TRENDS

Inpatient and outpatient admissions forecast (C-suite only)

70%

Inpatient Source: Premier online survey for Economic Outlook fall 2014 publication

60% 50% 40% 30% 20% 10% 0% Increase by more than 5%

Increase by up to 5%

No change

Decrease by up to 5%

Decrease by more than 5%

Outpatient

ECONOMICS

T E

Fig.3

Discharge trends

10% 8%

Source: A database maintained by Premier, Inc.

YOY percent change

2% 0% -2% -4% -6% Q1.2012

Q2.2012

Q3.2012

Q1.2013

Inpatient discharges

Total discharges

Q2.2013

Q3.2013

Q4.2013

Outpatient discharges

Discharges by payer type

10% 8% 6% 4%

Source: A database maintained by Premier, Inc.

YOY percent change

Fig.4

Q4.2012

2% 0% -2% -4% -6% Q1.2012

Q2.2012

Medicare

Q3.2012

Medicaid

Q4.2012

Q1.2013

Self-pay

Q2.2013

Q3.2013

Q4.2013

Managed care and other

OUTLOOK

QTR 4.14

ECONOMICS

T C

Fig.5

Surgery and emergency department visits

10% 8% 6% 4%

Source: A database maintained by Premier, Inc.

YOY percent change

2% 0% -2% -4% -6% Q1.2012

Q2.2012

Q3.2012

Q4.2012

Fig.6

Q1.2013

Q2.2013

Outpatient surgery visits

Inpatient surgery visits

Q3.2013

Q4.2013

Emergency room visits

Average length of stay

3.7

3.6

3.5

-1%

3.4

3.3

-2% Q1.2012

Q2.2012

Q3.2012

Q4.2012

Year-over-year percent change

Q1.2013

Q2.2013

Average length of stay (days)

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

Q3.2013

Q4.2013

Days

YOY percent change

ECON OMI CS 2 0 1 4

• A nalyzes spend by individual facility or IDN.

PREMIER’S

The Supply Mix Index methodology

The calculator can be found on PremierConnect. For more information about the Medical-Surgical Inflationary Calculator, please contact the Premier Solution Center at solutioncenter@premierinc.com.

SUPPLY CHAIN SOLUTIONS

The Medical-Surgical Inflationary Calculator is an easy-to-use resource designed to help members estimate medicalsurgical supply spend. The calculator:

inflation estimates to deliver a detailed estimate of projected supply costs; • Prepopulates the spend profile from one SpendAdvisor® report and allows users to manually adjust for anticipated spend; • Compensates for off-contract spend with an optional SpendAdvisor report; • Alerts members to contract categories that will be renegotiated in the current year; • Provides aggregate inflation estimates by line of business; and

designed to: •E nable the calculation of a hospital’s

Drug Budget Tool

The Supply Mix Index can also be

A resource for proactive drug expense management

calculated across systems, within

The Drug Budget Tool prepopulates

a system.

profiles for analysis and lets users

service lines, and at other levels within •B e statistically sound. The MS-DRG

evaluate their drug purchases. The tool:

Supply Mix Index calculates weights

• A nalyzes 93 percent of annual

using 4 million patient-level records

hospitals in a single SpendAdvisor report; and

from Premier’s QualityAdvisor™ database. •D emonstrate a more direct correlation to supply expense per patient case than

• Automatically fills in all of the

the Case Mix Index. Premier’s Supply

application’s analytic cells.

Mix Index focuses on the supply cost

To learn more about the Drug Budget Tool, please contact Jerry Frazier, director of Premier’s Center for Evidence-based Pharmacy Practice, at jerry_frazier@premierinc.com.

within a case, while the Case Mix Index incorporates other significant, nonsupply-related expenses. • A llow for cross-hospital comparisons of supply efficiency and intensity.

• Compares Premier’s contractual price protection and suppliers’ price

from more than 497 hospitals. It is

mix of services provided to patients.

• E xamines entire systems and multiple

A resource for proactively managing medical-surgical supply spend

combines clinical and supply cost data

Supply Mix Index based on the unique

drug purchases;

Medical-Surgical Inflationary Calculator

spending waste.

Premier’s new methodology will

Supply Mix Index

initially be found in the executive-

A methodology for calculating supply cost indexes for each Medicare Severity DiagnosisRelated Group (MS-DRG)

level reporting application of

Premier’s newly patented Supply Mix

included with OperationsAdvisor®,

Index allows users to calculate supply

Premier’s labor productivity

expense per patient procedure. Using the

and benchmarking product.

™

SupplyFocus®, which is used by acutecare facilities. SupplyFocus is also

index, hospitals can accurately isolate supply costs as a percentage of the total cost of a clinical procedure and compare it with other hospitals nationwide to ensure appropriate resource utilization

To learn more about Premier’s Supply Mix Index, please contact Mark Hiller, vice president of innovative solutions, at mark_hiller@premierinc. com, or Richard Westbay, program manager, SupplyFocus, at richard_westbay@premierinc.com.

and supply efficiency, while identifying OUTLOOK

QTR 4.14

ECON OMI CS 2 0 1 4

INFLATION SUMMARY

Range of supplier inflation estimates: This figure shows the range of supplier-reported inflation estimates for products within each service line. The range does not take into account Premier contract price protection or utilization data.

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

Projected Premier contract inflation estimates are calculated as follows: Pharmacy – Projections are derived from the Premier Drug Budget Tool. All others (except Foodservice) – Projections reflect the expected weighted average percent change in contract pricing for the existing contract portfolio as of October 1, 2014.

Service line

Average of inflation estimates

Projected Premier contract inflation estimates

Cardiovascular Services

3% – 5%

3.67%

0.01%

Clinical Laboratory Services

2% – 5%

3.00%

0.91%

Continuum of Care

0% - 2%

1.33%

1.28%

Facilities

0% – 15%

3.89%

1.19%

Foodservice

2% – 8%

5.00%

Imaging

0% – 10%

4.00%

1.21%

IT / Telecommmunications

0% – 9%

2.88%

0.10%

Materials Management

0% – 15%

3.87%

1.71%

Nursing

0% – 13%

3.17%

0.94%

Pharmacy*

0% – 56%

Not Applicable

7.60%

Purchased Services

0% – 0%

0.00%

Surgical Services

0% – 10%

3.39%

0.95%

Women & Children’s

0% – 15%

3.89%

0.00%

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

Range of inflation estimates

Not Available

ECONOMICS

T E

SUCCESS STORY

ScriptPro’s high-performance pharmacy management system boosts pharmacy productivity

eggie Singh, PharmD, RPh, owner of Live Oak Pharmacy (Live Oak, CA), uses ScriptPro’s SP Central

Pharmacy Management System to streamline his independent pharmacy practice and lower costs. Singh feels the system adds value to his pharmacy, so he has implemented it in several stores. According to Singh, “This system offers many features that make prescription processing easier, yet more secure, because every step is tracked and documented. It groups the patient’s order together during technician filling, pharmacist verification, and point of sale to ensure all the prescriptions stay together and leave with the patient. It also gives a detailed status for each prescription within the patient order, such as on hold or prior authorization, refill too soon, partial fill, out of stock, verified, or waiting in will call bins. “ScriptPro makes it so easy to run dual or multiple inventories, because inventory management happens behind the scenes. Each script is assigned to an inventory center, such as 340B or pharmacy, at the point of

OUTLOOK

QTR 4.14

ECONOMICS

T F

“Pharmacies have to get technology on board. Technology lowers your costs and increases productivity.”

data entry. At the end of the month,

“SP Central runs reports that give

aware” architecture ensures that all

reports are generated showing

me visibility into my business, such as

information is updated immediately

all 340B prescriptions as well as

what percentage of my patients are on

without the need to trigger searches

prescriptions from regular inventory.

a particular third-party plan and what

and lookups. Local processing,

is the profit margin from each plan?

enterprise coordination, and web-

change the patient’s third-party card

How many new patients did I get this

based applications weave together to

information or switch the prescription

month? Did I get results from the ad

optimize performance and broaden

from cash to third-party, without having

I ran, and is there shrinkage? These

the scope of system capabilities. It

to start over at the data entry terminal.

reports allow me to see how my business

handles specialized pricing and class-

We add insurances on the fly, right at the

is growing, and I have more free time

of-trade inventories, such as 340B,

to work on it because of ScriptPro.

seamlessly without the need to resort

“At point of sale (POS) you can add or

look up the status of the patient’s order

“I look forward to the new software

to add-on applications. Advanced

without interrupting me. We spend a lot

build being released that incorporates

pharmacy clinical services applications

less time looking for lost orders. Also at

a communications module for

position the system to continue to push

POS, the system notifies us if multiple

texting refill and pickup reminders,

the envelope of genomic medicine,

orders exist (in large bin, will call, or

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COMMODITIES Minimizing raw materials risk, 78 Copper market overview, 80 Cotton market overview, 82 Energy market overview, 84 Food market overview, 86 Plastic resins market overview, 90 Natural and synthetic rubber market overview, 92 Steel market overview, 94 References, 96

COMMODITIES

T F

MINIMIZING

RAW MATERIALS RISK

sample of Premier’s contracted suppliers identified key raw materials that serve as primary drivers of their products’ pricing. Potential category and market impacts are shown for the raw materials featured in this publication.

In order to minimize the risk associated with raw materials’ pricing, healthcare facilities should: • Review categories that may be impacted by fluctuations in raw material costs; • Use the inflation tables in this publication to locate suppliers with firm pricing in a category impacted by raw materials of interest; and • Refer to the contract launch materials in Supply Chain Advisor® to identify a category’s lowest-cost provider.

LABOR PREMIER CONTRACT IMPACT* Intraoperative neurophysiological monitoring services

•

Surgical instrument and scope repair

•

Cardiac rhythm management devices

•

ENERGY PREMIER CONTRACT IMPACT* PC hardware and software resellers

•

Video laryngoscopes

•

Third-party freight management

•

PLASTIC RESINS PREMIER CONTRACT IMPACT* Pain management – local anesthetic

•

Contrast media injector disposables

•

Can liners

•

*Refer to contract-specific price protection information in the inflation tables. Price increase risk: Red = High; Yellow = Moderate; Green = Low

COMMODITIES E

Fig.1

T C

This figure illustrates the percent of inflation on medical-surgical supplies attributed to each raw material.

Precious metals, 0.1% Natural and synthetic rubber, 0.6%

Cotton, 1.1%

Electronic components, 2.7% Organic and inorganic chemicals, 3.4% Base metals, 4.1%

Paper, 7.8%

Plastic resins, 8.6%

Energy, 30.7%

Labor, 40.9%

Source: Premier online supplier survey for fall 2014 Economic Outlook publication

OUTLOOK

QTR 4.14

COPPER MARKET OVERVIEW

PRODUCT CATEGORIES WITH HIGH COPPER CONTENT AND 12-MONTH PRICE OUTLOOK Energy efficiency services

•

HVAC equipment, controls and services

•

Ice machines and dispensers

•

Maintenance, repair and operations

•

Copper market update Over the second quarter of 2014, copper prices wavered between $3.09 and $3.19 per pound. Analysts suggest 1,2

that prices in the third and fourth quarters will fall below the ranges that were predicted in early 2014. 3 Prices are expected to range from $6,200$7,000 per metric ton through the end of the year.4,5 Because China is the world’s largest buyer of industrial metals, including copper, variations in the copper market tend to be in sync with fluctuations in the Chinese economy. Concerns over the growth of China’s economy have helped drive copper prices down by 7 percent this year.6 Although reports in earlier months optimistically hinted at economic growth, more recent data reflect trends counter to those reports, suggesting that Chinese demand for copper may not prove to be as robust as predicted. The skepticism surrounding the direction of the market has driven copper prices down further.7

According to Societe Generale Group, supply in the global copper market is expected to exceed demand by 470,000 metric tons, far outpacing last year’s 50,000 ton surplus.8 Still, the anticipated surplus in the market has not been forthcoming, and copper continues to trade at the top of the predicted range.9 In China, imports of copper fell by 70,000 tons over the month of May, signaling what could be the beginning of decreased demand.10 Analysts are also concerned that continued economic reform in China will slow overall growth, and in turn, reduce commercial demand for copper across the country.11 In addition to international concerns, spending cuts, high government debt levels, and unresolved fiscal policy issues within the United States will also put downward price pressure on global markets, including copper. However, the extension of quantitative easing-based monetary policy will continue to support commodity markets and prices.12

COMMODITIES E

Fig.1

T C

Average monthly copper prices (London Metal Exchange) 500 450

Cents per pound

400 350 300 250 200 150 100 2010 (July - Dec)

2011

2012

2013

2014 (Jan - Feb)

Source: U.S. Geological Survey: Copper statistics and information

Fig.2

Projections for 2014

FACTOR

IMPACT ON COPPER PRICES

COMMENTS

Slowing Chinese demand

Imports of copper fell by 70,000 tons in May 2014, signaling what could be the beginning of decreased demand. Continued economic reform in China may slow economic growth and reduce commercial demand for copper.

Uncertain surplus

Societe Generale Group expects the supply of copper to exceed demand by 470,000 metric tons this year. However, the anticipated surplus in the market has not been forthcoming, and copper continues to trade at the top of the predicted price range.

U.S. fiscal policy

Spending cuts, high government debt levels, and unresolved fiscal policy issues will put downward pressure on copper markets. Quantitative easing-based monetary policy will continue to drive upward pressure for commodity markets.

OUTLOOK

QTR 4.14

COTTON MARKET OVERVIEW

PRODUCT CATEGORIES WITH HIGH COTTON CONTENT AND 12-MONTH PRICE OUTLOOK Lap sponges or towels and specialty sponges

•

Restraints and fall prevention

•

Reusable textiles and textile services

•

Skin integrity: prevention, healing and support

• High cotton prices in the first half

Cotton market update In July, cotton prices fell to the lowest level in almost five years.1 Average cotton prices had risen to 94.04 cents per pound in the first quarter, but are beginning to decline, falling closer to the 2013 average of 90.42 cents per pound.

Although prices have increased since 2013, most analysts expected prices to drop significantly after the start of the new crop year in August. Forecasts 3

suggest prices will fall to about 85 cents per pound until the new harvest comes to market and should bottom out at 78 cents per pound by the end of the year.4 This trend should continue into 2015 as cotton prices for the 2014-2015 crop season (August-July) are predicted to be the weakest in five years.

of 2014 can be attributed, in part, to China, which has been stockpiling millions of bales, impacting supply. In the U.S., farmers have cut back on cotton production to increase their corn and soybean crops, which have been more profitable.6 Additionally, extreme drought conditions in West Texas and California and the possibility of an El Niño affecting weather in India, have threatened cotton crops in these top-producing regions.7 Each of these factors has resulted in upward pressure on cotton prices. However, recent reports by the USDA suggest that China will begin downsizing its cotton reserve.8 China’s imports are predicted to fall by 37 percent by the end of the 2013-2014 season, and by an additional 33 percent in the 2014-2015 season.9 Within the U.S., industry experts are forecasting a larger domestic cotton crop next year. Increased production in the U.S., along with the reduction of Chinese cotton stockpiles, will increase supply and put downward pressure on prices over the next year.10

COMMODITIES E

Fig.1

T C

The Cotton “A” Index The Cotton “A” Index is an estimate of the world price of cotton. It is an average of the five lowest quotations for a sample of 19 cottons traded internationally. 250

Cents per pound

200

150

0 2010

2011

2012

2013

2014 (Jan - Apr)

Source: National Cotton Council of America Note: Index values were unavailable from June 23, 2010 through Aug. 1, 2010 and again from June 10, 2011 through Aug. 1, 2011 due to insufficient quotes from merchants.

Fig.2

Projections for 2014

FACTOR

IMPACT ON COTTON PRICES

COMMENTS

Downsizing demand

For crop year 2014-2015, the USDA is projecting a 7.3 percent increase in consumption outside of China. Smaller stockpiles in China could result in a decrease in prices worldwide.

Increasing supply

The global supply of cotton is projected to increase by 3.8 million bales in 2014-2015, reaching a record 101.7 million bales.

OUTLOOK

QTR 4.14

ENERGY MARKET OVERVIEW

COMMODITY

CHANGE IN LAST 12 MONTHS

CHANGE LAST MONTH

Oil (light crude)

-10.10%

-3.74%

Heating oil

-8.04%

-1.01%

Natural gas

10.36%

-7.56%

Unleaded gas

-9.73%

-7.11%

Source: CNNMoney.com. Price change shown is from August 15, 2013 to August 15, 2014 or July 15, 2014 to August 15, 2014.

Oil

The EIA estimates that global liquid fuels consumption will grow by 1.3 million bbl/d in 2014, to 91.8 million bbl/d.1 This same rate of increase is expected for 2015 as well. In the U.S., liquid fuels consumption is expected to increase by 50,000 bbl/d in 2014 and maintain the same growth rate through 2015.2 Domestic production of fuels is anticipated to be strong through 2015: the EIA forecasts production to increase from 8.5 million bbl/d in 2014 to 9.3 million bbl/d in 2015.3 Most of the U.S. production growth has consisted of sweet grade crude oils, and growth in this area is projected to continue. Because of the growth in domestic production of crude oil, petroleum imports have significantly declined.4

Gasoline

Due to falling crude oil prices, the EIA predicts that the average retail price of regular gasoline will drop from $3.50/gal in 2014 to $3.38 in 2015.5 Forecasts also suggest that prices hit their peak for 2014 in May, at $3.67/gal, and will continue to fall through the year end as major refineries damaged in the spring return to working conditions.6

Natural gas

Assisted by improved weather conditions and the opening of several new wells, natural gas production hit a record high of 72.7 Bcf/d in March.7 Production growth is expected to continue at a rate of 4 percent through the end of 2014 before slowing to 1.3 percent in 2015.8 Because of rapid increases in production in the Marcellus formation, drilling activity may move back to the Gulf Coast in the coming months in order to stabilize prices near Henry Hub levels. Henry Hub natural gas spot prices averaged $4.58/MMBtu in May, and are expected to average $4.74/MMBtu for 2014 overall.9 Monthly prices are expected to remain near May levels until winter heating season begins.10

International crude oil market

the EIA predicts that OPEC surplus

have contributed to recent hikes in

The EIA predicts that OPEC crude oil

capacity will average 2.2 million bbl/d in

prices. Crude oil prices are expected

production will average 29.8 million

2014 and 3.5 million bbl/d in 2015.

to average $108/bbl through the end

bbl/d in 2014, signaling a decrease of

Global consumption of liquid fuels

of 2014, and are expected to fall to an

0.1 million bbl/d from 2013 production

is forecast to grow by 1.3 million bbl/d

average of $102/bbl in 2015.19 After the

rates.11 Experts expect that OPEC

in both 2014 and 2015.15 Growth in

January 2014 startup of TransCanadaâ&#x20AC;&#x2122;s

crude oil production will decline at

consumption will occur primarily in

Marketlink pipeline, prices for West

the same rate in 2015. Declines in

countries outside of the OECD. China

Texas Intermediate (WTI) crude

production have been attributed to

continues to be the leading contributor

oil increased $7/bbl from $95/bbl in

cutbacks in Iran, along with unplanned

to growth, with consumption targeted

January to $102/bbl in May. WTI prices

outages in Libya, Nigeria and Iraq.

to increase by 830,000 bbl/d by the end

will remain between $89/bbl and

of 2015. Consumption is predicted to

$114/bbl through the fall.20

While OPEC crude oil production is

anticipated to slightly decline, non-

decline in most OECD countries, with

OPEC crude oil supply should grow as

the exception of the United States.17

it has in recent years. Growth rates for

Brent crude oil prices averaged

non-OPEC crude oil are projected to be

between $107/bbl to $112/bbl for 11

1.5 million bbl/d and 1.2 million bbl/d in

consecutive months in May 2014.18

2014 and 2015, respectively.13 Because of

The EIA suggests that recent tensions

a reduction in production by some OPEC

in Libya and Ukraine, along with

members and non-OPEC supply growth,

record high levels of Chinese imports,

COMMODITIES E

Fig.1

Projections for 2014 FACTOR

Fig.2

IMPACT ON ENERGY PRICES

COMMENTS

Strong crude oil production

Non-OPEC countries are expected to lead the way in crude oil production, adding an additional 2.7 million bbl/d to the global supply through 2015. The increase in supply is expected to push prices down to an average of $102/bbl in 2015.

Consumption in China

Chinese consumption of oil is targeted to increase by 830,000 bbl/d by the end of 2015. China continues to be the biggest source of consumption growth, while oil consumption is predicted to decline in most OECD countries.

New and improved sources

With the opening of new wells and the repair of several refineries damaged by weather conditions, oil and gas production has increased significantly in recent months. The increased supply created by these new sources will create downward pressure on prices.

Henry Hub natural gas prices Projections

Dollars per million BTU

8 6 4 2 0 2013

2014

Historical spot price

2015

STEO forecast price

95% NYMEX futures upper confidence interval

NYMEX futures price

95% NYMEX futures lower confidence interval

Source: Short-Term Energy Outlook, June 2014. Note: Confidence interval derived from options market information for the 5 trading days ending June 5, 2014. Intervals not calculated for months with sparse trading in near-the-money options contracts.

U.S. gasoline and crude oil prices

Projections

5 4 Dollars per gallon

Fig.3

3 2 1 0 2010

2011

2012

Retail regular gasoline

2013

Crude oil

2014

2015

Price difference

Source: Short-Term Energy Outlook, June 2014. Note: Crude oil price is composite refiner acquisition cost. Retail prices include state and federal taxes.

OUTLOOK

QTR 4.14

FOOD

MARKET OVERVIEW

Global food prices

U.S. food prices

According to the United Nations’ FAO

The Consumer Price Index (CPI) for

Food Price Index, average food prices

all food saw only a slight increase from

fell by 1.2 percent from April to May.1

February through April. As of April

The May 2014 index of 207.8 points

2014, the CPI was 1.9 percent above the

marks a 3.2 percent decline in prices

CPI from the year before.7 The food-

from the previous year.2 Overall declines

at-home CPI rose 1.7 percent between

reflect downward price pressures in the

April 2013 and April 2014, while the

dairy, cereal and vegetable oil markets.

food-away-from-home CPI increased 2.2

Dairy prices experienced a significant

percent over the same period.8

drop, down 5 percent in May, as the

Since the start of 2014, meat, poultry,

market recovers from recent supply

fish, dairy and fruit prices have risen,

limitations and subsequent price

while prices have fallen for vegetables,

spikes. In contrast, sugar prices rallied

fats, sweets and nonalcoholic beverages.9

in May, up 3.7 percent from April due to

The United States Department of

concerns over possible El Niño weather.4

Agriculture’s Economic Research

The price index also indicated flat meat

Service (ERS) forecasts that food price

prices over the one-month period.

inflation will return to a range closer

Global supplies of wheat and other

to the historical norm in 2014 after

grains are expected to reach a three-

experiencing unusual lows in 2013.10

year high before the 2015 harvest.

Given the outlook for commodity prices,

While increasing supplies worldwide

animal inventories, and export trends,

keep food costs low, they also create

inflationary pressures are expected to

market competition and reduce overall

be moderate in 2014. Overall, the food,

demand for U.S. grain.

food-at-home and food-away-fromhome CPIs are projected to increase 2.5 to 3.5 percent.11 However, the CPI forecast is heavily dependent on weather conditions, and droughts in California, Texas and Oklahoma could have major effects on the prices of fruit, vegetables, dairy, eggs and beef.12

COMMODITIES E

Fig.1

T C

The Food Price Index The Food Price Index from the United Nationsâ&#x20AC;&#x2122; Food and Agriculture Organization (FAO) is an average of five commodity groups: meat, dairy, cereals, oils and fats, and sugar.

240 230 220 210 200 190 180 2011 (June - Dec)

2012

2013

2014 (Jan - May)

Source: FAO.org Note: The November 2013 release of the FAO Food Price Index (FFPI) introduced a number of revisions to the way the FFPI is calculated, including changes to its commodity coverage. The revised FFPI has been extended to 1961.

Fig.2

Price change by commodity

Commodity

Corn

Soy Beans

Wheat

Lean Hogs

Live Cattle

Sugar

Coffee

Change last 12 months

-24%

-15%

10%

21%

-11%

52%

Change last month

-2%

-7%

-1%

-27%

-7%

15%

Source: CNNMoney.com. Price change shown is from August 15, 2013 to August 15, 2014 or July 15, 2014 to August 15, 2014.

OUTLOOK

QTR 4.14

COMMODITIES

T F

Fig.3

Food categories and 12-month price outlook