Bill Stankiewicz Copy Scope 2010 R Oi Company Model

Integration As A Better Model
April 2010

John Black, VP of Supply Chain
Greg Goddard, Director of Operations
1
* * * CONFIDENTIAL * * * © Resource Optimization & Innovation, an Operating Division of Sisters of Mercy Health System. Creation January 2010.

Agenda

 Mercy Overview
 Issues Facing Providers
 Understanding the Issues
 ROi Model – An Approach to Solutions
 Keys to Vendor Compliance – Less is More
 Opportunities and Solutions – Our Approach to Integration
 Staying Ahead – Where do We Go From Here?
 National Recognition

2

Mercy Overview
Profile

Member Facilities 26 acute care hospitals
3 heart hospitals
1 rehab hospital

Operating Revenue $3.9 Billion
Co-workers 36,900
Medical Staff 4,650
(incl. 1,235 integrated physicians)

Uncompensated Care $208.0 million

Beds 4,379 licensed beds (3,638 acute)

8h Largest Catholic health system in U.S.
27th Largest health system in U.S.

Information current for Fiscal Year 2009, ending June 2009
3

Mercy Overview
ROi Structure

Performance Consulting
 Clinical Support Service
 Patient Care Services
 Operational Support Services

Facilities •Corporate Office – St. Louis
•Consolidated Services Center –
Springfield, MO
Group Purchasing
 Supply and Pharmaceutical Contracting Co-workers 300 FTEs from varied clinical and
 Capital Equipment Contracting business disciplines
 Contract Compliance Monitoring
 Rebate Management
 Pricing Administration
 Member Services MISSION:
to improve clinical, operational and financial
performance of our customers through a
clinically integrated supply chain.
Supply Chain Management
 Consolidated Services Center
 Inventory Management FOCUS & DIRECTION:
 Pharmaceutical Repackaging
▶ Leverage Infrastructure – Reduce Costs, Increase Service
 Custom Procedure Tray Manufacturing
 Purchasing ▶ Reduce Variation – Product Selection/Use and Process
 Customer Service ▶ Improve Value – Improve Revenue and Reduce Cost
 Transportation Management
 Print Operations
4

Mercy Overview
Value of the Whole > the Sum of its Components

ROi’s Mission: Drive Value to Members Through Supply Chain
Components…
Consulting:
 Alignment w/ clinicians
 Process Improvement
 Data Analysis
Group Purchasing:
Supply Chain GPO:  Item File Management
(Service) (Cost Control)  Price Control
 Physician & Commodity
Contracting
Supply Chain:
 Distribution operations
Performance  MMIS
 Pharmacy Repackaging.
Consulting:
(Clinical Integration) Together…
 Improved Clinical Alignment,
Abilities and Outcomes
 Lower Costs, Better Control
 Improved Service & Information
5

Mercy Overview
Top 10 Facts About ROi …

 Most visited Provider Based Supply Chain model in the U.S.

 8th largest GPO in the U.S. – 1,500 members

 ROi has the 2nd highest compliance and $/bed penetration in the U.S.

 Top 10 volume Medical distributor in the U.S.

 ROi is the first provider-based organization to build and operate an
FDA registered custom pack manufacturing operation

 CSC repackages 4.4 million unit dose pharmaceuticals per year

 Supply Chain defects 75% better than industry average (5σ quality)

 99% fill rate (next day, first time fill) – best in industry

6

Agenda

 Mercy Overview

7

Issues Facing Providers
Facing the “perfect storm”…

Economic
Rising costs of
recession
medical errors

Exploding
Growing bad Operating costs technology costs
debt from increase
uninsured and
under-insured Capital
constraints

Elective services
reduction Pension funding
concerns

Growing labor Revenues
costs and RN Pension funding
shortages
decline
concerns

Lost investment
portfolio State and Growing supply
Federal budget costs
cuts
8

Current Trends - Supply Expense

Operating Expenses
Labor…………... 48% •Labor – materials related
35% Materials………. 29% •Materials – all consumables
30.7% Overhead……... 23% •Overhead – space, systems,
30%

25%
21.2%
20%

15%

10.0%
10%
6.8% 6.7% 5.9%
5%

0%
Hospital Physician Prescriptions Program Research Nursing
Care / Clinical Drugs Admin Structures Home
Services and Care
Equipment

SOURCE: CMS, office of the Actuary, National Health Statistics Group.
Note: Breakdown of the top 80% of $2.3 trillion US healthcare spend in 2008
9


SUPPLY
CHAIN
SUPPLY Tech COST
The Provision of Care RELEVANCE
Disposable 64 Slice High Critical
2010 CT

2000

1990

1980

Reusable X-Ray Low Incidental
1970
Touch Tech
Based Based
Care Care

Supply cost are growing at almost twice
the rate of labor*…

*Source: Solucient, “Supply Costs for U.S. Hospitals Show Substantial Three-Year Rise,” Healthcare Financial Management, August 2005; Advisory Board
Growth Database; Clinical Advisory Board interviews. 10


Supply Cost Trending Study:
 SMI led program
 5 Respected IDN participated
 Complete supply spend focus July 2009
 One question…

“Could Supply Cost Ever Exceed Labor?”

“B” “D”
2010 2020 2030 2040 2050

“A” “C” “E”

ANSWER: Yes – now what do we do…
11

Moving the Supply Chain Forward

 Unsustainability – Cost/complexity of traditional models is not sustainable. Only two
essential parties are critical: makers and users.

 Homogenization - The lines of GPO’s, Distributor, and Provider Supply Chains will
increasingly blur. GPO’s and Distributors will create creative counter measures to abate
erosion of market control

 Leadership – Providers are not leading. Providers will increase the recruitment of supply
chain experts from outside the healthcare industry to infuse new talent.

 Marketing beats Science - The rapid growth of technology development will cause
spending on supplies and technology to exceed the Providers ability to objectively evaluate
and cut cost.

 Corporatization - Integrated Providers will begin to adopt a more corporate structure
and mentality of management to drive out variation in business and clinical practice.

 Profitability Linkage - Successful providers will integrate and link usage and
reimbursement data for better decision making.

 Integration Candor - Successful providers will increase their candid physicians
conversations on their role in cost and quality.

 Non-Traditional Integration – Industry/Payors will increase understanding and
involvement in the costs and quality of care.

 Moving into the Neighborhood – New technology will enable more quality care in
the home environment and erode the traditional acute setting. 12

Agenda

 Mercy Overview

13

Understanding the Issues
Challenges with the Traditional Healthcare Supply Chain Model

Traditional Healthcare Supply Chain Challenges

Manufacturer  Cost of Distribution
 Rising Cost of Supplies
GPO  Input on Contract Process
 Value Customers Based on
Size and Distance
 Lack of Consistent Service
Distributor  Controlled by Outsiders

Hospital Dock
 Physician Collaboration
 Service Levels
 Product Selection
 Data Management
 Silo Management
 Limited Best Practice
Sharing
Patient Use
 Too Complicated 14

Why Did We Change the Model? (The Traditional Model)

Med/Surg Mfg. Med/Surg Dist. Mercy Hospital
ISSUE: Complexity Pharma Dist.
Pharma Mfg. Mercy Clinics
Complexity of product
Lab Mfg. Lab Dist. Other Hospitals
and information flow
Film Mfg. Radiology Dist. Other Clinics
within the traditional
healthcare supply chain. Dietary Mfg. Dietary Dist. Retail Pharmacy

Linen Mfg. Linen Service Home Health

Retail

Mass Merc.

Other???

ISSUE: Geographical Match
More than 90% of Mercy’s
volume is OUTSIDE of the
traditional distributors hub
distribution service area

15

Big Bang or Intelligent Design? (The Traditional Model)

INTERMEDIARIES

MANUFACTURER GPO PROVIDERS

Admin Shareback
Admin Fees

Admin Fees

DISTRIBUTORS

Distribution Fees
Tracing Fees
Bulk Discounts
Channel Fees

Rebates

 Manufacturers pay GPO’s administration fees based on Mercy’s purchases.
 GPO’s share back a portion of administration fees to Mercy.
 Mercy pays distributors a fee for warehousing and distribution of products.
 Manufacturers pay Providers rebates based on GPO contract compliance.
16

The Anatomy of Supply Cost: The Traditional Model

Company Company Company Company
A B C D

Transport Profit ………………………………………………………….…….
Transport Cost ……………………………………………..………………
Distribution Profit ………………….……………………..
Sales Tracing Fees ……………………….…………….
Distribution Cost ………………………………………...
GPO Admin Fees ……………………………..
Total
Mfg. Profit ……………..
Delivered
Cost
Mfg. Cost ……………….

17

Agenda

 Mercy Overview

18

ROi Model – An Approach to Solutions
The Anatomy of Supply Cost: The ROi Model

ROi Model
Expense Revenue Net Impact
Traditional

Transport Profit ………………….
Transport Cost ………………….………………
Distribution Profit ……………..
Distribution Cost ………………………………
Sales Tracing Fees ………………………..………………………...
GPO Admin Fees ……………………………..……………………...
Total
Mfg. Profit …………………………….…………..
Delivered
Cost
Mfg. Cost ………………………………….……….

Delivered cost of supplies over and above manufacturer
COG and profit ranges from 14 – 28%
19

Simplicity is Better: The ROi Model

MANUFACTURER

GPO
Admin Fees

Rebates

DISTRIBUTION
Tracing Fees
Bulk Discounts

 Eliminated non-essential supply chain entities (GPO & Distributors)
 Captured traditional fees to fund Mercy’s Supply Chain infrastructure while
increasing rebates to SSUs
 Increased control and accountability for service and pricing
 Established closer link to Manufacturers
20

Traditional Model



Retail

Mass Merc.

Other???


21

ROi Model

Pharma Mfg. Pharma Dist. Mercy Hospital
SOLUTION: Complexity
Med/Surg Mfg. Mercy Clinics
Storage location capable
of handling all healthcare Lab Mfg. Storage &
Distribution
products in a Film Mfg.

consolidated fashion. Dietary Mfg.

Linen Mfg.

SOLUTION: Geographical Match
Central distribution point - More
than 86% of Mercy’s volume is
INSIDE of the ROi distribution
service area

22

Agenda

 Mercy Overview

23

Keys to Vendor Compliance – Less is More
Vendor Compliance Begins with Clinical Collaboration

Gain consensus
Reduce variability
Promote standardization
Facilitation
Create value
Decision Making
Produce sustainable change Sustainability
Measure and report results
Provide enterprise leadership

24

Horizontal Integration

Service Line representatives will have responsibilities for communicating in two
distinct directions:
 Vertically within their other SSU to other disciplines, other departments, etc.
 Horizontally across Mercy to their representative “peer” and eventually to
other/future ROi members
Future
SPR STL OKC FTSM ROG HOTS KS Members

Across the Across the Facilities
Facilities

25

The Results

Contract Utilization Trend
100%
Current
90% (85.9%)
80%
70% ROi
Aligned
60% Begins
Contract
Utilization 50% (37.8%)
40%
30%
20%
10%
0%
2004 2007 2009

Aligned for Vendor and Customer Value
26

The Results

Number of Contracts
600

500
ACTION:
557
400  38% reduction in number of
300 405 contracts
200  194% increase in annual
100
spend under contract
0
2002 2008
REACTION:
Annual Contract Spend  Partner means Partner
$500
 Easier to manage
$400 $470  Focused attention
Million

$300  Simplicity and Growth yields
alignment of expectations:
$200
 Improved Pricing for ROi
$100 $160  Improved Share for Vendors
$0
2002 2008 27

Before: Variation in SKU’s

 7,745 pharmaceutical items utilized
 529 used in all SSU’s
3500

3000

2500

2000

1500

1000

500

0

1 SSU
2 SSU
3 SSU
4 SSU
5 SSU
6 SSU
7 SSU

1 SSU 2 SSU 3 SSU 4 SSU 5 SSU 6 SSU 7 SSU
Number of Items 3028 1719 958 632 480 399 529

% of Items Common 39.1% 22.2% 12.4% 8.2% 6.2% 5.2% 6.8%
28

After: Variation in SKU’s

 3,500 pharmaceutical items utilized
 1,700 used in all SSU’s

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

-

Before

After

Before After
Number of items 7,745 3,500
Number of items in common across
all SSU's 529 1,700

29

The Results – Enterprise Formulary

Objective: SKU Reduction
 Create a system-wide formulary for 8,000

pharmaceutical products to reduce variation and 7,000
yield clinical, operational, and financial benefit 6,000
for Mercy 5,000
GOAL
4,000 3,500
Goals:
3,000
 65% reduction in SKU’s by end of year 2
2,000
 Reduce cost by $2 million by end of Year 1 & an
1,000
additional $1 million by end of year 2
0
 Enterprise adoption of therapeutic interchange 2007 2008 2009 +
in 3 categories in year 1
COST Reduction
$4.0
Key Attributes:
$3.5 GOAL
 Corporately Supported (Sr. Leadership) $3.00
$3.0
 Integrated Governance – DOP, Physicians, ROi
$2.5
 Physician Led
Millions

$2.0
 Evidence based – White Papers
$1.5
 Objective - Metrics Driven
$1.0
 Sustainability built into process
$0.5

$0
2007 2008 2009 + 30

How We Do It!

ROi Guiding Principles
 Involvement of Stakeholders…
 Creation of Value…
 Keep Our Word…

Simple to Understand…
…Highly Effective When Done Well

31

Agenda

 Mercy Overview

32

Opportunities and Solutions
Our Approach to Integration

Our approach to every opportunity…

MAKE BUY PARTNER
Key Questions:
▶ Are current commercial offerings aligned with our needs?
▶ Can we justify the expense of the commercial offering?
▶ Is the need strategic to our business?
▶ Can commercial offerings be modified to deliver expected results?
▶ Do we have the scale to justify an internally developed offering?
▶ Do we have the time to deliver an exceptional internal offering?
▶ Can we resource an internal offering to exceed commercial standards?
33

Opportunity



Retail

Mass Merc.

Other???


34

Solution: MAKE

Springfield, MO
 101,000 Square Feet
 Climate controlled
 Refrigerated Storage
 Frozen Storage
 Controlled Substance Cage and Vault
 Suitable for all Healthcare supply storage
needs in one facility
 Pharmaceutical Repackaging Operation
 Customer Service Operations Center

 Private Fleet (60+ vehicles)
 Reduction in transportation expense by
leveraging existing fleet and reducing third party
transportation expenses
 Shortened Order Cycle to 12 hours or less
 66% increase in acute care Med/Surg deliveries
 42% Reduction in hospital inventory
 Elimination of 3,000 material service failures
(stock-outs) per week

35

Solution: MAKE

MISSION RESULTS

Each stocked product is proven to 94% of all traditionally distributed
be clinically acceptable by the vast products are now currently
majority of users. sourced through the CSC.

Each stocked product targets Service levels from the CSC are at
service levels of 100% with next 99.1%; our results are almost 10%
day delivery without expedited higher than performance from
freight expenses. traditional med/surg distributors.

We can leverage our entire volume Products sourced through the
through a single point to drive the CSC have no direct distribution
lowest price in the market. or transportation fees.

36

Solution: MAKE
Asset Utilization

Determining What’s Stocked and What’s Not

A mathematic process used to determine the
Stocking Logic Definition:
product sourcing origin.

Stocking Logic Categorical Algorithms:

Revenue / Savings Expenses Velocity Unit of Measure

37

Solution: MAKE
Asset Utilization

Stocking Logic – Example #1

Stock

38

Solution: MAKE
Asset Utilization

Stocking Logic – Example #2

Not Stock
39

Solution: MAKE
Asset Utilization

Stocking Logic Objective Finding the right balance

40

Solution: MAKE
Asset Utilization

Balance = Ability

Driving Value Through Space Utilization

49%

20% 21% 10%
41

Opportunity: Patient Safety

 Call to Action - IOM Study (1999) revealing
significant patient safety issues

• Medical errors were the 8th leading cause of
death in the United States

• More deaths than motor vehicle accidents,
breast cancer or AIDS

• 7,000 deaths per year from medication
errors alone

• Adverse events cost the United States
approximately $37.6 billion each year

• Approximately $17 billion of those costs are
associated with preventable errors
Institute of Medicine, Committee on Quality of Health Care in America. To Err is Human: Building a Safer Health System, Washington, D.C.,
National Academy Press; 1999
42

Solution: PARTNER/MAKE

The Goals:
▶Reduce medication administration errors
▶Integrate Pharmacy into clinical care
delivery team

The Action:
▶Prioritized clinical quality efforts
▶Determined target area of focus
▶Gained commitment
▶Engaged stakeholders
▶Constructed repackaging infrastructure
▶Standardized hospital-based infrastructure
43


44

System-wide implications estimated based on number of beds

Medication Error Potential Prevented Prevented Annual System-
Type Events (6 mo sample) Administration Rate wide Implication
Wrong Dose 967 99% 153,548
Wrong Patient 35 100% 5,556
Wrong Route 120 100% 19,050
Total 1,122 99.1% 178,154
Potential Adverse Drug Events Avoided (10%) 17,815
10% of medication events (excluding wrong time administrations) result in potential Adverse Drug Events (Archives of Internal Medicine,Vol. 162, Sep 9, 2002)

45

46

Surgical Instrument Repair

Expense Service Days
 Opportunity: $800,000 45

– Inconsistent service $700,000
40 Days 40

levels, provided by 7 $600,000
35
30 Days

Service Days per Month
vendors, with varying cost

Annual Repair Expense
30
$500,000
points lead ROi to 25
$718,000
consider internalization $400,000 $584,000
20
$300,000
15
 Solution: BUY/PARTNER $200,000
10
– Unique partnership with $100,000 5
Instrument Repair
$0 0
company yields: Current State Proposed State
• 2 dedicated vans with 3
drivers, reporting to ROi
• Service standardization
across all facilities - 33%
overall increase in service
days
• 20% decrease in cost

47

Opportunity: Product Waste and Program Control
Why Self Manufacture Custom Packs?
 Product waste  Lack of vendor trust
 Lack of standardization  Excessive cost and inconsistent pricing

48

Solution: MAKE

Rationale:
 Elimination of Unauthorized Substitutions
 Elimination of Low Quality Components
 Standardization Opportunity
 Transparent Cost Structure - Elimination of Vendor Trust Issues
 Appropriate Use – Elimination of Under/Over Utilization
 Lower Total Cost Solution
49

Private Label

 Up-front customer input to assure
buy-in.
 Identical or improved product in all
cases.
 Focus on specification not brand.
 Reduces variation and proliferation
of SKU’s.
 Local, regional, national,
international sourcing strategy.
 Pride in ownership of brand.
 Reduces non-value added cost of
products (marketing & sales).
 Significant value to Mercy through
price reduction.
 $12 million in annual spend today ,
doubling every year.
 Double digit savings… every time
50

What is Really Important…
Three Fundamental Goals of Decision Making…

Good Patient Positive
Outcomes Bottom Line

Happy
Care Givers

51

Agenda

 Mercy Overview

52

Staying Ahead
Connecting the Links

Distributors
GPO’s Warehousing
Manufacturing

Supply
Purchasing

Revenue /
Expense
Management

Chain
Makers of Users of Transportation
goods goods

Pipeline
Visibility Backorder
Supply Chain Management

Inventory ERP Systems
Management Electronic Data
Interchange

53

Staying Ahead
External – Driving Volume, Leveraging Partnerships

HEALTHCARE RETAIL

27.6%

Opportunity
(13.5%)

14.1%

Healthcare Retail

Source: Average of group as per public company financials. 54

Staying Ahead

Spend Breakdown of Mercy Observations:
$43,426,000 ▶ Our largest vendors SG&A is…
▶2.8 X R&D
$50 ▶1.1 X COGS
▶1.6 X Net Income
$45
▶ Mercy spent $13,892,100 for a
$40 vendor to sell us your
$8.8 NI (19.8%) products…
$35 ▶ Only 2 of Mercy’s 23 hospitals
$2.1 Tax/Other (7.1%) make more Net Income than
$30 the vendors SG&A from our
business.
$25 $14.6 SG&A (32.0%)
$20
$15 $5.3 R&D (11.3%) Are we the problem?

$10 SG&A is a reflection of
$12.6 what it takes to get the
$5 COGS (29.8%)
product to the customer
$0 We have the ability to
impact this line – let us...

SOURCE: Vendor financials as reported in Reuters ProVestor Plus Company Report, December 27, 2009
55

Staying Ahead

Typical $1 of Spinal Device Revenue

Profit (2%)
$1.00 Taxes (4%)
Air Freight (2%) 9 cents dedicated
$0.90 Inv. Set Depreciation (7%) to avoidable cost
$0.80
Rep Comp (25%) 50 cents
$0.70
dedicated to
$0.60
G&A (12%) selling us the
$0.50 product
$0.40 Sales & Marketing (13%)

$0.30 R&D (13%)
$0.20 Royalties (7%)
$0.10
Device Cost (15%)
$0.00
Source: information provided by Spine Vendor
56

Wrap Up…

▶ Sustainability
▶ GPO Design & Metrics ▶ Medication
▶ Maximization of Operations Safety
Integrated ▶ Product ▶ Smart Pump
Model ▶ Formulary Implementation
Standardization Management
▶ Distribution ▶ Antibiotic
Design & Stewardship
Operations Consultant
Advise It

Contract It Source It Make It Package It Store It Move It Use It Pay For It

GPO Broker Manufacturer Packager Distributor Transporter Provider Payor

▶ 5th Largest ▶ International ▶ 1st Provider ▶ Largest ▶ Top 10 ▶ 60+ Vehicles ▶ 20 Hospitals in ▶ Operation in 3
GPO in US focus based Private Provider Volume four states states
Label program based CPT Distributor ▶ +500,000
▶ $670 million ▶ Demonstrated in US manufacturing according to miles per year ▶ 28th largest ▶ Over 150,000
under results in operation in HIDA health system members
contract reducing cost ▶ $4 million US. ▶ Every location
annually ▶ Med/Surg every day ▶ 4,379 beds ▶ Nationally
▶ 300+ ▶ Aggregated ▶ FDA Recognized
contracts buying events ▶ Growing Registered ▶ Rx ▶ Back-haul ▶ 1,100 Disease
interest with common integrated Management
▶ Most ▶ Efficiency other ▶ Rx Unit Dose ▶ Office carrier physicians Programs
compliant based providers Repackaging
GPO in US sourcing ▶ Courier, TL ▶ $4 B in assets ▶ Incorporated in
and LTL 1994
▶ Single ▶ Provider ▶ $3.9 B in op.
Negotiation Integration Revenue
57

Agenda

 Mercy Overview

58

National Recognition
 Most Wired Supply Chain Innovator
Award Finalist 2006
 NCI Supply Chain Innovator of the
Year Award 2006 – One of three
providers highlighted
 Winner – Council of Supply Chain
Management Professionals – Supply
Chain Innovation Award 2006
(October 2006)
 Winner – GHXcellence 2007 Award
for Large Providers (April 2007)
 Winner – FierceHealthcare Innovator
of the Year (May 2007)
 HFMA / AHRMM – Breaking down
Barriers: Achieving a High
Performance Finance/Supply Chain
Team (May 2007) – Highlighted Large
Provider
 Winner – GHX 2008 Innovator of the
Year
 IDN Summit Peer Award Winner
(April 2009) 59

National Recognition

Healthcare Top 25 Supply Chains

#2 Overall
#1 Provider
#1 GPO
#1 Distributor

60

Bill Stankiewicz Copy Scope 2010 R Oi Company Model

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