June 2, 2017

1. June 2, 2017 Purchased Services 201 (Getting from Here to There) Tim Berkey, VP, Engagement and Delivery Premier, Inc.

2. Today’s Objectives

3. Defining “Purchased Services” • Purchased Services = non-supply, non-capital third party service expenditure, including “Professional Services” (e.g., Anesthesiology contract fees) • Are variable…..and controllable! • Typically ranges from: • 19 – 25% of total operating expense • 50 – 125% of “supply expense” • Largely, a “third party labor expense”, but includes other costs: • Supplies used in the vendor’s provision of service; • Often, NOT at a straight pass-through • Equipment depreciation; • Taxes/fees/etc.; • Corporate overhead; and • Profit Margin.

4. Defining “Purchased Services” Alternative Rehabilitation Services Ambulance Services Anesthesia Services Appraisal Services Armored Car Services Association / Membership Fees Autopsy Services AV / Video / Photo Services Background Check Services Behavioral Health Services Benefits Management Billing and Debt Collection Services Blood Services Building Inspection and Compliance Bus, Shuttle and Taxi Services Business Process/Analytics Consulting Cable Provider Services Call, Answering and Paging Services Car Rental Services Cardiology Services Etc. Etc. Etc. • Premier has categorized ~$67B of AP spend in two years • 20 “category names” • 200+ “subcategory names” • 50,000+ unique vendors (excluding direct reimbursement to employees and intra-hospital transfers) • Similarity of vendors by region has informed national sourcing decisions and GPO portfolio growth • Now, 100+ national agreements

5. Example AP Spend Categorization Premier categorized ~$87M* of HMH’s AP data, as compared to our national database (“two-level” savings classification) Overall PS Opportunity Category Breakdown – Facilities Services * Includes Distribution throughout and Intra-System payment spend. Full report provided in separate handout

6. To Purchase….Or, Not to Purchase? • We have to use a third party because….. • We don’t have the internal expertise • We don’t have the internal capacity • We have the expertise, but a third party can do it more cost effectively • Providing the service is not seen as a desired “core competency” of the organization (i.e., better ways to use our resources/time)

7. Purchased Services – Common Challenges Resource Constrained Spend Management Often, limited to a handful of SC Contract Managers Lack of C-Suite Understanding or Support Complex Agreements Varying T&Cs Vendors are the “experts” Categories often assumed or not well known until there is a “problem” No Defined Total Spend Management Approach Lacking Data Performance indicators Price benchmarking data Total Spend Focus often limited to pricing improvement in select categories, where time permits PS Challenges Lack of Central Management No Specific Spend Management Tools Often, manual worksheets and simple files are maintained No one group “owns” all spend Current agreements may be old and stale

8. Purchased Services Portfolio Management – Premier’s View Discovery Phase 1: Analysis Phase 2: Design Phase 3: Implement Happy Memorial Hospital (HMH) Purchased Services Portfolio • Formulate strategies to reduce cost, improve quality, and enhance services • Refine cost/benefit analysis based on recommendations • Integrate Premier contract portfolio opportunities • Communicate options and determine next steps • Analyze RFI (if applicable) • Execute Premier national or custom contract (or) • Implement sourcing decision post RFI analysis • Implement tracking and reporting metrics • Communicate changes to trigger • Policy change • Education • Collect spend data and validate accuracy • Segregate spend by vendor and category • High level benchmarking of spend based on industry trends • Report findings to key leaders and discuss next steps of proposed partnership • Collect and review additional department level statistics and current contracts • Conduct interviews and tours • Validate findings with key stakeholders • Incorporate current regulatory and industry best practices Premier/GPO National Agreements Regional Aggregation Contracts Premier/GPO Custom Local or Regional Contracts HMH Locally Negotiated Contracts

9. Purchased Services Sourcing Process

10. Example Best Practice Tactics Multi-pronged Approach (Pricing Utilization Austerity) Labor Support Balanced vs Magnitude of Spend All PS Spend Allocated to Distinct Subgroups (e.g., VAT) High % of spend under contract w/specified pricing and T&Cs Well-defined, Repeatable Expense Review Strategy Centralized Spend Mgmt (Supply Chain in Center) Total PS Spend is Known and Understood Using a “source of truth” for Pricing Targets

11. Ideal, Multi-pronged Savings Approach Paths to Savings Facilities IT Professional Svcs Outsourced Clinical Svcs Major PS Categories Financial Svcs Laboratory Svcs HR Svcs Etc. Pricing Conversion Utilization Other T&Cs Austerity Also, utilizing “managed service providers” Do we even need to do these?

12. Achieving Credible Pricing Levels • Fact: You spend $300,000 per year on units of red blood cells (RBC) while paying $194/RBC unit. • Q1: Can you do better than $194? • Q2: How do you know? • Q3: When you begin to source a contract, do you already know you are likely to improve your price? Or, are you merely hoping to improve it? • Q4: Is it a presumption, or fact, that improving unit price will lower your total spend in the category? • Generally, there are limited “sources of truth” in potential price reduction • The price your hospital has already paid for the same unit of services with the same vendor • The price another hospital in your system is now paying, or has already paid, for the same unit of service with the same vendor • The price an external hospital is now paying, or has already paid,.……… • Your historical ability to negotiate, while not a source of truth (looking forward), is still meaningful

13. Example Pricing Strategy – Temporary Staffing Category Temporary Staffing Services (RN, IT, etc.) Pricing Approach • Best – Use of Managed Services Provider (9%+) • Better – Competitively source to smaller number of vendors (3-9%) • Basic – Price negotiation among incumbent vendors (0 -3%) Pitfalls to Avoid • Not engaging all Nursing and HR leadership early on • Accepting market increases as the status quo • Assuming that demand is not predictive • Allowing department leaders sole discretion to source new requests with preferred vendors • Increasing required fill rates upon new RFP/pricing agreement

14. Example Utilization Strategy – Print Migration Category Printer/MFD Utilization (aka, Print Migration) Utilization Approach • Best – 90%+ migration from desktop printers • Better – 60% migration from desktop printers • Basic – 30% migration from desktop printers Pitfalls to Avoid • Taking desktops immediately upon decision to roll out program • Leaving desktop machines in original locations with only policy/intent to send larger print jobs to MFDs or centralized Print Shop • Limiting remote print location to centralized Print Shop only

15. Example Austerity Strategies – Various • Artwork • Association/membership fees • Cellular phones • Coffee services • Dues and Subscriptions • EVS services in MOBs and/or non-clinical areas • Food stock on nursing floors, break-rooms, etc. • Furniture • IT software licenses • Lawn care services • Library services • Phone/POTS Lines • Physician point of care software • Plant (i.e., green plants) maintenance/service • Signage • Spinal braces/softgoods services • Uniform rental (scrubs and other) • Valet parking • Window washing

16. Consider…. • If price reduction is your primary focus and IF you are able to effectively source 1/3 of your PS contract portfolio every year…. • ~15-17% of your total annual opportunity will be addressed • A 1/8th reduction in utilization of a specific service is likely equal to the largest % pricing improvement you will commonly negotiate • Austerity matters! • Do we really know that XYZ PS investment creates net revenue enhancement? • Are not the days of “corporate image” and assumed patient satisfiers numbered in an era of dwindling reimbursement? • Vendors will always know more about their business than you will • But, if you think like a vendor you can lessen the chance of diluted savings • You still have the leverage!

17. Example Multi-Year Savings Approach (excerpt)

18. Other Best Practice Nuggets Best practice organizations….. • Are more adept/consistent at spend “classification in the GL” • Finish sourcing events on schedule – succeed or fail quickly and move on! • $100K of offered vendor savings vs an extra 60 days to achieve $120K total is a marginal gain, at best • $100K = $8,333/mo in savings, or a “lost savings” potential of $16,667 in 2 mos • Always prioritize projected gains vs time and complexity to implement before sequencing sourcing activities (e.g., bubble chart) • Establish a minimum floor for savings before vendor sourcing activity begins • Avoid the temptation to design better/best/perfect service requirements in categories that have been ignored • Is the service really poor now? • Almost always use a centralized contract repository (not an .xls file) • Achieve annual PS expense reduction of 40% or more of supply expense reduction

19. Premier Case Studies Initiatives Value (Savings %) Process • Information Technology - Temporary Labor • Freight Management • Printed Forms • Temp Staffing - $3.9M (17%) • Freight - $331K (48%) • Forms - $443K (23%) • Temp Staffing - Rightsize staff/normalize rate cards • Freight - Standardize system approach/vendor negotiation • Forms - Standardize system process/policy • Reference Lab • Outsourced Clinical Engineering • Blood Products • Ref. Lab - $802K (19%) • Outsourced Clin. Eng. - $762K (12%) • Blood - $562K (11%) • Ref Lab - Competitively bid, award to primary vendor • Clin. Eng - Consolidated to one system vendor • Blood – Competitively bid, awarded to single vendor • Laundry Services • Natural Gas Brokering • Lithotripsy Services • Laundry Service - $200K (20%) • Natural Gas - $200K (20%) • Lithotripsy - $21K (22%) • Laundry Service – Competitively bid, conversion • Natural Gas – renegotiation • Lithotripsy – competitive bid • Telecom • Outsourced facilities management contract • PACS Maintenance • Telecom - $137K (9%) • Facilities - $954K (8%) • PACS - $185K (23%) • Aggregated lines, reduced cost per and # of lines • Renegotiated fixed price to cost of services agreement • Negotiated maintenance during capital negotiations

20. Premier’s PS Approach Identify Initial Opportunities Validate Financial Impact Develop/Refine Implementation Strategies Implement Expense Reduction Strategies Obtain Member A/P Data and Existing Contracts Develop Topic-Specific Work Groups and Overall Steering Committee Develop Broad Transformation Roadmap and Business Cases Conduct Vendor Business Reviews and Bid Meeting(s) Conduct Categorization Analysis Using Analytics Engine Review Potential Opportunities with Stakeholders Conduct As-Needed Stakeholder Education on Implementation Strategies Train Internal Stakeholders on New Processes Conduct Interviews and Tours with SMEs to Refine Opportunity Gather Additional Information, As Needed Gather Additional Data, As Necessary, and Revise Final Business Cases Hardwire Savings Via Implementation Processes Develop Opportunity Summaries Revise Savings and Gain Stakeholder Approval Present Final Business Cases to Steering Committee for Approval to Proceed Initiate Formal Savings Tracking and Measurement Perform Ongoing Tracking and Measurement

21. About the Speaker • Is an AHRMM member • Has 25 yrs healthcare experience • Wants to know what you think…..what could make this talk even better? • Is NOT a fabulous dancer Mobile: 704-287-6557 tim_Berkey@premierinc.com