Supply Chain is a Strategy … Not a Department

Supply Chain is a Strategy … Not a Department Gene Kirtser President & CEO

Agenda • Introduction & Background • Supply Chain as it relates to… • Past: a Key Tactical Enabler • Present: a Performance Optimizer • Future: an Enabler of the Future Care Model, Industry Collaboration • Summary / Discussion

Mercy Footprint 31Acute Care Hospitals 4,400Licensed Beds 38,000Co-workers 200Outpatient Facilities 1,500Integrated Physicians 600 Advanced Practitioners

Mercy’s Transformational Journey We began as a holding company in 1986 We have become an an operating company with extraordinary competencies in execution The cultural evolution began in 1999 with supply chain as the “tip of the spear.”

Supply Chain Becomes Strategic In 2000 Supply Chain became a strategic initiative for Mercy

Supply Chain Touches Everyone • Hospital/Clinic – Senior Leaders • (C-Level, VP’s) • Accountability • Provider focused and based solutions – Assistance with goals- respect, value, recognition • Leadership Collaboration • Corporate Senior Leadership • (Corporate Staff) • “Systemness” • Relationship Management • Leadership (corporate) • Future Customers • (Physicians, IDN) • Value • Respect • Recognition • Facility - Mid-Managers • (Supervisors, Dir., Mgrs., VP’s) • Harmonious with environment • Communication, be heard, access to information • Respect SUPPLYCHAIN • Vendors • Partnership Relationships • Equal Opportunity • Profitability • Clinicians • (Nurses, Pharmacists, Resp. – Lab tech) • Efficiency of product access • Involvement in product decision making • Quality of patient care delivery/ patient safety • Industry Leaders • (Influencers, Publishers) • Succinct Story • Advanced knowledge, involvement understanding the model – New ideas • Reputable business model • Non-Integrated Physicians • Autonomy • Quality of life • Quality of care/ Patient Safety • SC Co-workers • Respect for individual input • Compensation/benefits • Tools to do the job

Manufacturer Manufacturer Traditional Models are Broken GPO Distributor Provider Traditional Supply Chain Model Many Large Commercial Silos Waste Waste Waste Waste GPO Disintermediated Supply Chain Distributor Provider Direct Contracting Internal Logistics Compressed Silos Waste Waste Waste Manufacturer Integrated Supply Chain GPO Distributor Provider Integrated Processes Integrated Contracting Integrated Logistics Integrated Processes Total Business Process

Med/Surg Dist. Med/Surg Mfg. Mercy Hospital Pharma Dist. Pharma Mfg. Mercy Clinics Lab Dist. Lab Mfg. Other Hospitals Radiology Dist. Film Mfg. Other Clinics Dietary Dist. Dietary Mfg. Retail Pharmacy Linen Service Linen Mfg. Home Health Retail Mass Merc. Other??? Service Complexity & Inconsistency ISSUE: ComplexityComplexity of product and information flow within the traditional healthcare supply chain. ISSUE: Geographical MatchMore than 90% of Mercy’s volume is OUTSIDE of the traditional distributors hub distribution service area

Traditional Supply Chains Chase Pennies

Supply Chain is a Strategy … Not a Department VISION • CLINICAL: Good Patient Outcomes • OPERATIONAL: Happy Caregivers • FINANCIAL: Positive Bottom Line BUSINESS STRATEGYin sync with Mercy DATA clean and controlled by Supply Chain RELATIONSHIPS are tight and trusting PRODUCT FLOW controlled by Supply Chain FOUNDATION • Invest in Technology, Process Improvement, Talent • Make/But/Partner Decisions • What Works: Stakeholder Input, Leverage, Commitment, Compression, Metrics

ROi’s Structure • Integrated Sourcing Solutions • Product and Services Contracting • Utilization Optimization • Contract Compliance Monitoring • Rebate Management • Pricing Administration • Member Services Facilities Co-workers • Corporate Office – St. Louis • Consolidated Services Center – Springfield, MO • Consolidated Distribution Center – St. Louis, MO • 315 FTEs from varied clinical and business disciplines (growing to 750+ FTEs with Unified Supply Chain) • Integrated Business Solutions • Purchasing and Accounts Payable Services • Information Solutions • Account Implementation • Customer Service • Mission: We will transform the Clinical, Operationaland Financialperformance of those we serve through an integrated supply chain. • Vision: • We will be a recognized leader in supply chain management through innovation and application of the best People, Processesand Technologies. • Values: • Service, Excellence, Dignity, Alignment, Accountability • Manufacturing Solutions • Pharmaceutical Repackaging • Custom Procedure Tray Manufacturing • Print Operations • Supply Chain Solutions • Warehousing and Distribution Services • Inventory Management • Transportation Management • Process Improvement

Integrated Business Model • One of the largest GPOs in the U.S. • Highest $ penetration per bed • Single Source negotiation strategy • 500+ contracts ($800 million) • International focus • Demonstrated results in reducing cost • Efficiency based sourcing • Provider Integration • 1st Provider based Private Label program in the US • Growing interest with other providers • Print Services • Instrument Repair • Largest Provider based CPT manufacturing operation in US • FDA Registered • Print Services • Rx Unit Dose Repackaging • Top 10 Volume Distributor according to HIDA • Med/Surg • Rx • Office • 80+ Vehicles • +2.3 million miles per year • Every location every day • Back-haul common carrier • Courier, TL and LTL

ROi Supply Chain Operation Springfield, MO • 101,000 Square Feet • Climate controlled • Refrigerated and Frozen Storage • Controlled Substance Cage and Vault • Suitable for all Healthcare supply storage needs in one facility • Private Fleet (80+ vehicles) reduces third party transportation expenses • Shortened Order Cycle to 12 hours • 66% increase in acute care Med/Surg deliveries • 42% Reduction in hospital inventory • Elimination of 3,000 material service failures (stock-outs) per week

CUSTOM PACK SOLUTIONS FORMULARY PRINT SOLUTIONS Unique Programs Private Label INSTRUMENT REPAIR SERVICES

Sourcing Strategy - Private Label PRODUCTS: • Basic Wound Care • Pneumatic Compression Devices • Can Liners • Patient Positioning Products • Cold Therapy Products • Disposable Minor Procedure Kits • IV Start Kits • Isolation Gowns • Hand Sanitizer • Sterilization Supplies • Disposable Blood Pressure Cuffs • Patient Slipper Socks • Alcohol Prep Pads • Medical Tapes & Adhesive Bandages • Orthopedic Soft Good Line • RATIONALE: • End user design and ownership – pride in ownership • Reduces variation and proliferation of SKU’s. • Platform for provider collaboration • Significant $ value • Patient Bathing & Wipe Products • Surface Disinfection • Instrument Reprocessing Solutions • Sterile Equipment Drapes • Surgical Masks • Surgical Apparel • IV Tubing Sets • OR Towels, Laps, Markers, Needle Ct • OR Turn Over Kits • DME - Canes, Crutches, Chairs, Walkers • ER Disposable Curtin System • Special Procedure Kits • Birthing & Neonatal Portfolio • Non Acute Care Products Portfolio

Mercy Meds – Rx Repackaging & Distribution

Custom Packs - Why Change? Who is paying for all of this extra material ?? Traditional Custom Pack Model: • Lack of cost containment • Inconsistent pack utilization • Unauthorized changes • Inferior product quality • Waste • End-use mistrust

FDA Regulated, provider owned Activity based costing model - complete pricing transparency Objectives aligned: No unauthorized substitutions No commission for volume growth 5.5 sigma manufacturing quality CUSTOM PACK SOLUTIONS ROi Custom Pack Manufacturing

Disaster Responsiveness – Joplin

Industry Recognition The Healthcare Supply Chain Top 25 • Essential to the larger strategy • Transparent • Desire to do what is right – for all • Significant bottom line contributor • Leadership Engine for Mercy • Integration is key distinction

Financial Contribution FINANCIAL PERFORMANCE: Mercy Supply Chain - Value Report – FY12 ROi - Customer Value Category Mercy Value Fee Elimination ……………………………………………………………………. $3,222,850. Centralization / Consulting ….…………………………………………….… $5,109,250. Contracting / Rebates ………………………………………………………….. $21,549,560. Total Supply Chain Contribution …………………………………………… $29,881,660. Centralization Fee (to ROi from Hospitals) ……………………………. ($6,711,810.) Net Financial Benefit to Customer (6.4:1) .……………………….… $23,169,850. ROi Net Income …………………………………………………………………… $9,205,000. Total Net Financial Benefit ………………………………………………….. $32,374,850.

Changing Healthcare Business Model BC - 1950 1950 - 2000 2000 - ? Air Travel, Internet Foot, Covered Wagon Interstate Highway System LocalRegional Virtual Today Healthcare is simultaneously Local, Regional, and Virtual

Supply Chain’s Future Evolution By Providing access to multiple touchpoints of care and reducing barriers, the redefined model will ease the path our customers take through the care process. Inpatient care Day surgery Endoscopy and outpatient procedures Chronic Disease management Mobile/ Electronic access Convenient or retail care Medical Home Self-directed health management will be supported by the care model. Home monitoring Disease management Home care Traveling nurse or care coordination Imaging and other tests in many of the care venues

RETAIL HEALTHCARE SG&A ComparisonRetail vs. Healthcare Suppliers 29.3% Opportunity (15.2%) 14.1% Healthcare Retail Source: Average of group as per public company financials.

NI (19.8%) Tax/Other (7.1%) SG&A (32.0%) R&D (11.3%) COGS (29.8%) The Cost of Doing BusinessCost Breakdown of a Major Trading Partner with Mercy Spend Breakdown of Mercy $51,396,800 • Observations: • Company SG&A is… • 2.8 X R&D • 1.1 X COGS • 1.6 X Net Income • Mercy spent $16,447,000for this company to sell us your products… • Only 3 of Mercy’s 26 hospitals make more Net Income than this companies SG&A from our business. $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 $10.2 $3.6 $16.4 Are we the problem? SG&A is an efficiency measure of the trading partner relationship We have the ability to impact this… let us $5.8 $15.3 SOURCE: Company financials as reported in Reuters ProVestor Plus Company Report, December 27, 2009

Industry Leadership & Transformation • 30% reduction in payables outstanding resulted in additional early pay discounts from faster payment that required less manual intervention. • 73% reduction in discrepancies, includes a complete elimination of vendor part number and unit of measure (UOM) discrepancies by supplanting part number and UOMs with GTIN on purchase order. • Improved sourcing of product by use of a single scan of a barcode to determine the right product and product UOM to reorder. • Less calls to customer service in the sourcing process. • Fewer stock outs due to the inherent simplicity offered to nursing staff of scanning barcodes at the bedside. • Better charge compliance resulting from scanning as a surrogate to traditional practices For more information go to www.roiscs.com

Industry Leadership & Transformation Mayo Clinic Intermountain Healthcare Mercy Geisinger Kaiser • Formed in December of 2010 • Adoption of GS1 standards and improve operations through best practices • Unified voice of well respected brands to uniformly move the industry to adoption • Work with trading partners to assure there is value for all • Agree reduce variation in practice where ever possible in our trading transactions • Linking standards adoption of improved tracking of clinical effectiveness

Industry Dynamics The Problem The healthcare industry is facing a crisis. External forces will strain providers operating margins. Providers will look for ways to operate more efficiently and cost effectively to remain relevant. Our Aspiration To reform the healthcare industry through collaboration by optimizing the Supply Chain.

Benefits of an Integrated Supply Chain • Proven method to reduce cost. • Proven method to improve patient safety. • Proven method to integrate physicians and clinicians in product decision making. • Proven service enhancement model that is a key satisfier for nursing. • Proven method to unite culture.

Stick to Guiding Principles Take Risks to Innovate Buy-In (at all levels) Experienced Talent Dedicated Resources Strong Business Cases Metrics Driven Systems Investments Industry Collaboration Secrets to Our Success

Questions for Providers to Consider • CLINICAL: Can your supply chain be positively linked to better care? • OPERATIONAL: Is your supply chain known for improving patient or caregiver satisfaction? • FINANCIAL: Does your supply chain materially contribute to your bottom line? • STRATEGIC: Is your supply chain considered a department or a strategy?

Questions for Suppliers to Consider • CLINICAL: • Do your products/services have a documented clinical improvement in outcomes – science behind the marketing? • Are your solutions addressing needs in all patient care settings? • OPERATIONAL: • Is your company efficient for providers to work with? • Provider Supply Chain leaders are becoming more – are you adjusting accordingly? • FINANCIAL: • Does your product/service improve the provider’s bottom line?

Questions for Suppliers to Consider • STRATEGIC: • Suppliers are homogenized – are you differentiated? • Are you selling “your box” or a solution to your customer’s needs? • Lines between GPOs, Distributors and Providers are blurring. How are you responding? • Are you strategically aligning with providers that will survive future industry consolidation?

Supply Chain is a Strategy … Not a Department