Thought Leaders Council Participants Bill Abrams, President of Distributed Products David Larson, President & CEO Medline Industries Kreisers Riad Abuelafiya, Vice President and General Manager Gerry LoDuca, President HORIBA Dukal Corporation Akhil Agrawal, President Andrea Logan, President American Medical Depot All Med Medical Supply Jackie Anderson, President & CEO John Luyben, Sr. Vice President Key Medical Supply Professional Hospital Supply Steve Blazejewski, U.S. President, Medical Supplies Sector Larry Malloy, Vice President, Global Brand Covidien Johnson & Johnson Health Care Systems Barry Brian, Vice President, Strategic Accounts and Distributor Management Dave McKinley, President, Medical Group BD Henry Schein Deb Bullock, President Kevin McNamara, President & CEO Independent Medical Co-Op TIDI Products Dennis Clock, President Steve Meyer, President & CEO Clock Medical Supply Welch Allyn Brad Connett, Vice President & General Manager, Medical Sales Dave Myers, Executive Vice President Henry Schein Seneca Medical Rod Cotton, Sr. Vice President, Professional Diagnostics Javara Perrilliat, Vice President, Global Supply Management Roche Diagnostics Owens & Minor David Donnelly, Vice President, Business Development Gary Reeve, President & CEO The Stevens Company MMS - A Medical Supply Company Anne Eiting Klamar, President & CEO Todd Ross, President & CEO Midmark Corporation Preferred Medical Joan Eliasek, Sr. Vice President, Marketing & Supplier Management Matthew J. Rowan, President & CEO McKesson Medical-Surgical Health Industry Distributors Association Chris Fagnani, Vice President Joe Sandora, Sr. Director, Medical Distribution Channel Lynn Medical Georgia-Pacific Corporation Joe, Grispo, Jr., Sr. Vice President, Chief Sales Officer John Sasen, Sr., Executive Vice President & Chief Marketing Officer B. Braun Medical PSS/World Medical Paul Heerwald, Vice President, Healthcare Key Accounts Mark Seitz, President & CEO 3M Health Care National Distribution & Contracting Steve Inacker, President, Channel Management, Medical Segment Doug Shaver, Sr. Vice President, Strategy and Business Development Cardinal Health McKesson Medical-Surgical Gavin Jeffs, Vice President, International Strategic Sourcing Mark Steele, President Owens & Minor Gulf South Medical Supply Paul Kaliner, President, Primary Care Jeff Summerour, President American Medical Depot Beacon Point Associates Paul Keel, President, Skin and Wound Care Division Miles Theeman, President & CEO 3M Health Care Affiliated Materiel Services Matt Kohut, Group Vice President, Sales Mark Zacur, Vice President, Strategic Marketing & Business Development Cardinal Health Thermo Fisher Scientific Provider Organizations Contributing Insights Detroit Medical Center Scott and White Hospital Planned Parenthood ProMedica Billings Clinic Lifeline Medical Associates Mayo Clinic Walgreens Surgery One University of Pittsburgh Medical Center Cottage Health System Cooperative Services of Florida Memorial Hermann Hospital System Baylor University Medical Center National Association of Community Health Cleveland Clinic Geisinger Health System Centers Cooks Children’s Hospital Lutheran Homes of Michigan Wireless Life Science Association St Joseph’s Hospital System Interim Healthcare of Wichita Advantage Trust Purchasing Group Health Partners/Regions Bristol Hospice Prairie Health Ventures Mountain States Health Alliance Sutter Care at Home Parallon/HCA Carolinas Healthcare System Bethany Home Clinical Pathology Lab Sentara Healthcare Turenne & Associates 2 | Healthcare Supply Chain 2015: Insights from the Industry Thought Leaders: Healthcare Supply Chain 2015 The Health Industry Distributors Association launched Top 5 Recommendations the Thought Leaders initiative to provide insights to its members on the unprecedented changes occurring 1. Fix the contracting process in healthcare markets. HIDA enlisted McKinsey & Company to conduct in-depth interviews with dozens 2. Link products and outcomes of healthcare provider executives across healthcare 3. Implement and champion data standards settings. HIDA’s own Thought Leaders then met with 4. Partner in standardization/ streamlining efforts the McKinsey team to evaluate the provider input and develop recommendations for the industry as a whole. 5. Enable the home setting Contents 4 Backdrop: Forces Driving Change 12 Restructuring for an Integrated, Consolidated Market 6 Driving the Next Level of Supply Chain Savings Top Recommendation: Invest in new capabilities to Top Recommendation: Fix the contracting process enhance service across care settings 8 Moving Beyond the Acute Care Setting 15 Next Steps Top Recommendation: Enable the home setting 10 Managing Risk, Supporting Outcomes Top Recommendation: Link products and outcomes Healthcare Supply Chain 2015: Insights from the Industry was produced by the Health Industry Distributors Association and McKinsey & Company, copyright 2013. All rights reserved. Healthcare Supply Chain 2015: Insights from the Industry | 3 Backdrop: Forces Driving Change The healthcare landscape is at an inflection point. The Affordable Care Act (ACA) will combine with other trends to accelerate change in the next three to five years. Two overarching issues are on the minds of healthcare providers: the evolving reimbursement landscape and changes in the healthcare delivery model. Factors in the evolving Our entire margin is reimbursement landscape expected to evaporate starting in 2014 because of lower • Declines in government reimbursement/implications of the reimbursement. Affordable Care Act • Changes in commercial insurers – VP supply chain, IDN • Rise of consumerism and patient payments Factors in healthcare delivery changes • Impending physician shortage • Aging population • Movement away from acute care into alternate care settings • Increasing adoption of information technology 4 | Healthcare Supply Chain 2015: Insights from the Industry Unprecedented change Providers expect operating margin declines of up to 30% The most striking finding from McKinsey’s provider research is how drastically providers are expecting revenues to decline, and their Expected margin decline 2011-2015 resulting willingness to make dramatic changes in their operations. 20-30% decline “We are facing 15-20% hard-line reimbursement changes. We need 10% to start making reductions in costs right now,” said one integrated delivery network (IDN) executive. Another reported: “Our organization’s 0-10% 20% leadership has said we need to be willing to change everything with the decline exception of our primary value proposition that the needs of the patient come first.” 70% What the changes are forcing 10-20% decline providers to do These changes are causing providers to rethink their operating models Source: HIDA Industry Thought Leader Interviews and address issues that have been on the table for quite some time, but now have become imperative to resolve in the near term. These include: • Implementing broad-ranging cost control programs, including lean operations, back-office cost control, and reduction of clinical variability (“Medicare margin” efforts). We are trying to give patients • Building sufficient scale in core operations (through in-region care closer to home - we will mergers and acquisitions or outsourcing), and expanding across always have inpatient beds, but the continuum of care (such as acquiring physician practices or they will be more concentrated. surgery centers) to drive economies of scale/skill and improve care coordination. We are highly focused on moving from inpatient to ‘retail’ • Aligning physicians to create efficiency and quality improvements, capture a disproportionate share of the commercially insured, and (outpatient). improve care coordination. – VP supply chain, hospital system • Exploring the full range of innovative reimbursement models (including episode-based payments, accountable care organizations (ACOs) or even IDNs) and piloting these new approaches in selected markets (while remaining cautious of strength of the associated strategic and business model rationales). • Investing in electronic health records (EHR) and information technology to allow for data exchange, cost and quality reporting, and optimization of processes. • Strengthening retail capabilities, including more sophisticated value-based pricing, direct-to-consumer and direct-to-employer supplemental care products, and even co-branded products with payers to offer on exchanges. Providers participating in the Thought Leaders interviews said they are looking to manufacturers and distributors to increasingly act as partners across their supply chain to help them address several of the issues they are attempting to address in the coming years. Healthcare Supply Chain 2015: Insights from the Industry | 5 Driving the Next Level of Supply Chain Savings Provider organizations expect reimbursement cuts to force reductions in operating margins of up to 30% through 2015. While all costs are on the table, supply chain is universally considered the top priority. Providers are ready to look beyond product cost and examine end-to-end Driving the Next Level of supply chain costs, and are looking to manufacturers and distributors to Supply Chain Savings help them become leaner and more effective. Panelists believe that a key component for success will be the universal adoption of data standards. Top Four Recommendations Implement and champion data standards 1. Implement and champion Distributor: “It all starts with data standards…we need to remove the data standards. ‘leap of faith’ mentality associated with adopting data standards.” 2. Fix the contracting process. Key takeaways: 3. Address end-to-end supply • Quantify the opportunity for stakeholders, demonstrating how data chain cost. standards adoption leads to pricing accuracy and savings. 4. Expand the scope of products • Align stakeholders across the value chain: software providers, in distribution. customers, manufacturers, distributors, and group purchasing. • Create a working team of experts across companies to discuss adoption processes and identify requirements (e.g., distributor, manufacturer, and customer experts). • Create a campaign to promote data standardization. 6 | Healthcare Supply Chain 2015: Insights from the Industry Fix the contracting process Distributor: “We’re all doing these incremental customer agreements individually, independently. This adds a cost for all of us. What we need to do, as an industry, is unite for a standard contracting process.” Key takeaways: • Create transparency and clarity in product price/tier qualification across all parties involved. • Move to all-electronic contracting model, eliminating waste that occurs in/results from non-standard approaches to negotiations, letters of commitment, sign-offs/approvals. • Develop and adhere to an industry-wide standard for the turnaround time for pricing/contracting changes. Participants endorsed a practice of 45 days’ notice from manufacturer to distributor in advance of contract/pricing changes. Address end-to-end supply chain cost Acute care distributor: “A hospital and distributor together can get more accomplished than a distributor on its own.” Key takeaways: If doctors have to choose between cutting labor, capital, • Partner with customers to jointly assess waste in the supply chain from manufacturer all the way to patient (e.g., logistics, inventory and supply costs, they will management, data management, formulary development, customer always choose supply. demand management). • This will require more data sharing and “hand-in-hand” partnership. – VP supply chain, IDN • Enable and promote shared savings goals that generate savings from both physical and data standards. We need consolidation of Expand the scope of products in different providers to facilities. distribution I would like to see 12 trucks instead of 64 trucks. Supply chain executive, IDN: “We would like our distributor to distribute preference items…but they are perceived as large, monstrous organizations, how could they possibly do a preference item?” – VP supply chain, health system Key takeaways: • Expand the scope of products moving through distribution to improve provider logistics and lower “cost to serve.” • Include opportunities with physician preference products. This may require diverging from the standard “cost-plus” economic model for distributors. Healthcare Supply Chain 2015: Insights from the Industry | 7 Moving Beyond the Acute Care Setting The ongoing shift from inpatient to outpatient care will require new thinking and new capabilities from healthcare suppliers. Outpatient care has grown faster than inpatient care for the last decade. Moving Beyond the Thought Leaders expect this trend to accelerate, since outpatient care is Acute Care Setting less expensive for payers and more convenient for patients. Top Three Within the outpatient segment, home care will likely continue to Recommendations outgrow other sites of care and will increasingly integrate with other acute and non-acute care settings. 1. Enable the home setting. 2. Support new front-line care Enable the home setting models. VP supply chain, IDN: “…the more you push care into the home the 3. Leverage non-acute data. more difficult it is to get product to them…we clearly need help there.” Key takeaways: • Anticipate a major shift in care settings and prepare to efficiently deliver to different care environments. In particular, servicing the home setting will require a very different distribution and service model and a true B2C (instead of B2B) mindset and capability set. 8 | Healthcare Supply Chain 2015: Insights from the Industry • Explore opportunities to improve outcomes in the home through technology, service, and end-user education, especially as practitioner shortages drive the need for more remote monitoring and telehealth capabilities. • Be prepared to educate health system decision-makers about cost-to- serve differences for the home and similar settings such as assisted living. • Look for ways to enhance monitoring of patient behavior and treatment compliance, for example, by tracking orders filled and communicating this information to the patient’s physician or practitioner. Focus on chronic diseases as a key opportunity. • Be aware of possible disruptors to this space such as Amazon and brick and mortar retailers, and build differentiating services including linkages to other sites of care. Support new front-line care models Distributor: “A different kind of primary care model is likely to emerge, and we as distributors need to be at the forefront, helping providers make sound investments in their front-line care models.” Key takeaways: • Be prepared to support the new front-line care models being tested …distributors and in response to the growing physician shortage and the increase in manufacturers should bring patients seeking care (including those newly covered by the ACA). a whole set of systems and • Understand the opportunity with community health centers, which products to bear on improving are expanding fast due to increased government funding; these costs and quality outside of the centers require a broad range of products and services. hospital. • Enable providers to achieve greater efficiencies in these new settings. Apply learning from other similar sites of care (e.g., physician office) – CEO, physician group to help these sites deal with scale/supply chain issues. • Be aware of potential new competition for these new front-line providers (e.g., Wal-Mart). Distributors have to Leverage non-acute data move into the home - there is no central supply store at Device manufacturer: “Data will be powerful moving forward. Many Grandma’s house. providers have limited visibility into their performance in the non- acute setting making this information highly valuable.” – CEO, long term care provider Key takeaways: • Embrace unique device identifiers which will allow distributors and manufacturers to know where the volume is going and use this information to help customers track purchases and understand utilization trends by site of care. • Push for interoperable systems to allow acute and non-acute settings to share data and drive efficiencies across sites of care. Healthcare Supply Chain 2015: Insights from the Industry | 9 Managing Risk, Supporting Outcomes In a word, the trend in healthcare is toward risk: more accountability for outcomes, more services bundled into a single payment. Increased risk heightens the need to deeply understand the linkages Managing Risk; between clinical procedures, product utilization, and outcomes. Supporting Outcomes The opportunity for both manufacturers and distributors is to create new product and service offerings out of existing or new product and Top Four data assets. Recommendations Link products and outcomes 1. Link products and outcomes. Device manufacturer: “The tools we provide have to have a knockout 2. Leverage data to create effect that ties to bigger issues including outcomes and total costs. actionable insights. Otherwise, we could give the product away and not have enough 3. Partner in standardization/ impact to help.” streamlining efforts. Key takeaways: 4. Prepare to shoulder some risk burden. • Help providers with analytics on key metrics for which they are now accountable: patient satisfaction scores, readmissions, infections, etc. • Retrain and/or restructure the sales force to ensure that representatives are competent to discuss clinical outcomes, productivity, finance, and other critical business challenges with providers. • Increase collaboration between manufacturers and distributors to share customer insights, develop proof points, and educate representatives to discuss product outcomes. • Ensure that compensation and incentives support these priorities. 10 | Healthcare Supply Chain 2015: Insights from the Industry