Supply Chain Update: Supply Expense Overview FY17 Initiatives Update Preview of FY18 Plans Palomar Health Board Finance Committee May 2, 2017

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1 SUPPLEMENT TO THE MAY 2, 2017, BOARD FINANCE PACKET POSTED FRIDAY, APRIL 28, 2017 Supply Chain Update: Supply Expense Overview FY17 Initiatives Update Preview of FY18 Plans Palomar Health Board Finance Committee May 2, 2017 Steve Ellis, Director, Corporate Supply Chain Services 1

2 Discussion Topics Supply Chain Department Overview Non Labor Expense Impacts Supply Chain Strategy Performance & Outcomes Group Purchasing & Aggregation Networks Palomar Health Interdisciplinary team Collaboration Plans Underway and for FY18 Q&A 2

3 Supply Chain Services Overview Resource Management Project Planning/Implementation, Etc. Expense Reduction Customer Service Expense Management Value Analysis Collaboration Analytics Vendor Management Other Duties 3

4 Healthcare Organizations are Facing Heightened Expectations and Expanding Challenges across Multiple Dimensions $ Cost Management Performance Improvement Smart Use of Big Data Personalized Medicine Palomar Health Increased Consumerism Physician Alignment Technology Investments Population Health Integration Across the Continuum of Care 4

5 Healthcare / Palomar Health Expense Challenges Rising costs (Inflation, Technology Advancements) Rising costs not offset with reimbursement Supply costs represent the largest non labor expense Supply costs increase 3 7% every year 5

6 Strategy Palomar Health will be recognized as the dominant provider of integrated health services as measured by market position and value based metrics of care. People Process Outcomes Mission Sustaining Financial Performance Customer Value Quality Cost Experience Brand Operational Excellence Clinical Integration Efficiency and Effectiveness Hassle Free Experience Consumerism Organizational Capabilities World-class Workforce Technology Patient First Culture ***Supply Chain Linkage Connecting with the Strategies and Priorities of Palomar Health*** 6

7 Supply Chain Mission & Strategy Acquire goods and services efficiently and effectively to meet the Palomar Health Mission & Strategic Plan Avoid waste Reduce costs to offset the effects of inflation Build & leverage partner relationships internally (PH) and externally Identify / implement creative solutions 7

8 Measuring Performance 8

9 Supply Spend March Adjusted Discharges MTD ACTUAL BUDGET 4,439 4,231 March 2017 Total Supply Expense by Supply Account - month to date A CCOUNT A CCOUNT NA ME FIXED FIXED ACTUAL BUDGET VARIANCE PROSTHESIS 2,551,006 2,116,118 (434,888) SUTURES/SURG NEEDLES 354, ,150 (92,268) SURGICAL PACK 301, ,426 (34,078) SURGERY GENERAL 1,028, ,425 (135,182) ANESTHESIA MATERIAL 2,431 2, OXYGEN/GAS 94,515 14,606 (79,909) IV SOLUTIONS 107,209 82,443 (24,766) PHARMACEUTICAL 1,609,085 1,357,860 (251,225) RADIOACTIVE 131,262 80,025 (51,237) X-RAY MATERIAL 2,387 1,449 (937) OTHER MEDICAL 1,582,544 1,395,901 (186,644) FOOD/MEAT 71,779 70,500 (1,280) FOOD OTHER 286, ,620 7, SUPPLIES LINEN 34,941 1,989 (32,952) SUPPLIES CLEANING 72,599 61,487 (11,111) OFFICE/ADMIN 54,205 51,695 (2,510) FORMS 51,484 29,502 (21,983) EMPLOYEE APPAREL 14,821 17,672 2, INSTRUMNTS/MINOR EQUIP 123, ,142 (18,780) OTHER MINOR EQUIP 120, ,167 8, OTHER NON MEDICAL 1,190, ,141 (214,633) OTHER TRANSFER (35,492) (25,616) 9, OTHER TRANSFER PHARM (109,375) (85,983) 23,392 TOTA L w/ TRA NSFER A CCTS 9,641,149 8,098,507 (1,542,641) TOTA L w/o TRA NSFER A CCTS 9,786,016 8,210,106 (1,575,909) 9

10 Volume Impacts to Supply Spend Adjusted Discharges (4,439 March Actual / 4,231 March Budget) 1,825 Surgeries system wide in March Highest monthly total for FY17 YTD (March = 1,825, Feb = 1,494) YTD total cases, 14,873, up 3% compared to FY16 Highest month of Surgery totals for various specialties Cardiothoracic 29 cases Gastroenterology 395 cases General 398 cases Vascular 38 cases Second highest month of Surgery totals for high dollar specialties Neuro 69 cases Orthopedic 441 cases Year over Year case total increases (by Specialty) Cardiothoracic 40.40% Gastroenterology 9.56% General 3.57% Gynecology 8.01% Neuro/Spine 10.27% Urology 4.35% Cardiac Rhythm Management (CRM) 12% higher than previous year 10

11 Supply Expense Variance Effect on Revenue Revenue Notes Prosthesis, Surgery General, and Pharmaceuticals. EXP VAR TO BUDGET (FIXED) GR ANCILL REV VAR TO BUDGET MTD YTD MTD YTD PROSTHESIS (434,888) (116,897) 1,169,844 2,706, SURGERY GENERAL (135,182) (1,399,457) 879,375 4,581, PHARMACEUTICAL (251,225) (1,138,797) 2,619,516 8,907,012 VARIANCE FOR ABOVE ACCOUNTS (821,295) (2,655,151) 4,668,735 16,194,527 TOTAL SUPPLY VARIANCE (1,542,641) (3,767,464) NR % 20% 20% VOLUME ADJUSTED VARIANCES (1,144,512) (2,961,304) Nrevenue 933,747 3,238,905 11

12 Supply Chain Ratio Palomar Health Supply Chain Ratio FISCAL YEAR EXPENSE REVENUE RATIO FY 10 71,123, ,383, % FY 11 74,331, ,007, % FY 12 76,250, ,716, % FY 13 83,701, ,127, % FY 14 90,683, ,691, % FY 15 97,414, ,687, % FY 16 99,947, ,933, % FY 17 (thru Mar. 17) 76,415, ,178, % Not for Profit Median Range: 16 21% * Investor Owned / For Profit Median Range: 12 14% * * Source: Healthcare Finance Management Association August

13 Reducing Our Supply Costs 13

14 Supply Spend Benchmarking Initial results

15 Supply Spend Benchmarking Status: 12/31/16 15

16 Supply Spend Benchmarking Status: 03/31/17 16

17 Group Purchasing Organizations (GPO s) and Aggregation Networks (AKA: Purchasing Coalitions) Fast Facts: VHA Palomar Health GPO since 2007 (Name changed 2016 to Vizient) Aggregation Networks West Coast Purchasing Coalition (WCPC) In January, Palomar Health joined the Upper Midwest Consolidation Service Center (UMCSC) Since January, contract onboarding and conversions underway Who is UMCSC. 17

18 UMCSC Membership 66 Members 23 States $8.2B Annual Supply Spend Class A (9 members) Aspirus, Inc. CentraCare Health Froedtert Health, Inc. Gundersen Health System Mayo Clinic NCH Healthcare System North Memorial Health Care ProHealth Care, Inc. ThedaCare, Inc. Class A1 & A1 NE (8 members) Palomar Health Baptist Health The Guthrie Clinic INTEGRIS Health, Inc. Mercy Care St. Bernards Medical Center Sparrow Health System University of Arkansas for Medical Sciences Class CCP (1 member) Sanford Health Class V (1 member) Vizient Class B (43 members) Altru Health System Arkansas Methodist Medical Center Beaver Dam Community Hospitals, Inc. Bellin Memorial Hospital, Inc. Beloit Health System Boulder Community Hospital Butler Health System Cayuga Health System, Inc. Comanche County Memorial Hospital Community Memorial Health System Duncan Regional Hospital, Inc. Excela Health Fayette Regional Health System Grand Itasca Clinic and Hospital Great Plains Regional Medical Center Holy Redeemer Health System Hunterdon Healthcare System Jackson County Memorial Hospital Lake Region Healthcare Little Company of Mary Hospital and Health Care Center McAlester Regional Health Center Meriter Health Services Norman Regional Health System Northeastern Health System Penn Highlands Healthcare Phoenix Children s Hospital Prairie Lakes Healthcare System Rice Memorial Hospital Ridgeview Medical Center Silver Cross Hospital Corporation St. Clair Health Corporation St. Luke s Hospital of Duluth St. Peter s Hospital Stillwater Medical Center Summit Health Swedish Covenant Hospital SwedishAmerican Health System Corporation Tri-City Medical Center Trinity Health Unity Health Washington Regional Medical System Yampa Valley Medical Center Yuma Regional Medical Center Class C (4 members) Bay Area Medical Center Grady Memorial Hospital Kingman Regional Medical Center LifeCare Medical Center Updated July

19 Palomar Health Engagement with the UMCSC Governing Bodies Board of Managers Business Development Finance Operations Clinical Member owned, member governed, member driven 19

20 Focus Areas MEDICAL DEVICES SUPPLY CHAIN COMMODITIES / OTHER CLINICAL BUSINESS DEVELOPMENT / 2.0 PROGRAMS Cardiology / Cath Lab / IR Orthopedic / Joints Trauma Spine Other Surgery Other Procedures Contracting Price Enhancements Standardization Rebates Networking & Aggregation Utilization Business / Office Supplies EVS Facilities Food Nursing Supplies Surgical LAB Endoscopy / GI Wound Care / Ostomy Other Patient Care CPT / Custom Packs Reprocessing Blood Mgmt 3 rd Party Instrument Repair Supply Chain Innovation Food Buying CLINICAL QUALITY VALUE ANALYSIS (CQVA) Effective data-driven, clinically based decision-making 20

21 Category Results Achieved with UMCSC Annual Total Savings Advanced Energy Platform Ultrasonic Cutting 2015(Medical Devic 61,938 Advanced Energy Platform Vessel Sealing 2015(Medical Devices 10,978 Biologic Surgical Mesh 2015(Medical Devices) 41,835 Bone Cement (Medical Devices) 47,000 Bone Cement Accessories 2016(Medical Devices) 27,441 Fall Management 2017(Commodity) 11,653 Hemostasis 2015(Medical Devices) 13,965 Incontinence Care Products 2015(Clinical Preference) 34,000 Interventional Urology Products 2015(Medical Devices) 26,718 Negative Pressure Wound Therapy 2015(Clinical Preference) 49,915 Patient Skin Care 2016(Clinical Preference) 15,912 Peripheral Vascular Specialty (Medical Devices) 22,641 Rapid Test Kits CDiff 2014(Clinical Preference) 14,236 Rapid Test Kits HIV 2014(Clinical Preference) 14,393 Respiratory Disposables 2017(Clinical Preference) 10,482 Sanitary Paper 2014(Commodity) 30,204 Sterilization Wraps 2015(Commodity) 10,744 Surface Disinfecting Wipes 2013(Commodity) 12,449 Surgical Equipment Covers 2016(Clinical Preference) 11,000 Surgical Gloves 2016(Medical Devices) 16,053 Suture 2013(Medical Devices) 150,000 Synthetic Surgical Mesh 2015(Medical Devices) 22,287 Trauma Products 2015(Medical Devices) 246,398 Urinary Catheters and Securement Devices 2017(Clinical Preferenc 33,156 Other Contracts Under $10,000 each (44 additional) 311,255 Total $ 1,246,653 21

22 UMCSC Results and Opportunities Palomar Health UMCSC Report Card Savings and Additional Value As of 4/4/2017 Results Achieved * Spend Savings % Savings $ Commodities (9) $ 858,100 7% $ 64,389 Clinical Preference (48) $ 3,583,695 8% $ 282,765 Medical Devices (25) $ 3,960,160 23% $ 899,499 $ 8,401,955 $ 1,246,653 Opportunities Commodities (14) $ 1,151,099 4% $ 41,812 Clinical Preference (35) $ 3,280,221 15% $ 490,722 Medical Devices (21) $ 7,445,395 26% $ 1,898,595 $ 11,876,715 $ 2,431,129 Non Optimized Additional Value Clinical Preference (5) $ 445,261 6% $ 27,361 Medical Devices (8) $ 2,095,939 16% $ 338,098 $ 2,541,200 $ 365,459 * Price activations with Vendors started in Mid March days to new pricing after contract signing 22

23 Palomar Health Resource & Expense Management Collaboration Palomar Health Leadership Vizient (GPO) Aggregation Network - UMCSC PRAC Capital Committee Perioperative VIP Team Interventional VIP Team Acute VIP Team Pharmaceutical & Therapeutics (P&T) 23

24 Key take aways Costs are increasing and reimbursement is declining Palomar Health must achieve & maintain Mission Sustaining Financial Performance Supply Chain is an important part of the organization s expense management program UMCSC is an important value proposition providing additional value through organizational commitment, active participation & network collaboration VIP, PRAC, and Leadership at all levels is necessary in support of our FY18 savings targets 24

25 Questions 25

26 Thank You 26