Premier, Inc. (PINC) Earnings Call Transcript

Okay. Great. I think we are live now. Thanks, everybody, for joining us. My name is Vikram Kesavabhotla. I'm one of the digital health analyst here at Guggenheim. Thanks for joining us today for our digital health summit. We're very excited to be hosting the team from Premier this afternoon. From the company, we have with us Mike Alkire, President; Craig McKasson, Chief Financial Officer; and from the Investor Relations team, Angie McCabe and Ben Krasinski, who I think many of you know. We're going to keep this to about 35 minutes of moderated Q&A. I have my e-mail here so to the extent that anyone in the audience has questions, feel free to send them in to me over e-mail at vikram.kesavabhotla@guggenheimpartners.com, and we'll try to get them answered for you. But I think with that, we can kind of go ahead and get started.

And it's obviously been an interesting year for your company. I think a lot of big changes in terms of your customers and your relationships, but also just dealing with all the dynamics around COVID. As a reminder for those in the audience, right, there's 2 big parts of this business between the supply chain services and performance services, we're going to talk about those throughout this conversation. But I think a good place to start would just be in terms of appreciating some of the history of how your value proposition to your customers has evolved and how those relationships has evolved as well? And I know August was a big month in terms of some of the renewals that you announced and some of the new relationships. So maybe if you can just talk about how that has changed over time and how we think about your relationships with their customers today relative to what we might have been familiar with historically with Premier, that would be a great starting point? We can follow-up and take the conversation from there.

Thanks, Vikram. And first, let me just say thanks for having us this afternoon. A couple things before we jump right into the answer to your question. I do want to call out the team. It's been an incredible year, obviously. They've done a tremendous job really supporting our health care systems through the whole COVID crisis, be it helping our health care systems obtain the important PPE, the care for the patients, working through issues to get access to generic drugs or drugs that are needed for patients that were put on ventilation, building out technologies to actually really understand how the virus is tracking and syndromic surveillance and building out some machine-learning capabilities to forecast/predict the needed PPE as the virus was continuing to evolve across the country. So I do want to call out the team. But as you brought up, August was a very important month for us. We did go through a renewal process, where we had the opportunity to go out and meet with our health care systems executives and talk about the new strategy, the strategy that we've been evolving over the last 12 to 18 months, get their perspectives, get their feedback. As part of that, we talked about sort of how we were looking at the financial restructuring of the business and getting them to a place of signing up for new 5-, 6- and 7-year agreements. And we thought that was really critical, right, to get their support with the strategy and then just as importantly, get their support by signing up for long-term agreements. And obviously, that provides us a great deal of comfort that we're hitting the mark in terms of creating the right strategies and creating the right value for those health systems. I think what was unique about this one was that we showed a very, very high percent of our health care systems that signed back up with us probably higher than the initial IPO. So we are really, really proud of the work and getting this financial restructuring done.

Yes. And maybe that's a good segue into just when we think about your supply chain services business and particularly within the GPO, right, I think the company, obviously, has kind of long-term targets out there in terms of growth and the supply chain services side, I think we've always thought about the net administrative fees kind of being a low- to mid-single-digit type of growth. Can you just talk about the algorithms to getting there? And now that you have this visibility going forward in terms of your administrative fees, how do you think about the different components that kind of drive that growth on the supply chain side?

Yes. Let me, at the highest level, hit sort of the value proposition that we have with the members, then I'll have Craig, if you would, Craig, just add in a little bit about the admin fee discussion. So we fundamentally believe that we're a little different than our competitors in the market as it relates to our GPO. We've been making significant investments in technology. And those investments really play out in a couple of different ways. One, it helps us to get after all cost. So we think our portfolio of contracts and capabilities is much broader than anyone else in the industry because we're able to get after the entire spend that a health care system has. So that's number one. Plus, we have the ability to bring in our clinical data. So as we look at ways to drive down overall cost for our health care systems, we think resource utilization, is really, really critical. So bringing that clinical data with our supply chain data really allows us to build out the algorithms like you talked about that are critical to our health care systems to provide high-quality and low-cost care. And with that, Craig, you can certainly add in on the admin fee discussion.

Sure. Thanks, Mike. Happy to. So Vikram, from a supply chain services standpoint, I do want to step back for a second. We really have 2 major business drivers in that segment. Our group purchasing organization, which, as you highlighted, has traditionally grown low- to mid-single digit. I'll come back to the growth drivers around that in a minute. And then we also have our direct sourcing business, where we are actually contract manufacturing for product which has been strategically differentiating -- differentiated during the COVID-19 crisis with our ability to really fulfill and meet member demand for personal protective equipment, in particular. That business, independent of the pandemic, it is growing at an extraordinary rate right now because of the demand and our ability to meet member demand for PPE. But in a normal steady state, that business grows at more of a high single to low double-digit type growth rate on that side of the business. If I step back now and say, what are the growth drivers to get us to that mid- to high single-digit growth for the segment, which is made up of low- to mid-single-digit growth again on the GPO, that is all about further penetrating and expanding the opportunities with our membership. And so it is identifying through technology, as Mike identified, opportunities to put more on contracted spend, which drives savings for the members and enables growth for Premier. We've had success in doing that. But we have more runway to go in terms of continuing to capture additional amounts of spend. We talk about the fact that today, across our membership, we have a $67 billion of spend running through our GPO, and we believe that when you take med-surg spend and pharmacy and the kind of supply component of a health care provider's expenditures, that's about $120 billion market just in our membership. And if you add purchase services, which is a large area of untapped potential, the market's actually about $200 billion. There's another $80 million -- $80 billion of incremental spend there. So it's all about capturing that spend, investing to get into those new markets like purchase services, we acquired a company called Medpricer about a year ago, which was all about having a technology solution to actually get after spend in the purchase services arena. And there are other areas like specialty aspects of physician preference and oncology in different markets that we're looking at in terms of growing the capture of that spend as well. We have some high compliance portfolios where we actually get more commitment and adherence to the contracts, which drives further penetration, one called our SURPASS portfolio and another one called our ASCEND portfolio, which we can spend some more time talking about as necessary. But those capabilities get us to that low- to mid-single-digit growth in the GPO. We do not look for revenue growth to come from increasing prices for our members, and we actually manage every year are we seeing any growth from inflation? And we typically have very nominal growth that comes from any price increase in the marketplace. So that's the GPO side and what the growth plan is. On the direct sourcing side, similarly, it's all about managing appropriate expansion of product coverage where there is a good opportunity for us to drive savings for members in commodity products. And so we will add more products to that portfolio and also extend and have further penetration with our existing membership in using more of the product categories, and there's a large opportunity in the nonacute space from a contract manufacturing or direct sourcing standpoint, to actually further our growth on that side as well. And then lastly, I should highlight, we do also focus on market share. We've been a net market share gainer over the past couple of years. And so we're always focused on looking for new business wins to add to our growth as well. But we have a big enough footprint that the majority of our growth comes from our existing footprint, and then we add share, which augments that as we move forward.

Yes. So a bunch of things to dive into that, I want to kind of leave enough time for. Maybe if we can just start on the administrative fees. You talked about the administrative fee shares that you have in your business, it's a constant question we got from investors in terms of how Premier's administrative fee shares compared to competitors in the market? And I think that may be oversimplifying the discussion a little bit given that I think you and each of the GPOs are very unique in terms of what you deliver. But could you maybe give us a sense for just where your administrative fee shares are now relative to the broader environment and kind of how you think about that trending going forward?

Sure. I'll be happy to start, and then Mike can add any additional color. So what we've publicly disclosed post the restructuring that Mike highlighted at the outset is that our administrative fee share on a go-forward basis will be in the high 40% to low 50% range. I do want to step back and highlight, though, that our value proposition and everything Mike talked about, the administrative fee share is only one small component or piece of the value that we are delivering for our health care providers. It is actually all about the savings and the value that we're providing to actually reduce their overall supply chain expense, and the administrative fee share is just basis points on a couple percentage points of purchase product, and it is not where -- there's value there, but it's not where the real value is. And so we actually, with all of our members, always have a return on their investment analysis that we review with them on a routine basis. We refer to it affectionately as a bubble chart. And when you look at the bubbles of return, the return that we're delivering in terms of driving savings is what's much more meaningful: the technology enhancement, the field services, and as Mike talked about, the clinical aspect of supply chain to actually eradicate waste and usage, and that's much more important than just the fee share itself. So that's the way that we think about the value that we deliver. Fee share in the marketplace ranges all over the place, depending on the type of business and the account and what other value drivers competitors may have, et cetera. But we feel good. And as Mike talked about, we now have 5-, 6- and 7-year agreements in place with no termination provisions. And we actually view that, that evidences, since members could have elected to take a different approach from a contracting standpoint, and they renewed with us for the long-term because of the overall value that we deliver including the fee share return as one component.

Got it. And maybe just a follow-up on that. You talked about just some of the programs that you have to drive higher compliance within your portfolio. Just a couple of things there. One, you talked about ASCEND and SURPASS, in particular. Can you just give us an update on what those represent? How much spend they are and kind of how they're doing? So maybe just taking a step back from a bigger standpoint, where across the different purchasing categories is there still room for more penetration, right? I know there are some areas that are very high compliance, some areas where you have incremental opportunity, can you just help audience figure out kind of as you kind of grow going forward, where is there more opportunity for Premier to take share of overall spend?

Yes. So the more clinical the products, typically, the more the opportunities for driving higher penetration. But before I get into that detail, let me circle back. So we have about $20 billion of health care systems volume that participate within our ASCEND program and about $8 billion in our SURPASS programs. So as SURPASS, just as a quick reminder, is a higher level of commitment than the ASCEND program. So it really is getting after really tough areas that traditional GPOs don't contract in. So we're really, really proud of the results of those committed programs. We also obviously are proud of our comanagement capabilities, right? So if you think about our acquisition with Acurity and Nexus (sic) [ Nexera ], the whole comanagement, cosourcing opportunity gives us -- or cosourcing capability gives us the opportunity to get after much more spend, given that we're in there, comanaging and really owning the supply chain outcome with our health care systems. And you've heard us talk a little bit about ProvideGx in the past. ProvideGx is an investment vehicle that we use to create healthier markets in the generic drug arena. So we want to help high-quality producers of generic drugs produce more drugs, especially in areas where there's a monopoly or duopoly that exists from a supply standpoint. So we want, obviously, to have our health care systems take advantage of those new manufacturing capabilities that the ProvideGx program allows for. And then you've heard us talk most recently a little bit about some of our new initiatives from a technology standpoint and supply chain, one is our stockd. program, which is our e-commerce platform. If you remember, stockd. was really created to help our health care systems provide products to the nonacute and their affiliates. With COVID occurring, we saw a really nice demand of need from nursing homes and other entities that needed PPE, and they leveraged our stockd. platform. Longer term, what we want to do with stockd. is really turn that into an ordering platform. So front end, it's got some e-commerce capabilities, but sort of behind the wall, we want to make sure that our health care systems can utilize that to extend pricing and extend their catalog to their nonacute settings and to some degree, where it's applicable to their affiliates. We've also been making some pretty decent and significant investment, actually, in our e-invoicing and e-payables capability. Again, e-invoicing is really about getting all of the invoices that a health care system has into a centralized place and creating efficiencies around managing those for the health care system. We also see downstream effect or positive impact for suppliers in that as we evolve that capability, there'll be the opportunity for us to work with our health care systems, leveraging that technology to pay their suppliers, our suppliers more accurately and in a more timely way. So those are additional technologies and capabilities that we are going to continue to evolve and build out. Then to answer your physician -- where are the opportunities -- where are the categories that we have more opportunities? It's always in the clinical preference and the physician preference arenas, where you actually need not just supply chain data, but you also need the clinical data that we can bring to the fore to help work with our nurses and work with our doctors to help them understand whether or not there's clinical parity by product and thereby allowing them to negotiate based on price if all the products were obviously demonstrating the same clinical outcomes. And if not, we could truly understand what kind of value that some products could deliver, either clinically or long-term from an outcome standpoint, and try to help our health care systems put some real value to that as well. So we're bringing all that to the fore to really help the health care systems get after all the spend that they have in their nonlabor expense areas.

Yes. And 2 just quick things I would add to that, Vikram. One is purchase services, which I touched on earlier. There's a large amount of fragmented spend for services. And so that is a ripe opportunity for us to get additional growth and penetration with our members. And then lastly, Mike touched on this, but I did want to reinforce the nonacute space. Traditionally, the nonacute space has not been as penetrated, given that a lot of the purchasing at times is not as centralized and managed, and that's where the technology enablement can really help us to get after that. But nonacute represents about 40% of our GPO today at this point. And so as that has grown and as care does move outside the walls of the hospital, the ability of us to technology enable our health care systems to manage that spend more appropriately and capture and then also for us to have technology to go direct to stand-alone nonacute providers are growth opportunities for us.

That's very helpful. I mean maybe now it'd be a good time to maybe shift gears and talk about the Performance services side of the business, which is obviously very important as well. And maybe it would be helpful just to start that discussion in terms of -- if you can talk about the range of services that you provide in that part of your business for hospitals to complement what you're doing on the supply chain side, and maybe as a part of that discussion, let me also talk about the long-term targets you have out there of mid- to high single-digit growth for that segment, what are the pockets of those services that are going to be driving growth for this company going forward? I think that would be a great place to start, and we can follow-up from there.

Yes. So today, performance services is buoyed by pretty much 2 aspects. One is our SaaS-based technologies, and then we add advisory services that sort of wrap around that capability. And Vikram, as you're aware, we bought Stanson Health probably more than -- a little bit more than a year ago. What Stanson does is it really helps us take all that -- all those insights from our quality data, our labor data, our safety data, our supply chain data, and it really helps us take all those insights and literally write them into the workflow to really transform the way that care is being provided. So we're really excited about that capability in terms of helping our health care systems drive improvement from a quality and cost standpoint and truly differentiating themselves in their markets, right? So to the degree that they're showing lower readmissions and having less harms and doing that at a lower cost, it will obviously help our health care systems brand. So that's number one. Number 2 is our advisory services business, where for the most part, we have collaboratives, and we do a lot of one-to-one consulting, as you've heard us talk about. We've really on our 1-to-1 stuff, really gotten after just pure performance improvement and cost management. So obviously, with COVID, our health care systems are really focused on: a, trying to get back to more of a regular cadence in terms of getting those elective procedures going and those kinds of things. And as you're sort of thinking through how to bring that revenue in and set up capabilities to drive that revenue, we're supporting them in terms of making them as efficient as possible. So we're doing a bunch of stuff with things associated with their corporate overhead and corporate allocations and those kinds of things. So as they are sort of rightsizing their business, we want to be there with some dynamic technology capability to help them sort of manage that cost to ensure that the cost and the revenue are in sync. So that's number one. A that's really all focused around health care system performance. And then you've heard us talk a little bit about some of these adjacencies. So we're leveraging that same technology, that same capability, and we're working now, obviously, and have been working with pharma on real-world evidence, working with them as they're thinking about launching and rolling out new therapies and those kinds of things in our life sciences practice. We stood up Contigo Health, which is a capability for our health care systems to work more closely with employers. We think that's really, really important to understand what those end consumers are, who really pay the bill for health care, understand what those needs are. And as part of that Contigo Health, there are 2 areas that we're focused on: one is building out centers of excellence. So we want our health care systems to be much more perceived or not for perceived -- be perceived, but truly be those centers of excellence for employers as they're thinking about where to have their employees and care provided as well as building on a high-value network of care. So for those very large national employers, we're working with our health care systems on creating those standards of care that we can spread that across the country in terms of how care should be provided. So that's in the Contigo. And then the final area that we've been focused on is really in the area of prior authorization. We believe with some of our machine learning capability and AI capability, we have the opportunity to really disrupt the prior authorization arena. So we've working through a number of partnerships and those kinds of things, building out that capability to really make that authorization, that real authorization approval process much more efficient and much more successful for patients and clinicians and physicians as well as the hospitals and the payers.

So a couple things that I want to dive into there because I think of all the things you talked about, right, a couple of the ones that I think have been at the forefront of the investor conversation have been Stanson and Contigo Health and obviously, I think kind of paralleling the focus that you guys have communicated in your conversations as well. Maybe we can just focus on those in a little more detail. Maybe starting with Stanson, right, you kind of talked about the value proposition that provides. I think you bought that asset maybe a little over a year ago now. Can you just talk about from when you bought it and kind of started having conversations with their customers about, I guess, cross-selling that into their cost base and their technology, just what were some of the challenges out of the gate? And kind of what are the -- what have you kind of learned throughout that integration process that kind of allows you to be more successful in that going forward?

Yes. I'm sure the teams were -- when we did the acquisition, I'm sure the teams were a lot more aligned around what were the specific use cases that we needed to really target with Stanson because it's a credible technology, right, that use -- that reads unstructured data, the unstructured notes within the EMR and creates machine learning algorithms to look at associations and then help to create ways to drive better care. And then as they came into Premier, I think it became really obvious that one of the big use cases was really PAMA, which is the -- for those of you who investors not aware, it was really -- it's a Medicare program really to get after high-cost imaging. And the idea is that if there are -- if health care systems and other clinicians that want to be reimbursed for high-cost images don't follow a certain protocol, they're not going to be reimbursed by Medicare. So we very, very quickly pivoted that asset to really help our health care systems and other nonacute facilities to really manage that whole PAMA capability. When COVID hit, we're already sitting, they're working in that workflow, we're already looking at, obviously, lab values, and we're looking at screens and all sorts of things to determine whether or not somebody should have a high-cost image, but we very quickly then pivoted that capability to look at syndromic surveillance. And I thought this is a really cool innovation that the team came up with. And the idea is at the point of care, at that time, in real-time, we could determine whether or not there was high probability that this patient has COVID. And why is that -- was that important? Or why is that important? Well, testing back then took a long period of time to test whether or not patients really had the disease and those kinds of things. More importantly, there was really no way to aggregate all that information very quickly. And we could look across the ZIP codes, we can look across states, whether there was a surge or a significant prevalence of the disease. And still today, we think there's a big use case that the federal governments and the states should take advantage of that. The fact is you don't need to shut a whole state down in some cases, right? Maybe there are specific counties that have surges that you should leverage this technology and truly shut down the areas that are being impacted the most, but leave the rest of the state open that doesn't have the significant impact of the virus. So we pivoted pretty quickly towards the syndromic surveillance, still building out the PAMA. And then as I said a little earlier, really working to build out some really cool algorithms and machine learning capabilities around prior authorization, obviously, focusing on images first because we want to take the learnings from PAMA and put that into the private markets. And then we're getting after drugs and some other things that are very, very expensive at the point of care. So anyway, we're really, really expensive -- we're really excited about how that -- the evolution of Stanson is and how it's becoming more and more sort of central to our entire business.

Yes. And the only color I would add to that quickly is that it's actually been about 2 years since we acquired that company and really strong growth. It was very small when we bought it, but we've been able to really expand it. We certainly lost a little bit of time in the early stages of the pandemic as people were really harnessed and focused on sort of dealing with the COVID trauma and situations. But as we talked about on our first quarter call, we feel much better about the growth now and people are uptaking and seeing the real value that, that asset can provide, helping them with their physicians and clinical decision support.

Yes. And maybe just a similar question on Contigo Health, but obviously, a very exciting initiative that you guys have talked a lot about. Just how are you thinking about the time line, the contribution from that part of your business? And just anything in terms of the -- how we should be measuring the progress there in these early stages of that initiative?