Premier, Inc. (PINC) Earnings Call Transcript

Allen Lutz, health care tech and distribution analyst here at BofA. Next up, we have Premier. I'd like to welcome Mike Alkire, President and CEO; and Craig McKasson, Chief Administrative and Financial Officer. Thank you, gentlemen, for joining us.

Thanks for having us, Allen.

Starting with the macro environment. Based on general commentary we've heard across a lot of different hospitals and health systems. It sounds like there's been a general recovery from sort of this post-COVID period where utilization was a little bit low than we've seen over the past several years. So how are your members thinking about their capital budgets today as utilization has improved? And what's their appetite for investing in technology and other services?

Yes. Thank you. So a couple of things. First of all, as Craig and I often say, the utilization trends are obviously a very good predictor of capital spend, supply chain spend and those kinds of things. So utilization is something we definitely focus on. But I will say that it is very regional. So the parts of the country that are showing real strong growth from a population standpoint, you obviously are seeing very, very strong recovery. Those areas that are either flat or shrinking, the recovery isn't quite the same. And in some cases, we're still seeing flat and declining utilization trends in some of those markets. So it is still very, very regional. And it is something that we have to continue to create offerings and services, regardless of which side you're on. So if you're in a very healthy market, then obviously, we are focused on helping with how those health systems are buying new capital, how they're expanding, how they're leveraging their capital. And so we have service offerings and capabilities that we hope that they leverage in terms of technology enabling their supply chain, how they're actually maybe expanding into the non-acute markets and those kinds of things. In the slower growth areas, we also have some fantastic offerings, really focused around our performance improvements. So technology enablement, advisory services. And then that part of the health care ecosystem, we're also trying to sell them capabilities to be labor extenders. So how can they do more with less? So truly, shared services capabilities, AI, machine learning, anything that can actually automate a process where they have less people. So those are the 2 areas of sort of utilization across the country and how we sort of focus on those.

Is there any way to quantify the change in capital budgets around some of the faster-growing areas, and maybe, are capital budgets still declining in some of the slower growth or where utilization is not -- hasn't really returned. I'm just curious if there's any numbers you can put around some of the growth and lack of growth you've been seeing in certain areas.

It's really hard. I mean, we do try to put some numbers around that, but it is very sporadic because you will see growth of mid-single digits in some parts, and then you'll see flat or shrinking in some parts. So it's really hard for us to put a nail in that. And we have really great data that kind of identifies that. But to answer your question, it's really interesting. You do have, in some of the areas that don't have growth, they're challenged because maybe they haven't been able to invest capital into the resources, and they're trying to figure out ways to get access to capital to create more efficient, either delivery mechanisms, delivery systems, non-acute facilities and those kinds of things to care for their population. So they still have capital needs. And our job is to figure out how do we take some of the operating costs out to allow them to reinvest those things back, that money back into their communities.

Yes. I think strategically, we really have to focus in regions where they are more financially challenged, it is really articulating a clear ROI on the benefit they will get from the technology investment. And it is where our belief in having wraparound services to actually drive the improvement, leveraging the technology. We don't just drop off a technology subscription or license and say good luck. It's really bringing the expertise alongside that to drive the benefit. And as long as we can articulate that return, and they can actually see that it's going to benefit them financially, they'll be willing to make an investment. It's just a little bit of a tougher sale given the pressures they're facing to operate their health systems.

Is there any difference in the types of performance services that health systems that are growing more quickly are choosing to buy versus those that are maybe struggling a little bit. I'm just curious how they think about the types of services and products that Premier offers? And are they looking for the same things? Are they looking for different things?

So it's all over the place. But in general, just in general, organizations that are struggling really are looking at how do I do more with less in terms of labor. So they really are looking at co-management capabilities. Are there things that they can do across various functions of their organizations collectively across other health systems. So really trying to create more scale as much as they possibly can to drive their per unit cost down on providing services. And I will tell you on the other side of the spectrum, the health systems that are doing really well are the ones that are advancing -- or investing alongside of us in new technologies like AI and machine learning and those kinds of things, really getting after issues that have been plaguing them forever. So think of things like prior authorization, think of things like how are we documenting procedures and standardizing procedures appropriately and those kinds of things. And then in some cases, obviously, many of those health systems are interested in getting into research as well. And they're looking at us, or looking to us to provide services around helping them get into the research market and those kinds of things.

Yes. On your most recent earnings call, you talked about this AI-driven provider performance improvement strategy. And I think you talked about this 100 top hospitals that was, I believe, in Fortune Magazine. And as you think about that type of publication, how has that open doors for some of the hospitals that maybe didn't make that list as well as how does it help for hospitals that are on the list. What are some of the things that they're coming to you? Is this a meaningful driver of new business opportunities? I'm just curious because I think you had a similar type of publication, maybe 6 or 12 months ago. But I'm just curious, what are you seeing in terms of opportunities from that?

Yes. So just very quickly, we acquired that asset about 12 months ago. So it's all part of the same program. But first of all, let me just say, to be recognized on that list, you do stand apart. It is publicly available data, and it's all performance oriented. So you do stand apart. If you're on the 100 top, you are one of the top performing health systems hospitals in the country. Having said that, we want to make sure those organizations are getting recognized. And then secondarily, as you said, huge opportunity for us to go in and do analysis and evaluations with health care systems to talk to them about where they may not -- might not be hitting the mark in terms of providing that level of performance to be a top-performing health system and so -- or hospital. So yes, it has truly open doors for us in the last year or so, for us to engage at executive levels to talk about true performance improvement platforms to include not only quality and safety, but also on the supply chain stuff.

2 builds I would have on that. First of all, the 100 top program, just to clarify, is a transparent program that you don't apply to actually become a top hospital, all hospitals are evaluated against this criteria across the country. So there are other ratings programs where it's sort of pay-to-play kind of approach, that's not what this is. The last thing I would say in terms of how we are thinking about that program and its ability to drive business moving forward is actually now that we have it, taking our technology and leveraging predictive aspects of our technology to actually be able to identify how they will likely perform the next time the 100 top comes out. So to your point, there are, a, either ones that are in the 100 top and how do they sustain and maintain there because some of our health systems actually use that as, for example, their incentive programs for the executives and running the health system to make sure that they're maintaining quality and safety and efficacy from that perspective. And the ones that are just on -- off the cusp can identify are they making the progress in the transaction move forward. So that's really been our focus is to advance the predictive nature to know where they will come out the next year, given there is a little bit of a data lag in terms of what the evaluation is based on.

And the reason that's important to what Craig said is there's a strong correlation between 100 top star ratings from CMS and Leapfrog, and those are other rating entities that look at health system performance. And so it's important that we're able to sort of coalesce all those ratings and then put a performance improvement plan in place for those health care systems to maximize all of those.

Really helpful. Switching gears a little bit to some housekeeping items here. Can you provide an update on your efforts to seek partners for Contigo Health and S2S. Namely, how is the process coming along? Are you seeing good interest? And then could you clarify, are you looking to outright sell the businesses? Or are you just looking for partners?

Sure. I'm happy to address that. First of all, we are looking to sell the businesses. We use the word partner intentionally because in all likelihood, given the relationships we have with health providers that are engaged in both those businesses, there's a likelihood we could conceptually maintain some ownership interest. So it's just when we say partners, we would be potentially a minority owner in the go-forward business depending on the structure and nature of it. But to clarify, it is a sale of the control and ownership of those businesses. Relative to the processes, no specifics to share today, but we'll tell you both are active and engaged. We do have a number of organizations that have shown interest in both of those and continuing to progress those with an intention to get them done as efficiently and briskly as possible.

Got it. And then on your most recent earnings call, you provided updated commentary around future expectations related to the GPO member share. Can you quickly walk us through those details and maybe clarify any points that you want to make sure investors understand.

Sure. Appreciate the question. So yes, on our earnings, we did talk about the fact that in fiscal 2024, our current year, our administrative fee share provided to members is in the mid-50s today. We gave early perspective. We won't issue guidance until our fourth quarter earnings call in August, but we gave a preliminary view that we would expect the blended overall fee share for all of our GPO business to be in the low 60s in fiscal 2025. When we think about the renewals of our members that we're going through, what I specifically talked about is there is a portion of our entire GPO business, about 70%, that is made up of the former, what we used to call member owners. So the actual health systems that we're shareholders in Premier and then we had acquired a number of members through an acquisition of Acurity, which was the hospitals associated with Greater New York. So all of those members had different economic terms historically given the value proposition that we provided to them. And we've been working through and have renewals coming up over the next couple of years associated with that 70% component of the GPO business. What I articulated that is, where we sit today, about 1/3 of that book has been renewed. So of that 70%. We have a road map of how we'll continue to renew through fiscal 2025, which is through June 30, 2025, that will get us to about 3/4 of that book being renewed at that point in time. And then we have some members that had contracts running into fiscal '26 and fiscal '27. So we'll continue to renew beyond that. And then relative to the longer-term view on fee share, we did mention that we would anticipate that low 60s that we'll see on a blended basis across fiscal 2025, likely could increase into the upper 60s in fiscal 2026 and beyond. And then we believe it will sort of hopefully stabilize at that rate on a go-forward basis.

Got it. Let's talk about some of the growth opportunities within the GPO. I think you've discussed in the past that Premier only captures about 50% of your current members' purchasing spend, can you talk about the runway to continue to penetrate your member spend and what initiatives and strategies you're leveraging in order to do that?

Yes. So it's a very important part of our growth strategy. We probably capture somewhere between 50% and 60%, maybe towards the upper end. So this still provides a significant runway for growth for us. The areas that we primarily are focused on are in the non-acute and purchase services, and let me break those out just a little bit. So purchase services are services that the health care systems buy on a regular basis. Historically, they've not lend themselves well to a national GPO contract. But over the last few years, we've been able to make some pretty significant investments in technology and resources to actually build out a portfolio around purchase services. So there are purchase services that are national in scale, some are regional, some are local. The most important aspect is that we are customizing it to the needs of the health systems. So we'll build out portfolios of national capabilities, regional and local. And in some cases, if we don't have contracts, we'll also provide them pricing benchmarks and those kinds of things. So they can actually -- if we can't create a contract, they can create a contract in parallel to the stuff that we're doing. So that's purchased services. And then as we've been speaking about for the last, I don't know, 5, 6, 7 years, health care is moving outside of the 4 walls of the hospital and into the non-acute settings. And so we've been making very significant investments in data and technology into that health care and non-acute segment of the market. What does that mean? These are things like surgery centers. These are rehabilitation centers, labs, imaging centers, those kinds of things, and really building out a portfolio that meets each of those non-acute facilities' needs. Another really key aspect of that is making sure that as you're building that portfolio out, you're creating a very seamless and easy transaction on the part of those that are actually buying the product. And so we've been making pretty significant investments in the technology to allow for that seamless transaction. And then the last area that we focus on, and you've heard us talk about this, is driving higher levels of penetration through our committed programs. And so you're going to see us continue to drive that. About 50% of our health systems, our customers actually participate in a committed program, and we'd like to see that get up to 75% and 80% over the next few years.