Premier, Inc. (PINC) Earnings Call Transcript

Good morning, everyone. Welcome to this session of the Leerink Global Healthcare Conference. I'm Mike Cherny, the health care tech distribution analyst. It's my pleasure to have with me Premier. To my immediate left is Glenn Coleman, CFO; Mike Alkire, CEO; Ben Krasinski, who heads up Investor Relations, is in the audience as well. They have no slides, which I love. So we're going to go straight into fireside chat.

But maybe just to re-level set for folks, one of the things that, especially, Mike, you and I, have always talked about is the whole dynamic of Premier the business versus Premier the partner. When you think about the market right now, and I'm going to go very big picture here, but you've had swings in utilization for your customers that are skewing to the upside. You've had now some changes under the new administration in terms of how some of your -- especially your academic medical center customers are faring with potential either perceived or real cuts that they're dealing with. How does Premier the partner turn on now, aside from just obviously the ability to drive best-in-class cost and supply spending, but to make sure that your health system partners are achieving the results they want to achieve in terms of running their businesses?

Yes. So a lot there. So let me just take it from an industry perspective first, and then we'll jump into Premier a little bit about how we're reacting to it. But a lot of stuff happening coming out of the administration. I think our health care systems are incredibly worried about what potential Medicaid cuts look like, some impacts on Medicare cuts. Also the NIH cost reimbursement issue associated with the academics, for those of you in the room, the government funds about 15% or guarantees 15%, but some of the large academics are getting 60% to 80% sort of cost reimbursement from NIH. And so, I'll tell you, if you reduce that and that goes down to 15%, there's structural cost reduction that's going to be necessary. So I think our health systems are all in a place that they are looking for fairly disruptive things around how they need to continue to transform their business. We literally had 70 health care executives in Clearwater last week. We call it our Board Advisory Committee. And these executives are CEOs, CFOs of some of the largest health systems in the country. But all of them, even those that are driving great margins, are incredibly concerned about some of the impacts that are coming out of the federal government and the administration. So what they've challenged us with is, hey, we've got to think differently than we have in the past. So Michael, you and I have talked a little bit in the past about total value creation for these health care systems. A couple of different things that come to mind and areas of focus that they've really challenged us around. One, from a GPO perspective, how do you continue to drive higher levels of commitment to get better pricing for products? So I think you're going to see an extension of our SURPASS and our ASCEND programs driving to much more deeply into the contract base of these health care systems. So today, we probably do 20%, 25% of contracts in some of those programs. I think you're going to see 50% to 75% penetration with those programs. I think it's something that is one of the easiest levers for them to pull, which is to try to drive that clinical standardization. Second is labor. They've been really concerned, obviously, about what's happened with labor since COVID. Lots of retirees. We've got the gray tsunami upon us where more people are retiring, less people to care for them. We've been building out capabilities over the last number of years to build out technology to become labor extenders. So think of things like prior authorization, HCC coding, things of that nature, where, traditionally, you need clinicians that actually do chart reviews and those kinds of things, but we're building out technology to actually do that capability. So that's another big value capability that we're bringing to the market. And then finally, we brought on a gentleman by the name of Dave Zito to run our Performance Services business. And Dave has a very, very long history with -- he was a partner at Ernst & Young and then really was one of the early leaders at Navigant. And Dave has brought a whole different perspective on how we're thinking about building out performance improvements and collaboratives and those kinds of things. So I'm really looking forward to seeing how he is going to continue to expand that capability because, quite frankly, our health care systems are going to need it. One last thing, and then I'll flip it back to you. He's really big into shared services. So they built out a pretty substantial and very profitable model about outsourcing revenue cycle and those kinds of things, revenue cycle management. So I would guess that we're probably going to be looking at doing a lot more shared services and co-management, and those kinds of things, both in the supply chain and other areas within the health care delivery system.

It's a great perspective to start, Mike. And maybe if I can pull on that a bit. You talked about some of the incremental service capabilities, technology functions that you've rolled out. Clearly, you're in the midst of a contract renewal process as you're pushing through. By no means are -- is this the only time that you talk to your customers about what more you can do. But clearly, it opens up a conversation potential to kind of rebase the contracts. You're going to talk price, but you're also going to talk service levels. As you think about the services that you've expanded, especially over the last few years, given the last contract renewal was during the member ownership unwind. It was obviously in the midst of COVID. Can you give us a little more flavor as you go through the renewal process and what the strategic parts of the discussions look like? Beyond the here is the net admin fee share that we're going to negotiate, it's more here's what more we want to do for you.

Yes. So I think it's all driven by value, what kind of savings are we going to be able to create for them over the next period of time. It could be a 3-year, 4-year, 5-, 6-year contract. So they really want to have sort of an understanding of how we're going to do that. As part of that, the focus that we've been making investments around is this technology enablement of supply chain. So really pulling in invoice data. I know this gets into a lot of the weeds, but pulling in all the invoice data and helping them be a lot more efficient with how they're doing invoicing and payment. And believe it or not, it's still an incredibly manual process with a lot of faxes and other kind of nontechnology-oriented invoicing capability that enters into the health care stream. And so they're very interested in our technology to automate those things and help them become more efficient as a supply chain organization. So that's the second area that we spend a great deal of time on. And then obviously, then we pretty quickly shift into how we're driving better levels of clinical standardization, how are we improving -- helping them improve their quality, how are we helping them as they kind of migrate to value-based contracting and value-based care and those kinds of things. So those probably are the 3 or 4 big areas that we kind of tease out and then put some numbers around in terms of the value that we're going to create for them longer term.

And along those lines, if you think about more recent trends, again, the renegotiations will take time, but your performance year-to-date on especially the GPO side has been better than anticipated. Can you give us a sense of what's been driving that outperformance and how you think about it in terms of what's embedded in the guidance for the rest of the year?

Yes. So I'll take this one. Just to remind everybody some of the comments we made and key messages we had for our second quarter earnings call, we were on track for our first 6 months of the year in terms of revenue, EBITDA, ahead on EPS. So for the full year, we reaffirmed our guidance for revenue, EBITDA, and we actually increased our EPS guidance, largely driven by the fact we were doing additional share repurchases. But for the full year, we're on track to what we said when we started the year. Having said that, there was some mix issues between our businesses. So Supply Chain Services has been outperforming and Performance Services have been underperforming. In total, obviously, no change. But if you look at the outperformance on the supply chain side, I would say the thing to highlight there is really the contract penetration momentum that we have. On the earnings call, I mentioned 5% year-to-date growth in our gross administrative fees, and it was pretty broad-based. If you look at the categories of med-surg, food, pharmacy, a lot of the facilities areas, really nice growth across the board. And if you look at the opportunity for us to grow, it really comes from the gross administrative fee line. So that's enabling us to overachieve, coupled with a slightly better fee share versus how we started the year and what we modeled. So those 2 drivers are really important for us. And I think as we look forward, this runway is still a long way to go for us on the contract penetration side. I say that because if you look at where we are today and my comment before on SURPASS and AscenDrive, I mean, only $30 billion of our $80 billion is going through those contracts. Lots of opportunity to drive more compliance, get our members more savings. But there's a large untapped area I call purchase services, which are non-good areas. Think of this as maintenance services, laundry, landscaping, those types of things, really untapped, I think, in terms of the opportunity there. Lots of opportunities around the whole physician preference area, which is where you see typically a lot higher products being used because that's how a physician was trained. And if you think about equal alternatives at a cheaper cost, that's really what we're trying to drive in terms of some of these member savings. But on the whole, those are the areas that have been driving the outperformance. The other thing I would just mention, too, is we're now starting to see the ramp on some of our newer contracts. These are important wins for us like AllSpire, as an example, where -- one of our biggest wins. We just started to implement that contract on January 1, and so that will ramp throughout the year. We'll see certainly next fiscal year, a lot better performance, but this is ramping nicely for us. We also had another member win that we didn't disclose the name of the hospital system, but that is going to contribute to our second half of the year fiscal performance. So all of that moving in the right direction. That's why we raised our guidance by $25 million for Supply Chain Services. And again, that was offset by the Performance Services.

Yes. And you're not a company that typically press releases names of wins, so AllSpire clearly stood out in terms of a sizable agreement. Maybe using them as an example, what was the biggest drivers that allowed you to win that contract, given that, obviously, it was a sophisticated organization that was not new to aggregating purchasing?

Yes. So just as a quick reminder, AllSpire is 7 or 8 health systems, primarily in the New Jersey and sort of that Mid-Atlantic kind of market, so Hackensack, Lehigh Valley. Wellspan, a number of other institutions. But what differentiated us, why we won, obviously, you have to have fantastic pricing and a strong market basket because it was an HPG customer before. So you still have to have those great programs. But I think what really pushed us over the top was our technology. And so if you think about what our technology can do, versus either Vizient or HPG, is we have the ability to aggregate that spend in a close to real-time way, where we're pulling in all that invoice data and we have some algorithms then where we look at what's the best pricing among a collection of health care. And I know that sounds simple, but that's very, very hard to do unless you get all the data. And then if you can do that on a regular basis, you're going to start to find where there's constantly opportunities for us to continue to drive value, because sometimes you want to go to the lowest price if you can make some conversions and sometimes you just want to standardize on what the majority of those health care systems are already using. Maybe a little bit higher price, but then you can also tee up opportunities for the future, which are lower-priced contracts. And then, of course, you always have the reaction. When you have a supplier or a business partner that loses an opportunity like that, they're oftentimes very hungry to get back in and participate in the next go around. So anyway, it creates the kind of friction that you want to create. I will tell you our differentiation: contracts and then the technology. We have been making the right investments in the technology to not only help them with how they're doing invoicing, help them how they're doing procure to pay, but also help them to become more efficient in the way that they do things like value analysis and other activities that the general supply chain organization does within the health care system.

Turning back to some of the high compliance contracts with SURPASS and ASCEND. To me, it's always seemed very logical that your customers want to go that direction, especially for commoditized goods, stuff where there's private label opportunities. As you go through the conversion cycle, what is it taking for some of your health systems to get over the hump in terms of moving towards a high compliance contract? And what are the hindrances for the ones that don't want to move in that direction?

I will tell you, I've seen more of an interest in these last couple of months than I've ever seen before. So I think financial pressure is everything, where, if the financial pressure is not there, is it really worth the focus on behalf of these executives to have to potentially get at odds with their clinical staff and try to drive standardization. And so -- but I will tell you, I think the financial imperative is there, and I think that the timing is right to drive a lot of the standardization. It's interesting. We talk a lot about commodities, but I think you're starting to see a lot more interest on clinical preference and even physician preference items, too. Because, again, as I said earlier, it is probably the easiest lever to pull. We've got some academics that are laying off significant numbers of people for the first time in the history of their business. And I think they'd rather try to drive standardization. So I'm very excited that the impetus is there to drive this change. Now what we have to do is not only identify where there's opportunities for great pricing, but we're going to also have to help them as they think about standardizing sort of value analysis across all these health care systems and then driving the change. So I think the change is a really important aspect of this because, oftentimes, it's one thing to actually have agreement on I'm interested in driving to that level of commitment, but many aren't able to actually execute it, right? And so the opportunity to really drive the change, I think, is going to be really critical this time around.

Yes. I would just add, Mike mentioned earlier, we were with a number of our key member CEOs and CFOs last week. And one of the emphasis items that they put on was we don't need incremental change at this point, incremental savings, we need transformative savings. And so to Mike's point, we've seen a lot more interest in the last couple of months of really driving significant change here. So I think that's the impetus for moving forward and trying to drive more compliant contracts, because that is the lower-hanging fruit and you can get some meaningful savings by going that route.

And I think shared services is next. They're going to be looking for ways to create scale and leverage labor across multiple entities as well. So not just what Glenn said, but I will tell you, as we spoke last week with those executives, I mean, many of them are a lot more interested in figuring out ways to create shared services capabilities more than they have in the past.