Premier, Inc. (PINC) Earnings Call Transcript

[Audio Gap] Here. We have President and CEO, Mike Alkire, and Chief Administrative and Financial Officer, Glenn Coleman. Thank you both for joining us.

I think the big focus for the past several weeks and the months now has been the macro backdrop, what's going on there with tariffs, now the executive order on drug prices, there's a lot of focus on this presidential administration, Will [ they want they with ] tariffs? But can you talk about what your health care provider members are currently experiencing as they think about all these uncertainties and really how Premier is positioned to help them?

Yes, sure. First of all, thanks for having us. So a couple of things. You sort of mentioned the issues associated with tariffs and that's coming and going. I feel like that's incredibly fluid. And so we'll see how that kind of plays out. But given that some of the negotiations that happened over the weekend with China, I think I'm a bit more bullish that we'll get some resolution around that. Things that are given that I'm not so sure that will change in any short period of time are the labor crisis that's affecting the health care system. So I think everybody is aware of this that follows Healthcare. We had a lot of folks resigning during COVID, people that we had expected to be in the labor force for a number of years. And I just think that they got burned out and decided that wasn't for them. And so we've got significant shortages. And a lot of people talk about nursing shortages. But boy, when you go around talking with health care systems executive, we're talking about radiation technologists, pharm techs, just core people that you need to keep a hospital running. So we still are struggling quite a bit with labor shortages, the impending Medicaid cut that was kind of championed or there were some conversations around yesterday I think that's about, I don't know, potentially like an $80 billion impact on health care? That's going to be huge. So the health care systems are going to have to think about structurally, how are they going to realign themselves so that they could absorb that kind of impact. And so -- but tariffs are, I think shorter term, I think labor is longer term, and then these Medicaid cuts -- these impendent Medicare cuts are going to be big drivers of how health care systems are going to operate. In terms of how are we sort of aligned to sort of support them, and I know there are going to be some questions associated with are these things going to have an impact on their ability to spend money on service and those type of things. But I got to tell you we've made the right levels of investments in technology to do a number of things. First, we've got a lot of core capabilities to help health care systems understand how their performance is and how they think about spending cost curve. So we like to go in and have broad-based conversations around things around are you negotiating the right rates with payers? Are you doing the right things in terms of standardizing your clinical care? Are you doing the right things in the supply chain? Are you doing the right things in labor? Are you utilizing labor appropriately? So we do a lot of analytics. We have a ton of data, obviously, and we have technology where we can actually help them benchmark and understand the improvement opportunities where they need to drive performance improvement. And then after you do those exercises around performance improvement, what's very, very unique about our capabilities is we have the ability to write things into the workflow, which is Epic. And you think about Cerner and those kinds of EMRs. And that's something that's very unique to us in that -- we've been doing this now probably for 3 or 4 years where we've been impacting the way that how physicians treat patients and those kinds of things through alerts and drop-down boxes and those kinds of things. So anyway, I think we're very, very well positioned to help health care systems think about the future and how they need to be actually building out capabilities to support the community.

Yes. I'd add a couple of things. So on the tariff point, we recently built a tool for our members where they can see where product is being sourced from, what the impact of the tariffs is. That's been very helpful for them to be managed through this tariff discussion, which is fluid. In addition, as Mike mentioned, we're integrated into the workflows of our members. And so from an AI point of view, we're doing a lot around reimbursement coding, ensuring that our members are being properly reimbursed and that's a big focus for us moving forward.

Yes. I want to talk about the tariffs a little bit around some of the things Mike you mentioned. We did our quarterly survey found that hospitals were worried about, maybe a 6% to 7% increase in cost around tariffs. And clearly, it's fluid. No one knows what's going to happen as it relates to their P&L. You mentioned a couple of things, standardizing supply chain using technology and benchmarking AI that you've been building out for a long time period. As you think about the concerns that your customers are having today, does the tariff piece, does that add urgency for them to add specific things from Premier? And what have you seen in your recent conversation with your customers around those opportunities?

Yes. So first of all, from a tariff standpoint, the health care systems don't have the ability to absorb those tariffs, right? So -- and I know you're out having conversations and you're hitting 6% to 7%. But I will tell you, their operating margins are not -- many of them are 3%, some of them are pretty flat depending on the part of the country that they're in. So they don't have the ability to consume tariffs at those levels. So yes, there's a heightened sense of urgency. Glenn talked about some tools that we've developed where based on where products are manufactured, you guys know that it's pretty sophisticated in terms of how the tariffs are levied. So we have some pretty sophisticated capability to understand the various parts of a product where it's being manufactured and then we can actually help them understand really what the impact -- the real impact is. And then most importantly, help them understand products that won't be impacted by the tariffs, right? So that's really important that they have the options to understand where the tariffs are going to be really to be negated, but it's interesting. It's driving all forms of conversation, and this is something that's really important. Now we're looking for additional streams of revenue. So how do I maximize the relationships with the state, how do I ensure I've got better access capability. I'm seeing a big shift to more market-oriented kind of capability for the health systems, identifying how to get people into the system, how to ensure that once they're in their system, they're appropriately treated, but maintained within the system. But boy, I'm starting to see a lot of strategic interest in that side of our business as well. But that is all being driven by the current tariffs. But I will also say the potential impact on Medicaid.

And I would add, most of our contracts are what we call firm for the term. So there is fixed pricing in those agreements for multiple years, which legally and contractually helps our members out. Having said that, we do have a committee that we established with our members, where it may be appropriate to pass some of that pricing through. But that's really a decision that's based upon our members saying, yes, not us. At the end of the day, we want to make sure we have healthy supply chains, right? If we have supply shortages or sole-source suppliers in certain cases, we want to make sure that they're not pulling out of the market. And so we have established some maybe, and we will see some of that probably pass through at some point in time.

Yes. Well, it just depends how to tariffs get implemented and the length of contracts. So one of the things that's kind of interesting, people always ask, how is this different from COVID? In some cases, it's very similar to what happened with COVID in that suppliers are going to hold their pricing as much as they possibly can hold it. And then most likely, if they can't actually provide the product at a reasonable margin, then they'll come and say, look, [ what agreement ]. And then to Glenn's point, that's where this committee kind of kicks in and they determine whether or not they're going to accept this or not. And if the answer is not, then they're going to be looking for alternatives that where people are not going to be -- or their health system is not going to be impacted by these tariffs. I mean that's just how the process will continue to work out it's too early to tell, and I don't want to be overly positive. But if we can keep working through some of these tariffs, I'm hoping that as some of these contracts come back up in a year or 2 years, 3 years, but you're not going to see any impacts that we're worried about.

Okay. Interesting. I want to just last question on tariffs there. Glenn, you mentioned firm for the term. I like that phrase. As you think about tariffs, there's a lot of different stakeholders that could be impacted. You have the manufacturer, obviously, the GPO provider, patient, insurance company. There's a lot of different ways for tariffs to flow through the system. You mentioned that there's a lot of you have fixed terms for your products. How do you -- how would you envision, let's just say, a blanket, 5% increase? Like how would that -- how would you expect that to go through that went through today for the next year? Like who is going to take the blunt of that impact?

Again, too early to tell, but I think it will be spread across health care. You're going to have some suppliers going to have to take the brunt of it because they're just in a scenario where a very healthy market and there's competition where people may be not exposed to the same kind of tariffs you're going to have wholesalers that in some cases are going to wholesalers or distributors. I've already got some that say that they're going to hold the line on what they're going to do in terms of passing along that pricing, so that means they're going to hold some of it. I think we'd be naive to say that the health care systems aren't going to be potentially impacted by it, which then potentially if you go all the way to a full circle might impact patients and then might impact federal government at some point, right, where they might have to be increases in market mass for those kinds of things to ensure that some of these communities can continue to be served by some of these health systems. So it's hard. It's really early. It's really hard for us to be laser-like focus and say these folks are going to absorb it. I think it's going to be category-specific.

Got it. Makes sense. I want to pivot a little bit here to the GPO business. You're almost through renewals. I think there's a lot of interest around what the reset baseline for this business could look like. . Can you talk about how we could think about the baseline heading into next year? And your ability to resume growth in 2027 and beyond?

Yes. So if you look at where we are today, about 80% of the way through as we exit this quarter, which may be at 20% to go. We think, ultimately, we'll be pretty much complete by the end of fiscal year '26 with all the negotiations and maybe a few that are still outstanding, but the vast majority will be done by the end of fiscal year 2026. And the aggregate blended fee share is probably in the high 60s versus low 60s today were all said and done. Having said that, our Supply Chain Services business continues to do much better than expected. We're really driving better contract penetration. We talked about 3.5% growth year-to-date on a most recent earnings call, seeing good growth across key categories for us, medical, surgical, diagnostics, food pharmacy. Those are important categories for us, all seeing growth lots of opportunity to continue to get more contract penetration. If you look at the total spend that we captured today in the hospital system, it's probably 50% to 60% on the acute side, and nonacute is even less than that. So we still have a long runway ahead of us relative to the amount of contract penetration we can get. And so we're pretty excited about the gross administrative fee is growing. Obviously, for the next 12 months or so, we're still going to be dealing with higher fee shares, offsetting a lot of that gross administrative fee growth. We've outperformed so far this year. We had another beat and raise quarter in Q3. We see it would be at the high end of our guidance range for Supply Chain Services as we exit the year. And so Yes, year-over-year, we are down, but we're doing a much better job of managing the overall headwinds. And I think as we go into 2027, I think we'll start to see the inflection point back to growth.

Got it. I appreciate those comments. And Glenn, you talked about contract compliance, you're 50% to 60% penetrated within your hospital customers. where -- I don't want to call it low-hanging fruit, but where is the -- where are the biggest opportunities for -- we talked about contract compliance for a while. In 2025, where are the opportunities today? And are they the same opportunities as it was 3 to 5 years ago? Has it evolved? Are there new things that you're looking at? Just curious kind of where your customers are improving contract compliance here?

Yes. I think driving more product categories on to contract is obviously going to help us as we go forward, having customers that are doing our SURPASS program, which is a compliant program that's going to help the overall spend levels, but if you look at just other categories outside of medical supply, we have a purchase services business, so everything outside of goods that you're buying. So these are third-party services for everything from landscaping to maintenance, the linen services, things of that nature, that's untapped, right? And so that's untapped spend that we're going after. And I think physician properties is another area where physicians are still using preference items. And we have a clinically equivalent product that's out there, at a cheaper price, really driving towards that in terms of getting more spend on contract versus a physician using a product that they're comfortable with that they were trained on and all of that. And so those are the areas that we think there's more opportunity.

A couple of things real quick on PPI. Again, I think from a differentiation standpoint, we have the data and the intelligence to work with those physicians in PPI to show them whether or not there's any clinical differentiation from an operating standpoint. For the most part, that's what they're really keen on understanding is they're really any outcome differentiation. And so but we have some very, very unique dividend capability, number one. Number two, once we actually do begin to train physicians and looking at some of these areas, we have the ability then to -- through the workflow, being able to ensure that they're following different formularies and doing the appropriate work and those kind of things. So very core system, very, very unique to our organization. And then the purchased services, we've acquired an asset a few years back that I guess it's not just an analytics capability, but it is actually own GPO. And so because purchased services is so vast, I do think you need infrastructure like that to really get after it. Otherwise, it just because of the consulting exercise. And again, I think that's very differentiated for our offering versus others in the market right?