1. Trends in Hospital Cost Management
Health Care Industry Committee
Trends in Hospital Cost Management
Ready-to-Use Presentation Slides

2. Median Hospital Operating Expense Growth and Revenue Growth
Cost Control Fundamental to Future Profits
Cost Growth Nearly on Par with Revenue Growth
Median Hospital Operating Expense Growth and Revenue Growth
2008 to 2011
Source: “2011 Not-for-Profit Hospital Medians, Final Report,” Moody’s Investor Services, August 2012 Advisory Board interviews and analysis.

3. Labor Costs Compose Majority of Total Costs
An Imperative, But An Opportunity
Cost Growth a Large Portion of Pleasantville’s Gap-to-Goal
Success Largely Contingent Upon Managing Labor Costs
Pleasantville’s 10-Year Total Cost Projections
4.0%
Other
Capital
Labor
$12.8M
Supply
$25.2M in cost savings across 10 years
Source: Advisory Board research and analysis.

4. Soaring Benefits Key Labor Expense Driver
Premiums Spending Increasing at Rapid Pace
Employers Shouldering Most of the Burden
Average Annual Health Insurance Premiums and Worker Contributions,
92% total premium increase
102% employer contribution increase
Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, ; Advisory Board research and analysis.

5. Urgent Need to Bend Supply Cost Growth Curve
Unchecked Supply Growth
Average three-year CAGR1
Price Pressure Unabated
Suppliers facing 2.3% medical device excise tax, begins December 2012
Flattening clinical innovation curve fails to drive down prices in maturing markets
Market demand for new device-dependent procedures, without proven benefit
Compound annual growth rate.
Source: Lichtenberger Scott, et al, “How Sourcing Excellence Can Lower Hospital Costs,” Health International, 2010, 10: 18-29; Advisory Board research and analysis.

6. Leveraging Scale to Extract Price Concessions
Utilizing National GPO Purchasing Power
Eliminating the Middle-Man
GPO Spend as Percentage of Total Supply Spend
Intent to Pursue Self-Contracting
2010
Already
self-contracting
No plans
Looking into self-contracting
Plans to
self-contract
2010
Less than 40%
More than 60%
40-60%
58 percent of respondents anticipated an increase over the next year
98%
Hospitals purchasing products through GPOs1
51%
Hospitals belonging to at least one regional GPO
Hospitals use an average of two to four GPOs per facility.
Source: Heath Industry Group Purchasing Association, “A Primer on Group Purchasing Organizations,” available at: accessed Oct 10, 2012; United States Government Accountability Office, “Group Purchasing Organizations: Services Provided to Customers and Initiatives Regarding their Business Practices,” available at accessed Oct 4, 2012; Advisory Board research and analysis.

7. Scale Providing Limited Benefits
The Diminishing Returns to Scale
Narrow Negotiating Focus Misses Greater Opportunity
Limited Influence of GPOs
Failing to Consider Factors Beyond Price 7%
Average price reduction by incumbent GPO supplier when hospital engaged in aftermarket competition1
Procedure Time
Support Personnel
LOS3 Reduction
Improved Quality
Logistical Costs
Supplier Services
10-14%
Average savings hospital achieved from lowered bids2
100%
Of interviewed PPI suppliers stated they do not give GPOs the best price
n=8,100 aftermarket transactions,
In 2010, average savings to the hospital was 15%.
Length of stay.
Source: Litan R, Singer H, “Do Group Purchasing Organizations Achieve the Best Prices for Member Hospitals? An Empirical Analysis of Aftermarket Transactions,” 2010; Advisory Board research and analysis.