Upper Midwest Consolidated Services Center, LLC

UMCSCAnnual Report

2016

1 | UMCSC 2016 Annual Report

MissionThe Upper Midwest Consolidated Services Center is a member-driven supply network of Vizient member organizations. Together we commit to centralized sourcing and contracting, explore supply chain management initiatives and shared business solutions. The UMCSC supports healthcare providers and suppliers by working closely together to deliver increased clinical effectiveness and economic efficiency.

Founding Principles

The UMCSC is founded on the members’ vision to increase efficiencies and reduce expenses by aggregating spend and redesigning supply chain processes through collective decision making. To achieve this vision, members agree to the following principles:

● Make decisions collectively based on what is best for the alliance as a whole, rather than individually for their organization.

● Hold each other accountable for delivering upon commitments to the UMCSC.

● Follow behavioral guidelines that protect the integrity of the UMCSC brand.

● Utilize Mayo’s “go to market” and Vizient strategy.

● Create a single voice throughout supplier negotiations.

● Participate in innovation that drives value.

2016 YEAR IN REVIEW

Another remarkable year! Together we achieved $124.3 million in savings. Our 2.0 Innovation Programs have hit their

stride, composing $25.2 million in savings and over $3.6 million in program revenue. Nine new members were welcomed to the collaboration, including Butler Health System, Cayuga Medical Center at Ithaca, The Guthrie Clinic, Holy Redeemer Health System, Hunterdon Healthcare System, Penn Highlands Healthcare, Phoenix Children’s Hospital, Summit Health and Yuma Regional Medical Center. Our footprint spans the nation with 24 states represented.

Our investment in technology drives efficiency and transparency, and positions us as an industry leader. UMCSC reveal™, a 2.0 Innovation Program launched in February, has enhanced our relationships with suppliers by providing valuable insights into the UMCSC portfolio, enabling the optimization of contracts and monitoring of our commitments to the market. In addition, we embarked on an $80 million multi-category implementation plan to accelerate value by utilizing aptitude™ in our sourcing and contracting process.

In early 2017, we look forward to refreshing our company’s brand with a new name, delivering value beyond price through clinical supply integration (standardization, utilization, outcomes based contracting) and increasing our role in the delivery of exceptional, cost-effective care. The best is yet to come.

UMCSC 2016 Annual Report | 2

BRENDA PETERSON, RN, MBAUMCSC Service ProviderVice President, Member Business VenturesVizient

KEN PRICEUMCSC Board ChairChief Operating OfficerProHealth Care Inc.

JAMES R. FRANCISUMCSC Service ProviderDivision Chair, Supply Chain ManagementMayo Clinic

65 members

Encompassing 212 hospitals in 24 states

$8.6 B annual supply spend

3 | UMCSC 2016 Annual Report

UMCSC MEMBERSHIP

Class A (9 members)Aspirus, Inc.CentraCare HealthFroedtert Health, Inc.Gundersen Health SystemMayo ClinicNCH Healthcare SystemNorth Memorial Health CareProHealth Care, Inc.ThedaCare, Inc.

Class A1 (8 members)Baptist HealthThe Guthrie ClinicINTEGRIS Health, Inc.Mercy Medical CenterPalomar HealthSt. Bernards Medical CenterSparrow Health SystemUniversity of Arkansas for Medical Sciences

Class CCP (1 member)Sanford Health

Class V (1 member)Vizient

Class B (42 members)Altru Health SystemArkansas Methodist Medical CenterBeaver Dam Community Hospitals, Inc.Bellin Memorial Hospital, Inc. Beloit Health SystemBoulder Community HealthButler Health SystemCayuga Health System, Inc.Comanche County Memorial HospitalCommunity Memorial Health SystemDuncan Regional Hospital, Inc.Excela HealthFayette Regional Health SystemGrand Itasca Clinic and HospitalGreat Plains Regional Medical CenterHoly Redeemer Health SystemHunterdon Healthcare SystemJackson County Memorial HospitalKingman Regional Medical CenterLake Region HealthcareLittle Company of Mary Hospital and Health Care Center

McAlester Regional Health CenterNorman Regional Health SystemNortheastern Health SystemPenn Highlands HealthcarePhoenix Children’s HospitalPrairie Lakes Healthcare SystemRice Memorial HospitalRidgeview Medical CenterSilver Cross Hospital CorporationSt. Clair Health CorporationSt. Luke’s Hospital of DuluthSt. Peter’s HospitalStillwater Medical CenterSummit HealthSwedish Covenant HospitalTri-City Medical CenterTrinity HealthUnity HealthWashington Regional Medical SystemYampa Valley Medical CenterYuma Regional Medical Center

Class C (4 members)Bay Area Medical CenterDickinson County Healthcare SystemGrady Memorial HospitalLifeCare Medical Center

Membership List as of April 2017

UMCSC 2016 Annual Report | 4

Governance

Board of Managers: KEN PRICE, CHAIR Chief Operating Officer, ProHealth Care, Inc.

Sets the strategic direction and guides all business activities of the UMCSC.

Business Development Committee:

MIKE BOESLAGER, CHAIRVP Support ServicesSt. Luke’s Hospital of Duluth

Develops strategic initiatives in support of the UMCSC mission and vision.

Clinical Committee:

MARK MATTHIAS, MD, CHAIRVPMA, CentraCare Health System

Ensures physician involvement in product evaluation and focuses on clinical leading practices and outcomes.

Finance Committee:

PAT TINCHERDirector Finance - CFOAspirus Langlade Hospital

Monitors UMCSC financial performance, budgets and accounting of savings, fees, revenue and distribution.

Operations:

JOE BLISE, CHAIR Director Supply Chain, ThedaCare, Inc.

Develops, implements and assesses strategies to enhance the UMCSC contract portfolio, gains supply chain efficiencies and approves contacts.

UMCSC

5 | UMCSC 2016 Annual Report

65 Members

212 Hospitals in 24 States

$124.3 M

$450 M

$702 M

$26 M

contract compliance in the Medical Device Category in 2016

of success collaborating in a network environment since August 22, 2008

900,000 lines of data processed into powerful analytics and business decision tools

19:1 RETURN IN SAVINGS for every $1 our members spent on UMCSC services in 2016

300+ contracts in the UMCSC portfolio

UMCSC by the Numbers$8.6 B

8 YEARS

91%

Additional Products Medical Device Clinical Preference Commodity

10%

32%49%

9%

savings achieved in 2016 (first year savings and rebates received in 2016)

member savings since inception (first year savings and rebates received in 2016)

total contract value since inception (cumulative savings and rebates achieved year over year for entire length of contract)

in rebates paid by UMCSC suppliers in 2016

member annual supply spend

Member Savings (in Millions)

UMCSC 2016 Annual Report | 6

Cost RecoveryThe Cost Recovery Ratio illustrates member return for participation in the UMCSC portfolio

Class 2015 2016 Since Inception

All Members 13.9:1 19.6:1 9.9:1

Class A Members N/A* N/A* 12.7:1

Class B Members 4.3:1 8.6:1 6.4:1

Class C Members 1.5:1 3.2:1 3.1:1

*Due to no deficit obligation for Class A members

Spend PerformanceMembership compliance to spend required in each of the three portfolio categories

Category

A Member B Member C Member

Spend Required

2016 Compliance

Spend Required

2016 Compliance

Spend Required

2016 Compliance

Commodity Items 90% 99% 85% 90% 75% 97%

Clinical Preference

80% 100% 75% 92% 65% 96%

Medical Device 25% 86% 20% 96% 15% 64%

0

30

60

90

120

150

201620152014201320122011201020092008

$0.9$14.6

$31.0 $33.6$41.7

$71.0$57.2

$75.5

$124.3

7 | UMCSC 2016 Annual Report

The founding vision of the UMCSC is to increase efficiencies and reduce expenses by aggregating spend and redesigning supply

chain processes through collective decision making. In March 2014, the UMCSC Board of Managers approved a revision to the UMCSC strategy, which called for the organization to develop innovative products and services that deliver value outside our traditional areas of sourcing and contracting.

This enhanced strategy is referred to as UMCSC 2.0 and delivers value by:

• Evaluating product and service consumption

• Creating efficiencies by impacting functions beyond sourcing and contracting

• Unlocking value by operating activities previously performed by suppliers and members

• Pursuing value of all kinds (cost savings, utilization savings, clinical enhancements, growth enablement, capital allocation and funding, revenue enhancement, etc.)

• Achieving improvements together that are improbable when systems act alone but may be attained when systems act collaboratively

2.0 INNOVATION PROGRAMS

In 2016 alone, 2.0 programs generated $25.2 million in savings and over $3.6 million in program revenue. The UMCSC is pleased to showcase four of the 12 programs in this year’s report.

Blood Conservation Impacts Patient Outcomes and Expense BLOOD MANAGEMENT PROGRAM

Self-Insured Health Systems Align Employee Pharmacy Benefits EMPLOYEE PHARMACY BENEFIT MANAGEMENT

UMCSC 2016 Annual Report | 8

Barbara Day, System Lab Director and blood banker by trade, championed the charge that led Excela Health to conserve $525,000 in

blood related expenses this past year. Members participating in the UMCSC’s Blood Management Program have made significant progress in aligning clinical behavior with American Medical Association (AMA) evidenced-based protocols and standards for red blood cell (RBC) blood use; transfusing one unit of RBC’s at a time and using hemoglobin < 7 gm/dl as the threshold for transfusion. In 2016, the program improved patient safety, conserved blood and saved associated costs of nearly $3 million.

Excela Health physicians were engaged and ready to embrace change. “Our pathologist was really instrumental, he spoke at all of our department

meetings and no one pushed back. We had information to help paint the picture, and the UMCSC monthly meetings helped keep us on track,” explained Day.

In addition, Excela Health used technology to drive adoption of the evidenced-based protocols through computerized physician order entry. “We were able to get control around order sets; the physicians needed to articulate why they needed additional blood beyond the recommendation. It gave them an opportunity to really consider what they needed,” she added.

“If we can reduce our usage of blood, there is a financial benefit and it’s known that transfused patients have a longer length of stay. This program has allowed us to keep blood for patients who really need it.”

Self-insured employers are generally reliant on their Pharmacy Benefit Manager (PBM) for processing and payment of prescription drug

claims, developing and maintaining the formulary, contracting with pharmacies, and negotiating discounts and rebates with drug manufacturers. Members have aligned their contract end dates to position for a single future contract and saved $17 million through the renegotiation of current contracts. This puts the UMCSC in a position to aggregate covered lives and in turn, achieve lower prices through price discounts from retail pharmacies, rebates from pharmaceutical manufacturers and the efficiencies of mail-service pharmacies.

“We were able to save $11 million,” said Susan Wescott, Director of Pharmacy, Mayo Clinic Health Solutions, Pharmacy Benefit. “It’s been a great opportunity for us to work together as a group to obtain better pricing and

better contracts. In the pharmacy benefits space, pricing is contingent on volume, therefore we have achieved more than we could on our own.”

In addition, through the Employee Pharmacy Benefit Management (EPBM) Program, they have achieved better alignment and efficiencies from a relationship standpoint and maximized their current contract. Employees on the plan have realized a direct financial benefit from increased discounts and improved ordering capabilities.

“Selecting a Rx benefit manager, and getting the best performance from that vendor is complicated business; we have appreciated the consulting available through this project,” said Wescott. “In working with the membership, we have a large bolus of employees; that’s enough to get started and grow as we work together as a group.”

Green Initiative Garners $2M MEDICAL DEVICE REPROCESSING

9 | UMCSC 2016 Annual Report

Single-use medical device reprocessing is the disinfection, cleaning, remanufacturing, testing, sterilization, packaging and labeling

of a used medical device to be put in service again. Reprocessed devices are less expensive than Original Equipment Manufacturer (OEM) devices and meet FDA 510K approvals like OEM devices. Together with Medline ReNewal, the UMCSC Medical Device Reprocessing and Sustainability program is a partnership with the primary objectives of reducing costs and improving operational efficiencies for single-use medical devices. Members participating in this program can achieve upward of 50% savings on select devices, and in 2016 UMCSC members garnered $2M in program value.

“Everyone is more environmentally minded, and we need to look for savings whenever we can. If you want to find savings, reprocessed devices are an easy way to go,” said Tom Rand, Senior Medical Buyer at Swedish Covenant. In the second half of 2016, Swedish Covenant had one of the UMCSC’s highest utilization rates of reprocessed items; they collected almost 17,000 items for reprocessing and saved $126K by buying reprocessed items instead of new. “By November we had exceeded our savings for any month we’d been reprocessing. You’re getting the same product or better back and saving money; no in-service or conversion effort required.”

“The key to all of this is communication,” said Rand, “making sure the departments are aware of the program and staying on top of it, connecting Medline with the physicians and clinical departments, knowing what items can be reprocessed and what items the physicians are comfortable using a reprocessed device.” In addition, communication and coordination with Medline has enabled program success. “Every day I get a report from Medline so I know what items are available for purchase. If I don’t see availability of a high frequency item, I make sure our items are being put into our bins and keep Medline informed.”

Aspirus, Inc. was the first UMCSC member to evaluate its manual process of ordering reprocessed products and then adopt an automated solution called LightSwitch. This MedlineRenewal ordering technology allows members to select which reprocessed products they will purchase and if they are available, the order can bypass the buyer and automatically route to MedlineRenewal. This “reprocessed products first” approach can be set up to accommodate various requirements including dedicated inventory, contractual agreements and reorder points to ensure products are on the shelf and available for patient care use. “When [UMCSC and Medline] came to us, I told them twice that it wouldn’t work” said Jen Underwood, System Director of Supply Chain Informatics and Systems. “LightSwitch was originally created for the Lawson electronic requisitioning process (RQC) and we order through a PAR replenishment process using Lawson’s mobile supply chain hand held technology. It took a lot of creative thought but we were able to overcome that barrier. There is a way” she said. “We needed a program to be built where our logistics team could fully support and own the process and LightSwitch allows that to occur.”

“Our biggest savings so far is the reduction in time spent to process orders. Our buyers have cut the time they were spending managing the ordering of reprocessed orders by 50%,” said Underwood. By using LightSwitch, Aspirus, Inc. has also realized a higher utilization of reprocessed items which “supports the green initiative and true financial savings that significantly impact the bottom line.”

Collaboration Elevates Quality PHARMACY COMPOUNDING

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The UMCSC’s compounding program increases quality, decreases cost and mitigates regulatory risk for Anticipatory (503B) compounded

medications. With intense scrutiny on quality standards (cGMP manufacturing standards and full test-hold-release batch testing), UMCSC members selected QuVa Pharma as the UMCSC’s program partner in 2016.

“There are more regulations to abide by and increased scrutiny of these regulations by boards of pharmacy, which affect everyone,” said Mary Phipps, System Director of Pharmacy for CentraCare Health and Chair, UMCSC Pharmacy Council. “This contract brings a better price, and more confidence in terms of quality and safety.”

Twenty-one member pharmacy champions and the UMCSC Pharmacy Council were active participants in this program’s development. “One of the largest benefits is that it allows members to do a much more thorough evaluation of suppliers; for us to go on-site and evaluate companies would have been impossible – it is not logistically and financially feasible for members to do this,” said Phipps. “The UMCSC process gives us a higher level of confidence; all members performed an evaluation, knowing this contract was a group effort is important.”

“Through our partnership with the UMCSC, we’ve been able to lead the industry in a change that is focused on quality and confidence in sterility, efficacy and potency,” said Stuart Hinchen, CEO, QuVa Pharma. “It’s what staff and patients deserve to get every time.”

Testing of compounding products is a very expensive endeavor. “With the right level of collaboration and communication, we can manufacture with confidence and at a scale that enables us to cover the cost of testing,” said Hinchen. “We all have a role in creating an effective supply chain. We’ve established a good rapport with the UMCSC. If there are fluctuations in volume, they are notifying us so we can adjust manufacturing.”

The UMCSC’s 2.0 Compounding Program achieved nearly $3 million in year-one savings.

“This contract brings a better price, and more confidence in terms of quality and safety.”

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Upper Midwest Consolidated Services Center, LLC