Premier, Inc. (PINC) Earnings Call Transcript & Summary

Joining us. Welcome to the BofA 2022 Healthcare Conference. I'm Michael Cherny, the health care tech and distribution analyst. It's my pleasure, more importantly, to have the team from Premier. We have Mike Alkire, President and CEO; Craig McKasson, CFO. I think we're going to just have a nice friendly conversation. But I know you reported earnings last week. I don't know if there's any highlights you wanted to touch base on, in terms of some of the thing that really stood out in the quarter.

Yes. First, Michael, I'll start. We spent a lot of time just talking about what's happening in the macro environment within health care. There is obviously -- our health care systems are under a lot of pressure right now from an earnings standpoint and from a margin standpoint, a lot of pressure on them from labor and obviously, supply chain. So I really want the investors to understand that Premier is really well positioned to support them as they're trying to improve their margins. And then from a numbers standpoint, we basically narrowed our ranges for guidance for the rest of the year, and we're excited about the last quarter.

And this -- well start big picture so that's an important topic. And I know we've talked about this a lot over the last 2-plus years is Premier's role in the channel. In fact, that you've had customers with shortages, customers with cost overruns, areas where they come to you, I wouldn't even call them all customers, a lot of them are partners, too, and say, how can you help us.

Yes.

As you think about the changes that have occurred to your customer base, to your partner base over the last couple of years, how has your relationship morphed with them to add more of that value-add component in terms of them coming to you for more than just maybe what's my best price on a GPO contract on this line of products that we need help on?

Yes, it's a great question, and I'll have to probably step us all the way back to the beginning of the pandemic. So this would be in the sort of March, April time frame of 2020. When we started to see that the impact of COVID on our population and obviously, the applications to the supply chain, we very quickly stood up a coalition of other GPOs of distributors of suppliers to truly understand where was PPE in the pipeline? And where -- how much of our health systems had it and were there really any stockpiles and all those kinds of things. And so through that, it became incredibly obvious that we were going to have a pretty significant issue with getting access to product. So we -- because we've had long-term relationships in Southeast Asia with various manufacturers of PPE, because we have a team over there that supports our direct sourcing function. We very quickly turn that on. And we got access to product that others that you would characterize as our direct competitors didn't really have access to. And quite frankly, the distributors were struggling, obviously, as well just because of what was in their pipeline and their ability to deliver because at the time, Michael, get everybody in the market at the same time trying to get access to the same amount of products, people that needed them. We're actually in the market looking for against folks that were trying to stockpile at the same time, and they didn't really need them. So the net of all of it is we provided a significant amount of capability in terms of masks and gowns and gloves to our health care systems. And I think it's -- I don't think, I know it's really strengthened our relationships with our customers and our members. And quite frankly, as a result of that, we had a couple of large IDNs that left competitors and came to us because we were able to sort of meet their needs. But the net of all of it, I would tell you, is our partnerships, I think, have strengthened dramatically. And the last thing I'll say is it gave us an opportunity really to showcase what our technology could do. So we built out some algorithms supported by machine learning that understood where the pandemic was spreading using both our data as well as Hopkins data. And we were able to forecast the needs of PPE, so folks didn't have to go in the market and stockpile. We could say if the surge progresses the way that it's forecasted, here's the kind of products that we're going to -- you guys are going to be needing. So I think it sort of set the tone a little bit for our customers that we're going to be there. We're going to create different pathways to get them access to product. But two, it also showed them that we've got some incredibly strong technologies that could be utilized in use cases that they weren't initially planned to be used for.

Yes, the only thing I would add to that is that it reinforced the need to be attentive to resiliency moving forward. And so we actually, through that process, actually have relationships now with subsets of our members where we've invested in domestic manufacturing capability for gowns, for masks, for gloves and importantly, for shortage drugs to make sure that we're really not going to put ourselves in the same exact position that we were in previously.

And along those lines, how do you see your customers evolving in terms of how they want to -- I don't know stockpile is the right word, but how they want to manage the supply chain? How are you seeing things changing from a just-in-time inventory dynamic? And how can you essentially become even more of their outsourced inventory, provider, inventory I guess, aggregator as much as anything else?

No, I think it's a great question. And I think it's not only important for us, but it's -- and our members, but it's also important for the industry that we stabilize the stockpiling and the utilization of product. So we had a very different approach. We invested along with our health systems in domestic companies that produce face masks, that produce isolation gallons, that produce generic drugs, and then we created a partnership with gloves. And what that allowed for us to do as part of those partnerships, 1 of the things we -- not only do we expand production, but we also asked them to inventory large amounts of product, in effect, create stockpiles. So that our health care systems didn't have to build out facilities and distribution capabilities to have all that stockpile. So those guys, the partners that we created had huge capacity to stockpile and inventory, those kinds of products. And so we ask them to do it for us. And then secondarily, we do have some very, very large integrated delivery networks that do have very significant distribution capability so then we obviously leverage some of those facilities as well.

And so along those lines, as you think about whether it's COVID-related items that have been heavily in demand or obviously the ongoing rebound of elective procedures, where do you think we sit right now? This is a business that maybe doesn't have the same volatility or fluctuations as other, companies tied to utilization, but still within or for supply chain services is at the end of the day, utilization-driven business. So where have you seen things come back? Where have you seen things that still are struggling? And maybe along the same lines, too, where you think things have shifted in the grand scheme of how you're being able to arrange and source products for different signs of care?

It's a great question. So you're going to have to remind me on the second question on where we see the growth -- all right because the answer to that is not acute, but let me get into some of the details on just what's happening with utilization. So at the end of the second -- our second quarter at the end of December, I think utilization, Craig, was up sort of mid-single digits in the acute, low double digits in the non-acute, I'll tell you, it's very regional. So you're seeing in some pockets where you're seeing significant utilization coming back to pre-COVID levels. And then in other areas, you're seeing maybe 90% capacity. And I will tell you, it's all driven by labor right now. So with the high cost of not just clinical but other operational people and the cost of labor. And I'll give you all an anecdote that we had seen. Now it's come down quite a bit. But the average cost of a traveling nurse was -- and this is all going to be rough, was $80 an hour. And during the height of this labor issue probably 8 weeks ago, was up to $210 an hour. So a threefold increase in labor cost. And Craig likes to say, a lot of that labor was coming from the same ZIP code. So folks said, I'm going to go and become a traveling nurse and then they'd go work with an agency and then basically come right back to the institution or go across the street to another institution. Point is that put a ton of pressure on these health systems and to a place where they're having to truly look at the services that they're providing and saying, okay, obviously, we've got a mission to our community, and we are going to meet the needs of that mission. But we've got to look at those procedures that are driving profitability because we've got to make sure we can keep the lights on. So I'll tell you, it's significantly impacted. You all saw HCA's earnings. You guys know what's happening from a margin standpoint, but the margins are getting significantly impacted. So again, I think at the end of the day, I know what we're doing. I mean, we've got incredible technologies to help our health care systems create more variable costs versus fixed costs. We've got a great advisory services team to help them really look at and rightsize the kinds of services that they're providing to make sure that they're driving the right levels of margins to meet the return on capital needs of the health systems. And we've got some incredible technology that I think is -- they're all in their sort of earning -- in early innings, but it's going to be a great opportunity for us to leverage our machine learning AI capability especially around things like prior authorization, which heretofore has been an incredibly manually driven effort with a lot of clinicians. HCC scored a lot of clinicians looking at chart review, doing those kinds of things and understanding what's the appropriate way to code for procedures. Those are 2 areas that I think that the technology enablement can actually offset labor utilization and allow for folks to take that labor and redeploy those and clinical beds and those kinds of things.

Yes. The only thing I would address was the second part of your question is sort of what have they learned through this? And I think everybody knows, but care is continuing to move from the 4 walls of the hospital to alternate sites. And so we are well positioned given our focus on that part of the business as well from a supply chain standpoint. Our non-acute GPO now represents about 40% of our total GPO. That's up from about 30% 5, 6 years ago. And so a lot of focus on ensuring that we're enabling providers to get savings because traditionally, what they pay for supplies in those non-acute care sites was substantially higher than it probably needed to be if they were leveraging an organization like us.

Got it. I want to come back to that topic, but another thing has been to trying and your compensation so far is the role of technology. So I always think of Premier is having 2 parts of technology, the technology that you're developing internally to make your core GPO supply chain service is better and this technology that's been out we're facing. On the latter part, you made a lot of advancements recently, a lot of introductions, Contigo, Remitra, and some other aspects. Maybe just give us an update on where you stand right now in your overall portfolio and also the role that internal technology development plays in what you're able to transition into the external customer-facing side?

Yes. So I think I've had a chance to spend time with most -- everybody in this room. I think everybody knows my background is technology. I came from large systems integrator was a computer science guy by training. I think health care is truly 1 of the big underutilizers of technology, especially advanced technology. Machine learning and AI is nothing new to industries outside of health care. I do think leveraging that advanced technology has the ability to transform the way care is being provided, transform is an incredibly overused word. But I will tell you, to the degree that you can look at unstructured data in an electronic medical record, and you can sort of bring meaning to what that data is saying and then put algorithms or machine learning capability around that and design what's the appropriate pathway for care. It's going to be -- it will profoundly change the way that care is being provided. And we fundamentally believe that. So we're going to continue to make those investments. That's all part of PINC AI, which is really our clinical decision support capability. Two big areas of focus are really 3 big areas of focus off of PINC AI. I talked about HCC coding. I talked a little bit about prior authorization. If you want to get into some more detail, we can jump into some detail there. We have been our clinical decision support to help our health care systems drive performance improvement. And as part of an adjunct to that, we also have a life sciences practice where historically, we've been providing retrospective data to top pharma over the years. Most recently, in the last few years, we've been doing projects and programs on real-world evidence in terms of looking at therapies and how they were responding in the real-world environment. And then most recently, and we're really excited about this, we've been using that same technology platform to identify and activate patients for trials. And so we think it's really unique. Pharma has been coming after us for a number of years saying we need more heterogeneity in the data. And so help us with understanding that. So we're partnering with a number of large pharmaceutical companies to build those algorithms really, really excited about that. So that's our PINC AI. And then a couple of other parts of the business you were asking about Remitra, our e-invoicing and e-payables platform. We are in our major IDNs right now utilizing that technology. Really, what we're doing is really expanding the footprint of capabilities from an invoicing standpoint within those organizations. And by the way, that's another 1 of those opportunities that reduce labor cost. Because if you have an invoice that has an error and you're like, I'm making this up, but at Bennett Weston, you have more than 20 hospitals, you have hundreds of non-acute facilities and you have hundreds of clinics. And you have an invoice in 1 of your clinic errors and invoice in 1 of your clinic errors, 1 of your clinics, an error in 1 of your clinics invoice systems, it's really, really tough to track that down. And so they need technology platforms like Remitra to identify, centralize those kinds of issues and fix those very, very quickly. And we think we have a very, very unique technology solution that's going to do that. Remitra is early stages. We're with 14,000 suppliers today. We need to continue to expand that out. We're building out the capabilities, the network on the provider side. We're in a number of our largest health care systems, and we have to continue to expand that. So that product, as you know, Michael, that is -- Craig has put some -- Craig and I have put some pretty significant numbers out there from growth and we feel very good about where we are in terms of obtaining those numbers. So that's Remitra. And then Contigo is our offering really towards the employer market. And it started a few years back, have 1 of the United States' largest employers came to us and said, look, we're unhappy with the way care is being provided to our employees. You guys have a long-standing history of working with health care systems and standardizing care and truly improving the quality of care to patients, and we'd like to work with you. And that was really the impetus behind Contigo. And today, not only we're continuing to evolve our high-value network, but we've got a fantastic centers of excellence programs for the large employers in this country that are really, really innovative and want to leverage centers of excellence for their employees. So we've got TPA capabilities to support them to do that. I will tell you the future of that is really to build a network of our health care systems and other providers to really sort of be the backstop or the wrapper, if you will, for our health care systems that have health plans. So we have a number of those that sit within our ecosystem, and we want to build out the fabric by which how all of those are woven together. So we're really excited about Contigo.

Yes. The only thing I would add to that, Michael, is that from a growth perspective, the way we think about the Performance Services side of technology that Mike just talked about is we've come out and said kind of mid- to high single-digit organic growth in the business. We really think about the provider business as being sort of a mid-single-digit growth. But those adjacent markets that Mike talked about is where we think there's a lot of opportunity. That's the clinical decision support the life sciences, the Remitra and the Contigo that he just addressed. We just came out last week and said we're exceeding our goal to achieve 25% growth at least this year, and we've targeted 30% to 40% growth moving forward. So that's really what's going to augment the base of sort of supporting our providers. The last thing I would say that you were asking about is our vision on technology is we do invest in technology to help us kind of identify opportunities internally, but we try to build technologies that will help providers and us simultaneously. So if you think about on the supply chain side, Mike talked more about the Performance Services side, but a lot of our investments around automating supply chain analytics, looking for contracting opportunities, it's to leverage things for our benefit and our own team members as we try to target savings for health care providers, but it's also stuff that we're selling to the providers so that they can do that within their own institutions as well.

And aside from just the quarter-by-quarter growth tracking and seeing the numbers shake out, I mean, you have a lot of irons in the fire, which given the fraud reach that from your has across the health care channel, makes all the sense in the world. What type of KPI should we in this room all of us be looking for? Are we looking for new contract relationships? Are you looking for some of these advancements or rating for proof points like on the clinical trial enrollment side, where here is a study that we powered, how should we think about when we're checking the box to make sure that the milestones that you've laid out are hitting a track record set obviously from just the quarterly results, which we'll get a sense of over time?