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

Morning, everyone. Welcome to the JPMorgan Healthcare Conference. My name is Annie Samuel, and I am the health care technology and distribution analyst here at JPMorgan. We're thrilled to have Premier with us this morning. With us are CEO, Mike Alkire and CFO, Craig McKasson. They'll do a quick presentation, and then we'll open it up for Q&A. So with that, let me turn it over to Mike.

All right. Thank you, Annie, and thank you to JPMorgan for having us. It is an exciting event for us to be able to come and talk to you about our strategies and such. So the way I'd like to do this is I'm going to cover a little bit of our strategy. I'm going to talk about the industry's trends that are affecting health care. And then talk about how our operating models and our strategies are helping our health care systems navigate sort of those headwinds? And then I've asked Craig to give an update on what's happening operationally across the business. So from an industry perspective, I think there are three trends. I think I'm frozen actually. So I think I might as well hit the disclaimer while he's getting our stuff up and running. But the next slide will be the disclaimer, and it's all the important information about forward-looking statements and those kinds of things. Okay, here we go. So there's the disclaimer. And then just a little bit about Premier and what's happening across the industry. So I would tell you that there are three overriding trends affecting our health care systems today. The number one issue is labor, labor, labor and labor. And yes, I'm saying it that much because I will tell you, they have gotten out of the situation where they were paying 2x or 3x the amount for traveling labor nurses and those kinds of things. But the price of traveling nurses has settled back to about 30%, 25% more than it was pre-COVID. So there is still some pretty significant costs associated with that clinical staff. I will also tell you, though, in the nonlabor areas, the pressure as it relates to increasing minimum wage and those kinds of things are also putting a lot of pressure on the labor that's required to run health care systems. And so those costs are obviously also adding to the cost line for the health care systems. And then finally, I will say that as we have talked about for years, where we have this sort of aging population, sort of the gray tsunami, if you will, that do we have enough clinical staff to actually take care of those folks. And it is something I was at the not-for-profit track yesterday, that almost all of the health care systems talked about is that they didn't have enough access to quality clinicians and doctors and their focus was really how do we have to really change the way that we practice to ensure that we can provide high-quality care and maybe not with the levels of staffing that we've had in the past. So labor is number one. Two is the proliferation of high technology. And what do I mean by that? As health care systems are starting to sort of sort through how to deal with AI, machine learning, generative AI and other advanced technologies. I think they're sort of getting their legs under them to say, okay, what are the functions that we really want to focus on to leverage advanced technologies. And I'll spend a little bit more time with you there -- around that with you. And then the third is something I've been talking about for a long period of time, but it's this imbalance of scale as it relates to the payers and the providers. And again, I've been spending the last couple of years talking about it, but I've been talking about it in terms of access to capital. I will tell you, we also are beginning to see some pretty substantial imbalance as it relates to the scale now as health care systems are having to do negotiations with entities that are their payers that are far larger than they have historically been. And so that's creating a lot of issues. Yesterday, I heard in the -- and by the way, when we're out with our health care systems, I'm hearing the same thing, but the amount of denials that are happening for claims is at an all-time high. And so those are some pretty prevailing issues that they're dealing with. And what I want to spend a little bit of time with you now is to just talk a little bit about what we're doing to actually support the health care systems in those 3 areas. So if you think about labor, for the most part, the services and the technologies that we've created could be perceived as sort of labor extenders or efficiency drivers. And so if you think about the work that we're doing as far as AI and machine learning, as you think about prior authorization, as you think about working with HCC codes, that work allows for the health care systems to take the technology -- the people, I'm sorry, the resources that historically have worked in those areas because both of those had been historically and still are very manual efforts. But to the degree that we can automate those parts of the operation. It allows for those -- for the most part, those clinicians to get back to work and -- work in terms of working with the clinical side as opposed to the administrative side. And so the things that we're doing from an AI machine learning as it relates to HCC coding, as it relates to prior authorization and then also as it relates to invoicing. So we're also building out pretty substantial technology to actually improve the way that invoices are actually being managed at the health care system and transforming the way that health care systems look at e-Invoicing and e-payables. And again, I'll get into some of that in just a second. As it relates to the proliferation of technology, we've been spending a lot of time with our health systems on Capitol Hill talking about AI and the importance of AI, but we want to do it in a way that we know that it's going to be profoundly helpful to the health care systems and not create a whole bunch of distraction for those health care systems. So we want to make sure that the federal government and other agencies are taking advantage of the innovation that the AI and machine learning can actually help those health care systems with. All right. So very quickly, as just a reminder to some of you that are new to the story, we do have a highly differentiated business model. It is all baked around the relationships that we actually have with our health care systems and other providers. As you can see, we have a very, very large footprint, great relationships with these folks. We have many of these folks that are represented in our Board advisory committees and other committees that help make decisions for the organization, both strategically and also operationally. So as we think about how we make contracts and who we partner with from a supplier standpoint and those kinds of things. So we have that fantastic relationship with our health care systems and other providers. We've got this comprehensive scalable data set and capability, and you can sort of see the reach of that 45% of all U.S. discharge data is within our databases, and we have more than 1 billion individual encounters within our databases as well. And that data and that technology allows for us to drive meaningful insights and solutions into multiple markets. So I've been talking a lot about the health care system market. But we're also doing quite a bit of work in the nonacute area. We have taken quite a bit of our stuff that we've been doing with a prior authorization as it relates to our health care systems and extending that to payers. So we can use some of those same algorithms that we're using again for the providers and help the payers become more efficient as well. We have a Contigo Health offering, which is all about helping our health care systems interact more closely with employers in the market. So as they're thinking about value-based care, as they're thinking about ACOs, as they're thinking about contracting directly with employers, we want to build out capabilities to support them as they go through that journey. Our technology and our data is also being utilized in the life sciences areas. So we're doing a whole bunch of stuff as it relates to real-world evidence studies and other support services for health care systems as they are going through drug trials and those kinds of things. So just very quickly, our business itself, we have 2 segments of our business. We have our supply chain business. We talk about it in terms of technology enabling the supply chain as we do believe that's a fairly significant differentiation for us. We've been making some pretty significant investments in our technology as it relates to e-invoicing, as I said earlier, but also as it relates to us really focusing on purchased services spend within our health care systems, which is a very significant spend part of the operations of a health care system and then also in the nonacute area. So we're going to continue to make investments to help our health care systems as they move outside the 4 walls of the hospital and provide care in the nonacute settings. We also have a capability called S2S Global, which is all about supply chain resiliency and helping our health care systems think about ways that we can go directly to the market for products if, in fact, we see that products aren't unhealthy. So we've got some partnerships there with health care systems where we've invested in domestic manufacturing of gloves and gowns, in generic drugs and also in some incontinence products as well. So that's the supply chain part of the business. One other area there, though, I would like to highlight that's been getting a lot of traction in the market recently, and that's really our area on co-management and outsourcing. So as our health care systems, especially those that are in struggling markets are looking ways to reduce costs. We do provide capabilities to do comanagement of their supply chain and other operating functions. And that business is doing very, very well as we speak. So that's the supply chain business. In the Performance Services side, we have our PINC AI data set, and that's really all focused clinical decision support. So think about helping health care systems drive high levels of quality, improve their safety, supply chain. So we have a broad range of capabilities to help our health care systems perform at their top level in those areas. And then we also have this sort of clinical decision support capability that overlays on that. That provides opportunities and insights for performance improvement. And we have a fairly robust advisory services business that uses that information to help our health care systems drive higher levels of performance. We also have a focus in our direct-to-employer area with Contigo Health. Two primary areas there. One is, it is a network Wrap for health care systems, health plans that want to provide broader capabilities to their health plan populations. It also is the Centers of Excellence model for large employers that want to use Centers of Excellence to help manage health care costs for their employee base. And then finally, Remitra, and I've been talking quite a bit about Remitra, but that is that e-enabled, e-invoicing capability that I spoke of. Before I turn it over to Craig for some operational updates, I did want to provide some insights and some recent awards and recognitions that Premier has received still with all the work that we're doing, we are being recognized as a significant player in health care. I will tell you something I was incredibly proud of yesterday, but when Rob stood up from Intermountain, he talked about quite a bit of the awards that Intermountain Healthcare had won over the course of the year and he flipped the page to the PINC AI 15 Top Health System Awards. And he said, this award is based on pure performance. It's not a black box. You don't have to guess how you actually land on this list, but he said this is an award we're incredibly proud of winning. And that is the brand that we did acquire about a year ago, that 100 Top which allows not only obviously for health care systems to be recognized differently than their peers, but it allows for us to have sort of a pointy end of the spear to actually access health care systems to who are interested in participating in those rankings and trying to drive up sort of their reputation on those rankings. So with that, I'm going to flip it over to Craig for an operational update.

Thanks, Mike. I'm going to be relatively brief and just reinforce some of the commentary that Mike highlighted, but I think -- and so we can get to the fireside chat and some of the questions that we're hoping to have. I think if we think about how we're looking to advance the business and move it forward, it really is kind of formulated and based in those core areas that Mike highlighted, first and foremost, our member relationships. So it really is how do we strengthen grow, deepen the relationships that we have with those that are already members and continuing to expand our member footprint, which we've had success doing. We're going to continue to look for ways to strengthen and build the existing capabilities that we have to make them more meaningful. We're also beginning to look at ways to connect them. So our foundation is in health care providers, but as Mike has talked about, and as we think about the other markets that we can move into, what are those sweet spots, whether the stakeholders, be it employers, life sciences, suppliers, et cetera, where we can continue to strengthen how we work with multiple stakeholders through the same capability. That leads to the innovation that Mike highlighted. And then we do have a big focus on this expansion into adjacent and non-health care provider markets. It's all rooted and grounded in, first and foremost, the footprint that we have over 4,300 hospitals, over 300,000 nonacute providers, top 50 life science companies, significant employers that we're really developing and maintaining those relationships to advance and take the business forward. Looking through that lens for the innovation opportunities that we have and how we can actually create solutions that will be ready made for success once we do so. And it's really enabled by the highly engaged culture of employees that we have, which have a tremendous passion for improving health care in this country. And lastly, it's underwritten by the strong financial foundation that we do have. We have a net cash position. We don't have debt. We continue to generate significant cash flow that allows us to actually take the business forward as we look to the future. I'm not going to run through the details on this slide, but these are examples across those various pillars of our future strategy where we've had success over the past recent year. Mike highlighted a number of these when you think about deepening the relationships around supply chain resiliency. And that's really around low-cost supply chain resiliency. So finding ways to automate the manufacturing processes domestically to be able to manufacture products that will be competitive long term. Mike touched on the 100 Top program and the success we're having actually embedding that to enhance our existing PINC AI technology and advisory services capabilities to help move and rise the tide of health care provider performance. We're very focused around the nonacute part of our supply chain strategy. And so we're excited about the launch of the Premier SmartPO process to really get after lower contract attachment in the nonacute space. And we think a real opportunity to do that moving forward. And then Mike touched on Life's -- applied sciences continues to be a big focus for us. From a capital allocation standpoint, we have publicly indicated that we are -- and the Board is evaluating strategic alternatives, and we're in the midst of that review. We do continue in that process. We did announce last summer the sale of our non-health care GPO operations for approximately $800 million in cash as part of that process. There is a sense of urgency on the part of the Board to finalize and complete that strategic review so that we can move forward and hope to bring that to a conclusion as soon as we possibly can. I touched broadly on the stability of the financial framework that we operate from. And lastly, I would say from a capital allocation standpoint, we have not changed our philosophy around a balanced approach. We will continue to look for the right ways to deploy capital to advance our skills and capabilities, as I talked on the previous two slides, but balance that with shareholder return. We do have our quarterly dividend that's in place returning approximately $100 million of capital today at an appropriate kind of market-facing yield and we'll continue to give consideration to shareholder repurchase once we finalize and complete our strategic alternative review depending on the outcome of that end result. I think lastly, we just believe, as Mike indicated, we sit in a very important spot in health care between the providers, government and the other stakeholders in the marketplace to really be forward-leaning in terms of some of the things that the market's going to need and look forward to continuing to leverage the unique long-standing member relationships that we have to take the business forward as we go along. So with that, Annie, I think we can turn it to the Q&A.

Yes. Great. Thanks so much for the really helpful presentation. I think maybe we'll start high level, Premier always just has such a really insightful view of the health care ecosystem just kind of based on where you sit. Maybe you could start on the Performance Services side. What types of things are your customers asking for, what problems are they looking for you to help them solve?

Yes. So first of all, and I think we've been saying this now for the last few quarters, Typically, that question comes along the lines of what's happening with health care utilization. And I will tell you, health care utilization is very lumpy. So if you're on a high-growth state and we're talking about organic growth now. You're watching your utilization go up a couple of few points. Things are -- in some cases, growing bigger than they were prior to the pandemic. And you're seeing decent growth happening in those growth states. If you're not in a growth state, we have a number of health care systems that are struggling even to just maintain volumes that they've had historically prior to COVID. And so I do want to sort of layer that into this answer to this question. So what does that mean? If your revenue is not coming in at levels that you expected, what are the things you need to be doing to actually be a viable entity to provide health care in your community. Number one is you've got to figure out ways to cut costs. I talked a little bit about being all of our capabilities and Performance Services being a labor extender. But truly, it's also a huge opportunity to drive efficiencies. So if we're able to leverage technology to automate procedures that have historically been labor-oriented and prior authorization is one that has historically been very, very labor oriented. Again, and doing the work and getting the outcomes that manual effort would require, those are processes and procedures that those organizations have to look at very, very seriously. Same with HCC scoring. They've got to make sure, as they're thinking about their revenue models are they documenting patients appropriately and ensuring that they're getting the revenue that they need to be generating to serve those patients. Finally, and I mentioned this, but as the payers and the health care systems are having a little bit of a debate on what should be happening and we're seeing reimbursement rates take longer than they've historically taken. I do think arming our health care systems with the data that proves out that they're driving the level of outcome -- clinical outcome that is going to be paramount so that they can go to the payer and say, "Look, here's our history. Here's what we've been able to do from a performance standpoint. Don't delay our payment, pay us on time. We need the cash flow. We don't need to be going to markets -- debt markets to get additional cash flow for working capital." So anything to do with driving efficiency, extending labor, those are the key areas that the health care systems are really asking us to support.

Mike, one last point I would highlight. I do think part of the reason we're excited about the 100 Top program that we acquired is longer term, we do believe the way the market is evolving, there's going to be more focus on those health care systems that perform exceptionally well from a consumer standpoint. 100 Top is one. There's obviously other programs out there, but we have a lot of data and information that supports that if you perform well under that program, you're going to perform under the other ones, whether it's CMS, Star or Leapfrog, whatever the other programs may be. And so we do think that, that's going to be a real need in the future in terms of us as consumers wanting to know we're getting care at really high-quality organizations.

If you want to delve a little bit deeper to that. One of the things that we've been doing is building out analytics to actually help our health care systems proactively with managing like Leapfrog programs and Star ratings from CMS. So for the most part, those are lagging indicators of your performance on quality to the degree that we can help forecast how their performance is looking from a Star rating or Leapfrog or whatever, it is going to be paramount that we help them do that so that they can change practice before they actually get their ranking. Because to what Craig said, one of the things that we're really laser-like focus is how do we take and help the -- take all these measures, including 100 Top and take these and have them consumable for patients, right. So that they can make the appropriate decision for care for them and their families.

Maybe along that lines, I mean, are you helping with kind of -- you talked about prior authorization, but also price transparency and things like that. I would imagine that, that would be a huge catalyst and probably avoid that hospitals need help with.

Yes. So it's interesting. From a price transparency standpoint, the number one focus for us is to help them become more efficient. So whatever the price ends up being, we want to make sure that the highest quality helping our health care systems drive the highest quality at the most reasonable price. And you know this, when you -- they price out services, there's a number of things that actually go into that. Our focus really is how do we drive down the labor cost, how do we drive down the supply chain cost, actually, so that they can price their services differentiated in their markets.

Interesting. You talked about labor today is such a huge problem still, and it feels like we've been talking about this for a couple of years now. Do you see any light at the end of the tunnel? I mean, when is this going to be better? Or are we just going to have -- is this just the new normal?

I saw an IDN yesterday at the not-for-profit track -- talk about their labor issues, and they said that within the academic settings of their footprint, and they were a huge health care system provider, but within all the academic settings of their footprint, they said they can only meet 50% of the demand for their doctors and nurses. So think about that. That's just one area. So no, I will tell you, I think that we've talked -- been talking about this for years, this idea of the gray tsunami, retiring population that's going to be needing more health care and fewer people to actually provide the health care. So we've had a number of initiatives to include the technology and services to actually help the health systems become more efficient. But we've also created partnerships where we can help drive more throughput to get more people trained and credentialed and those kinds of things to provide the care. So those are other initiatives that we're working on with some of our health systems.

Yes. And the other thing I would underscore health care providers are going to continue to be needing to focus on earmarking as many resources as possible to clinical-facing and patient-facing activities. So the other place you'll see us focused on is how do we actually automate and make administrative back-office tasks more efficient. So that's where our co-management solutions where we're actually helping them operate their supply chain, where we can actually take a resource and have it be assisting in more than one institution, that's where there's going to have to be efficiencies in order to allow because the cost of labor is not going [ backwards ].

And yet, we thought it would be such a huge catalyst for IT spend, but they still don't have the money to spend. It seems like it's a tough cycle for them to get out of.

Yes. And I will tell you, it's one of the reasons that we went and had this big focus on these enterprise license agreements that you spent some time talking to us about. We have to make it simpler for the health care systems to buy technology as well. And we do think that an overarching technology plan where we embed clinical and safety and supply chain, all those things together make it a much more simple buying process as opposed to these independent buying procedures that many of them use today.

That's helpful. Maybe we can talk about AI. That's been a really hot topic for investors this year. You guys have a lot of capabilities there. How is that resonating with your customer base? And maybe can you just spend a little bit of time talking about what you do there and maybe how the data that you have from your customer base helps fuel the AI engine and solution.

I'm feeling a little lacking and that Scott is in the room here who was the CEO of Stanson, the organization that we bought a couple a few years ago. That is the underpinning for our AI capabilities. And they've been doing an amazing job of working with Cedars-Sinai and other institutions around. Looking at the unstructured text of Epic and Cerner and Athena and bringing real contextual meaning to that unstructured text. And why is that important? Well, it's important because there's a lot of information that can be utilized within that unstructured text to help with identifying what's the appropriate next step in caring for a patient or help with identifying whether or not somebody should be documented and reimbursed a certain amount of money. The other use case that we've had a lot of traction in is identifying patients for trials. So that technology has allowed us to flip the funnel. So in Life Sciences, typically, they look for an investigator and then they look for an entity to help them with doing a drug trial. And so what that technology has allowed us to do is if they give us the characteristics of that patient, the lab values and the other things, we can sift through that data and identify patients that potentially could be perfect for a trial, which I think is going to be a significant game changer as you think about drug discovery because for the most part, there's been quite a bit of homogeneous sort of data that's been utilized. Now we have this heterogeneity of data across regions, rural, urban, cross race, all sorts of things that now we have access to that I think could create a great equilibrium in terms of having people get access to some of these discoveries and medical devices.