More Than Low-Hanging Fruit:

2. More ThanLow-Hanging Fruit: Successful Value Analysis, Phase II WSHMMA Spring Conference Tacoma, WA April 27, 2006

3. Garrett W. Hoover, MHA, MBA President / CEONason Hospital Roaring Spring, PAandJohn E. Siedlinski, MHA, RT(r)President & CEOMaterials Management Consultants / RPINaperville, IL

4. Geographic Background • Roaring Spring, Pennsylvania closest to Altoona; 2 hours east of Pittsburgh • Roaring Spring, middle of the state, an hour from State College • Hospital has been in business since 1896 – 109 years

5. Hospital Background • Nason Hospital is an acute care facility, licensed for 42 beds with an average daily census of 27 • Medical Staff of 100, representing the specialties of: - Orthopedics - EENT - Urology - General Surgery - Podiatry - OB/GYN - Pediatrics - Gastro-Intestinal - Ophthalmology - General Practice • Nason has a total of 260 FTE’s,comprised in head count of 283

6. The Problem… NASON Reimbursement Percentages • Like many Pennsylvania hospitals, Nason had experienced declining admissions, a resurgence to O/P care and declining reimbursement

7. The Problem … • 70% of Pennsylvania hospitals lose money on patient care • 50% of Pennsylvania hospitals have negative operating margins • For the first time in its 108-year history, Nason Hospital wasprojecting a$1.4 million shortfall

8. Meeting the Problem Head On ….. • Discussed a business relationship with RPI to turn Nason Hospital around • RPI developed Project Plan to address both staff & supply resource management • Based on Hospital Board acceptance of the Project Plan and resulting Project Proposal, RPI was given the go-ahead to proceed • An estimated 5 – 10% was going to be carved from current staffing costs using RPI’s Management Control System • Performed a Supply Chain Assessment in Summer, 2003 which listed improvement opportunities & Road Map for implementation via Value Analysis Team process

9. Value Analysis Gets A Green Light • VAT structure & Chairperson is selected • REW Form is developed & tested • Opportunities are tracked through to final disposition • Cost Savings tools are developed • Cost-Benefit Analyses templates aredeveloped & implemented • “Got the word out” regarding Value Analysis Team process • Training scheduled for VAT attendees • First VAT Meeting was scheduled;VAT staff are trained • VAT Kick-off has begun

10. The Need for Value Analysis • “There is a silver lining. Trimming Supply costs is a fairly high impact way to boost profitability or get a balancesheet out of the red. • If you increase revenue$1.00, you might make5 cents off of it.But almost every dollaryou save in supply costsgoes to the bottom lineand you don’t have to fireanybody or lay anybody off.” Health & Hospitals Magazine, May, 2004 - Richard Kunnes, M.D., Vice-President of Consulting Services for VHA, Inc.

11. Nason’s Value Analysis Team -Structured for Success • Garrett Chairs each Session • Multi-disciplinary task force • Organized approach; Departmentheads interviewed regularlyfor staffing, process & supply costreduction opportunities • Physicians approached on ad hoc basis • Vendor negotiations woven into VAT process • Successes communicated toBoard, medical staff &the community Nason VAT

12. VAT Chair Commitment isKey to its Success • VAT meetings held in Boardroom or Garrett’s office – Confirms VAT importance • Garrett attends & actively participates in all vendor strategy / contract negotiation sessions • Staff attend, on time & are prepared • Garrett sets the tone and the agenda • Garrett reports savings to-date prior to each meeting and summarizes & assigns“to-do’s” prior toVAT adjournment

13. Develop an RFP for Mobile MRI Services, to be on-site 3 - 4x/week Alliance Imaging was the incumbent Mobile MRI provider Met with several local providers of this service Leveraged vendors against each other Renegotiated new agreement with Alliance Imaging One yearCost Savings:$258,700 Consulted with Medical Staff regarding pro’s & con’s of this approach Reviewed financials and reimbursement potent-ials Leveraged competitor’s pricing & current volumes with incumbent Mobile MRI provider VAT voted to choose Mobile MRI service with the lowestunit costs VAT Opportunity Reviewed: Mobile MRI Services BACKGROUND SOLUTION

14. Owens & Minor is incumbent prime distributor for Med-Surg products Leveraged incumbent book of business against Cardinal, Burrow’s & other suppliers In addition to NovationDistributors (ADA), alsoconsidered non-contract ones Savings Targeted:$15,000 Cost-plus mark-up was verbally agreed to at 6.5%a long, long time ago Negotiated the mark-up from 6.5% down to cost + 5% Negotiated to receive the full WISDOM Program, and its Reports, included at no cost for 1 year VAT Opportunity Reviewed: Owens & Minor Mark-up BACKGROUND SOLUTION

15. Alcon Contract = $9,280 Stryker Pain Pump = $2,892 Forcep & Instrument Repairs = $4,192 Switched from Reglan to generic drugs = $1,100 Renegotiated Reference Lab Contract = $33,000 Blood Bank transfer process change = $11,100 CME giveback days = $2,700 Policy Change - CRNA monitoring of Epidurals = $50,000 Cancelled subscriptions AJN & Respiratory = $145 Switched GPO FoodService Contract= $4,367 Employee Pension Plan = $206,000 New contract for Smith & Nephew Burrs, Bits, Blades = $3,500 Examine the frequency of Bed Changes = $7,306 Better Scheduling of RSV Vaccinations = $16,413 Orthopedic Prostheses Standardization = $30,000 Pacemaker Standardization = $15,000 Phase I - VAT Successes

16. Electronic Delivery System = $7,784 Negotiated New Electrode Agreement = $1,300 Physician Benefits = $5,100 Physician Vacation = $9,500 Wound Care products & Urologicals = $1,600 Print superbillsin-house vs.outside = $500 Reduced pricing on Kodak MRI film = $1,518 Elimination of O.R. Inventory = $3,663 ACMI: Scope Repair contract = $2,400 Increased use ofO & M Medi-Choice(private label) products= $6,249 Development of BNP test for CHF (in-house vs.outsourcing) = $14,000 New contract for GeneralLab Supplies = $24,000 Changes to Pharmacy Formulary (Activase to Retivase) = $11,000 Learning Harbor Education(in-house vs. outsourcing)= $12,000 Office Supplysavings= $2,000 Phase I - VAT Successes

17. How Do We Get The DocsTo Play Along? • Meet them on their turf & appeal to their business sense by showing them all current financial & quality data • They now understand the importancethat Value Analysis has • We continue to target eachopportunity; “their” productsmay be under scrutiny • We make sure they do notnegotiate any contracts outsideof Value Analysis Team process

18. $1.0 Million Savings Achieved! • On 7/14/05, Nason Hospital exceeded $1.0 million in cost savings by switching from branded Rocephin to a generic product alternative (conservative savings targeted = $23,385)

19. Savings Implemented To Date Phase I Target: 5/03 = $250,000 savings • Savings Identified, Quantified & Implemented to 7/26/05 = $1,008,978 • Licensed Beds = 42 • Average occupiedbeds = 27 • $ Saved / Average OccupiedBed as of thatdate = $37,370 Phase II Target: 5/06 =$1.5 Million Savings

20. Relative Cost Savings How much would your Hospitalneed to save,per adjusted occupied bed,to achievesimilar levels of success? Actual Cost Savings achieved to date at Nason = $37,370 / average occupied bed

21. Lowest hanging fruit Product standardization Vendor consolidation Inventory reduction Consignment implementation GPO portfolio maximization Reimbursement optimization Contract renegotiation Extensive GPO assistance & intervention Changes to practice patterns Drastic culture changes Product usage Ultra-sensitive products Formulary effectiveness Most time-consuming & difficultPhase Phases of Value Analysis PHASE I PHASE II

22. Losing The Momentum Why Most Value Analysis TeamsNever Get To Phase II? • Waning Executive or Administrative Support • Not enough Cost Savings soon enough • Little direction; sense of purpose • Initial efforts failed • Perceived lack of interest • No financial incentive • Do not know how toget there from here • Changing membership • Too many priorities pulling staff in other directions • No GPO / Distributor supportfor change • VAT burnout

23. 5/03 = $0.00 12/03 = $425,000 8/04 = $836,357(2004 AHRMM Presentation) 3/05 = $963,000 7/14/05 = $1,000,000 7/26/05 = $1,008,978 (2005 AHRMMPresentation) 12/05 = $1,250,000 (estimated) 5/06 = $1,450,000 (estimated) NASON Hospital VAT Milestones PHASE I PHASE II

24. Phase II VAT Opportunities We’re Pursuing • Novation’s Orthopedic &Interventional Radiology Assessments • All Health to target other cost-savingopportunities • Additional staff reductions using theManagement Control System • Reprocessing of S.U.D.’s / Recycling • Demand-matching forOrthopedic prostheses • Linen loss & inventory shrinkage • Product usage • Supply Formulary • Strict, Closed-DoorDrug Formulary

25. Phase II VAT Opportunities We’re Pursuing • Service Contracts: Capital Equipment & Maintenance • Applying Supply Chain leverage & Purchasing synergies via Pennsylvania Mountain Hospital Association (PMHA) - A local consortium of like-minded hospitals • Benchmarking Hospital & Materials Management operational statistics • New & Emerging Technologies • Placing “Unprofitable” service linesunder the microscope • Further stock reductions -M/S products & Pharmaceuticals

26. VAT Tools: What Will Help Us Get There? • Meeting frequency changed to Monthly – More time to identify new opportunities • Accounts Payable annual spend list, sorted in descending order • Discussions with All-Health/Novation,Owens & Minor, McKesson • Leverage from Pennsylvania Mountain Hospital Association • Ongoing Education & Communication • New MMIS & ORMIS

27. VAT Tools: A/P Annual Spend List- Now What Do We Do With It? • Contact the Accounts Payable Supervisor or Controller; obtain 12-month list of who was paid in an MS-Excel format • This list should include the Vendor #, Vendor Name and 12-month spend • Sort Excel spreadsheet in descending $ amount; eliminate vendors spent < $25.00 • Look for vendors with the greatest spend • Sort on Vendor name; add duplicative vendors together to obtain one total • Add Vendor category for each entry in column to the right (i.e., Bank, Legal Service, Pharmacy wholesaler, Lab, etc.) • Sort spreadsheet so vendortypes are together & totaled

28. VAT Tools: Accounts PayableAnnual Spend List • Cut & paste the Vendor categories so they’re all together on one page each • Hand out Vendor category lists at your next Value Analysis meeting with the questions: • Do we know who these vendors are? • Is the amount we spend with each of these vendors a surprise or is it expected? • Can we standardize these vendor’s products with another manufacturer’s products? • If a service, do we need the service these vendors provide? Can we perform these services ourselves? • Do we have current contracts forpurchases from these vendors? • It there any way we can reduce ourannual spend with these vendors?

29. Lessons Learned • Without full Administrative support, you will have limited success • The better due diligence you perform on each cost saving opportunity, the easier they’ll be accepted and implemented • There’s no such thing as a “Sacred Cow” • Question everything; nothing stays on table • The reimbursement picture should be examined for each opportunity; if not, you’ve only got half the picture • Outside eyes helped us keep theVAT’s on track & target, whilechallenging the status quo

30. Lessons Learned • Keep your Board regularly informed via Agenda item • The #2 item in your hospital’s budget may not be as well-controlled as we’d like to think • If we’ve tried it before, let’s look into the opportunity again - due to a changing environment • Materials Management needs support to do its job properly • You cannot communicate enough– at ALL levels • We did it - you can do it, too.