Owens & Minor Health Care Conference September 10, 2008

1. Owens & Minor Health Care Conference September 10, 2008 ‘Achieving Diversity in Health Care Businesses’ Charles R. Morris

2. The Opportunity in Health Care

3. Health Care Largest US Industry, and Among Fastest Growing Mfr Employment: 1996-2016 HC Employment: 1996-2016 NB: HC data includes only care. Pharmaceuticals, medical devices, etc. listed under ‘manufacturing,’ ‘distribution,’ etc.

4. Canny Investors Love Health Care “…So financials are going to shrink as an important part of the S&P 500, and the question is, "What's going to expand?" Two areas that have potential to expand are technology and health care.” -- Byron Wien, Barron’s August 25, 2008 Life Sciences (biotechnology and medical devices) accounted for 28% of all venture capital investing in the first half of 2008 “in line with its dominant position in recent years.” --PricewaterhouseCoopers Health Care second largest sector of S&P 500, at 13%; Financial Services, 20% -- Wall Street Journal Medical Device Industry (Imaging and Devices) ~$250 billion in Global Sales. U.S. Considered Technology Leader -- European Commission 2004

5. Growth Driven Primarily by New Products and Expanded Markets Laparoscopic Gall Bladder Surgery (Aetna US HCare) Cost per Procedure: -25% Total Spending: +18% Cataract Surgery: Now Half-Day OP Procedure: Volume up Fourfold Depression Treatment: Medication Much Cheaper Than Talk Therapy, So Vast Expansion of Treatment Population Spending Costs

6. Some Striking Improvements in Resource Efficiency

7. Improvement Over 1968 Heart Disease Death Rate = ~1 million Lives a Year

8. Most Important U.S. Employer • Biggest employer by industry • 14 million in 2006 • Care providers only (e.g., excludes pharmaceutical and medical device industries) • Fastest growing: • Forecasted 3 million new jobs between 2006-2016 • Twice as Fast as Rest of Economy • Substantially better paying than rest of industry • Only wage laggards in custodial, aides, and other lower-tier personal care workers • Striking wage catch-up effect 1970-1990, as industry moved up technology curve.

9. Ideal Industry for Diversity Initiatives • Substantial Govt involvement – ie, ‘diversity friendly’ environment • Enormous spread of subindustries • Highest-tech to lowest-tech • Manufacturing, distribution, R&D, direct care, education, training, much else. • Health care largest industry concentration for Black and Hispanic-owned small businesses • Few dominant players • ~600,000 firms in direct care functions • ???000s in other health-care industries • Rapid growth and constant restructuring • Huge increase in sub-MD specialties in labs and direct care • Feeders from highly-diverse two-year and four-year career oriented colleges

10. Diversity and Access

11. Affirmative Action: the Original Diversity Initiative • Dates from recognition of widespread discrimination in jobs, housing, much else during in post-Selma US. • Adopted in Federal government under LBJ; • Institutionalized in Federal govt and Federally-funded programs by Richard Nixon • Required active programs, supported by ‘soft quotas’ – i.e., increased diversity as an index, but no numerical target • Always controversial – ‘reverse discrimination’ • Original approach affirmed in Bakke (1978) • But Ct. specifically disallowed hard quotas.

12. In Health Care, Affirmative Action Focused On Medical School • De facto segregation of hospitals and medical schools well into 1960s • Meharry (Nashville) and Howard accounted for most Black medical training • ‘White’ medical schools often referred their Black students to Meharry or Howard for clinical experience (in Black wards) • Clear progress since then • SNMA (minority medical student organization) 7,000 members with chapters in all leading schools • American-born minorities still underrepresented on medical school faculties • Subtler ‘ceiling’ issues probably more important • Curtis (2003)

13. Backlash Against Affirmative Action in 90s, Based on ‘Mismatching’ • Academic studies suggested that AA harmed minority students • On average less qualified on standard tests than white students • Therefore placed into arenas where bound to fail • One study (on law students) suggested that AA reduced the number of minority law graduates • Sanders (1996)

14. Recent Cohort Studies:Mismatching Greatly Overstated • Standard test scores good broad academic predictors, but more as performance thresholds • Two large samples (law schools and undergraduate schools): • Minority students in lower-quartile standard scores had very high failure rates • Above-threshold performers against statistically better-qualified whites • Academic performance lagged white students’ • Among undergraduate sample, post-grad professional degrees slightly exceeded that of white students Bowen and Bok(2000) • Among law students, graduation, bar passage rates, nearly indistinguishable; job placement slightly better. Rothstein and Yoon (2008) • Analog: Wall Street, consulting firms, often recruit highly-motivated blue-collar kids from non-elite backgrounds

15. HBS Minority Executive Career Tracking • Distinguished three career stages: entry, middle-mgmt, and executive • Whites moved through entry levels noticeably faster than minorities • Minorities who made it to middle, caught up with whites, and moved slightly faster through executive levels • Key factors in minority advancement: • Longer entry period used to broaden experience within company • Mentoring • Informal, but visible, designation as a fast-tracker • Thomas and Gabarro (1999)

16. Medtronic Diversity Initiatives • Corporate sponsorship; company-wide training • Outreach through conferences/seminars; close involvement with diversity-focused organizations (NMSDC, HUBZone, WBENC, etc) • Counseling and individualized consulting to suppliers; coordinate with diversity training resources • Metrics and reporting • Of 16,000 small business suppliers, 900 minority-owned and 2000 women-owned • Advice: Professionalism and market knowledge of supplier is crucial. It’s about a helping hand, not reinvention

17. O&M and Kerma Medical • Earl Reubel an experienced business man who understood performance • Making a transition to a new venture in medical supplies. • Started with a cost edge – in-house mfr • But inexperienced in medical supply chain. • O&M recognized the potential and mentored on industry culture and practice • Gil Minor sat in on sessions: buy-in from top of O&M • Kerma’s business up many-fold • Paradigmatic win-win case

18. Consistent Threads • Business and professional diversity programs are not social work • But require a complex ‘qualification’ hypothesis • Standard qualification protocols do establish risk thresholds • But above the threshold, are poor discriminants • Instead, can signal ‘social learning’ deficits that mask abilities • Successful diversity programs target those deficits • The common theme of ‘Mentoring’ suggests highly particularized problem focus • But the discipline of business ensures real focus.

19. The Win-Win Paradigm