The Healthcare Supply Chain Top 25 for 2014

Transcription

1 G The Healthcare Supply Chain Top 25 for 2014 Published: 19 November 2014 Analyst(s): Eric O'Daffer, Kimberly Nilles, Andrew Stevens, Stephen Meyer Gartner highlights organizations across the value chain that are focused on reducing supply chain inefficiencies, while improving the quality of healthcare. Leaders continue to optimize their capabilities, while preparing for changes that population health models will drive through the supply chain. Key Findings Cardinal Health attained the No. 1 spot in our ranking for the fourth year in a row. Mayo Foundation, Intermountain Healthcare, Owens & Minor and CVS Caremark rounded out the top five spots in the ranking marks the first time in our study that a retailer has cracked the top five. AbbVie, Providence Health & Services, Banner Health and Amgen were all new to the ranking this year. Healthcare providers, as a group, added one company to the list, while manufacturers lost one compared to last year's ranking. The increasing scale of organizations through mergers/affiliations and the alignment to new revenue models, like bundled payment and population health, had the most impact on the healthcare value chain this year. Meanwhile, themes driven by the Accountable Care Act remain a constant, with most focus on lowering the total delivered cost of care. Recommendations Invest heavily in improved analytical capabilities. Aligning supply chain capabilities with revenue models is a bigger profit improvement opportunity than just optimizing the operational supply chain. Commit to standardizing products and services with the point of care. Providers, clinicians, manufacturers and distributors can reduce the variability of care and lower cost by reducing complexity in their relationships. Embrace strategic sourcing across the value chain. Integrated delivery networks (IDNs) need to lead here, but supply chain leaders at manufacturers need to expand their influence within their own company to bring all the value they can.

2 Accelerate building new supply chain capabilities by dedicating resources to define and eliminate your weaknesses. Be bold and align with the strategic objectives of your organization to deliver value from supply chain beyond operational efficiency. Table of Contents Analysis...3 Overview... 3 An Industry Motivated to Change...3 Inside the Numbers... 8 The Top Five...8 Healthcare Providers Two Wholesalers and a Retailer...13 Manufacturing Healthcare Value Chain Capabilities...17 The Healthcare Supply Chain Top 25 Methodology Manufacturers, Distributors and Pharmacies...18 Health Systems Opinion Component Polling Procedure Composite Score...23 Looking Ahead Recommended Reading...23 List of Tables Table 1. The Healthcare Supply Chain Top 25 for List of Figures Figure 1. Healthcare Value Chain Capabilities Model Figure 2. Peer Opinion Panel Composition: Value Chain Segment Figure 3. Peer Opinion Panel Composition: Role...21 Figure 4. Peer Opinion Panel Composition: Revenue Page 2 of 24 Gartner, Inc. G

3 Analysis Overview The Healthcare Supply Chain Top 25 for 2014 reflects the metaphorical middle part of a marathon journey to build patient-driven supply networks. The participants know the route, but the excitement of the starting line has worn off and a few aches and pains have set in. Each company knows the real pain is coming later in the race, and that the only path is forward there is no going back. Following our marathon metaphor, a number of things became clear in our 2014 ranking. Most major themes remained constant from the past few years. Organizations across the value chain are trying to balance managing their business in the current fee-for-service reimbursement model, while planning for bundled payments and population health models that will likely change their supply chain response. Talent development and retention, collaboration across the value chain, cost-to-serve initiatives, adoption of data standards and data analytics capabilities are all still in various stages of development across companies in the Healthcare Top 25. Discipline to stay the course and incrementally build capabilities are the hallmarks of companies on this year's ranking. Companies near the top differentiate even more, realizing that core capabilities are necessary but not sufficient, so they look for innovation. Organizations that retain talent and keep a focus on how supply chain supports their organization's mission and aligns with the business strategy are the ones that are able to sustain excellence in their supply chain. Our universe for this research is 185 companies, of which 25 are recognized in the ranking making the list takes strong measured performance along with recognition of peers and analysts. With 21 of 25 organizations repeating from our 2013 study, consistency and capabilities that are built resonate, but innovation puts companies near the top of the list. Success drives success. The journey continues. Financial stability in the Top 25 has remained relatively constant for providers, as represented by bond ratings in the past two years. Only one provider experienced a decline, while four of the five manufacturers that made the ranking both in 2012 and 2014 experienced a declining three-year return on assets (ROA) figure averaging a 10% decrease. Each company in the ranking has its own story to tell, of course, but on the whole we see that IDN consolidation and price pressures are mounting and outpacing innovation that IDNs will pay for. Service expectations remain high and efficiency has not caught up with cost pressures. An Industry Motivated to Change Fear and competition are great motivators, and they have driven the healthcare industry to further consolidate. Few industries are as fragmented as healthcare, so one could argue that it is about time. Two healthcare retailers have led the way in national consolidation already. Consolidation has been a well-documented trend at healthcare providers, and manufacturers have joined the merger and acquisition (M&A) party this year in full force. Manufacturers are seeking to be indispensable to providers and find complementary product lines that can help them impact care at their largest IDNs. BD buys CareFusion. Medtronic buys Covidien. Zimmer Holdings buys Biomet. Provider Gartner, Inc. G Page 3 of 24

4 mergers have slowed in number, but the size and impact in specific markets is undeniable. The Federal Trade Commission (FTC) has taken notice of market power issues making some nontraditional alignments of affiliated hospitals more prevalent. A PwC report from September 2014 showed a considerable decline in number of transactions year over year, but predicted a continued trend toward consolidation. And the big deals seem to be getting even bigger as organizations across the value chain see the benefit of scale in their relationships. Leaders are building supply chain capabilities and innovating at a greater scale than ever before. There are even some glimmers of hope for sustainable and scalable collaboration initiatives across the supply chain. Gartner highlighted a few in our Healthcare Supply Chainnovators research announced in May, and there have been others as well. Mercy and Loma Linda pioneering "repless" models in the operating room. Cook Medical and other manufacturers investing in supply chain optimization teams focused on cost-reducing initiatives across the value chain. Providers are looking for "total company" solutions from manufacturers, and "supply chain solutions" teams can be the focal point for aligning revenue, cost, quality and downstream patient-outcome-related initiatives. Heavy investment in analytics capabilities at large IDNs indicates that value is not always in the execution of contracts, but in the intersection of information around cost, quality and outcomes. Data and analytics will be king, and the dozens of analysts hired along with investment in improved tools will change the way IDNs look at cost to serve and share that information along the value chain. Similarly, manufacturers are looking for an analytics edge in how they run clinical trials and measure the efficacy of their products. Last year, we talked about the blurring lines between what each constituent of the value chain does continued that trend, with some interesting examples contained in this research. Perhaps the best example is CVS moving deeper into the business of healthcare through an acquisition, and exiting products detrimental to health. CVS effectively divested a $2 billion tobacco products category and it acquired Coram Specialty Infusion in a 60-day period in These moves made CVS the largest provider of specialty infusion in the U.S., and solidified its position as a healthcare provider versus a corner drugstore. Providers' supply chains are advancing their thinking as well determining that the health of the patient can be impacted by supply chain outside of enabling the acquisition of the elusive "right product at the right price," but adding in the right location. That location is multidimensional as well, with different meanings along the care pathway from preadmission to postdischarge at home, clinics, long-term care locations as well as acute care hospitals. Determining cost to serve, and intersecting it with revenue and the total cost to deliver care are the waves of the future. IDN leaders are aligning supply chain response as a generator of revenue and profit with broader company goals. The companies in this research are prepared to go the distance and are off and running in the right direction. We wish these leaders and the healthcare industry great success in a race that is worthy of running and look forward to sharing the journey. And now we proudly present the Healthcare Supply Chain Top 25 for 2014 (see Table 1). Page 4 of 24 Gartner, Inc. G

5 Table 1. The Healthcare Supply Chain Top 25 for Ranking Company Name Three-Year Weighted ROA (2011 to 2013) 1 One-Year, End-of-Year Inventory Turns (2013) 2 Bond Rating 3 Truven Health System Percentile Score 4 Peer Opinion 5 (91 voters) Gartner Opinion 5 (17 voters) Composite Score 6A,6B 1 Cardinal Health 3.5% Mayo Foundation AA Intermountain Healthcare AA Owens & Minor 5.0% CVS Caremark 6.0% Mercy AA Johnson & Johnson 9.6% AmerisourceBergen 3.5% McKesson 3.2% Walgreens 7.3% BD 10.8% Ascension Health AA Advocate Health Care AA Gartner, Inc. G Page 5 of 24

6 2014 Ranking Company Name Three-Year Weighted ROA (2011 to 2013) 1 One-Year, End-of-Year Inventory Turns (2013) 2 Bond Rating 3 Truven Health System Percentile Score 4 Peer Opinion 5 (91 voters) Gartner Opinion 5 (17 voters) Composite Score 6A,6B 14 Kaiser Foundation Hospitals A Abbott 7.2% Cleveland Clinic AA UPMC AA Geisinger Health System AA Covidien 8.7% AbbVie 16.4% Pfizer 9.8% Providence Health & Services AA GSK 12.2% Banner Health AA Amgen 7.7% Page 6 of 24 Gartner, Inc. G

7 2014 Ranking Company Name Three-Year Weighted ROA (2011 to 2013) 1 One-Year, End-of-Year Inventory Turns (2013) 2 Bond Rating 3 Truven Health System Percentile Score 4 Peer Opinion 5 (91 voters) Gartner Opinion 5 (17 voters) Composite Score 6A,6B Notes: 1 ROA: ((2013 net income / 2013 total assets) * 50%) + ((2012 net income / 2012 total assets) * 30%) + ((2011 net income / 2011 total assets) * 20%) 2 Inventory Turns: 2013 cost of goods sold / 2013 inventory 3 Bond Rating: All ratings were mapped to the Standard & Poor's (S&P) rating system using an industry-standard mapping system 4 Truven Health System Percentile Score: Data taken from the Truven Health Analytics 15 Top Health System Percentile Score 5 Peer Opinion and Gartner Opinion: Based on each panel's forced-rank ordering against the definition of "high-quality patient care at an optimal economic cost" 6A Composite Score, Health Systems: (peer opinion * 35%) + (Gartner opinion * 35%) + (bond rating * 15%) + (Truven ranking * 15%) 6B Composite Score, Nonhealth Systems: (peer opinion * 30%) + (Gartner opinion * 30%) + (ROA * 20%) + (inventory turns * 20%) 2013 data used where available. Where unavailable, latest available full-year data used. All raw data normalized to a 10-point scale prior to composite calculation. Source: Gartner (November 2014) Gartner, Inc. G Page 7 of 24

8 Inside the Numbers The Top Five Cardinal Health Congratulations to Cardinal for making it four years in a row at the top of our ranking. The gap to No. 2 remained close again this year as Cardinal faced stiff headwinds as it absorbed the loss of $25 billion in business at Walgreens. ROA improved this year over 2013, while inventory turns declined due to a shift in the mix of business. Cardinal still leads with our peer voters and that, combined with solid quantitative metrics and peer/analyst votes, put Cardinal in the No. 1 spot again. Cardinal continues to have the widest breadth of any company in healthcare. It is a manufacturer, wholesaler, distributor, retail pharmacy and a connector at many points in between. Cardinal continues its heritage of customer collaboration, especially in medical products distribution by further integrating the acquisition of home healthcare company, AssuraMed, and, in 2014, getting deeper in medical devices through the $320 million acquisition of AccessClosure. Cardinal is also leveraging point-of-use technology in its WaveMark acquisition and working toward providing visibility across the healthcare value chain it connects from point of care back to the manufacturer. Perhaps, most interesting, is Cardinal's continued development of the Innovative Delivery Solutions group. This group goes well beyond supply chain logistics to focus on the four F's find meaningful growth, fix inefficiencies, fulfill quality care mission and follow the patient. Early success at Medstar Health in pharmacy and BJC HealthCare in medical devices shows early promise in delivering value beyond cost reduction. Mayo Foundation Mayo lands at the No. 2 spot for the third year in a row and gains ground on the top rung of the ladder in the process. Mayo is a model of consistency, combining the balance of high quality of healthcare scores and solid bond rating with top echelon peer and analyst scores. Mayo continues to demonstrate leadership in the healthcare value chain by retaining and developing top talent and aligning with its Clinical Care Network group to tie value in supply chain to quality and controlled cost of patient care. Mayo has long been an innovator in the development of analytical functions in supply chain and has nearly completed a five-year project to connect supply chain information with clinical, quality, engineering, accounting and revenue cycle. Its "manage to reimbursement" initiative, aligning supply chain cost, especially implants, to what it is paid for a procedure, is an outgrowth of this progress. Mayo's refresh of its strategic plan in 2014 shows an organization not resting on its achievements. Supply chain's strategic plan connects to the vision of the organization, and aligns the goals of supply chain beyond cost in serving the growing network of owned clinics, Mayo Clinic Care Network affiliates and the 153 hospital members of the Upper Midwest Consolidated Service Center it operates. Mayo's strategic planning and ability to execute those plans is a differentiator. Last year, Mayo crossed the $1 billion mark in documented savings attributed to supply chain since Page 8 of 24 Gartner, Inc. G

9 2000, with over half of that coming in the past five years. Look for more savings and even more connectivity to patient care models going forward. Intermountain Healthcare Intermountain Healthcare climbs one spot to get to third this year in our ranking on continued peer and analyst recognition of its capabilities, along with a tremendous bond rating and solid quality-ofcare scores. Intermountain represents one of the closest things to a literal "City on a Hill" in the world of healthcare providers through its $40 million investment in its supply chain center. The CEO and CFO at Intermountain often communicate supply chain's connected role in delivering population health, and the talent-laden supply chain organization (SCO) has expanded the vision and delivered value over the past eight years. Intermountain's unified view of population health as the revenue model of the future for the organization effectively galvanizes the supply chain response in coordination with clinical and financial as well as its owned insurance company, Select Health. Intermountain's Shared Accountability Model puts equal weight on the patient, provider and payer to lower the cost of care. Intermountain's commitment to keep patient care costs to Select Health at CPI+1% by 2016 aligns initiatives across the organization, with strategic sourcing responsible to drive new nonpricefocused initiative-related savings in conjunction with key trading partners. Intermountain is documenting savings every year, but also going further to take hard dollars directly out of the budget each year so those savings stick. Intermountain did some major foundation laying for the future in completing its ERP implementation in 2014 and anticipates the integration of its electronic medical record (EMR) in In July 2014, its new 144,000-square-foot homecare and hospice center opened, showing a new commitment to the continuum of care, giving them an advantage over other IDNs in serving the home medical equipment, pharmacy, home health and hospice/palliative care needs of its patients enabled by supply chain. Owens & Minor Owens & Minor earned the fourth spot in our ranking this year. Owens & Minor captured high scores from peer voters and received the highest number of votes from Gartner analysts in the study. Owens & Minor's continued partnership with and investment in IDN supply chain capability development may be a core reason why we see this recognition across analysts and peer voters alike. Owens & Minor continues to develop a suite of solutions that support its core mission for providers that range from leveraging 500,000-square-foot Regional Distribution Centers to smaller Strategic Logistics Centers designed to serve one customer and go beyond Medical Surgical distribution. The scope of this menu of services includes core distribution services and alignment in price, utilization, inventory and logistics costs across supplies along with a platform for expanded services. Likewise, Owens & Minor has made progress in its market expansion to serve medical device manufacturers. It has several implementations with device manufacturers that are taking sales representatives out of the logistics role, reducing inventory/complexity and risk in the value chain. Gartner, Inc. G Page 9 of 24

10 Lastly, Owens & Minor's strategic acquisition of Medical Action in the summer moves it further into the "less neutral" category of distributors with manufacturing and kit packing capabilities should be interesting to watch on a multitude of fronts for Owens & Minor. CVS Caremark 2014 marks the first year a retail pharmacy has made the top five in our ranking. Congratulations to CVS Caremark for breaking the barrier, climbing four slots to No. 5. Over the past six years of the study, CVS has steadily increased ROA to 6.0% and inventory turns to 9.3, while capturing more peer and analyst recognition along the way. Bold moves at the top of the pharmacy food chain are becoming regular events. This year, CVS Caremark made two of note and broke into the top five. First, if you did not recognize CVS Caremark as a healthcare provider before look again. Symbolically and culturally, it made the decision to stop selling any tobacco products a category that represented $2 billion in annual sales and has an impact to earnings. It made the decision because it was incongruous to its mission. CVS Caremark's stated goal is to "transform primary care by expanding our national footprint, offering new clinical services and collaborating with health systems." CVS getting out of the tobacco business is in conjunction with two other moves into the delivery of care. The first is an ongoing commitment to add 700 more MinuteClinics by 2017 to a total of 1,500 across the United States. Also, in January 2014, CVS Caremark became the largest specialty infusion provider in United States through its acquisition of Coram Specialty Infusion. This makes it an organization that has retail, mail-order PBM capabilities and the ability to deliver specialty pharmaceuticals in more than 80 locations nationally. Combine this with its public announcement this fall that it has 40 clinical affiliation agreements with providers across the country and you can almost feel a rebirth for this healthcare company. CVS Caremark garnered votes from analysts who had high respect for its capabilities as a retailer as well. CVS Caremark is the largest retail pharmacy in the United States and is leveraging that power along with Cardinal Health to lower the cost of generic drugs. Additionally, its use of customer data from its ExtraCare loyalty program allows it to tailor the offerings at each store to consumer demand. Healthcare Providers Healthcare providers represent 87 of the 185 companies in our ranking universe, and a record 11 providers made the Top 25 this year. A significant amount of the supply chain innovation in the healthcare value chain is occurring at the leading edge of providers. Many in the middle and lower maturity levels are still stuck in the past era of obsessing about contract pricing negotiations, costplus deals with distributors and share-back percentages with group purchasing organizations (GPOs), but leaders are changing the face of healthcare through innovations across the traditional supply chain boundaries of plan, source, make and deliver. Gartner terms the movement the "patient-driven value network," and leaders are progressing along the maturity curve rapidly (see "Now Is the Time for IDNs to Build Patient-Outcome-Driven Supply Chains"). Emboldened by their success, Top 25 providers keep pushing, and that is what we continue to see from this group captured in the ranking and even in many that did not make the ranking. It is a Page 10 of 24 Gartner, Inc. G

11 tough group to differentiate in. Even the most mature providers struggle in some areas, especially with chronic challenges in standardization of products and services. Mercy (No. 6) moves up four spots this year on improved patient care metrics and the highest analyst ranking given to a provider. Mercy is relentless in its improvements each year and represents an interesting hybrid between a commercially available supply chain services business and an outcome-focused, forward looking IDN. ROi, Mercy's supply chain subsidiary, is part distributor, part GPO, part services business and part consultancy all in an eager-to-share, bringing-it-every-year package. Mercy continues to demonstrate what great talent can do. ROi has alumni leaders of three large IDN supply chains currently, and the past three presidents of ROi hold the titles CEO, COO and senior vice president of operations at Mercy. For all that transition, however, Mercy is a stable supply chain that continues to deliver innovation in how it thinks about data standards and analytics in the business of patient care. Mercy leverages collaboration at the crossroads of clinical staff, revenue, cost and supplier collaboration in its innovative "rep-less" spinal implant model, documenting 91% compliance with one manufacturer, 35% cost reduction and increased efficiency through standardization. Lastly, Mercy gets kudos for thinking innovatively about the supply chain response across the care continuum on the multiple planes of location and care cycle. Ascension Health (No. 12) is a fitting name for this $17 billion, St. Louis-based health system, with a national footprint from Connecticut to California that has climbed the ranking fast. Ascension debuted on our ranking last year at No. 25 and jumped this year to No. 12 on the transformational work in supply chain it has been working on for the past five years, without sharing much of what it was working on until this year. Strong bond ratings plus solid quality-of-care ratings and improved recognition from peers and analysts raised Ascension in the ranking. While improving its supply chain through the formation of the Resource Group, Ascension has demonstrated a willingness to declare who its collaborative partners are more boldly than many providers across food service, distribution and fleet management, to name a few. Ascension has quickly garnered a reputation for being both big and able to execute well across its geographically dispersed network. Advocate Health Care (No. 13) has risen steadily up the ranking over the past three years. Supply chain capabilities have largely supported this "quiet" leader in patient care, scoring one of the top quality-of-care scores in this year's study, while keeping costs under control with collaborative agreements, innovative solutions, like SharedClarity and clinical value analysis, along with solid analytics. Advocate's supply chain has support from the C-suite and continues to invest in capabilities that will accelerate it profitably into a world dominated by population health revenue models. Its merger with NorthShore University HealthSystem will make it the 11th-largest IDN in the country. Having the resources and discipline to deliver supply chain value in the merger and keep patient care quality high will keep the Advocate team hopping in Kaiser Foundation Hospitals (No. 14) has made the ranking the past four years due to solid recognition for its end-to-end integrated supply chain and care delivery response. Peer votes buoyed Kaiser along with great patient care metrics this year. Kaiser's supply chain focuses on analytics at the intersection of patient outcomes and cost. Its payer-provider model has put it ahead of most organizations in crafting a supply chain response to support population health models. Delivering Fitbits, pharmaceutical adherence, care in the home, supporting active lives and healthy Gartner, Inc. G Page 11 of 24

12 eating food chain make for a different experience at Kaiser. Owning the information is critical, and Kaiser (along with the rest of the Healthcare Transformation Group of Mercy, Mayo Clinic, Geisinger Health System and Intermountain Healthcare) continues to push for greater adoption of GS1 and UDI compliance now so it can connect devices across its EMR and ERP systems to yield better information on patient care and cost to serve. Cleveland Clinic (No. 16) continues its run in the Top 25 ranking with steady performance in three of the four categories, only lagging in its quality-of-care score. Cleveland Clinic partnered with its GPO to offer a commercially available sourcing model that incorporates clinical outcomes and strategic sourcing to take costs out for affiliates it partners with. For 2014, Cleveland Clinic announced budget cuts of $330 million, with supply chain improvements and ties to overall efficiency gains of 23% across common operations. Cleveland Clinic partners effectively with its surgeons as a core competency, and it shows in supply chain. Leveraging this methodology will carry it far. UPMC (No. 17) moved up two spots this year on an uptick in bond rating and solid peer and analyst rankings. Its quality-of-care score, which was strong in 2011 and 2012, has shown some weakness in the last two years. UPMC's supply chain capabilities are foundationally excellent in a tough geographical market. It continues to find ways to innovate in supply chain and was able to bring money back to the organization through the $12 million sale of 51% of its e-procurement arm, Prodigo Solutions, while funding the future development outside the UPMC umbrella. It also developed BioTronics to manage the end-to-end life cycle of capital equipment across the enterprise, improving service and reducing cost. UPMC's direct pharmaceutical wholesale/gpo continues to be a valuable asset, taking significant cost out of the system and capturing the interest of IDNs around the country. UPMC continues to work on horizontal supply chain issues across all points of care and is addressing product shortages/cost containment issues head-on. Talent runs deep at UPMC, and much of its progress can be tied to this bright group committed to finding the next big breakthrough. Geisinger Health System (No. 18) makes it five consecutive years in the Top 25, holding relatively steady in the middle of the ranking. Geisinger's payer/provider model in a tight geographical market has given it an advantage in driving supply chain into the fabric of the organization. Geisinger has built best-demonstrated practices in the marketing of supply chain capabilities internally through programs like Project HELP (Healthcare Enabled Logistics Program) that put a value on service and ties to increasing time for clinicians to provide better patient care. By providing focus and consistent metrics to the challenge, Geisinger was able to reduce nursing time spent on logistics by 34% from January to July Geisinger has also focused real time in making progress on standardization across clinical and nonclinical products. All IDNs have gaps in standardization, but Geisinger has moved into overdrive to address this variation across its system from the patientcentric perspective. Providence Health & Services (No. 22) is a new entrant to the Top 25 this year. With strong patient care scores and bond rating, Providence's efforts over the past five years to centralize and transform supply chain are recognized this year. Geographically dispersed along the West Coast from Southern California to Alaska, Providence has to balance agility in its supply chain response to the diverse markets it serves, while driving common practices through the enterprise. Culturally patient-care focused, the supply chain team has built a supply chain response through its supply chain center in Olympia, Washington, that serves two large markets for its medical products. Page 12 of 24 Gartner, Inc. G

13 Providence ventured beyond medical surgical distribution in supply chain center to manage IT asset distribution and repair, creating a new system capability and saving $5 million. Providence supply chain works hard, as well, to expand influence in nontraditional areas of spend. It recently evaluated its $440 million spend in engineering and hospitality governance in a new way. It focused not only on reducing the supplies procured, but also evaluating the appropriate level of service and utilization patterns across the system to standardize and improve the experience, while driving out cost. Banner Health (No. 24) is another new provider entrant to the Top 25, with balanced scores across the four categories and particular strength in quality of patient care. Banner's supply chain response is thoughtful, methodical and connected to patient care across the care continuum. It has been recognized in 2014 by several organizations for the progress it made in supply chain, with documented savings for its efforts in reducing waste across the supply chain of $226 million in the past five years. Banner has completed initiatives around physician value analysis that have aligned decision making around product quality, outcomes and cost, and have made strides in the practice of systematizing an evidence-based analysis in all decisions. Banner also completed initiatives to take more control by insourcing pharmacy services like total parenteral nutrition (TPN), compounding and drug repackaging. Banner is a leader in understanding and executing a new role for supply chain in serving population health models in the care continuum. It has effectively segmented the service needs of different points of care better than most IDNs and is working to manage the trade-offs between supply chain cost to serve, total cost to serve and revenue. Two Wholesalers and a Retailer The next three companies represent two pharmaceutical wholesalers and a retailer in the top 10 of our ranking. Each company had interesting developments that moved them closer to the patient and continued innovation in the healthcare value chain, albeit in very different ways. In general, distributors and wholesalers have an advantage historically in inventory turns that they have traded off, on average, with lower ROA than manufacturers. Retailers' changing business models and maturing supply chain capabilities have driven improvements on ROA and inventory turns in the past two years. Both retailers and wholesalers have made major changes to their business strategies recently partnering on generic drug acquisition, enhancing logistics, expanding globally and extending service capabilities. The next three companies in our ranking are excellent examples of these larger industry trends. AmerisourceBergen (No. 8) and Walgreens (No. 10) stories are intertwined at points and diverge in others. AmerisourceBergen gained this year on solid financials that demonstrate the challenges of bringing on $25 billion in new business from Walgreens in a short period of time. Inventory turns went down from 13.5 to 12.2, while ROA dropped from 4.6% to 3.5%. Despite this, peer opinion held steady, while analyst rankings went up year over year as AmerisourceBergen became the outsourced supply chain back end for Walgreens, expanding beyond the original scope of the agreement. AmerisourceBergen is also driving deeper relationships with pharmaceutical manufacturers as it expands to South America, with a $110 million stake in Profarma. Walgreens (No. 10) dropped a few spots, but stayed in the top 10 on continued progress in its acquisition of the remaining 55% of Alliance Boots it did not own, and creativity in the Gartner, Inc. G Page 13 of 24

14 AmerisourceBergen deal mentioned above. Inventory turns are up slightly and ROA declined slightly to 7.3%, but that only tells the story in the short term. Walgreens has declared that it is a worldwide healthcare company that will leverage the combined platforms of Walgreens, Alliance Boots and AmerisourceBergen. Near term, this looks more like a retail pharmacy focus than a healthcare company with the September announcement that it is spinning off its specialty infusion business at a time when its largest U.S. competitor, CVS, is investing in one. We see progress, however, on the "clinical affiliations" between Walgreens and IDNs that include sharing EMR data and jointly managing chronic conditions. Walgreens stated in August that it had negotiated 20 such agreements in the U.S. McKesson (No. 9) has been in the Top 25 each year of our ranking, highlighting a consistency and recognition for what it has been able to accomplish. McKesson is primarily a pharmaceutical wholesaler, but its expansion globally was completed through the acquisition of Celesio in January 2014, which also gives it improved market buying power in generics. This ranking does not reflect the impact of the Celesio deal on quantitative measures. For the period measured, McKesson is down slightly in both ROA and inventory turns as well as on the relative peer and analyst votes. In general, McKesson has a track record of successful acquisitions and has solidified its position in the specialty pharmacy and holds the leading market position in the medical office sector through the acquisition of PSS World Medical. McKesson has a menu of technology and process solutions for many provider supply chain problems as well. Connecting these disparate offerings has been a challenge. McKesson runs mostly independent business units, with little overlap or coordination between them and its relatively disparate healthcare customers. Each unit, however, has core supply chain competencies that impact the delivery of patient care positively. Manufacturing This was another challenging year for life sciences manufacturers in the Top 25. For the second year in a row, no manufacturer was able to make the top five in the rankings. In total, eight manufacturers were included in the Top 25, down from nine last year, with three dropping off the list and two newcomers joining the group. Manufacturing supply chain leaders face a challenging environment internally, with the different silos in their organizations' R&D and are inwardly focused on operational improvements. Pressures are still high on cost and revenue with impacts from the medical device tax, the Branded Prescription Drug Fee, growth of reference pricing, the continued shift of decision making from clinician to economic buyer and loss of exclusivity continuing to place a premium on organizations that can drive cost out. In addition, increasing M&A activity is focusing the attention of supply chains inward. Regulatory requirements and some paper-based processes in manufacturing also conspire to slow the pace of innovation in supply chain. Finally, the need for increased patient interaction and focus on outcomes is acknowledged; yet, there are few examples in practice too often customer service ends with having product available and shipping it on time. Leaders are working to solve these challenges and build capabilities from the point of care back through the supply chain, but the pace of change has been slow. Johnson & Johnson (No. 7) is our highest-ranked manufacturer, holding steady at the No. 7 spot for the third straight year. Peer opinion increased substantially this year over other manufacturers, and Page 14 of 24 Gartner, Inc. G

15 is second only to Cardinal Health overall, while ROA held steady and inventory turns slipped again. J&J's effort around patient focus, especially its initiative to use voice-of-the-customer feedback in 20 different markets around the world, is a role model for other manufacturers. J&J's supply chain is still challenged by its complex, decentralized model across diverse business segments in consumer, pharmaceutical and medical devices. While it has many initiatives aimed at improving its supply chain maturity, the bigger challenge is how to consistently deliver them through the organization in a connected way across divisions. Investments made in business analytics across the many ERPs at J&J, and they're taking voice-of-the-customer feedback to segment customers with a view to analytics and cost to serve, show promise. In short, progress is being made by J&J, and customers in the U.S. seem to be taking note. BD (No. 11) received the highest analyst rating among the manufacturers, but still slipped a bit in the rankings, losing ground across the ranking categories. Ranking aside, BD is a clear industry leader, making the shortlist of collaborative organizations operationally while maintaining some of the highest standards of consistency in the industry on all fronts. BD retains consistent and thought-leading talent, and is rock-solid on our foundational ranking criteria in supply chain. Manufacturing is not fully integrated so, eventually, it may find hurdles to end-to-end visibility. With that said, BD has a dedicated team that monitors quality, efficacy and safety, and feeds information back to the operations teams. While operationally collaborative in data standards and efficiency, BD's challenge going forward is to view supply chain as central to serving its customers in driving better patient outcomes through leveraging all the strengths of BD. Its bold move to expand its reach through the acquisition of CareFusion will be great to watch in 2015 and beyond. Abbott (No. 15) had good recognition from both peers and analysts and delivered strong quantitative metrics. Since spinning off AbbVie in early 2013, revenue growth has been a challenge, but Abbott has done a commendable job improving turns. It has developed a road map to increase collaboration and visibility over the past year. Of note is its assurance of supply initiative, which aligns well with the dynamic supply capability of our healthcare model. This initiative is focused on quality, relationships and collaboration, with the end goal of sustainable supply. Covidien (No. 19) improved its ranking year over year, moving up two positions. This movement was mostly on its improvement of inventory turns up nearly a half turn year over year and an improved recognition from Gartner analysts. Covidien has improved its efforts in collaboration, network visibility and dynamic supply. Covidien is focused on developing best-in-class logistics, along with innovative collaboration solutions, and is recognized for its ability to execute supply chain improvements across the organization. Its Sharing Healthcare Solutions forum engages all supply chain stakeholders in finding innovations. Medtronic's acquisition of Covidien will be interesting to watch as Covidien's breadth of products and relationships with IDNs bring added depth to a collaborative relationship with providers that Medtronic seeks. AbbVie (No. 20) is new to the rankings and in its first year of eligibility to boot. Up until now, it was a part of Abbott. AbbVie's ranking was bolstered by strong quantitative scoring. Both its ROA and inventory turns were the highest of any manufacturer in the Top 25. Now, fully spun off from Abbott and no longer relying on shared services, AbbVie has ambitious plans to improve its logistics maturity by establishing a global center of excellence (COE). It appears to have been primarily focused inward and foundationally in the first year postdivestiture, but also had a vision for how Gartner, Inc. G Page 15 of 24

16 supply chain can help provide continuity of patient care and improved outcomes aligned to adherence to a course of care aligned with patient and payer goals alike. This whole customer (patient) experience approach that ties to revenue and outcomes along a care pathway is the supply chain of the future, and we applaud AbbVie's early efforts here. Representing 67% of revenue in the latest quarter, Humira's patent expiration in 2016 will impact its supply chain initiatives and strategy. Pfizer (No. 21) made the Top 25 for the fifth year in a row. Pfizer has focused on its global supply chain capabilities, and that may have hurt it in this U.S.-centric supply chain ranking. It still garnered a great deal of recognition and made great strides in ROA, improving to 9.8% this year from 6.4%. Inventory turns, similar to many pharmaceutical manufacturers, is still low at 1.6, but has many initiatives aligned with our healthcare model. It has shown the ability over the years to communicate its supply chain vision well and execute on its plans across a complex organization. It has platforms and processes to collaborate with both upstream and downstream partners, and good end-to-end visibility with industry-leading performance management capabilities. It also has made strides with the development of its supply chain organization in building for the future. Pfizer has created a lead role responsible for supply chain talent and has implemented social networking-type tools for knowledge sharing and virtual collaboration. GSK (No. 23) held its spot for the second straight year on the strength of its ROA, improved inventory turns and solid support from peers and analysts alike. GSK excels in collaboration and change management, and has great foundational supply chain capabilities. GSK's president of manufacturing and supply reports directly to the CEO, so goals are well-aligned to the objectives of the company for profit, growth and improved patient care. GSK also demonstrated intraindustry collaboration in a $17 billion asset swap with Novartis and a $5.4 billion deal with Eli Lilly and Co. to strengthen areas of the company and divest others. Its vaccine businesses has much public focus at the moment, given GSK's malaria vaccine and work to produce an Ebola vaccine that may be fast-tracked in Given the uniqueness of the how these two high-profile vaccines will be trialed, marketed and distributed, GSK will need to have solid foundational supply chains that have the supply chain maturity to execute agile and flexible differentiated solutions in challenging geographic locales. Overall, GSK recognizes the importance of patient outcomes and has developed a vision and road map to improve its alignment to the goals of providers/payers. Future initiatives that bear watching are its GSK Production System for on-time product launches and defect reduction and a supply chain academy. Amgen (No. 25) returns to the Top 25 after a one-year hiatus to claim the last spot in our ranking. Riding solid peer and analyst support, Amgen overcame low inventory turns and slightly declining ROA to make the list. Amgen demonstrated to multiple initiatives that align with companies progressing through our supply chain maturity model. Of particular note is its work in supply resiliency. Amgen has a multiyear project to gather information from its supplier base, compare it to geographic and current events, and output a risk mitigation strategy, based on likelihood and impact. Amgen has solid foundational supply chain capabilities, especially in regard to supply planning and segmentation. Page 16 of 24 Gartner, Inc. G

17 Healthcare Value Chain Capabilities For "The Healthcare Supply Chain Top 25 for 2014," we maintained our model for value in healthcare. Our model is designed to highlight activities in the healthcare value chain that enable high-quality patient care at optimal cost, driven by the following core set of capabilities: Figure 1. Healthcare Value Chain Capabilities Model Value Chain Goal: High-Quality Patient Care at Optimal Economic Cost Patient Focus Collaboration Network Visibility Dynamic Supply Change Management Outcome Focused Comparative Effectiveness Voice of the Customer Shared Vision and Goals Sustainable Collaborative Relationships Joint Value Creation Demand Inventory Compliance Segmented Supply Chains Value-Added Services Vision Leadership Guiding Metrics Innovation Culture Foundational Capabilities Operations and Innovation Excellence Business Process Optimization Enabling Technologies Governance Talent Management Source: Gartner (November 2014) Patient focus A patient-back supply chain strategy focused on market accessibility, patient outcomes, care quality and cost impacts all intraorganizational and interorganizational functions, from product development to partner collaboration. Collaboration Trading partners must enter into sustainable, collaborative relationships with a shared vision and transparent set of mutual goals to create win-win improvements influencing the entire value chain. Network visibility Trading partners must create bidirectional visibility to key information, such as inventory, demand, compliance, outcomes and cost. Dynamic supply Because high-quality outcomes aren't static targets, all organizations must create agile, value-added supply chain responses tailored to multiple customer and channel segments. Gartner, Inc. G Page 17 of 24

18 Change management Value in healthcare is a long-term quest, and organizations must have the vision, strategy, execution discipline and strong governance to sustain change in the face of ingrained beliefs and process habits. Foundational excellence To drive toward higher-level capabilities, organizations need to focus on the basics and optimize their operational excellence and business process harmonization initiatives. Moreover, they need to ensure that their systems are capable of supplying credible data on which to implement higher-level capabilities that affect outcomes and cost. Developing future supply chain talent requirements is important at the foundational layer as well. This model is also used to guide both peer and analyst voters as they consider companies to select for the ranking. The organizations that received the most recognition either have established a strong and credible foundation, an innovative vision for future success, or are already pursuing and realizing benefits from joint initiatives with trading partners. Although our model cannot ensure success in execution, the industry overall recognizes that the path toward a future healthcare system, one that is cost-efficient and focused on patient outcomes, is based on the principles captured in our model. Wherever a company sits in the value chain, and wherever one falls on this year's ranking, this model can be used to frame and set parameters to supply chain strategic goals. At the same time, leaders must develop the skill sets most conducive to executing against initiatives that involve an end-to-end understanding of processes and culturally ingrain a "patient back" perspective within their company. The Healthcare Supply Chain Top 25 Methodology Consistent with our Global Supply Chain Top 25 research methodologies, the Healthcare Supply Chain Top 25 ranking is derived from two main analyses: quantitative measures and opinion. Quantitative measures provide a view into how companies have performed in the past, and establish proxy connections between financial health, performance and supply chain excellence. The opinion component offers an eye to value chain leadership and demonstrated supply chain performance crucial characteristics of our Top 25 ranking. These two components are combined into a total composite score. Health systems have vastly different operating models. Access to common, public financial data is not easily captured, compared to publicly traded manufacturers, distributors and pharmacies. Therefore, we utilized different assessment methodologies for these two major segments of the healthcare value chain. Manufacturers, Distributors and Pharmacies The first step in our Top 25 methodology was to identify a population of companies to include in the analysis. Consistent with prior years, we derived a 2014 master list of manufacturers, distributors/ wholesalers and retail pharmacies from a combination of sources. Compared to the methodology for our global cross-industry Supply Chain Top 25, we decreased the annual revenue thresholds required for inclusion to ensure that we cast as wide a net as possible. However, one factor remained constant: All companies must publish audited financials specific to a healthcare business to be included in the Healthcare Supply Chain Top 25. Page 18 of 24 Gartner, Inc. G

19 The second step in our methodology was to determine the quantitative measures to utilize in our analysis. Consistent with prior years, we utilized ROA and inventory turns for operating and supply chain effectiveness, respectively. Publicly available, audited financial data was collected for each company for the years 2011 through This data was used to calculate a three-year weighted average for ROA and a 2013 end-of-year measure of inventory turns. The third step in our methodology was to determine the weighting applied to the quantitative measures versus the opinion score. We strongly believe that the collective wisdom of the healthcare crowd points the way to supply chain excellence and successful trading partner collaboration. We also believe that repeated, bidirectional and genuine collaboration between trading partners is a crucial ingredient to achieving value in healthcare. So, consistent with last year's methodology, we applied a 40% weighting to the quantitative measures and a 60% weighting to the opinion score. Health Systems Our methodology used to select and rank health systems has remained consistent with our process last year. We openly discuss this methodology with key executives from health systems, and the majority of these executives support this methodology, which has allowed us to keep the primary components in place for As we have the past four years, we partnered with Truven Health Analytics on two components of the process: to determine a meaningful group of health systems to analyze, and to determine a proxy for quality-of-care score for the health systems. Our list of eligible health systems was developed based on two factors. Since there are approximately 280 health systems in the U.S., we chose to down-select health systems, utilizing one main criterion consistent with our overarching goal for the healthcare supply chain: quality of patient care. We also decided to utilize only the systems in the medium and large categories of Truven's study to be eligible, consistent with how we have a revenue threshold size for manufacturers, distributors and retailers. Truven Health has collected quantifiable public data in 10 key areas of patient care for the last 20 years. The results are published in its 15 Top Health Systems report on patient care, which is part of its 100 Top Hospitals program. This percentile score is based on publicly available data across 10 measurements of patient care performance, including mortality, complications, patient safety, core measures, 30-day patient readmits, 30-day mortality, average length of stay (ALOS), expense, operating profit margin and Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS). As previously mentioned, we used the Truven Health report for two purposes. First, we used Truven Health's Top 2 Quintiles list of health systems $750 million and greater as the base population eligible for our ranking. To be consistent with our previous Top 25 rankings, we added in eight systems that scored high in the peer and analyst voting during "The Healthcare Supply Chain Top 25 for 2013." Second, we used the percentile score from the 15 Top Health Systems report from Truven Health to develop a force-ranked score for the quality of patient care for each hospital system. Gartner, Inc. G Page 19 of 24

20 As we did last year, we chose bond rating as a proxy for operational efficiency at the health system level. Although a bond rating is not a perfect proxy of operational efficiency, it does reflect the financial discipline and management effectiveness of a health system. We used ratings from Standard & Poor's (S&P), Moody's and Fitch to develop an aggregate bond-rating composite score. For consistency purposes, we mapped all bond ratings to the S&P scale, which is reflected in Table 1. The last step in our health system methodology was to decide how to balance our quantitative measures and opinion scores. To maintain consistency with last year's methodology, we applied a 30% weighting to the quantitative measures and a 70% weighting to the opinion score. Here, once again, the wisdom of the collective healthcare crowd should prevail. Opinion Component The goal of the opinion component is to draw on the extensive knowledge of the professionals who interact and have direct experience with the organizations being ranked. Any supply chain leader from a manufacturer, distributor, pharmacy or health system is eligible to vote. However, only one vote is accepted per company. This year, we received peer votes from 91 supply chain leaders, approximately a 12% increase over last year. Voters came from the most senior levels of supply chain organizations from across the value chain. To keep the voting composition consistent with the representation from the different segments in the value chain overall and the historical averages of the voter population, we allocated an aggregate percentage vote to four key areas this year. Manufacturers have a 45% weight, Health Systems voters a 33% weight, Wholesalers/Distributors 7% and Other (including experts, consultants, retailers) a 15% weight. Seventeen Gartner analysts representing various industry and functional specialties cast analyst opinion votes as well. Each of these analysts drew on his or her primary field research and work with healthcare value chain companies when casting a vote. Page 20 of 24 Gartner, Inc. G

21 Figure 2. Peer Opinion Panel Composition: Value Chain Segment Source: Gartner (November 2014) Figure 3. Peer Opinion Panel Composition: Role Source: Gartner (November 2014) Gartner, Inc. G Page 21 of 24

22 Figure 4. Peer Opinion Panel Composition: Revenue Source: Gartner (November 2014) Polling Procedure Peer panel polling was conducted during September 2014 via a Web-based, structured voting process. Voters were taken through a four-page system to identify their final selection of leaders. Here's a breakdown of the four-page system: The first page provided instructions and a description of our model for value in healthcare. Specifically, they were asked to consider the following: Which organizations are developing and implementing strategies to support the delivery of high-quality patient care at optimal costs? Which organizations are building and implementing l supply chain capabilities in the areas depicted on our healthcare value chain capabilities model? The second page solicited demographic information from voters. The third page provided panelists with a complete list of the organizations to be considered. We asked them to choose 30 to 50 that, in their opinion, most closely achieved the ideal of value in healthcare. After the subset of leaders was chosen, the panelists were then asked to force-rank the companies from No. 1 to No. 25. Page 22 of 24 Gartner, Inc. G

23 Individual votes were tallied across the entire panel, with 25 points earned for a No. 1 ranking, 24 points for a No. 2 ranking and so on. The analyst panel and the peer panel used the exact same polling procedure. By definition, each person's expertise is deep in some areas and limited in others. Despite that, voters weren't expected to conduct external research to place their votes. The polling system is designed to accommodate differences in knowledge, relying on what author James Surowiecki calls the "wisdom of crowds" to provide the mechanism that taps into each person's core kernel of knowledge and aggregates it into a larger whole. Composite Score All this information that is, the quantitative measures and opinion votes is normalized onto a 10-point scale and then aggregated using the aforementioned weighting into a total composite score. The composite scores are then sorted in descending order to arrive at the final Top 25 ranking. Looking Ahead Congratulations to all the companies recognized in the 2014 Healthcare Supply Chain Top 25 ranking. We look forward to 2015 and beyond and expect that this middle part of the marathon will be challenging for all the companies in the healthcare life sciences supply chain. Our advice is to become one with the pain and keep pressing forward the future of high-quality, affordable healthcare depends on your efforts more than ever! Recommended Reading Some documents may not be available as part of your current Gartner subscription. "Now Is the Time for IDNs to Build Patient-Outcome-Driven Supply Chains" "Healthcare Supply Chainnovators, 2014: Fresh Approaches to Major Challenges" "The Healthcare Supply Chain Top 25 for 2013" Gartner, Inc. G Page 23 of 24

24 GARTNER HEADQUARTERS Corporate Headquarters 56 Top Gallant Road Stamford, CT USA Regional Headquarters AUSTRALIA BRAZIL JAPAN UNITED KINGDOM For a complete list of worldwide locations, visit Gartner, Inc. and/or its affiliates. All rights reserved. Gartner is a registered trademark of Gartner, Inc. or its affiliates. This publication may not be reproduced or distributed in any form without Gartner s prior written permission. If you are authorized to access this publication, your use of it is subject to the Usage Guidelines for Gartner Services posted on gartner.com. The information contained in this publication has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information and shall have no liability for errors, omissions or inadequacies in such information. This publication consists of the opinions of Gartner s research organization and should not be construed as statements of fact. The opinions expressed herein are subject to change without notice. Although Gartner research may include a discussion of related legal issues, Gartner does not provide legal advice or services and its research should not be construed or used as such. Gartner is a public company, and its shareholders may include firms and funds that have financial interests in entities covered in Gartner research. Gartner s Board of Directors may include senior managers of these firms or funds. Gartner research is produced independently by its research organization without input or influence from these firms, funds or their managers. For further information on the independence and integrity of Gartner research, see Guiding Principles on Independence and Objectivity. Page 24 of 24 Gartner, Inc. G