After several discussions with Premier Inc. (PINC), Credit Suisse https://www.credit-suisse.com has assumed a neutral view of the company. The company operates through two segments that includes Supply Chain Services and Performance Services.
The Supply Chain Services segment primarily offers products and services led by the Group Purchasing Organization (GPO) business while the Performance Services segment provides “Software-as-a-Service” (SaaS) informatics products and consulting services.
Premier operates the second largest GPO for hospitals and health systems in the U.S behind Vizient https://www.vizientinc.com. Premier does $60 bin of purchasing volume through their GPOs annually across 50 states making up about 30% of the overall market.
The GPO is a supplier-paid business model where the company groups together a large number of providers with similar supply needs, and then purchase supplies in bulk from manufacturers or suppliers on their behalf.
By buying in large quantities Premier creates savings as suppliers are willing to pay an administrative fee for large purchases which is typically about 2% of total spend shared between Premier and the purchasing providers. With about 30-35% of the fees passed on to the customers, the company has consistently realized single-digit organic growth in their GPO business and expects low-to-mid-single digit future growth.
Through SaaS-based solutions and consulting services, the company is able to provide unique technology solutions and advisory services to evolve within the changing healthcare environment. A differentiated service across customer needs is offered based on the substantial data and technology that the company has built over time and the long lasting relationships the company has with members.
After some strong years of double digit growth on both the top and bottom line, Premier’s growth in the past couple of years has moderated from low-to-mid to single digit. Along with their FY4Q19 earnings release, the company is expected to issue their FY20 guidance, which they have already hinted will reflect a low-single digit to mid-single digit Y/Y growth on both revenue and EBITDA.
On September 11, 2019, Credit Suisse made a quick check with Premier management to discuss the drug pricing legislation titled “Prescription Drug Pricing Reduction Act” (PDPRA). In late July, the Senate Finance Committee https://www.financesenate.gov introduced and passed the legislation which makes significant changes to Medicare Part B drug payment, Part D program, and Medicaid drug-related payments. This may cause manufacturers to either increase their prices or reduce payments to or opt not work with GPOs.
Also, the bill includes Section 109 which would amend the existing definition of bona fide service fees causing GPO administrative fees to be treated as price concessions. The fees would then have to be included in the average sales price.
Premier argues that both CMS and MedPAC have recognized that GPO administration fees qualify as a bona fide service fee by meeting a four part test since GPOs provide legitimate and quantifiable services to manufacturers.
Premier’s advocacy team has been attempting to educate lawmakers and as a result, there has been some interest in excluding GPO administration fees from the provision. At this time, the proposal is in the review comment period to be considered by the full Senate this fall.
Lastly, Premier does not have any indication on any further extension of the hospital improvement innovation network contract with CMS beyond March FY20. However, the company notes that the funding going to the program is sitting in a CMS indication fund, which may encourage CMS to implement another program where Premier would be able to participate.
For more information or to provide feedback, email Jailendra Singh at jailendra.singh@credit-suisse.com or call 212-325-8121.