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MedAssets, Inc. (NASDAQ:MDAS)

February 28, 2013 8:00 am ET

Executives

Robert P. Borchert - Senior Vice President of Investor & Corporate Communications

John A. Bardis - Founder, Chairman, Chief Executive Officer and President

Michael Patrick Nolte - Chief Operating Officer and Executive Vice President

Daniel Piro - Principal and Vice President

Gregory A. Strobel - Vice President of Sales & Marketing

Rand A. Ballard - Chief Customer Officer, Senior Executive Vice President and Director

Charles O. Garner - Chief Financial Officer and Executive Vice President

Dave Klumpe

Analysts

Richard C. Close - Avondale Partners, LLC, Research Division

Robert P. Borchert

Ladies and gentlemen, good morning. We're going to start the presentation. So good morning, everyone, and I'm Robert Borchert, Head of Investor Relations for MedAssets. I'd like to welcome everyone to the MedAssets 2013 Investor Day.

Members of our executive team will be making forward-looking statements during today's presentation so please refer to the risk factors identified in our Form 10-K for the year ended December 31, 2012. We'll also discuss certain non-GAAP financial measures and the relevant reconciliation schedules are -- can be found in the appendix at the end of our presentation today. Now would also be a good time for you to silence your phones or place them on vibrate, whichever you prefer.

Looks like I'll need some audiovisual help with the slides. Let me pause for one second and we'll get this fixed, one second. This is a good time to start with the technical difficulties. We'll get them out of the way.

[Technical Difficulty]

So on the Safe Harbor slide now. Let everyone read that for a few minutes. Okay, so our agenda for today, we'll begin with John Bardis providing a brief overview of MedAssets and our position of strength within the health care industry. And he'll be followed by Chief Operating Officer, Mike Nolte, who will discuss our operating growth strategy, as well as a review of our Spend and Clinical Resource Management segment. Dan Piro, president of MedAssets' Advisory Solutions will highlight our differentiated performance improving capabilities; and hand it off to Greg Strobel, who will cover our Revenue Cycle Management segment and highlight our emerging opportunity in bundled-payment methodologies. We'll then open it up for 5 to 10 minutes of a Q&A session with the first round of presenters, and then we'll follow that with a short 5-minute break.

We'll then resume the presentations with our Chief Customer Officer, Rand Ballard, who will discuss MedAssets' value proposition and then introduce executives from Northwestern Memorial Healthcare and University Health System. You will then have a chance to ask our customers questions before I turn it over to Chuck Gardiner to review our financial performance, expectations and outlook. And then we'll open it up for a full Q&A session with all of our executives. We also have a number of other senior leaders from the MedAssets team with us today that will be available after the formal Q&A session for you to speak with them informally after we finish today.

So as many of you know, MedAssets is one of the leading performance improvement partners for healthcare organizations. We're founded in 1999 and today provide our total cost, revenue and process improvement solutions to more than 4,200 hospitals and over 122,000 non-acute care providers across the United States.

So as an investment, MedAssets is a market leader in managing over $50 billion in provider spend and touching more than $365 billion throughout our revenue cycle capabilities. We believe we have the most comprehensive spend, clinical resource and revenue cycle management solution portfolios in the industry today. We are leveraging our expertise in the industry trends to grow in this dynamic market.

MedAssets has a very strong financial model with high recurring revenue, visible earning streams and enterprise that generates robust cash flow which enables us to pay down debt and continue to invest in our business for future growth and profitability and scalability.

So at this time, let me introduce our Chairman, President and Chief Executive Officer, John Bardis.

John A. Bardis

I thank you, Robert, and welcome, everybody. We really appreciate you being here this morning. I'll just try to give just a very brief overview of some of the highlights of MedAssets' capabilities and then turn it over to the operating teams to give you a much deeper dive into how we do what we do. But as a starting point, one of the things I wanted to make a point around is that this industry is going through a massive cost transformation requirement. So no matter what is being spoken of in the press, whatever we see going forward, this is about cost reduction. Now the payer environment is going to remain involved with making sure fee-for-service is in place while we move to a fee-for-value model. But both are be -- are going to be in place at the same time.

A quick financial performance snapshot for us is, we're about a $640 million company today as of the end of 2012. We've had an 8% compound annual growth rate for the last 4 years on our revenue, did a little bit better than that last year. Breaking our business down, we're about 61% of our revenue comes from our Spend Management business, 39% of our revenue comes from Revenue Cycle. As far as adjusted EBITDA is concerned, last year $207 million. We had a very nice growth there. 77% of our adjusted EBITDA comes from Spend Management and 23% comes from Revenue Cycle.

When you look at the types of products that we have to offer, 41% of our revenue today comes from strategic sourcing, 30% from SaaS-based software tools, 15% from embedded management services and 14% from consulting. 80% to 85% of our revenue is re-occurring with 3- to 5-year typical contract lengths. We have a very differentiated broad solution set that addresses multiple customer needs. So for example, we're not just a group purchasing organization that provides single products under single price for administrative fees but also many other aspects of how we manage the supply chain including the clinical supply chain, which focuses on how products are actually used and benchmarking best practice on that clinical resource utilization. All in all, we have the broadest portfolio of technology-enabled services, delivering high-value proposition in the revenue cycle and spend management arenas of institutional healthcare.

We have a strong senior leadership team. You'll hear from all of them today. Some new faces to -- as many of you have met Mike Nolte before, great background. In particular -- of interest, when we were originally speaking with Mike with his strong background in discipline process-oriented operations with a heavy emphasis on software which is good for us. I think we all know that Rand has been the driver -- Rand Ballard has been the driver of our client relationships since the company was founded. I'm pleased to welcome Keith Thurgood to the team. You'll get a chance to hear from him today as President of our Spend and Clinical Resource Management business, as many of you know, a deputy commanding general and chief of staff in the United States Army Reserve. Much more than that, has a remarkable supply chain background both in the U.S. military, as well as on the domestic side. Greg Strobel, who's done a wonderful job this last year 1.5 years of turning around our Revenue Cycle business. As you can see from the results, a lot going on there. And certainly last but not least, is Greg -- excuse me, Chuck Garner. Chuck has done a terrific job in the financial and operating turnaround of MedAssets and I think has done a very solid job of beginning to restore our credibility on the street. And I'm very appreciative of the efforts that he and his team have put forward.

So look, U.S. health care expenditures continue to grow faster than CPI, faster than the economy, the GDP. Everyone we talked to, whether they're a payer or a provider, has indicated to us that their ultimate objective is to slow the growth rate of cost in health care in there -- the various areas of responsibility down to CPI.

What we are continuing to see is we're seeing a $2.7 trillion industry increase its overall expense rates at 6%, which is meaningfully beyond GDP, meaningfully beyond CPI. Everybody knows this is fundamentally unaffordable. However, the folks that we concentrate on today are U.S. hospitals, and approximately 5,800 of those. This is a $1 trillion of this $2.7 trillion in spend, enormous economic intensity in just roughly 5,000 locations. That guy -- I've mentioned this before, I've never seen economic intensity. I'm unaware of economic intensity of $1 trillion vertically integrated in 5,000 locations anywhere in the world. Each of these institutions operates differently. They have different costs to the structures. They have different payment systems. There is a best practice out there, not just in terms of price and cost, but in terms of outcome. We find that you don't have to sacrifice outcome and quality in your marketplace for lower cost and so best practice is, the focus going forward, whether it's the price of a product but more importantly, how a product is utilized and the types of disease states that are being managed. And so we'll get to talking a lot more about that, particularly with Dan Piro's group. But the point there being, hospitals are by far the largest segment of the U.S. healthcare delivery system and the most expensive.

Pressure will continue to be cost. And I want to come back to that again. Cost, cost, cost. And going forward, we don't believe that the marketplace is moving strictly to a fee-for-value payment. We will see a hybrid and we believe that hybrid will be, for some period of time, continuing to be heavily weighted on fee-for-service. So tools and capabilities that take into account that hybrid going forward are important in order to be able to effectively deal with health care providers.

Long-term growth targets. As we talked a little bit a few weeks ago on our earnings release, I want to get to this right away. It's our expectation and our goal to drive the long-term growth by 2016 to 10% on the top line and 15% on the bottom line. I'd like to believe we can overachieve those goals. As we can see, in 2012, we had earnings growth of 14.1% and that is the midpoint of what's been discussed this -- since we released our forward outlook, is 12.4% for 2013. Our objective is to accelerate growth through innovation and take advantage of the evolving marketplace. As I think, as you'll see, today we have a lot of tools and capabilities that are focused on the evolving healthcare marketplace as we know it today.

And then not to make light of this, I think we've made meaningful improvements in operations. We expect to continue to make meaningful improvements in operations. We expect those improvements to accelerate our earnings trajectory.

Our strategy is very straightforward. One, we want to continue to transform the company through operational improvement, maintain the market-leading positions of our Spend and Clinical Resource Management business, as well as our Revenue Cycle Management businesses, which are in the service and the leading technology company in the industry; improve the ability to innovate and move rapidly as we bring new products to the marketplace, that will be driven by operating discipline; invest to become more relevant in the transition to fee-for-value, you'll hear more about our Bundled Payment Solution today; leverage advisory expertise, which is industry leading, for the clinical coordination and integration of performance improvements. So clinical coordination and performance improvement is really about resource management and better patient outcomes.

We want to -- we, I think, have a very good reputation and want to maintain that reputation for high-quality client service. We want to align our organization around incentives and value drivers and we want to continue with the incentives and value drivers within our financial models, as well as what our clients need. And we want to continue to take advantage of bringing great talent into the company. I think we've made a good move in that regarding this last 18 months. And make prudent investment tradeoffs between infrastructure and innovations. In other words, we will continue to pay down debt. That is our focus. We intend to be prudent in how we do that and we will continue to invest appropriately in infrastructure and innovation in the primary business.

So with that in mind, it's a privilege for me, and a pleasure, to induce Michael Nolte, our Chief Operating Officer and Executive Vice President, to really walk you through our market opportunity and our strategic growth initiatives. Mike?

Michael Patrick Nolte

Thanks, John, and good morning. I'm going to start off by talking through a business overview and then dive a little bit deeper into the supply chain Spend and Clinical Resource Management segment. And at that point, I'll also introduce Keith Thurgood to you which I hope, everybody takes the opportunity today to spend a little bit of time today with Keith and get to know him. He won't actually formally present today but he'll be available for questions after we wrap up.

Let me start off with just a view of market opportunity for the overall business. If you look across our core markets, revenue cycle, our spend segment and then look at future potential in our advisory business, there's a couple of things to know. One is, very significant opportunity in terms of market potential relative to our current revenue. The little orange bar on here is really the current penetration. The other interesting piece of this is, we know just about everybody in the industry. We talk a lot about relationships within the business and the fact that if you look across both segments, we have relationships with about 4,000 hospitals.

Our ability to just grow the business within those existing relationships, on here represented by the light blue bar, is pretty significant. And so it's not about signing up new customers, building new relationships. It's really about leveraging the potential partnerships that we can create with our existing customers. And we're going to have Dan Piro up here talk a little bit specifically about what we're doing around our advisory business. But the other layer on top of that is the ability to grow our consulting business as a fundamental part of our portfolio.

How do we do that today? Really it's 3 big areas of focus. It starts with a total cost approach, focused on driving down total cost for health care providers. We also, at the same time, look at how we help our customers build disciplined process. That can be supply-chain focused. That can be revenue-cycle focused. It may also be clinically focused. There's work that we do today with customers in places like the emergency room in a hospital, working through turnaround time and trying to improve quality outcomes through different parts of the health care system.

And then lastly, we are the leader in that last mile for reimbursement for our customers. Whether it's moving into Bundled Payments or existing fee-for-service models, a combination of technologies and software to drive great success from a reimbursement perspective for our customers. And we'll have Greg Strobel up here later to spend a fair bit of time talking through that segment. But yet another part of the portfolio that drives overall clinical and financial success for our customers.

If you look across our offering, the interesting thing is we don't take one approach. It doesn't boil down to a hammer trying to find a nail. We look at our customers as a relationship and look for opportunities that may be focused around a service, around a technology, or around, in some cases, complete outsourcing to drive success. And our goal overall is to build a great relationship and to leverage a combination of these technologies and services to drive that success from a customer perspective.

The interesting part though is, like any business, we have work to do. John mentioned operational improvement. Back in 2011, Chuck Garner and other folks that were involved in really trying to rethink the way we ran the business started off by building a better construct to make sure that we were more predictable, more financially accurate, that we were clear on our forecasting relative to performance. And we've grown from that and you can sort of see how we've laid it out over the next couple of years. But there's work going on just within the business to get the core engine to scale. And as I think about where my role in the future is focused, it's really on both segments and try to make sure that we take a great set of portfolio, a great set of businesses and build those into something that drives more consistency and more predictability. And for me that means thinking about how we drive operational success across the business.

And you may be asking me, how do you that? I think of the business in 4 key components. And I -- we see the priorities on here. I almost believe these are covenants, right? A covenant is sort of a serious promise and it's a promise to you and to the business around how we're going to drive success. It starts in the upper left-hand corner with great teams and I think, like anything, probably makes sense to everybody, of getting the right talent in place is critical for our future success. For me, it moves from there to what we define as customer success. And you'll note, that's not customer revenue. It's not more sales. It's actually taking a customer back view and making sure that what we do enabled them to be more competitive in their markets.

We always have to be mindful of our obligation to shareholders and so if you look at the bottom right-hand corner, driving profitable market growth for me is growing faster than our markets and doing it in a way where we drive operating leverage. And then lastly, making sure that we remain ambidextrous. So we obviously have to meet quarterly and annual commitments, but at the same time, we want to make sure that we're investing in a way that's disciplined and high impact for the future so that we can continue to grow the business, not just next week but over the next 2, 3, 4, 5 years.

So let me kind of talk through the 4 levers quickly and give you a sense just from an overview perspective of where we're focused and where we're investing. As you look at people, we start with trying to build an engine in a business that's different from the -- what we've had historically. The -- we grew up as a very sales-focused, very commercially focused organization. And as we've grown as an organization, it's become more crucial for us to be able to retain and develop talent internally. So one big area of focus around people is making sure that we put the right leaders in place. We brought in a new HR leader. As many of you know, Keith Hicks has been instrumental in beginning to help us mature as an organization from a talent perspective.

Second is around customer service. We've had, throughout our history, a great set of customer relationships. And guys like Rand Ballard have made sure that we've built that over time. If you flip that to the way the operations of the business really work, that focus has been more on technical support or technical service and less on really driving a customer service culture. And so whether it's in our RCT business or within our Spend segment, one other big focal point for us is to begin to drive leaders and behaviors that create more of a customer service culture, as opposed to a technical or another service culture.

Third, I mentioned innovation. You don't get there accidentally. And one of the areas, as we think about bringing new talent in, and I've been acutely focused on product management specifically, that we're trying to build capabilities around strategy and really forward thinking, whether it's product marketing to ensure that we've got the right insight in to where the market's headed, or great product managers to make sure that we're making good strategic decisions around the products and services that we're building for the future. And then lastly, you can't lose sight, obviously, of building revenue success within the business. And Dan, as I mentioned, will talk a little bit about Advisory Solutions and what we're doing there, as well as ensuring that we drive great commercial talent. And I'll describe a little bit of how we're starting to reshape the sales model particularly around enterprise sales to drive more of a portfolio approach to the overall MedAssets offering.

So let me start -- I'll kind of walk you through customer success. The way to kind of think about how we look at driving this customer relationship and making sure that our customers, as I said, look at our relationship as a way to drive their competitive successes, starting with quick impact. And so when we think about our advisory business, that's really what that delivers. It's being able to identify and solve quickly high-impact problems for our customers. And then to move quickly from there to analytics that support that, so that it's not just, hey, a couple of smart guys that come in and tell you what they know. It's actually a data-based approach driven by analytics that help us make great decisions that are fact-based for our customers. Because as you know, health care organizations in particular, are culturally difficult to drive change. And so the more that you do that from an analytic footprint, I think the more successful that you are. There are occasions where that work makes sense to be harder than the software, right? And so, as we think about where we innovate in the future for our customers around software and technology in particular, it's taking the work that we do that might have, at one point, been a consulting project or might have been an analytics decision-making tool and beginning to build workflow that makes that a consistent process. And then on the far right side, there are occasions where it makes sense for us to fully outsource. And whether that's supply chain or revenue cycle, being able to take our people and actually put them in place at a customer to help drive that success on an ongoing basis is a key part of how we go to market strategically. And so you can see the bottom row and get a sense of the kind of results each of these deliver as we move left to right. But the bottom line is that, whether it's the -- just an advisory business engagement or whether we're doing full outsourcing, we've over and over again been able to prove that we can deliver impact to customers.

The other thing is you can't lose sight of internal success, right? So the other piece of customer success is, as I suggested, making sure that we drive towards more of a customer-service approach. And this is just one simple snapshot. There is a lot of activity like this going on in the business right now. There is something called a Letter of Commitment. And for those of you who aren't familiar with what that means, it's basically how we account for spend within our customer base. It's a -- has been a key pain point for customers. It takes us historically about a month to process those. And you can just sort of see what taking a clear, deep dive into a particular part of our process, that is a customer pain point delivers in terms of results. So you take that down from 35 days to a day. And so now, we're at a point where we manage this activity basically in 24 hours. It's great for customers because it reduces the hassle time in their follow-up. It's also great for us because it drives revenue success more quickly. As we account for that business, we're able to make sure we have better forecasting predictability and more accountability with the vendors that we work with within our group purchasing organization.

On a profitable market growth side, the biggest thing for me is being able to take this balanced view to how we run the business. If you look at those 4 covenants, as I described them, starting with people, moving to customer success, making sure that we're meeting our financial commitments and ultimately, making sure that we're making the right investments for the long term, that's the balanced approach that we take to how we run the business. Things like that LOC process are crucial to our future success as well. And so whether we'd use Lean process improvements to drive revenue improvement or we're taking cost out, it's that ability to make sure that we're efficient and that we're driving operating leverage that ultimately is what's going to make sure that we maintain a great business over the long haul.

And then lastly, I'll talk a little bit about the specific sales approach. But as I described, that potential in the market slide at the beginning, you notice how large that is and one thing we have begun to do is to make sure that we're being deliberate about how we approach those relationships. Where are the biggest opportunities with the customers? Where do we believe we can drive a better relationship? How do we ultimately make sure that we're accountable for sales and commercial success within a particular customer relationship?

And you know, just to give you another snapshot of what this looks like tactically, if you look at for example, just the customer contract. And this is an actual example. We won't talk about which customer but if you think about contract utilization as one lever, right? We have a set of contracts that we deliver price to a customer through our group purchasing organization. This is what we typically do when we're kind of working through how we grow that business. And you see the green on here is basically where we see opportunity relative to benchmarks, where we see the ability to drive better utilization of our contract. And that's great for us from a GPO perspective because it drives up revenue, but it's just as good from a customer perspective because it means they're using more valuable lower-priced contracts and lowering their cost.

The last piece around the profitable market growth discussion I wanted to highlight is really a renewed focus on trying to align commercial activity with where the opportunities sit. And you can see the snapshot just in terms of how we've begun to go to market from a sales perspective. The key point here is -- the bottom row really it's focusing on making sure that we have people in place from an enterprise standpoint who are able to sit with a C level executive and have a conversation about the entire portfolio that we can deliver. And bring that together in a way so that we can adapt to their needs but also bring to bear the full range of capabilities that the business has. And it's moving from what has been traditionally been more of a product or a service-based sales approach where you have people with specific insights and specific relationships driving products and services within the portfolio.

And that's all backed up here by making sure that we keep those people in the field more. And so another focal point for us is driving more consistent process in the back office. And you can imagine, if you're a commercial person, if you're a sales person, if the back office part of how we contract, how we recognize revenue is unpredictable, it makes it more difficult in terms of how you ultimately go from a customer lead all the way to booking an order. And so the second piece of this is not just making sure we have the right people in place but also making sure that those people are focused on the highest value activity, which for us is driving better customer relationships than selling.

And when we do that, you can see what the results look like. Just another quick customer snapshot. You look from 2011 to 2013 within this customer relationship and you can see a great base of business built around our Spend and Clinical Resource Management segment and then being able to come to market with the full range of capabilities. In this case, adding on revenue cycle capability and making sure that we expand that relationship and the kind of results we get in terms of growing that customer relationship.

Let me wrap up and just talk a little bit about the last chunk of this around innovation and this idea of being ambidextrous, making sure that we're focused on delivering quarterly and annual results, but not losing sight of investments for the future. This isn't comprehensive. It doesn't include everything that we're investing in, but these 3 things that are, at least right now, we believe are critical to our future success. So left to right on here. If you think about our customers, one big pain point for them is around their procurement cycle. Health care is -- well, a lot of procurement activity in any industry involves a lot of cost investment, a lot of people touching different parts of the process. Health care in particular tends to be pretty manual. We have some great assets today already in the form of our National Procurement Center which is at its core, is a procurement clearinghouse. So we move on to build better capability for our customers. And so, one of our investments today is around beginning to complete the cycle within what we call procure-to-pay but it's sort of driving that procurement cycle towards more of a digital low-touch approach where we're able to take cost out of the procurement process within a health care organization, but probably just as importantly for them, drive up accountability. So that the -- their ability to have insight into what they're really spending and on what is helpful to them in terms of being able to manage their businesses more effectively, to manage their cost more effectively and ultimately, to drive their success.

Second, and we're going to spend a fair bit of time on this later. Greg Strobel will give you a little bit of a deep dive on what we're doing around episode of care. I think many of you recognize the move from fee-for-service billings to something that looks a little bit more episodic, whether that's around a bundle or taking responsibility for a full patient population. But we have a lot of investments already in terms of being able to deliver technology and services to support that transition and it continues to be a big focal point for us as we go into the future. Because while we expect fee-for-service billing to be around for a long time, there are increasingly new models that are being tried, and in some cases, are beginning to be successful around taking more of a risk-based approach within provider organizations.

And then lastly, and I'll kind of talk about how this all comes together on the next slide strategically, but we have a ton of analytics capability within the business today that really is targeted at specific capabilities and solutions. It's in support of software, it's in support of services, it's in support of outsourcing arrangements that we have. Our belief is that our ability to bring that together in terms of beginning to be a business that can help customers take on a risk differently than they have historically, is going to be crucial to our success in the future. And so the last area of innovation for us is beginning to think differently about how we look at analytics as an overall core part of our portfolio.

So as we look into the future, I'm just going to give you a kind of the history till today and give you a snapshot of why we believe the businesses as we have them today and the investments that we're making makes sense as we look ahead strategically. As we look back, our core businesses really started with a couple of very simple principles. The spend side of our business was really about getting great price from a vendor or a service provider and passing that along to a health care organization, aggregating up spend on some level, and making sure that we could get the best price possible.

If you look at our Revenue Cycle business, it was really about driving fee-for-service reimbursement success, which really boils down to how quickly you can get claims processed and make sure that you get cash in the door so that you're getting paid for the services that you provide.

As we've evolved as a business that's moved from that sort of simple price-and-reimbursement view to something that starts to look a little bit more complicated and when Dan talks about what we're doing around the advisory business, where we started to really have differentiated success was in high impact areas within what really amounts to utilization on the spend side. It's nothing more than taking a total cost approach instead of just trying to chase the best price.

And then on the Revenue Cycle side, the evolving industry has led to us being able to influence with new technology, the revenue cycle success of our customers, where it's kind of gone from simple fee-for-service billing to starting to include how you handle much more complex arrangements with payers, managed care, other activities that have drawn us into a different level of complexity and really, a different level of success, making sure that we capture every dollar owed to our customers. Where I believe that's headed is really towards this intersection of 3 things: it's this total cost approach; it's value-based reimbursement, and so our customers are getting paid for delivering high-quality health care fundamentally; and in the middle of that is in support of a great clinical and other great process. And when you think about our capabilities and how they come together, being able to simultaneously manage as a health care organization, the costs associated with a particular pattern of care for a patient, the reimbursement associated with that so you make sure you get paid for it, and really, the quality outcomes of it as a way to drive clinical success is going to be increasingly more and more important. And it's nothing more on some level than a shift of risk from what traditionally has been a payroll into provider organizations.

And at the end of the day, it really is about our ability to help our customers be successful. And so as we look at indicators of great health care organizations on the left-hand side of this and think about our capabilities as we apply to that, we today believe that we have a set of capabilities, services and technologies that allow us, not to just make health care organizations a little bit better, but actually to make them best-in-class. And that broad portfolio is fundamental because whether we like it or not, health care organizations are not all the same. Their needs aren't the same. They're in different places in their evolution and bringing together a portfolio that's comprehensive matters to them in terms of being able to drive their success.

So it's just -- in terms of wrapping up the overview really quickly, as you look at the market, fundamentally the pressure in the industry drives tailwinds for us from the standpoint of reimbursement and costs. It makes the solutions that we already deliver more valuable.

If you look at our capabilities, they're differentiated relative to competitors and have proven over and over again that we have the ability to deliver results through a variety of different approaches, whether it's services, consulting or technologies. We have an enormous amount of potential just to expand the relationships that we have today. Forget about signing up a new customer. Within our existing customer base, we have the ability to grow our relationship in a way that drives revenue success for us and makes our customers more successful.

And then lastly, we can't lose sight of the future. And whether that's making sure that we stay in touch with the market as it evolves, the ton of complexity and a ton of uncertainty really in the market space, or ensuring that we're being disciplined about how we innovate, we got to make sure that we're simultaneously making sure that we meet our commitments and that we invest for the future successfully.

So as I said, I'm going to kind of go through 2 pieces and give you a little bit of a deep dive on the SCM part of our business. We could get Keith Thurgood up here but he's only been here a couple of weeks so I said I'd stand in for him this time. If we do this around the same time next year, he'll obviously be up here. But as I said, I want to make sure everybody -- if you get a chance, make sure you take the time to get to know Keith, ask him questions about his background and kind of what he's seen so far. I'm sure it would be a great perspective to make sure that you have. Let me kind of walk you through a deep dive before we bring Dan Piro up here to talk specifically about our advisory business, on what we're doing on the SCM segment.

So if you -- kind of shifting gears and going specifically to our Spend and Clinical Resource Management segment, this is a great business, fundamentally. It is a place where if you look at the revenue and EBITDA performance, we drive great operating leverage. It's got enormous growth potential, as I've already mentioned. It is a comprehensive portfolio of solutions that drive customer success. And it matters to customers. We -- if you look at what we're able to do from a total cost perspective, it's high impact. And that 3% to 10% is a pretty wide range but it's commonly in the upper end of that in terms of our ability to impact health care organizations and make sure that we drive success. You'll hear a little later on from a couple of customers who'll talk about that kind of impact and what that's meant to them.

The interesting part of this business is even -- forget about customer potential within our existing business offerings. If you just look at a typical healthcare organization, the vast majority of where we focus traditionally from a cost standpoint has really been in the sort of green and light blue parts of this pie chart. It's really around commodities and supplies and other things that a health care organization uses, capital and pharmaceuticals.

We touched services and increasingly are beginning to increase our footprint in contracting for services, but we're only scratching the service -- the surface, for example, in labor. And so there's a ton, in addition to a great business, that's got a lot of potential even within our current segments. There is a number of areas within the SCM segment where we can expand and grow the business, and labor is a big one of those that accounts for more than half of most of the spend of the health care organizations that we serve.

The great part about this business as well is that it's the best in the industry. We don't just identify opportunities to save money. We just don't talk about it. We've actually been able to deliver it in a way that's accountable, right? And many of you know that, we've had, historically, a guarantee model for some of our customer relationships. We don't miss those. But more importantly, the way that we economically get reimbursed for the risk that we take around those guarantees is highly accountable. It's the customer literally certifying that we've delivered the saving that we signed up to deliver.

And so, that business has been built around really, 3 core chunks of business. One is the group purchasing organization and some of the things we do around strategic sourcing around that. Second is this advisory business I've described and as I said, Dan will talk a bit more about. And it's all underpinned really, by an analytical foundation so that we're making fact-based decisions as opposed to just offering advice.

It's comprehensive in terms of its approach. We get great pricing of course, and we've been able to sort of lead the industry in terms of focusing on high dollar value items around things like physician preference. And the good news is we believe it's a great business going forward, right? Our ability to continue to deliver return on investment for our customers has been proven time and time again. Rand will talk a little bit later about the economics of that and what the deals have looked like over the last couple of years. But when we're able to build the right relationship and deliver, it drives a great deal of success for customers and continues to build this business as a high-growth part of our portfolio.

The differentiated pieces of the group purchasing organization for us really amount to a couple of things that are fairly specific. One is, we bring customers into the conversation. Many of you know, we have a group of about 60 customers that help us drive our negotiation process. It's not a MedAssets negotiator sitting in a room with a vendor or third party and hacking through a contract. It's actually supported and backed by a group of customers that help us make good decisions and actually, in some cases, participate directly in the negotiation process with the commitment to buy on the line. And you can imagine, that's pretty very powerful. You bring together 60 of our largest customers in a room, have a set of vendors who are there pitching their products and pricing them and knowing that if they win, they're going to get a substantial amount of market share in terms of the shift to their business and grow their business in a way that's going to make them more successful. That drives very, very direct behavior in terms of the commitment of our customers to shift share, but just as importantly, our vendor's ability to make sure they're delivering value and maintaining those contracts in a way that's market competitive.

And then we do a lot of other things to ensure that we're flexible where we need to be. As I mentioned, health care organizations, whether we like it or not, are not all consistent and their needs and local markets and in other parts of their business may vary. And as a result, our belief is that we have to make sure that we have the right portfolio of solutions to drive that success.

The second sort of piece of this pie is around the advisory business. And it's focused in this case, really around using proprietary data to attack high-dollar-value items. We learned a long time ago that the overall cost success of our customers is not just about getting that great price. It's about making sure that you drive behavior and cultural change. Whether we like it or not, the physicians and other clinicians that work within those health care organizations and that influence purchasing behavior, they have preferences. They have preferences about items that they use. They have preferences about how they want to use it within a particular process. And so if you really want to maximize the ability to control costs within a health care organization, particularly around high-dollar-value items, the only way to really do that effectively is at the coal phase. It's to do it, blocking and tackling with those providers within a health care organization and you can't do it from arm's length. And then we've expanded those capabilities to include making -- just looking at broad process, whether that's clinical process in an operating room, supply chain process, getting better there, or actually revenue cycle process, making sure that our customers are getting reimbursed for the work that they do.

And I don't want to understate the analytics point. There are a number of -- we sort of gave you a snapshot in here, the tool sets that we use and it's -- the names of them are probably less important than what they drive in terms of optimizing the success of our customers, driving efficiency and making sure that we help our customers make good decisions, whether that's around those high-dollar-value items or just managing the effectiveness of their supply chain overall.

So let me kind of walk you through just what this looks like from the standpoint of the economics within our group purchasing organization. There's really 3 pieces to the way the spend model works. You've got on the left side of this, you have a hospital or a health care provider. You have us as a GPO in the middle, so you could write MedAssets on the green box if you wanted. And on the far-right side, you have somebody who's providing a product or a service. And essentially what we do is we negotiate on behalf of our customers a great contract and we deliver that to the hospital or provider on the left-hand side of the screen. In return for that negotiation, we take a share of 1% to 3% in the form of an administrative fee of the volume that gets created. The cool part of it is it's an overall win for everybody on this picture. The hospital gets great pricing and drives down their costs. We have the ability to grow revenue as that spend increases in the form of an administrative fee. And if we do it right, we see shares shift for that vendor or distributor, where they're growing their business as well.

And just kind of looking at a more specific example. This is what -- how it translates economically. So if you look at -- starting with 50% compliance, meaning we have a health care organization who, 50% of the time, uses our contracts and you increase that to 55%, meaning they're using our contracts more frequently. You can kind of see how that plays out. You see the contract compliance driving market share up. You see it driving total spend down for the health care provider and you see us increasing our administrative fees. And there's some pricing coming out of this, right? It's not just pure volume obviously. The way you get here and drive great compliance is by making sure those prices are effective. So it's not linear in terms of 5% to 50%, but the point is that overall, you end up with that three-way win across the 3 parts of the GPO. And when we get that really right and the places we see highest compliance are where we've done a full outsourcing arrangement. Some of you have met Dave Klumpe and he's here today, encourage you to spend some time with him. But where we have high compliance, you see pictures like this, right? Where you, over time, start off in the kind of the 10% to 20% range and move, in this case up to 80%. Right? And this is an example of an actual customer, right? And what we were able to do over time by influencing their purchasing behavior really through making it economically effective, right? Because it's driving down this. This is the other part of the picture from the customer perspective. If they look at supply expense as a percent of total operating expense, left to right on this chart, you can see what the impact of that pricing does over time and what that utilization does from their perspective.

And to kind of move quickly to sum it up, we -- as we look ahead, are going to grow a couple of different ways. The group purchasing organization grows some pretty specific ways. One is, we drive up compliance. Two, covering more things matters. So as we expand the footprint of what we contract to do, that expands our ability to grow the business. It also helps make our customers more successful. And then there's some other things that are more around pricing and the volume that we can control. That's obviously within our customers that drive that success. But if you believe volumes are going to go up, it generally drives our revenue up and our customers spend up a little bit as well.

On the other side of this, we can layer on some really interesting services and solutions on top of that to drive differentiated group -- growth on top of just the group purchasing organization revenue. And as I said, Dan will spend some time talking you through what that looks like from an advisory business standpoint.

So before I bring Dan up here, just to kind of wrap up, we are a market leader today. All right? We have more coverage in terms of spend within this industry, north of $50 billion at this point, than anybody else from a group purchasing organization standpoint or a spend standpoint. We see an enormous opportunity to expand our relationship with customers. If we've done anything that we want to make sure we improve on, it's ensuring that we're able to expand the relationships that we have today. We know just about everybody. The question is, do we fully reach the potential of that relationship in terms of what we want to build with customers. We have today a set of very differentiated services and we're continuing to invest to make sure those stay relevant. And lastly, we'll, as Dan's going to talk about, have a number of things that we're doing to make sure that we continue to stay relevant and build advisory and other capabilities on top of what already is a terrific business.

So with that I'll ask Dan to do a little bit of a deep dive into the advisory business. And thank you, guys, for your time this morning.

Daniel Piro

I don't know what I did, Robert. All right. Well, good morning, everybody. It's a pleasure to be here. As Mike said, my name is Dan Piro and I appreciate the chance to talk a little bit this morning about Advisory Solutions and what we do at MedAssets. Specifically, well, maybe some of you are not completely familiar with the term advisory solutions as it relates to MedAssets. But MedAssets has had these capabilities, the ones you see across the middle of the page there, for quite a long time. And what is new is that we are combining and knitting together these pretty powerful point solutions into an overall, more or less, consultancy Advisory Solutions business. And certainly, some of the reasons for knitting together some of these like sort of advisory companies, it is to scale, it is about efficiencies. But quite frankly, the most important aspect of why we did this is that it allows our customers to move the needle a lot faster. There's a lot more pop in our bat, if you will, to go help our customers when we have aligned these services in the proper way.

So maybe just to give you an example of that, Clinical Resource Management, that's an area that MedAssets has been doing a long time. We have very deep clinical expertise in many, many of the service lines. Marry that with, say, what we do in Revenue Cycle Services, the 300 billion plus a year amount of information that comes through that, when you start to marry those things up and you think about a future reimbursement scenario that is around bundled payments, not fee-for-service, where hospitals and physicians actually get paid when they do certain things, I don't know of anybody in the country that has the cost and the revenue that MedAssets does in order to put this together and then the deep analytics. So we're pretty excited about what the possibilities are in this area.

When you are an advisory company, it's really all about your talent, right? It's about the people that work with you and that you can put in front of your customers and represent your organization. And I think we have some very deep talent in Advisory Solutions, about 400 staff, 250 professionally facing folks. We've got a very well-educated group, as you see up here, 5 MDs, more in our clinical area, Pharm Ds, well more than 50% of our staff is master trained, deep experience both in consulting, as well as coming out of operations. For us, that's pretty important to have people who are actually operators as well as people who know this business and that's how we built this model. But I guess most importantly, when you talk about the talent, I think what we try to do is attract people that are passionate, passionate about being part of the solution, not part of the problem and I think one of the reasons I'm still here after all these years with MedAssets, it's the culture and it's the mission-driven approach that John Bardis sets the tone for across our organization. I think that's a great recruiting tool for us as we get talent.

If I could just try to make it simple, as simple as possible, I'm trying to describe, really, all of what MedAssets is trying to accomplish but more specifically, what we live doing everyday in Advisory Solutions. If you look at this picture and you see the 2 bell-shaped curves. So the one on the left, it could be a bell-shaped curve of manufacturing a product, whether it's a flat screen TV, whether it's a F150 truck or whether it's a total joint replacement surgery. And in health care, for the last 30 or 40 years, a fair amount of variability has just allowed to exist in the system as long as you keep it within the guardrails for the most part. And a big part of my career, quite honestly, has been trying to approach the outlier physicians and move them a little bit closer to the center and it's 1%, 2%, 3%.

But you know, I think those days are gone. We are now in an ACO world. We can't just look at incremental change. It is a fundamental shift and that fundamental shift is going to occur through data, through best practice, through evidenced-based order sets and through our ability to have a feedback loop with physicians to show, are you really getting closer to what the goal is.

And by the way, when you talk about bundled payments or episodes of care, you're also talking about an alignment of the economics. Maybe the reason it doesn't work so well on this side, doctor gets paid differently than the hospital. When they get paid together, you are going to start to see this sort of approach on the right-hand side.

Maybe if I could take that -- that same idea -- another quick example, what you're looking at is a scatter gram -- scatter graph of congestive heart failure patients. MedAssets's very deep in our data. A couple hundred thousand congestive heart failure patients in our database at any one point in time. Well, we know that actually 22% of those congestive heart failure patients come back into the hospital. So as you look at sort of the utilization here, length of stay and the variable cost per case and each of those are doctors at one hospital, one hospital in a fairly large IDN and you see the variability in resource consumption and you know 22% of these patients are coming back, if you were making flat screen TVs, you'd say, we're not going to stay in business very long.

So what our goal is quite simply, you saw the last picture? We go back to that one. This is a typical community-based hospital. This is an organization, the same patient population in a clinic model. In a clinic model like a Kaiser, like a Intermountain Health, like a Cleveland Clinic, where there is alignment with the physicians and the hospital and the data and the process is there, this actually works. You can improve the quality, reduce the cost and when you're talking about a future-based world where organizations are at risk, which of these 2 diagrams would you rather have? I think it would be the one where there's a very tight cluster. But in order to do that, Kaiser, Intermountain Health, others, it's taken them decades to put in place those things that work. 4,000 hospitals in the United States don't have 20 or 30 years to get to this picture. That's what we do at MedAssets in Advisory Solutions. We bring in the tools, subject matter experts, the feedback loops, the health organizations, identify best practice and then track if, in fact, we are following that best practice and it's just a continuous cycle loop.

So hopefully, I've given you a slightly better picture of what we do as part of MedAssets for Advisory Solutions. We're really that group in the middle. Greg Strobel's going to come in and talk about Revenue Cycle. You've already heard Mike talk about the spend side and the supply side. We sit in the middle and we facilitate both of those groups with our Advisory Solutions. But I think -- well, I know. I've been in this business a long time. I've been in the consulting business. We have a very, very dynamic group here. This is a $4-billion-a-year industry in operations performance consulting and that was 2010. I have no doubt in my mind given the advent of reform and what hospitals are going to have to do, this is a very growing market and I think, MedAssets, because of our data, because of our process, because of our footprint in many, many hospitals, and quite frankly, the results that we get. And in a little bit of time, Chris Vasquez is going to come up, tell you a little bit about what we've done for her in Advisory Solutions. I think that you'll find that to be a fairly compelling story. So with that, I'm going to bring it up. Greg, thank you.

Gregory A. Strobel

Thank you, Dan, and good morning, everybody. From a Revenue Cycle market trend perspective, health care reform is here to stay. I think we all know that. And we know that it's going to drive significant change in terms of reimbursement methodologies and reimbursement complexities. That's causing a bit of chaos in the industry today as providers are seeking new tools, new services, advisory services in order to adapt to this changing landscape. We know we're moving from fee-for-service to fee-for-value. We know it won't be overnight. And we know fee-for-service was about volume and fee-for-value is about cost management and quality of care outcomes. In the end, data and analytics are key drivers to organizations' ability to manage this change, especially as it relates to reimbursement.

As was said a couple times so far, fee-for-service isn't going away and the unique value proposition of MedAssets is we are the strongest, by far, in terms of having the full scope of reimbursement engines from the very front end in patient access, all the way through the back end and what's evolving from a performed [ph] perspective. In terms of our business, we do touch about $365 billion in annual gross patient revenue.

If you look at the chart over on the right, you'll see that about 70% of our business is technology enabled web-based solutions, technologies and tools; 30% is revenue cycle services made up of business office outsourcing services, specialized recovery services; and as an overlap in the middle, we have a consulting offering. Specific to revenue cycle on the services side, is your classic revenue cycle reengineering services, which you could think of as basically business process change within admissions discharge and transfers, HIM and patient financial services. Within the technology piece, this is really proprietary systems optimization services to make sure that our clients that purchase our tools get the maximum value out of those tools.

2,600 customers, and these are really best of breed technologies that span the entirety of the revenue cycle. Many of the tools are workflow oriented tools and many of them are very specifically designed to make sure that we capture the appropriate and maximum amount of net revenue and also drive cash at 100% of the net revenue calculated. At the end of the day, this is about the net revenue and it's about driving improvement in the net revenue by as much as 1% to 3%. It can be more than that in some situations, especially when we, I'll say, supercharge our offering and combine it with services and tools. And certainly, within the first year of an engagement, when we see our customers actually combine our offerings like this, sometimes, the result is even in excess of 3%. We have grown at about 11% plus compounded annual growth rate since 2009.

I think this point was made by Mike, but the unique opportunity for my group is that we're only in about 40% of about 3,000 Spend Management Customers, so we have a long ways to go and a nice opportunity to continue to sell into our existing and friendly customer base. Also, I'll add that unique opportunity as we identify cost savings and generate those dollars in the Spend Management business, we can recommend possibly that they funnel some of those benefits over to the revenue cycle side to purchase tools to increase net revenue.

In terms of why we're differentiated, these are technology enabled service solutions that are really, as I said, best of breed tools, purposely built to sustain improvement within the revenue cycle and across the revenue cycle. These are interoperable with most HCIT systems and I'll point out that, for example, we have a long-term relationship with Cerner to actually marry our tools with the Cerner applications. So even though Cerner is delivering a patient accounting product, they're asking us to actually marry some of our very specific purpose built tools to act as an overlay to their existing products. As well, in terms of sustaining customer value, we know that the HCIT tools are obviously, multi-, multi-million dollar investment whereas our tools are modest upfront implementation fees and 3- to 5-year subscription based fee structures. We are ranked by Modern Healthcare as the #1 Revenue Cycle Management company.

Let's dive a little bit deeper into what our solution set does look like. If you think about the revenue cycle, it has kind of a beginning and an end, and on the left side, it starts in the area of Access Integrity. And it's ensuring that we're capturing all the correct data on the front end to prevent unnecessary denials downstream, obviously. In the middle of the process, which marries up with HIM, we have our Charge Integrity products to make sure that we're actually capturing the right revenue and compliant revenue codes. And then also within Reimbursement Integrity, its ensuring that we're actually perfecting the bill, getting the bill out the door and maximizing and accelerating the cash flow. And after all those tools are deployed, some of our customers say, but you know what, I still need the staff and I need an augmented staff capability to actually go get this money. So we have our Revenue Cycle Services division. It is actually acting on behalf and as a business office or going after collections, specialized difficult collections to get on behalf of our customers. At the end of the day, it's about optimizing patient and payer revenue and accelerating their cash flow.

A little deeper dive, what you see here are our key products and they're also our key revenue drivers for the division. And what we're moving towards now is the fee-for-value-oriented Accountable Care management tools that I'm going to talk about a little later. I will highlight 1 box here, that is the clinical documentation improvement box. We recognized -- first of all, this has been a big grower for us in 2012, and the reason for that is because providers are now realizing with the advent of ICD-10 in 2014 that the whole coding process is going to become that much more complex. And in order to make sure hospitals are driving the right case mix index, it's very important that the clinical documentation accurately reflect the intensity of services that are being provided. This box represents not only a tool but also a service that drives physician education, clinical documentation specialist education and marries tools with services to ensure the proper documentation takes place within the organization. When we sit down with a customer and we start talking about revenue cycle, it's important for us to architect the solution that maximizes the return on investment and sustains value over the long term. And it's not just about technology. It's not just about optimizing tools. It's not just about advisory services but -- MedAssets is uniquely about all of those and its about putting together and architecting a solution that is comprehensive across the revenue cycle with people, with technology, with services to maximize that benefit.

2012 is a good year for Revenue Cycle Management. We grew about 15%. We got our handle around some revenue leakage that was taking place in the business. Much greater, what I would say, measurement and accountability for revenue, and you can see in the chart here that if you back out some of the items that, I'd say were a little bit of cleanup items for us, you would see that probably on an adjusted basis, we might have grown 10% to 11%. This is obviously great growth as it relates to kind of where we were in 2011. So 2012 was Phase I of this kind of operational improvement for Revenue Cycle Management. I think I even stood here 15 months ago or so and we talked about some of these changes that we were going to make within the business. I'm pleased to report that those were successful in 2012. 2013 is Phase II of operational improvement and execution for us. Certainly about maintaining strong discipline around revenue management but it's also about operational efficiency. We've already kicked off the significant LEAN engagement throughout the entirety of the Revenue Cycle Technology organization, not necessarily about cost reduction but more about productivity improvement. We have some areas where we think we have some duplication of efforts and we think we're going to be able to streamline that over the course of 2013. And clearly, we want to balance our investments and make greater investments as it relates to innovation, especially in some of the areas that are in combination with these evolving technologies and the evolving industry.

In terms of our field sales organization, we want to focus more on new customer acquisitions and the way we're going to do that is by leveraging our existing client management and account executive team to take on some accountability for carrying a quota. And as well, we're going to launch an inside sales program, initially, to kind of move some of our smaller pots and pans types offering but ultimately, I think, this could be a great channel for MedAssets in terms of inside sales, which we really haven't had to-date. And we will continue to invest in strong operational leadership. We've already made several changes. 2011 was about turning around the operational leadership of our Revenue Cycle Services division. Caitlin Zulla is here with us today and has made great strides in terms of that particular division. 2012 was about implementing some new leadership in RCT, which we've recently done.

Let me highlight the Episode of Care Bundled Payment Solution. Again, this is targeted specifically at the evolving new reimbursement landscape that we know is before us and is actually being piloted at several organizations and is in play in several organizations. If you look kind of how the industry has evolved from a revenue cycle perspective within 1990s, it was squarely focused on fee for service and transaction oriented Revenue Cycle Technologies. As we moved into the current day, we know it's moving more towards fee-for-value and quality management and we see how the tools are evolving as we move up the ladder. All of these addressing changes and the types of reimbursement. Uniquely, MedAssets has all those tools. For 20 years, we have been developing state-of-the-art reimbursement technologies and that's exactly what the industry is facing today. The advent in emergence of new reimbursement technology. So I think its core. We're excited about the fact that this is kind of our core bread-and-butter from a technology perspective and we'll continue to build out these proprietary engines just like we have with this new Episode of Care Bundled Payment product.

We know there's an increased appetite for hospitals to move upstream. We see hospitals offering or acting like payers and starting a payer-oriented type business and we know that there's a lot of shared risk and shared savings models that are evolving, both between payers and providers and providers and physicians. And it's all just, again, in reaction to a decrease in the fee-for-service volume and reimbursement that we know is going to take place. Like I said, for 20 years, we've been developing these types of reimbursement engines. In June '11, we launched this Episode of Care Bundled Payment engine and to just go a little bit deeper into what it does, the first thing it does is it tracks cost and it tracks the clinical care aspects of a bundled payment. When you think of a bundle, think of managing diabetes as a chronic condition for a 12 month period and negotiating with the payer exactly what you're going to get paid in total for that bundle and for managing that clinical care pathway. Okay? So it's a specific care-oriented payment. It's not capitation from the perspective that you're signing up to manage any condition for the patient. But you're signing up to manage that specific clinical pathway for a specific price. These engines don't exist really in the industry except for this Episode of Care and Bundled Payment engine. Very important to this engine is being able to identify, overtime, what the potentially avoidable complications might have been as it relates to that particularly service over the course of that 12-month episode and being able to track those and utilize that information to help change the practice and behavior patterns of your clinicians and physicians to avoid those potentially avoidable complications in the future. If hospitals can do that and they can see what's causing these higher cost medical services to be provided, they have the opportunity to actually take action against that, enter into these bundled payment arrangements and know they're going to make money. The other advantage of this tool is that it runs concurrent with fee-for-service, so not only can they accommodate bundled payment, but they can also take fee-for-service claims and model what if. If I enter into this bundle, will I make money based on the clinical patterns that I see in my organization? Or will I lose money? Also, I'll add that it's the only PROMETHEUS certified calculation engine in the industry. PROMETHEUS being a clinical care methodology, if you will, for how these bundles should be created.

Let me highlight a specific customer, a large integrated delivery system in the Northeast that has decided to offer bundled services. And they have a strong desire to get with payers and sign up for this type of reimbursement because they see it as an eventuality in the industry. They've signed up for our Episode Manager Automated Bundled Reimbursement engine. And in addition to that, they want to marry it with Dan's advisory services to actually understand what should be included in these bundles. So actually to find bundles initially in and around behavioral health and women's health bundles. Why did they choose us? They chose us because the product is ready today. They chose us because it has prebuilt bundles in existence already. And they chose us because our time to market in responding to their desire to do this tomorrow exists today with MedAssets.

I think I covered most of these, but in summary, this product helps to model cost and profitability, helps to automate and track payments and also, very importantly, marries both fee-for-service with this evolving new bundled payment technology.

With that, I will turn it back to Q&A and Robert.

Robert P. Borchert

Yes. So at this point I'm going to invite John and Mike and Dan Piro. [Indiscernible] you can stay up there. So we'll do that 5 to 10 minutes of Q&A now. Essentially on the first set of presentations you've seen. So if you ask a financial question, we're going to defer that to once we get past Chuck Garner. And then after this we'll take a quick break. So we'll just wait for them to... Any questions?

Question-and-Answer Session

Unknown Analyst

My question is actually for Greg. A couple of years ago, one of the challenges that the RCM segment have in customers were telling us was the lack of integration on products and there's a lot of good individual standalone products but they wanted them pulled together. What's the update? I know you pull together the Access Integrity suite and the Claims suite. Where do you think you are in terms of integration on the product lines? Is there more opportunity to bring those together? Or is there more demand from customers who try to integrate these solutions?

Gregory A. Strobel

Yes, we are making headway in that regards. We are linking a lot of our products. I'd say the most recent linkage will be this episode of care engine and the bundled payment engines with our contract management tool. So the customers, we have a very large customer base on the contract management side are already asking us from a contract management perspective, I can see that you can accurately track payments and kind of what you got paid versus what you should have gotten paid and identify that variance, but now you got to go a step further and you have to integrate that bundled payment methodology and that reimbursement complexity into the Contract Management engine. So for 2013, for us, that's a major initiative to launch those 2 as many of our customers are asking for that marriage. And I can talk off line with 3 or 4 other major connection points that we're making across the revenue cycle as it relates to our products.

Unknown Analyst

I also wanted to ask a question, Greg. I was curious, when you think about the $5 billion opportunity that you've identified within RCM, I'm trying to better understand what's the mix of opportunity, if we think about between the technology side and the services side? So currently, you have just a sliver, just looking at the new opportunity within your base, how much of that is services and technology?

Gregory A. Strobel

As I said, we're about a 70/30 split today. We certainly see what the evolving technologies that we're getting into, a great demand and a great interest for that. I think we'll continue to grow the technology business very quickly. Exact mix? I mean I would estimate it will stay in that either 70/30 or even 80/20 favoring to technology on the services side, potentially. And when we go and, as I said, when we talk to our customers, we're not specifically focused just on tech or just on services, it's how we marry both of those. It's hard to say exactly how that mix will evolve. Really, it depends on the unique needs of the customer and what's going to drive the greatest return on investment for them.

Unknown Analyst

Hi, Greg, we'll just keep asking you questions, I guess. For RCM, can you talk about your tightened relationship with Cerner. You said you're working to integrate some of your bolt-ons to Cerner's financial systems. So can you name 3 of those bolt-ons specifically? What are those that I'm not sure you're working most closely with?

Gregory A. Strobel

Sure. Well, we have a strategic reseller agreement with Cerner. And we're selling our XClaim product for our claims management. We're selling our Contract Management product with their existing patient accounting deals. We're selling our Charge Integrity products. So we have the ability to marry with them and they're actually asking us to come to the table on new deals with our specific technologies. I think even more important and I didn't mentioned this in my presentation, is that we built a claims validation engine in the cloud and the purpose of that claims validation engine, because we have, we believe, one of the best in class claims editing tools but even if you don't buy our tool, we want to offer that claims validation capability in the cloud, so an organization like Cerner or any other organization could access that application in the cloud, if you will. So that's really the nature of our partnership both for a reseller perspective and also to integrate this claims validation engine.

Unknown Analyst

What about charge capture and charge audit both with Cerner and Ethics?

Gregory A. Strobel

Charge capture is absolutely our CCA product and our CDN management products are all on the table for these vendors that want to resell this product, and Cerner is doing that as well.

Unknown Analyst

Have they created their own charge capture products or not? Are you still working pretty much with them?

Gregory A. Strobel

Not, I don't think to a specific degree and specificity that MedAssets offers, certainly.

Unknown Analyst

Maybe this question can go to Dan. It's about your Advisory Services. It's clearly an area of growth for you, so as you get bigger, you'll be competing against perhaps the larger consulting firms in the area. Your advantages as you stated are the tools that you provide but how will you assure its independence from the rest of MedAssets, so that when a provider, an ACO, contacts you for advisory services that will be objective?

Daniel Piro

Well, that's a good question and it's probably something that some of our competitors are going to say, they can't be objective because they have all these tools. So this is something we deal with on a regular basis but it really comes down to, I think, the quality of your people, the quality of your solution. I actually think it's an advantage for us to be partner of a one-stop shop as opposed to providing just episodic consulting or quite frankly, you have to bill at a certain dollar amount and then you go on to the next place and the next place. We are really looking for longer-term partnerships. This is going to be a long process of transformation for hospitals. So in my opinion, there's a lot more hospitals that want a partner over the long haul that can provide everything not just to come in and do a quick hit. So yes, you're going to have some of that but I actually think the position that MedAssets is in is advantageous.

Gregory A. Strobel

Let me add to that really quickly as well. One thing that's a hallmark of the work that Dan and his team all do is very measurable results and I think we stay focused on making sure that we make specific commitments to customers and then we drive that success. Yes, you might get into situations where you get accused of trying to be leveraging other solutions but as long as you're delivering impact and you can measure and quantify it from a financial benefit perspective? To me, our customers should care more about the success of the relationship and less about, I guess, perceived utter motives for why we would sell advisory business.

Unknown Analyst

And as you grow, how are your pricing start to change? Will it be more of a traditional consulting firm? Or will it be more of maybe perhaps take on some performance consignments? Or how -- Just the pricing strategy?

Gregory A. Strobel

We got to deliver performance and that's what we do. And we come into organizations with our supply chain, with our Revenue Cycle Technology and with our people. Our clients need us to move the needle and so invariably, that's the business model of MedAssets.

Unknown Analyst

For Greg, can you give update on the competitiveness landscape? Clearly, RCM is becoming a more attractive space for everyone and I know you touch up on your differentiated capabilities, the breadth, then the whole RCM cycle, maybe that, that ends well, but just how will you summarize your differentiating your...

Gregory A. Strobel

When I was paying for my competitive landscape, And I'm not going to talk about specific competitors or vendors by name, but I would say that we still see that from the perspective of what our mission is in life, which is solely on the development of best-in-class, best-in-breed Revenue Cycle Technologies that we're going deeper and deeper than any competitor that stays in the HCIT space. We still see the HCIT vendors are somewhat of a closed loop system where our technologies operate across the entirety of the revenue cycle to make sure the revenue cycle is firing in all 4 cylinders. So from that perspective, I see as great position for MedAssets to continue their strengthen and their position in offering these unique products.

Richard C. Close - Avondale Partners, LLC, Research Division

Richard Close with Avondale Partners. Question on the Consulting and Advisory business. It makes me think back to the transformational deals that you guys used to do. Maybe talk a little bit about the difference between this consulting and advisory versus transformational deals, which, if I remember correctly, was a lot of up front consulting and work and then it dropped down to just a steady-state revenue cycle technology.

Daniel Piro

Richard, the transformational arrangements that we have in the past, say, for example, in Cook County in Chicago, were big one-time go in and fix this and then transition it over. With our Revenue Cycle Technology, as well as our Clinical Resource Management groups, there are a host of projects along the bandwidth of improvement that are actually connected to one another. So for example, in the clinical resource management arena, we may have an engagement in surgery, right? How do we improve surgical cut times and how does that relate to the use of various specific devices, where there's a current impression of clinical outcome that either is or is not accurate, so how do we improve that process? That improves patient outcome, reduces the cost of the device and falls within the bandwidth of how payment is now coming down. So -- and that payment may be coming down in a number of different forms, both from private insurance and Medicare. So recently, we were at a very large client of ours this week where they had gone, in the last 2 years, from 20% Medicare margins to this year, 0. And so this is an ongoing change almost like cylinders in an engine that are not in sequence with one another that has to be tuned. And so, I believe that the technologies we tend to leave behind in those engagements then either solidify or continue to report back on the progress of the performance that we intended to achieve and then also point arrows, right? A lot of technology also continues to point arrows at where we need to go next. So I think, in particular, Gary Fennessy from Northwestern and Chris Vasquez from University Hospitals, you'll get more of a sense of how the integration of professional services and technology creates an ongoing cycle of improvement as opposed to the point that you raised when you go into Cook County and do a single one-time set of behavior changes and then hand it back. I think this is a much more sustainable model for both the client and us.

Gregory A. Strobel

I'll just add to that point. Those transformations were all revenue cycle services deals and that was 2010 and prior. So if you recall, we basically pressed the pause button in Revenue Cycle Services and then began to sign more longer term, larger Revenue Cycle Services deals. USC is a good example in 2011, so much different component for you versus what you'll hear -- we just talked about today.

Robert P. Borchert

One more question before we go to a break.

Unknown Analyst

Just a question for John, a little bit what you're talking about today but also from the call. You talked about like 30 new customers wins on supply chain management, and maybe this is also for Mike. It sounded like looking at the opportunity, should we think about the next 3 years, growth is more about cross-selling, getting better compliance, more services, less about footprint. You guys have done a phenomenal job on the footprint side the past couple of years but is there really that much opportunity left there? So we really should be focusing on you guys driving cross-selling penetration, not new footprint on the supply-chain side?

John A. Bardis

I think it's certainly a great question. I think it's going to be probably be meaningful pieces of both. So a lot of the transformational supply and cost management work that we have been proposing over the course of the last 2 years is actually now gaining on different level of traction at the provider level. So by the way, that also, for us, is harder to measure and predict. So we have a number of large proposals out on the table today that are about clinical integration and clinical transformation on the cost and spend management side. I suspect we're going to see some nice throughput on that over the course of this next 24 months but -- and in some cases, that's the new accounts, big new ones. But to your point, the same store growth opportunity, for example, on the spend area, but this is also true in revenue, remain substantial. And we have come to conclude that we believe, today, in the spend management arena, Sandy, that there's about $200 billion of leakage just inside hospitals today on purchase services and products that are not being purchased under contract. And that is consistent with a piece of information that we've had, given to us by the largest Catholic health system in the country, which upon having a couple of different good quarters in a row, came to conclude through it all, that only 37% of what they're buying in their local hospitals, even though they have a very sophisticated supply management and supply chain program, only 37% of what they were buying that was a nonlabor spend was actually under a contract price. That came from a variety of sources. One, the penetration of vendors who are under contract that's selling something, again, that is not in contract. And then Professional Service contracts and a whole host of other areas. Along with local contract vendors or noncontract vendors that provide services. So what we're becoming to -- beginning to realize is that having a contract for something does not necessarily suggest that the client is using it to the full extent because there has historically been no back-end audit that's live of the transaction, whereas, in the financial services industry, you can tell when something's been purchased and you can tell how the transactions occurred. So we believe there's a major run there for same store growth. To the tune that, we think the GPO industry is only covering about half of what it should be, which represents a pretty big opportunity for us. So, I think, technological expansion for us, Sandy, in that regard, which we're continuing and under Mike's leadership, to really focus on that technological expansion -- is really focused on capturing that and going after that $200 billion.

Robert P. Borchert

So at this point, let's just take a quick 5 minute break. Stretch your legs, run to the bathroom and you'll hear me introduce Rand Ballard in a few minutes. Thank you.

[Break]

Robert P. Borchert

All right, this time I'd like to introduce Rand Ballard, our Senior Executive Vice President and Chief Customer Officer. Rand?

Rand A. Ballard

Thank you, Robert. I wanted to do a couple of things before I introduce 2 really incredible panelists that we have today. And first off, I really wanted to talk about the MedAssets' market position that we have. As the Q&A with John and 1 of the questions really led directly into this. In the spend segment, we currently have relationships, ongoing relationships, with 3,000 of acute care hospitals. In the revenue segment, we have relationships with 2,600 of the acute care hospitals. So 4,200 of all of the acute care hospitals in the United States, we have an existing relationship with. In non-acute, we have 122,000 providers that we have access to. So that means in the installed base of acute care hospitals, the opportunity for us to provide additional value is greater than 80% of them and a great chance for us to do it. So it's a great market position for us. The reason is because of our market leadership. Those hospitals have signed off in $3 billion in documented savings. And these documented savings are much different than what other companies do in terms of their identified savings. These are implemented, realized savings that have gone to the hospitals P&L.

Additionally, as we've mentioned in the last 24 months, we've had 60 new spend segment relationships come to us. If I remember, I think, at our first Investor Day that we had, we were happy when we had 3 to 8, so that change is coming because of the cost pressures the providers are feeling. Additionally, we've had 600 customers via Revenue Technology Product in the last 24 months. So the need for those technology products is also increasing. The other thing, as we mentioned, our Spend segment contracts are typically 5 years and our Revenue Technology contracts are typically 3 years. So we're not spending a lot of time out having to resell those as they are multi-year, ongoing relationships.

Now, it is my exciting thing to be able to introduce our 2 panelists. First, will be Gary Fennessy. Gary is Vice President of supply-chain and hospital operations for Northwestern Memorial Healthcare in Chicago, Illinois. Gary oversees the health system's supply chain, laboratory services, pharmacy, facility and nutritional services. Prior to his current responsibilities, Gary served in various management positions within Northwestern's finance division. He is a member of the Healthcare Financial Management Association and the American College of Healthcare Executives and serves on various community boards and committees, including the Uhlich Children's Advantage Network. Gary earned his master's degrees from DePaul University.

We also will have Chris Vasquez, who is the Executive Vice President and Chief Operating Officer of University Health Systems in San Antonio, Texas. She has been with UHS since 2009 and in 2010, University Health System became South Texas' first and only Magnet Healthcare Organization, a status earned by about 6% of all the U.S. hospitals. Chris spent the majority of her professional career with Memorial Hermann Healthcare System. She received the Regence Award for American College of Healthcare Executives and earned her Masters Degree in Health Administration from the University of Houston.

Gary?

Gary Fennessy

Well, good morning, everyone. And thank you, Rand for the opportunity here to speak on behalf of Northwestern and MedAssets. I'll probably start with a little bit of an oversight of who Northwestern is. We are in downtown Chicago, right off the Magnificent Mile, where the hospital is located. We have 2 main facilities: Prentice Woman's Hospital in Chicago and the Feinberg School, which encompasses about 900 beds. And we also have a facility up in Lake Forest, about 26 miles north of us, and multiple ambulatory clinics throughout the Chicago end area. Probably the most important thing on this slide here is, what we're very proud of is, this past year, we got moved up to the 12th spot on U.S. News & World Report, which is our goal to be a top 10 organization by the year 2020 in terms of all aspects from a quality perspective, from a brand recognition perspective and from a research perspective. We are affiliated with Northwestern University under the McGaw Medical School, which includes the Rehab Institute of Chicago, Children's Memorial Hospital and ourselves. So, very large academic center and we have the #1 brand recognition within the city of Chicago.

We are an academic medical center where the patients come first. Everything we do, we talk about, is about our patients and from a quality perspective. And I think this is an important point that it would say, I'm -- I've been a healthcare executive for over 30 years and I believe we're in this transformational period, where healthcare is really on the cusp of massive changes, driven by a whole host of initiatives, which is basically, one, the economy cannot afford the cost of healthcare for us to be competitive in a worldwide market place. But more importantly, for our patients, that we really need to start proving quality and value. MedAssets, as a partner, has really helped us move this and our relationship with them goes back to 2005.

This slide summarizes a lot of why we've chosen MedAssets. But I think a couple of things have to come out of it and I think that some of it is more of the intangibles with MedAssets, at least from my perspective. We have a very formal contracting policy at Northwestern, where our contracts typically are in 3- to 5-year contracts approved at times, and we go out to bid regardless of how well an exchange is going between ourselves and a partner.

So I've commented to Rand on numerous occasions, we're really a difficult customer. We're not easy to work with. We demand a lot but we're fair and equitable and we push MedAssets and they push us. And I would say that the most important thing about the MedAssets relationship is the culture. Our cultures are very, very much aligned. So we are trying to drive performance and we drive performance through measurable outcomes. So that's what's key for us and that's actually helped -- and our relationship goes back to 2005 and we recently reset it and we converted our relationship from Novation to MedAssets and prior to MedAssets coming on board, we had been with Novation for over 25 years. That was a very, very big change for Northwestern.

They're an extension of our team and I would say that on a day-to-day basis, when I go over to the supply-chain offices, we see the MedAssets employees working with our employees. I think of them kind of as 1 team or 1 team who are focusing on reducing cost, driving revenue enhancements and optimizing performance. We have a very structured supply-chain strategy that aligns ourselves along sourcing, contracting, utilization, transaction management and that one piece that's not on here, which is distribution and logistics, and MedAssets team fits into all those buckets and various sizes. We use their tools, we use their resources. Along this line, we've been very active in the pre-commit strategy with the Spend Management Board in terms of contracting and we've seen some very, very good results, which I'll show you here in a few minutes.

So one of the issues that we talk about is how do you measure supply-chain performance and at the end of the day, for us, we started on this journey where our compounded annual growth rate in supplies is running at about 13% to 14%, which is unsustainable and we knew we had to make a change. So we created a strategy around supply-chain in those various buckets that we talked about. And the first thing we did, which we thought was the right thing to start with, was our GPO. We put that out to bid. MedAssets won it and we saw in that first year a rather dramatic change in our whole cost structure which dropped us from a 10% down to a revised 10% compounded annual growth rate. And since that time, working with MedAssets and working with our strategy, we've cut down our -- in aggregate dollars, our total compound annual growth rate by more than half. And that includes volumes, inflation, supply costs and utilization. At the end of the day, what matters for us is are we driving our absolute supply spend down? Our total supply spend, including capital and so forth, is about $500 million annually.

If you want to look at it with the cost per case, which just kind of takes that volume equation out, we've driven our cost down to a point where it's under the rate of inflation. We still believe that there is tremendous opportunity on the side of utilization and a tremendous opportunity that relates to variability and practice with our physicians. So using actual consultants, working with our team and our physicians, we have a very integrated position activity in our campus. Our physicians participate in all our supply decisions. And in fact, run our Executive Device Committee. We've had great success in trying to manage the asset. I would say there are tremendous opportunities still in healthcare across the country, the amount of variability is significant and we can see it. You saw some charts earlier today, which I thought were very interesting to show that variability.

The changes in healthcare as I said is a transformational change. We believe that we need to reduce our cost by 25% to 30% over the next 4 to 5 years for us to remain competitive with the changes that are about to occur. Regardless of the strategies that you take on revenue, one thing we know for sure is we're too expensive as an industry. So driving cost out becomes critical and we need to get the Medicare breakeven. Today, we lose $0.20 of every dollar of every Medicare patient we see at Northwestern and probably $0.35 of every dollar for a Medicaid patient. And we know that Medicare baseline may be the top 10 payers 5 to 6 years from now, so we need to drive our costs there. MedAssets is, for us, right now, the right partner to move forward in driving to that change.

As I said, Northwestern is a very metric driven organization. So in addition to all the supply-chain activities, this is just an example of things of how we approach our organization. I just want to give you a sample of that, all along, are research and enterprise, focused clinical growth, cost reduction and so forth. We are a very measurement-intense organization. We spend a lot of time with the Executive management team on a month-to-month basis looking at all this. Our Board is very actively engaged in that and our overall performance of the management team is based on the measurements that's represented here.

The challenges? As I said, are enormous in healthcare. And in Chicago, it's almost a little bit different. We have a tremendous amount of consolidation occurring in our marketplace today. In the last year, we've seen 3 hospital systems consolidate. We purchased like 4. We're in active conversations right now with 3 or 4 other hospitals within the Chicago land area and we see a pretty massive consolidation occurring in the next 3 years. To give you an example, our largest competitor in the Chicago land area is Advocate Health System and they have 15% market share, which is relatively low compared to other organization -- other markets in the United States. So we think there's tremendous growth. We're at about 4% to 5% in terms of our market share within Chicago.

So at the end of the day, one of our Board members, Ron Felton [ph], who sits on our finance committee and executive committee summarized it best. You must take decisive action now in lowering costs, improving quality and service to earn the ability to grow in the future. We've kind of taken this as our banner and this is the area we're really driving towards. And MedAssets has been a very, very good partner for us in helping to achieve our goal since our relationship began in 2005. Thank you.

Robert P. Borchert

Thank you, Gary, Chris?

Christann Vasquez

Good morning. Let me tell you we have a little trend going here because I described myself as a very difficult customer and a very direct communicator. So many people at MedAssets will tell you, I am difficult and that I do pick up the phone when I have a concern. So I'm here today to talk to you a little bit about our experience in San Antonio, Texas. Let me first start off telling you about the organization that I work for. University Health System is a nationally recognized academic institution with a primary teaching site for University of Texas Health Science Center. Similar to other academic institutions, we have signature services. We have a trauma center, transplant, neurosciences and the highest level of neonatology services in our community. We serve a population of 1.7 million and growing. I think it's important on this slide to point out the fact that our children, those under the age of 18, we know right now 25% of them are growing up in poverty and that is something that at University Health System we take very seriously. To the right side of this slide, you see some of the recent awards that we've achieved and recognition.

In 2011, we were sitting back as an executive leadership team and we're looking at the forecast for 2012. So in May of 2011, we sat down and talked amongst ourselves and said what were our projections for 2012? How are we going to hit those and what is 2013 look like? And what we quickly realized was there was significant change coming in our industry and we had to be a better prepared organization.

I'm going to point out 4 points on this slide that I think is important for you all to know. The first one is we actually are building a replacement facility, so we have huge capital investments. We're building a million square feet replacement facility with 700 private rooms, state-of-the-art technology, 35 operating suites and much bigger space. To me, that's all exciting but it's also -- I'm thinking about the costs as we're building of how we're going to operate this facility.

The second point I'll point out on this slide is we were looking at what was happening in the state of Texas and what were they going to do to our reimbursement. Simultaneously, we're looking at healthcare reform, accountable care organizations and so we were trying to anticipate what we would expect in the next 3 years in that particular area.

The last point is the cost of our supplies and the technology in our industry continues to be at the forefront of what we need in academic medicine and we need to figure out a way how to drive that cost structure down.

The last point that's not on this slide is we have something in Texas called, the 1115 waiver, which really requires us to transform healthcare and change the payment mechanism. And so that was something we're also worried about, not to mention the bundled payments and aligning incentives.

So we sat down and we started to talk about a plan and we reached out to our GPO, MedAssets. We reached out to other GPOs who we worked with and other consulting firms that we have traditionally worked with as an organization. And we told them we estimated we had a hole that we needed to fix between $10 million to $15 million and we asked them to put their brightest and their best together and to come to us with some plans and some solutions.

We evaluated this throughout July, August and then through September. At the very end of August, we started to zero in on MedAssets as the potential strategic partner and we have this lightbulb come on at one moment, we're thinking of MedAssets, who we've had a long-term relationship with at University Health System but primarily, on the GPO side. And it was through this process that the lightbulb went on and we saw a broader, more comprehensive approach.

What we did in September and October is started hand selecting people from our team and trying to evaluate some of the team members that MedAssets would bring to the table. And one of the things I'm most proud of is when we put our budget together, we felt so committed to this opportunity that we have a line in our 2012 budget and my name was next to it, so I took it very personal, that we felt so comfortable with the solution that we took a line and prepared our budget. And the last point I'll make on this slide, is sustainability and that, in our industry, is critical. It wasn't a one-shot. It was a long-term plan.

I'm going to refer to this slide as what Dan Piro called disruptive innovation. So this slide represents our entire organization and could you imagine what I would be managing if I had to bring in a consultant for every one of the boxes on this particular slide. It would be very difficult to control all those messages in a very complex organization. So on this slide, you would traditionally think of MedAssets, or I would have in the past, just on the supply lines. So how could they help us with that $115 million dollars? But through this process and the comprehensive solution, they brought answers to each of these particular areas. I would tell you in the clinical solution, they brought real doctors who practice medicine to talk to my doctors. Gary and I were talking about it and saying, imagine if I walk in on my Surgical Executive committee and I say, okay surgeons, starting tomorrow you all are going to use these 3 devices. And they all say, yes, and say, great idea, Chris. End of the day, it doesn't work like that.

So MedAssets brings a team of physicians to help them clinically talk through deciding what best practice is out there and how do we get some decisions made that help us do a better job purchasing.

Under the purchase services example, how do we buy our blood at the trauma center? That's a critical component of what we do. But not only how we buy the blood? But how do you utilize your blood? Are we overutilizing that? And are we using it appropriately? So very detailed, and again, I have to say the people that are on the team know the clinical issues behind the detail when they're talking to our physicians, our nurses, our lab technicians or our radiologists.

The last component is really that revenue component, and I found it interesting that some of your questions really were around the revenue cycle. That is a critical component of what we do each and every day in the healthcare industry, but everything above that is what probably keeps me up at night. As Gary said, we have to drive out cost. We have to drive utilization improvements and we must drive clinical quality and that is, as an operator and a financial person, that's what I needed help with and that's what this particular slide...

I also called this slide, no stone unturned. In University Health System, we have been focused on AAA+. To the right of this slide, you see a pyramid, all the circles represent various locations within our organization and I wish I could tell you that we have standardization in every little circle. Quite honestly, we don't. Transforming healthcare means that we are trying to focus on the prevention side and the wellness and access to primary care. And if I could do that really, really well, what happens at the end of the day is the little blue circle at the bottom and that's the academic medical center. That's where we admit to into the hospital. And so through the MedAssets process and the LEAN initiative and the standardization and supply and the utilization, we're working across all the circles to ensure consistency, high-quality, low-cost and efficiency.

We were committed to this project. This slide is meant to show you that we came up with very detailed timelines, accountability and structure and ways to drive out the waste in our industry. I was proud to tell you that we have achieved all of the benchmarks that we laid out here on this particular diagram and ensured success in each of the measurements.

When we entered into this relationship, we did not think of it as just a shot. We thought of it as a long-term strategy and a partner, a single partner for us, was important. So that we did not introduce a different consultant of the month, quite frankly. I'm proud of the fact that in 2012, we exceeded the goals that we outlined together with the MedAssets team. 2013, we've already hit the ground running and probably are midway through our 2013 goal in our first quarter. And then 2014, we've rolled out the sustainability portion and the way for us to continue to drive the change and the transformation that we need in our industry and that I'm committed as a professional to ensure we deliver to our patients we serve.

I have to tell you I've been in healthcare 25 years and I am very proud of the work we have done on this transforming the culture within University Health System. At the end of the day, we will drive quality up, serve more patients in the appropriate setting, drive down the cost structure, drive out the waste in our organization and transform an industry that I've been serving in, in over 25 years. Thank you.

Robert P. Borchert

So at this time, we'll take some questions from the audience. Anyone other than Sandy?

Unknown Analyst

I was hoping to ask Gary a quick question in terms of the -- when you showed the slide on the cost trend and the improvement you saw by switching over from Novation over to MedAssets. Have you been able to split out the benefit you received from Aspen in the physician preference items as opposed to traditional GPO spend?

Gary Fennessy

We've been with Aspen on several initiatives and we target it around primarily in the area of PPI. In an academic medical center, as Chris mentioned, just going into a room from an account of a little bit of an autocratic process and saying that we're going to go to 3 vendors and this is the choice, it just doesn't work that way. So with Aspen, we kind of redesigned our whole Medical Executive Device Committee and how decisions are made. And it's been -- probably this one comment that I made -- did not make, that's probably the most important, is that we've got sustained savings since we worked with MedAssets. Those trend lines are moving. We're not bumping year-to-year and up and up and up and down. So as much as there's been sustained improvement year-over-year. And so the work that we do with MedAssets and regardless whether Aspen or be it the supply chain team, what we try do is build the culture and build it from a sustained perspective. I'm not sure I'm answering your question directly. I don't have to carve out that piece from the rest of the supply spend plus initiatives that we're working on independently. At the end of the day, what matters, to me is, are we getting results? And so far so good.

Unknown Analyst

Two questions, I think it's for both of you and I appreciate your time. First, you mentioned -- I think Chris mentioned, you have -- that revenue cycle was mentioned, as well as supply chain management. I guess my question, from a customer perspective, how much difference does it make? Or how important is it that you have a supply-chain vendor that's also your RCM vendor? Or really could you have a great RCM vendor that's completely separate? Are there really synergies that you feel like you get as a customer having those both under one arm? And then the second question is the big picture industry. A lot of talk earlier from John and Mike about ACOs and the bundled payments. As an organization, how aggressive do you want to be and -- do you want to try of lead in the ACO and jump in? Or are you going to sort of wait and watch? What are your thoughts on the ACO model and how that's going to be a change in your organizations?

Gary Fennessy

Well, I'll try to answer that question on the ACO model. From a Northwestern perspective, we're evaluating it. We have not jumped into that in any big way. Our approach is that, again, as ACO are you going to take on risk? Are you going to go down a giant physician practice acquisition? All of that, regardless of whatever structure, which ever approach you take on that, the one thing we do know is you've got to take cost out. You take your cost out that whatever model you go forward in terms of revenue management, from a strategic perspective, you know you'll be positioned well. Revenue is -- in the past, as I said, I think we're in a transformational change in healthcare. I think in the past, there was a lot more emphasis placed on price on the revenue side and not as much on the utilization side and I think that's the major change that's going to occur. Hospitals are not going to see the revenue growth that they've seen in the past but there -- I will put a caveat to it, the importance -- since revenue system like MedAssets brings to the table is incredibly important that for every dollar that you capture -- you're capturing, do not have any leakage in the system. There's no room for leakage anymore. So you need to make sure you're capturing every dollar.

Christann Vasquez

So at University Health Systems, we actually are going to be ACO ready, so we've worked on all the components. We have an employed group of primary care physicians and we align with UTE Health Science Center for all our specialty services. We also have a payer. We have a health plan that we own and operate and so we've taken some steps to ensure that all the components are ready. We'll decide -- make that decision as soon as Washington gets a little clearer on that as well. In regards to whether I believe it's important to have the same store, for me, it makes my life easier quite honestly. Now, what we do is we have an executive monthly meeting with the MedAssets team. So for me to be able to go into a meeting for 1 hour, hear results and complain about this and praise this, and I do complain, I'm quite honest with the MedAssets people. It's a much easier task for me, personally, to manage and to stay on top of all the data and all indicators. The other point I will make is we have to do everything to drive our industry to best practice. If I brought in 4 different consultants, I'm sending a watered-down message to my staff and by the time it gets to the frontline, they're all running around saying, she's bringing in a productivity expert. And so by bringing in 1 organization for us, I will tell you, you could talk to any frontline person, they know we're working with MedAssets, but they're focused on driving the waste out.

We are working on workforce solutions, but that's not all they see. And if I brought in just a productivity company, that will be all they'd see.

Unknown Analyst

Do you have one product that drove some very increased cash flow for you that was on your side?

Christann Vasquez

This is actually an interesting story. So in healthcare, we're very bright people, lots of MDs running around, advanced degrees and so we think we know everything. We've had a long-term relationship with MedAssets and they kept trying to bring a product to the table. And our revenue cycle, people could say, no, we do this really well, no. So through this process and the level of engagement that we have with the team, our revenue cycle, to tell you, we'll, I'll take a look at it. And that one product was implemented in our organization in 2012 and produced $6.5 million benefit to us.

Unknown Analyst

Just a follow-up on the ACO question, maybe a bit more from Ms Vasquez. What offerings or tools, services did you use specifically to become ACO ready? And once the regulations become clearer, what will you go back to MedAssets in addition to push that along further and also second half, it's just what do you wish that they also had? What offer do you wish that they also had to meet ACO requirements that they don't currently have?

Christann Vasquez

That's an easy -- I'm going to answer the last question. I wish they had a product that gave me more hours in the day, that's number 1. Actually, to be ACO ready, we put a team together, outlined what the requirements were and divied up the responsibility. One of the areas that I would reach out to MedAssets is the bundled payments. That is an area that we do, right now, at University Hospitals. And they actually do that in our transplant program because that's how we're really paid, quite honestly. We're not as sophisticated as I would like it to be. The other area I would reach out to and I hope Jean is not listening, but would be the population management. Because in an accountable care organization, we must figure out how to manage a large group of people, not just in the hospital but throughout the community. And so population management is probably at the top of my read list right now and figuring out how I transform an organization that's used to episodic care and really figure out the data point on the population management.

Daniel Piro

I would absolutely concur what Chris said about the population management for ACOs. That's probably going to be the most difficult risk as it relates to managing in that environment. As for ACO preparedness, I think the same kind of similar approach, our executive committee got together, management team got together and we approached it from 2 sides. One is what do we need to do in terms of cost management, looking in the future where we think we're going to be and that's how we came up with our goal to take out 25% to 30% of our cost over the next 4 to 5 years. And our focus is on that side. The second side is how do we ensure that we have no leakage on the revenue systems and no leakage on revenue. We don't anticipate any major restructuring in managed care contracts other than decrease the reimbursement and on the restructuring of Medicare, it's definitely going downward and in the State of Illinois the Medicaid reimbursements is basically a disaster. Even if you do get paid, you don't get paid for a year. So we really focus our attention on leakage and so forth on that side, and the tools that we used on claims management and denials and so forth that we use with MedAssets help us in terms of those 2 strategies.

Unknown Analyst

So in terms of priorities, this is a question for both Gary and Chris, is it fair to say that in terms of priorities, first is cost, supply, because you alluded to -- that's what keeps you awake at night. And then after that, so from that asset, is that more of a foot in the door and then once you see this so great in what they do, and then you will evaluate their revenue cycle management, is it fair?

Gary Fennessy

Yes. I think that's a very fair way as we're very focused on the expense side of it. And when I say supply, I also include all of our purchasers [ph] advanced category and capital. So it's more than a foot in the door, it's that we have a long-term relationship with them. We're just still not quite sure on the ACO model where the Chicago markets is going to take us. I think that related to the ACO model, I think you really need to think about it market to market. California is a much different place than the Chicago land area, it's much different than Texas and so forth. And I think they're going to evolve over the next 5 to 10 years. And I think that's why you see a little bit more hesitance they used to say -- in fact most hospitals I talked and the systems I talk to, even within the Chicago land area have not completely jumped into a true capitated risk model and ratio and just hospitals are just not debt prepared, there's very few systems that are. Maybe Kaiser is, because it's one of them that's been at it already for 20 years. So with that exception, there is very few systems that are that far along in terms of ACOs.

Unknown Analyst

And you use 2 products now from RCM?

Gary Fennessy

I think we use 3 on the revenue cycles.

Unknown Analyst

And you use 1?

Christann Vasquez

No, we use multiple. The one that I mentioned was just the new one that came in. If I could just mention one thing to your comment, ACO ready, I think Dan showed an interesting slide. CHF, congestive heart failure, is a disease that in our community, as Gary mentioned, that is -- there is very high levels of patients with CHF. Every time that patient is admitted, it's a cost. And so our responsibility with our 1115 Waiver, we have to keep that patient healthy and out of the hospital. So in Texas, we're already moving to an ACO because our incentive comes not for the hospitalization but on decreasing readmission, keeping those patients out of the hospital and I'm giving them access to primary care. And so the incentive comes with all of those data points and not the hospitalization.

Unknown Analyst

Have you seen any improvement in customer support over the last several years and then, second part of the question is, what does MedAssets need to do better for you?

Gary Fennessy

I'll respond back. I said this yesterday to a group of people about MedAssets, that I think that a lot of it is a culture issue more than anything and I can only tell you from my experience, I can't speak for the rest of the clients in MedAssets. But prior to MedAssets, if I ever had an issue with -- and I've been in the supply chain a long time. If I had any issue with the previous GPO, it seemed like I had go through 4, 5, layers before I eventually got an answer. If I have a problem and I put a call into MedAssets, I guarantee you, within 24 hours, I get a call from either Rand or John Bardis. So I don't know how much better it can be and I usually don't even have to do that because I usually get it resolved with my current rep. To me, that intangible is really a main difference between MedAssets and other customers. And to me, that's a high-dollar value proposition in terms of pay back.

Christann Vasquez

So I've actually worked with MedAssets in the past with another organization and then coming here. We certainly have seen an increase in our service level as we started talking and being open to new ideas. I describe myself as a difficult customer and I will tell you, I pick up the phone and I have all of their numbers on speed dial and their mobile phones. And they all have me on so they recognize my number when I call. Because they normally say, hi Chris. So I figured that out. Very responsive and as I bring issues up, I really do have to tell you I'm a very direct communicator so I don't mix words often. I am never made to feel like I'm complaining. I am complaining but I'm never made to feel like I'm complaining. And for me, that's what sets them apart.

Unknown Analyst

Chris, how many rev cycle products do you use in terms of technology and do you think you're going to be buying more? And can you maybe just describe these monthly meetings that you have, like how are they measuring the performance, like is there a bad debt measurement, is there a cash collections measurement?

Christann Vasquez

Actually, we meet and it's -- again we're doing comprehensive. So they're looking across our organization. So they're reporting to me on a monthly basis, projects that we've worked on where we've had documented savings. We go line by line, quite honestly. So the first month, it was 150 projects that have potential cost savings and then we whittled that down. So this month we tackle this group and then I sign off on a letter at the end of that meeting that's already been run through our financial people, already taken in decrease off our 2013 budget line and when we close that meeting, I sign that letter. We then discuss the upcoming projects for the next month and that has proven to be invaluable. And because there's something called gloves, surgical gloves in healthcare. And this is like taking the doctor's right arm off. So if that was a project they were going to be working on in March, tomorrow, I would want to know that before they started to work on it. So our executive team on those, you're going to hear from doctors about gloves. So it's a very detailed meeting that we have and very comprehensive with the potential savings that we could have and then the third piece of the meeting is that sustainability piece. So I hope we continue to see the decreases that we've projected.

Gregory A. Strobel

I'd say that they have about 9 revenue cycle products and then Chris' previous organization, that organization bought every revenue cycle product we had, so she's very experienced in that area.

Unknown Analyst

I just wanted to ask and forgive me if I missed this, do either of your health systems outsource procurement to MedAssets? They have this -- I mean, at least new to me, I guess it came along with them from Broadlane the outsourced procurement?

Gary Fennessy

On our side, no. We don't outsource. We do a lot of outsourcing but not on the supply chain side at all.

Christann Vasquez

And our answer is no.

Unknown Analyst

Have you evaluated it? Does it make sense? And I guess, what are the roadblocks to outsourcing? Is this something you just feel like you need to keep control of or is there some other obstacle?

Christann Vasquez

No one's recording this, but I would love -- oh, it is being recorded. I think it's a great idea. I think it's politically a very difficult thing to do. So I believe, Ken, we have people come in from MedAssets and help us gain a higher level of how we handle our processes.

Gary Fennessy

From our side, we've evaluated it and again, it's a little bit of the intangibles, I believe. Our supply chain team is very clinically focused. We recruit from within our own nursing staff, a lot into the sourcing side. It's been very effective. I like to use the word that -- I don't wear the decoder ring when I'm talking with the physician, I'm not an M.D. and they want to know that there's someone who actually understands the clinical side of that tremendous credibility in terms of helping us. Now we'll bring in Aspen to work side-by-side with our clinicians with their clinicians but it really makes a difference when a surgeon within Northwestern we're working at our initiative and they know that someone that used to work in our OR is there trying to work with them. It has moved our -- it's accelerated a lot of our cost savings initiative. And I can't say enough of what Chris just said. You would think surgical gloves just to make a comment. It's almost comical. You literally -- you say one arm, I think it's more like you're taking off both the arms. I mean it's so hard to move on a surgeon -- something that is that simple and that just gives you a sense of the challenges that we have in healthcare still going forward and the opportunity too.

Robert P. Borchert

I would say also, the supply chain outsourcing, it really is a market-driven phenomenon and a hospital phenomena. So part of our core competency is we're not here to outsource, we're here to evaluate how well their organizations are performing. So it may not be a solution needed in these organizations, but I will say this, we're having more conversations in that arena than we've ever had and I'd say twentyfold more we ever had where the challenges of the cost reductions that the organizations are going through, their existing staff doesn't have it. Here, they've already seen the light and they're implementing different types of people in the supply chain to effect that change. That's the big part of the partnership.

No more questions? Okay. At this time, I'll thank Chris and Gary and Rand and would like to call Chuck Garner up.

Charles O. Garner

Thank you, Robert, and good morning, everyone. Before I jump in, I just want to highlight a point John had mentioned earlier. Last, about 2 years, have been pretty busy for us. We made a lot of changes internally, we brought some new leadership onto the team including Mike Nolte, Keith Thurgood and Keith Hicks who is our Senior Vice President of HR and we also instituted what we call our enterprise planning enforced management process, which the goal is really to link finance to operations to HR. So we have more predictability and more visibility and more accountability in the organization. And two of those members of my team I just wanted to highlight who are here today if you have a minute to speak with them, Steve Hess who leads our corporate development team, he's been instrumental in leading that enterprise planning enforced management process. And all of you I think, know Robert Borchert, our Senior Vice President of Investor Relations and Corporate Communications. He really has worked tirelessly to help us improve our visibility and transparency as we report our quarterly results as well as to do things like today, our Investor Day. I'd also remind you we released our Q4 earnings in 2012 results last week. There's about a 20-plus page slide presentation that accompany those. We'll start doing that as a routine course of business that provides lots of details which I will not go through today but I would refer you to those just on the Investor Relations tab in our website.

So with that, let me just give you a quick snapshot of a couple of metrics we look at in terms of financial performance. If you look at the 4-year trends, you can see we've had top line growth, revenue growth of about 8% compounded. Adjusted EBITDA margin's been trending in that low 30% margin and recorded about 8.5% over the last 4 years. Adjusted EPS has grown 11.3% and ended 2012 at $1.13 per share. And free cash flow generation is something we're really excited about with our business model, we generated operating cash flow of over $150 million in 2012 and that's, on a per-share basis, that's about $2.50 per share. After capital expenditures and other investments, we have free cash flow of about $91 million or about $1.50 per share.

Turning to our capital structure. As many of you will recall, our last acquisition was the acquisition of Broadlane Group in November of 2010. At that point, year end 2010, we had a little over $1 billion of net debt. Since that time, we've paid down their net debt to $871 million, for about 2 turns, from 6.1x to approximately 4.2x at the end of 2012. And again it just highlights the free cash flow generating capabilities of the business model.

We also completed a refinancing of our existing credit agreement in December of 2012. The net result of that was a couple of benefits. One is we've certainly reduced our interest expense and took advantage of favorable credit markets. In addition, we picked up some flexibility in some things we can use our cash flow for, whether it's buying back shares, retiring bonds, and certainly prepaying debt as well as loosing some covenants, which we thought we'd take advantage of although we didn't feel the need to do so. As we end the 2012 full year, we stand at a max leverage covenant of 5.75x, which steps down to about 5.25x about a year from now, at the end of the first quarter of 2014.

Turning to our 2012 results, which again, are highlighted in much more detail on our Investor Relations section of our website, we ended 2012 with 9.5% consolidated revenue growth, approximately 12.5% consolidated adjusted EBITDA growth and about 14%, almost 14.5% adjusted EPS growth.

So pretty favorable results in 2012 and again, I think this largely reflects many of the operational improvements we put in place beginning in 2011 and continue to put in place in '12 and we'll work -- endeavor to beyond that in '13.

We also get some questions around our performance related fees. I wanted to highlight a couple of takeaways here. For performance related fees tend to be primarily focused in our spend in the critical resource management segment. Typically 90% of our performance fees are in that segment. Any given year, they tend to be a couple of percentage points of our total revenue. As you look back in 2011, they were about 5% of revenue. Last year, they were about 3.6% and we're projecting in 2013 they will be about 3% of revenue. While they're not a material portion of our base of revenue, they do create a little bit of variability on a quarter-to-quarter basis as we report our revenue and also, as we'll show in the next slide, why it has a little bit bigger impact on adjusted EBITDA and adjusted EPS on a quarter-to-quarter basis.

We've had a very good track record of delivering on those fees and thanks to -- frankly having some proper chancing of customers, that make sure we put some skin in the game, we're very well aligned and frankly, make sure we continue to strengthen our business and our offerings. And so thanks to certainly, Chris and Gary for their support, surely, coming here today as well as making us a better organization.

So as we look into 2013, we estimate roughly $20 million of performance fees we anticipate achieving in 2013.

As we turn to the next page, this will just give you a quick idea of how performance fees, and specifically, this is an example of an SCM guarantee account. So most of our SCM contracts tend to be 5 or 5.5 years in length. So the illustration you see here shows a hypothetical contract, 5 years in term. And you'll see by quarter, what we'd expect to achieve in revenue. This assumes a $100 per year -- or excuse me, a $100 per quarter expected revenue recognition. But you'll note in the first 6 quarters, there's a ramp-up process as we build momentum, achieve performance improvement, transition oftentimes our group purchase organization. And you'll see in this case, in the first 6 quarters, that there may be some performance thresholds that we've negotiated with our client as part of this contract. And so the piece that's highlighted in that dashed area indicates the piece of revenue that we do not have a contingency around this contract we would normally recognize. But because of that performance-based contingency, we would tend to recognize that once those performance thresholds were met. In this hypothetical example, we've assumed that happens in the seventh quarter. It can oftentimes happen in multiple quarters, but just for simplicity, we've illustrated that it happened in the seventh quarter. So you'll note that the revenue that wasn't recognized in the first 6 quarters, assuming we've achieved that guarantee or that performance threshold, we'll then be recognizing that period. And then once we achieved and removed any contingencies from that contract, you'll see a more normalized revenue recognition in the remaining quarters. I'd also note that we're obviously just focusing on the revenue component here on this illustration but we will incur costs and recognize it as expenses in the prior quarters as they're incurred. So we're not deferring or not recognizing those related expenses, only the revenue portion.

Shifting now to long-term growth targets. We spent some time on our Q4 call last week, talking about our ambitions as we look forward 2016 and those include targeting a 10% total net revenue growth rate and a 15% adjusted EPS growth rate by 2016. We just wanted to make it clear that this isn't 2014 guidance at this point, but it certainly sets an expectation on where we look to move the business. It also gives you some sense for where we ended 2012. Because of the highly recurring revenue nature of our contracts that if we do this right, we'll start to see momentum build. It's sort of like turning an aircraft carrier because so much of our revenue is in the recurring portion, about 80% to 85%. We should look to see the momentum build over the next couple of years to get to a more normalized growth rate that's about 10% top line and 15% bottom line. And Mike and Greg and Dan and others, John, have spoken about some of the initiatives we're continuing where that's run -- continue to drive operational improvement, continuing to divest in more feature functionality or also through innovation and we've talked about some solutions. For example, episodic care and bundle payment, as well as advisory solutions as a couple of examples.

Just in terms of the mix, the last bullet here indicates we would anticipate that rest the segments to grow a little bit faster, than our spending clinical resource management segment. But we'd also expect to find balanced growth and opportunities in each of the components of the businesses that comprise those respective segments. So our GPO, our SCM services and consulting as well as our revenue cycle management technology.

Couple of other items to note. Obviously, a lot of talk today, Chris, Gary, John, others have mentioned it. With the Accountable Care Act, there's a lot of change happening, there's a lot of folks making early bets on ACOs or other structures. There's a lot of folks waiting more to see how it's going to evolve. We too expect that the ACA will have both positive, as well as some negative impacts on our business. Within the net impact is probably positive as we will try to increase urgency to drive more operational efficiency, improved alignment and clinical resource utilization and also a meaningful reduction in the cost structure among healthcare providers over the next several years. That, coupled with the fact that we'll also be providing insurance coverage, it's something around the 230 million more folks over the next few years at likely lower reimbursement rates and a different mix than we've seen historically.

That's obviously a big component that impacts our outlook as we go forward. As well as the rate of adoption of new solutions like our advisory solutions, transaction management capabilities, often in cases of whether there's revenue cycle management or spending clinical resource management, whether it's outsourcing or other embedded services, as well as more emerging reimbursement methodologies and models, whether it's bundled payments, episodic care, reimbursement models and increased shift of risk to providers.

Contract compliance and utilization and coverage is a big lever for us that's driving same store sales growth in our group purchasing organization. John and Mike had talked about while GPOs traditionally and historically are focused on about 20% of costs, which are more of the commodity type items, we're really endeavoring to be much more of a comprehensive both spend and clinical resource management provider and this reform involves taking on risk and signing reimbursements with clinical outcomes. We actually believe that having the revenue cycle capabilities, coupled with their spending clinical research management capabilities are both important, relevant and a differentiator.

And then lastly, the size and pace of both our infrastructure and our R&D investments will impact our long range outlook as we go forward. A few mentions earlier and I think Greg mentioned around lean investments, so we're adding a few more folks to our internal lean team to drive operational improvement in our revenue cycle management technology business. We believe those investments pay dividends over time, but in the near term, those are increased operating expenses. We'll also make investments in capital expenditures to drive increased productivity and efficiency over time as well as the more natural capital investments and operating investments to drive customer facing innovation and revenue growth.

Turning to our FY '13 guidance, which we'll see here on this page is a snapshot. We're projecting about 6% consolidated net revenue growth. Part of that has to do, as Greg mentioned earlier, we had a very strong year coming in rev cycle. That was a combination of some onetime benefits we achieved in 2012 as well as some easier comps in '11. As we factor that in, we anticipate, as I said, about 6% consolidated revenue growth. We have a little tiny bit of adjusted EBITDA operating leverage, that's more with the fact of 2 things: 1, continue to make reinvestments in our business for long-term growth and productivity and also a little bit of a mix shift around the margin as we do make some more progress on some of these more embedded solutions, advisory solutions, et cetera, that tend to have a little bit more of a lower margin because they tend to be more labor intensive solutions. So we think they're really important as part of a broader technology enabled services offering.

And then lastly, we're projecting to grow at the midpoint of our guidance our adjusted EPS about twice the growth rate of adjusted EBITDA in 2013, so about 12% or almost 12.5% adjusted EPS growth in 2013. And as far as we've driven some financial leverage, both deleverage our business as well as some benefits from the refinancing we completed in December of 2012, which we estimated saves us about $6 million in interest expense in 2013.

A couple of assumptions, I won't go through all these, but you can refer to them, but free cash flow, we anticipate to be on our trend of about 35% to 40% of adjusted EBITDA conversion. So $80 million to $90 million of free cash flow. We had anticipated have we not done a refinancing, that we would have likely been more of a cash taxpayer in 2012 because the refinancing, that really pushed up into that in 2013. So with some of that cash flow, we'll use to pay cash taxes, we anticipate that's about $20 million at the midpoint of our forecast.

And then you can see we're also picking up a little bit more depreciation in '13 related to some capitalized software that we put into service and so that will pick up. You'll note in our model that the depreciation expense is picking up a bit, but our amortization is actually coming down by pretty much a comparable amount. And then as I mentioned earlier, performance related revenues, these are these contingent related performance fees, we're expecting a range of $18 million to $22 million, or about 3% of revenue in 2013.

I think it's helpful to share with you a little bit of how we internally put together our guidance forecast and why we have confidence in the numbers we've laid out here. So we spend a lot of time looking at what we have under contract. And so for that, it's contract for our group virtualization, revenue for technology, outsourcing solutions, et cetera. Some of those revenue streams may be fixed dollars in nature, oftentimes our revenue cycle technology was $100,000 per year subscription over 3 years. It's very easy to forecast. Some may be more variable revenue streams. For example, our group purchasing organizations. Inherently, it's based on volume of purchases, which are inherently difficult to predict with a high degree of precision. So we try to do our best to estimate what that is based on purchase patterns and conversations with our clients.

And so when we put that work together, we come up with an estimate of what we expect the next 12 months revenue is under contract. And as we look at that as a percentage of our guidance, that gives you our contracted revenue coverage ratio and that's what -- as you look on a consolidated basis, it's 88.7%, meaning that at the end of 2012, there's about 11.3% of our 2013 guidance that we still need to go sell, implement and recognize the revenue, which you'll also note that, that 88.7% contracted revenue coverage ratio is very similar to where we ended the year, full year 2012 at 88.8%. You'll also note that year-to-year it tends to fluctuate a little bit. So it's some art and a healthy dose of science we try to apply to it. But that gives you a sense of how we come up with our revenue guidance for the year and why we feel the revenue guidance for 2013 is both realistic and achievable.

In terms of our capital allocation, it's really continuing on a framework we laid out, I think starting back in 2011. It's 3 things: it's execute, it's innovate and delever. And so the focus again continues to be reducing our debts. So using free cash flow to lower interest expense and reduce our total leverage.

Second is investing in operations and execution that's both investments in internal productivity, internal efficiency, internal scalability and reliability of our solutions as well as investing in both near term and longer term platforms for growth and functionality to drive greater ROI for our customer base so that they hopefully will continue to look in that asset as an innovator, a differentiator and have great confidence in the results that we can deliver for them through our technology enabled services solutions.

I'd also mention that we will, from time to time, selectively look to partner with third-parties to bring enhanced value to our customer base. And we will, over time, continue to evaluate M&A opportunities, but certainly, as John mentioned on last week's Q4 call, that is not our focus nor our priority for use of cash flow and certainly not in the near term.

With that said, just to summarize, I believe we're well positioned for continued financial value creation. We were pleased to share with you last week, the results of our 2012 full year and our Q4 performance. We believe it's based on a very solid and differentiated financial model. Recurring revenue is a key piece of that and also the free cash flow conversions, very important to us as we look to delever our business. We believe the long-term growth targets and our focus on both strengthening the core of our business, strengthening the operation of our business and continuing to augment the talent we have, are critical to driving future growth and we wanted to share with you what we believe are achievable financial targets over the next couple of years as we look toward 2016.

And specifically to our 2013 commitments, what we expect to achieve, we believe are relatively achievable and I wanted to make sure folks understood how we arrived at those. So with that, I think Robert's got the mic, and I think you want to bring the management team up for Q&A?

Robert P. Borchert

Yes, so for the management presenters, from [indiscernible], please come to the front. What I also like to do and I mentioned this earlier is that following this Q&A session, the other MedAssets executives are here and I'll introduce them and they'll be standing to kind of the back right of the room so you can come and introduce yourselves to them but just for this moment, let me just introduce and I'll ask our executives to stand up so you know who they are. We mentioned Keith Thurgood, who is the President of our SCM segment; Scott Gressett, who is our EVP of SCM operations; Les Popiolek, SVP of Strategic Resourcing; Dave Klumpe, SVP of Supply Chain Services; Caitlin Zulla, SVP of Revenue Cycle Service Operations; Jeremy Belinski, SVP of Population Health Management; Gina Thomas who's SVP of Enterprise and SCM Sales, back right; Madonna Unger, who's SVP of SCM Client Management; and Ann Diamond, who is our SVP of marketing, who's in that room as well. So with that, we'll open up for Q&A.

Unknown Analyst

Just to comment on the goals, the 10% top line, the 15% bottom line goals you've given us for the next several years. Just talk a little bit, the EBITDA margins, I mean, are we reasonable to project out maybe a mid-30s kind of EBITDA margin and also help us out taking that 10% top line to that bottom line of 15%. Is that going to come from pure margin expansion, deleveraging, should we think about SG&A coming down, maybe share repurchase and we'd talk a little bit about acquisitions? Just help us out there.

Charles O. Garner

Sure. So let me just try to reframe the targets. So we obviously shared the 2012 results. We have set a goal by 2016 to be at a 10% top line growth rate and a 15% adjusted EPS growth rate. In terms of the question around margins, we believe there's meaningful opportunities in the business to drive enhanced productivity and efficiency. So that will be a positive to margin expansion. The trade-offs to that is levels of reinvestment in the business. So we do not expect that we would take any or shouldn't say take any -- take all improvements and efficiency to the bottom line. We'd probably look to reinvest some portion of that. As well as the fact that we talked about some of the other services we have around advisory solutions, outsourcing, embedded services. Those solutions tend to carry a lower margin. So over the next couple of years as we grow both their technology and their group personalization, which tend to have higher margins versus outsourcing embedded services or advisory solutions, which tend to have, relatively speaking, a lower margin. That mix will dictate what the ultimate margin is by 2016, but certainly our goals and ambitions are to drive, one, top line growth importantly, two, operating leverage, while still reinvesting the business to drive that top line growth, and then 3, as we continue to delever, we obviously have the ability to prepay the debt we have in place and we believe we have the cash flow to do that and we also have flexibility now as a result of the Credit Agreement that we put in place in December of 2012 that we can do some things we didn't have the flexibility about before, whether it's around share repurchase, bond repurchase, things of that sort. So we do have other avenues and ways to drive financial leverage as well, between now and 2016.

Unknown Analyst

This may be a fairly basic question that's been mentioned a lot today and as I was reviewing the transcript, you talked a lot about the transaction management and transaction management services. I want to maybe just understand more specific, what exactly are you doing when you say transaction management and services and what's the actual business model behind that and how you're actually getting paid?

Robert P. Borchert

Dave Klumpe. Come on up here Dave. Let me introduce you to the individual who runs all this, Sandy. Dave, who runs our Transaction Management and Outsourcing business, which today, encompasses about $5.5 billion, includes organizations like Tenet and Kaiser Permanente and others. He's the guy that knows the details, so I thought I'd love to give him a chance here.

Dave Klumpe

So really, what we're talking about is managing purchasing transactions. So the consumables, the services, the equipment that providers need to purchase, it's supplying technology and people and processes around that to forecast what clients are spending that help them align their actual purchasing patterns to the contracts that they chose to utilize. So a couple of slides that we had up there earlier that spoke to contract utilization. The core, one of the core businesses we have in the spend segment is to help providers put spend under contract. In other words, aggregate the purchasing plan of different organizations to actually create contracts that we know will create value for them. There's huge difference though between creating a contract that you know that has value and actually aligning your purchases with those contracts that you worked so hard with your clinicians to put under contract.

Unknown Analyst

Why not talk about, because it's current in the financial news, is Tenet. Tenet just came up with their earnings release and they attributed a meaningful part of their expense control to once again declining supply cost per encounter. You might want to just address that real quickly, because Tenet I think has what, a 94% contract compliance rate. I mentioned to you a minute ago, 37% for the average systems. So there's some impact to talk about here.

Dave Klumpe

So Tenet Healthcare, well over 50 facilities, $1.6 billion thereabout in supply spend. We manage the entirety of those supply chains for them. So I have over 200 employees on my team that actually run the sourcing and procurement and materials management which are really the logistics operations for those facilities. To John's point, they have demonstrated at least 6 quarters in a row now, their supply expense per patient pay has trended downward. So that's really a great endpoint, proof point, in the value in the integrated model that we're describing, which is, again, creating great contracts but then aligning that with the organizational discipline to manage those transactions in a way that you're actually accessing those contracts that you worked so hard to create but then paying the price that you're supposed to pay under those agreements. One of the challenges that a typical provider has, just due to the sheer number of transactions. Kaiser Permanente, by example, last year just within their purchasing system, they had 5 million unique purchasing events that occurred in their organization. It takes industrial scale with systems to make sure that all of those transactions are aligned with the contracts that you want to use and in fact the vendors are charging you the price that they've agreed to charge you and unfortunately in our industry, there's a lot of noise around that, which is not typically in the providers favor when there are errors. When there are errors occurring, they're rarely in the providers favor. They're often in the supplier's favor. And we bring order to that in a way that we manage transactions for a client to again align them with the contracts that they've chosen, help them decide what contracts to use, but then align the transactions to those contracts and then make sure by interrogating every purchase order against every invoice, that the client is actually getting the value out of that contract that the supplier committed to them.

Unknown Analyst

I wanted to go back to the long-term growth expectations. Any idea of 10% growth out in 2016? Have you done a bottoms up plan to determine how you're going to get there and what bucks -- I know you said RCM should grow a little bit faster. I was wondering if you went through the different line items and which business segments within each of SCM, RCM and how fast they need to grow?

Charles O. Garner

Yes. So we've done, as I mentioned, as part of enterprise planning enforced management process, which we started back in 2011. We've done various cuts at a -- just to answer your question around a bottoms up plan. I think we're continuing to refine that's. So in the first half of this year and now certainly that Keith Thurgood is here, we'll take another review and cut that as part of our annual planning process. We feel that we have pretty good categorization on where those buckets come from, but as usual, there's a number of pieces usually smaller products that are in early stage that's around episodic bundle care payment, advisory solutions, et cetera. I think we'll have better visibility after a couple of quarters to see how the market reacts. Also to see how reform takes shape. But we feel pretty good with the plan we have in place. We can always make it better and that's part of what we'll continue to refine in the first half of this year.

Unknown Analyst

And I just want to follow-up in terms of -- and I realize you don't have an exclusive budget, but if we think about sort of the mixed impact and you sort of alluded to that for 2013, if we think out to 2016 in order to get the 10% top line growth, should we expect a significant mix impact that's kind of the reason behind the question I asked Greg earlier, it sounds like that won't be happening on the RCM front with 70% to 30% type of services mix?

Charles O. Garner

The way I would think about mix, over time, I think you can see a gradual mix shift so for example, as Dan and team are driving more success with advisory solutions, things of that sort, you tend to pick up some of that revenue. Where it tends to be more impactful and I think the question earlier came around our transformational deal a few years ago. When you pick up a few large multimillion dollar outsourcing arrangements or embedded services arrangements in revenue cycles, for example, because the base is relatively small, it has a pretty big impact. So as you look at retirement [ph] you build that bigger base of those types of embedded services in outsourcing, as well as the consulting business. I think you'll find that mix shift to become more muted over time. But certainly in some areas where we're starting up those small base you can have an impact quarter over quarter and more in the near term. That said, you also don't tend to land a lot of those large deals in a short period of time. But 1 or 2 here and there can have an impact.

Unknown Analyst

Just a quick question on RCM technology. With respect to the operational improvement timeline, could you talk a little bit about your plans for consolidating the RCM technology to more on a common platform or fewer databases?

Daniel Piro

Yes. We continue to look across the revenue cycle technology set and especially with a lot of the conversation you heard today here around revenue cycle analytics and business intelligence, we're looking to create a common warehouse, if you will, to aggregate all of the data across all of our products for actionable information as our clients move towards more of a quality drivers and ultimately population health. So we recognize and it's a key driver for why we're focusing heavily in and around business analytics. It's more about, as much about integrating and creating a foundation of data as it is about connecting the products.

Gregory A. Strobel

I think one of the other points on revenue cycle technology tools is that even today, there are certain product adjacencies that are already showing that integration, so whether it's claims management, denial management and contract management, which are using the same data capabilities, whether they're product adjacencies and similar users, that's already beginning. We're making -- it's not having a full swoop of putting everything on a single platform today to making sure you make the right decisions along the way.

John A. Bardis

Yes. Just to expand on that a little bit, Joseph. From a reimbursement engine perspective, the tools are already very integrated and utilizing the same engine for whether you're calculating the patient estimate on the front end or quantifying whether you actually got paid correctly after the claim was filled and paid to ultimately linking yourself to an episodic care of bundled payment engine. So I try to talk a little bit about how that reimbursement engine is so core to the heart of the revenue cycle and that engine for us is very, very important.

Unknown Analyst

Great. So a lot of time typically, you have spent on the performance-based revenue and obviously there's a slide there which Chuck was definitely very helpful in terms of explaining some of the variability but your history has been so strong in meeting those guarantees that it's tough for me to figure out what type of customers still need you to put that much skill in the game to prove yourself that you need these contracts. So I don't know if it's John or maybe even a Rand question but, as you think about the customers that still ask you for these performance-based incentives, what's the typical profile and what's the hindrance for them that they want to see some of these metrics hit rather than just signing up and seeing some of the result to generate with all your other customers?

Gregory A. Strobel

I'll take a stab at that. The 60 new customers that we signed in the last 24 months in the expense side, I think only 2 of them had a performance guarantee. And 5 years ago, probably half of them would. So I don't think we're seeing the requirements for that as much, but I will say this. When we do charge the performance guarantee, we do charge a premium for that. And that premium, it's actually a very good model for us when we do do that. But typically, when customers ask for a performance guarantee, it's because they put a line item in their budget that they have to hit and they're not going to get their bonus if they don't hit that number. So they want to make sure we have an aligned incentive and that we absolutely have skin in the game on it because the savings really have to be realized and also some organizations have really long term relationships with premier innovation. I know one with a large system where the CEO was on the board of BHA. His board said, "We want a guarantee." And he said, "Why, I believe MedAssets can do it." He said "We want a guarantee. We as a board want to make sure we have a financial guarantee." So let's start with the variables we may have. We typically make 20% to 30% more on those guarantees.

Unknown Analyst

If I may, I have a question about your pricing leverage. What leverage do you have in terms of increasing price and is there a CPI component to your contracts?

Gregory A. Strobel

Are you speaking of the group purchasing business pricing for the products?

Unknown Analyst

Overall. The corporation overall, in terms of increasing price for consulting and so forth, their contracts. And is there a CPI component like you increase it every year?

Gregory A. Strobel

Yes. I would say that all of our contracts, the vast majority of them, do have a CPI annual increase put into them and that's a normal standard that we do. Having said that, I do think that some of these unique relationships that we have are kind of beyond the traditional CPI pricing relationship. It's very much more performance-based and the opportunities are somewhat endless as long as you continue to drive performance.

Unknown Analyst

Contract revenue coverage ratio. What are the historical numbers? The contract revenue coverage ratio, what are the historical numbers, do you have some reference?

Charles O. Garner

Right. So I think on the slide we've tried to show at least in the last 2 years, what the comparison total contracted revenue coverage ratio is. You'll see where we're forecasting for 2013 is pretty much right on top of on a consolidated basis, where we ended 2012. You'll see for 2011 it was a higher coverage ratio, meaning that between what we had in the bag or in the book at the end of the year, the prior year, we sold less in addition to that to achieve the numbers for 2011. Over time, as you go back several years, you'll see it oscillates a little bit, that's why I said it's a little bit of art and science. What you can't easily break apart from that part of it is mix, right? So $1 of consulting revenue will show up the same as $1 of GPO revenue. While the consulting revenue may be a 6-month project, the GPO revenue could be part of a 5-year contract. So when we do that detail buildup, we take all that into account but we tend to look at sort of a high 80% to low 90% coverage ratio as a pretty good band of where we end up being. You'll see this year we're actually -- again, a little over 88% consistent with last year. That means we've got to sell a little about 11% -- a little over 11% more beyond what we already have contracted at December 31 of 2012.

Rand A. Ballard

I think Chuck also defined this when he was on that slide which is our contracted revenue estimate is signed contracts and renewals and the next 12 months, forward 12 months of revenue. So some things that are not in our contracted revenue estimate as of 12/31/12 will be certain renewals that may not -- the renewal for 2013, but it may not have been signed by 12/31 of '12. So for example, we recently renewed a patient to a long-term contract. So as we -- so if the revenue cycle technology tool, for example and there is a June 30 timeline on it for the next renewal, we'll only have 6/12 of the year revenue in the contractor revenue estimate.

Unknown Analyst

[indiscernible] because I know it's hard to see the clarity but that's very important because mix shift is so key. I understand advisor business because it's labor intensive, is going to be lower margin but can you say how much...

Charles O. Garner

Yes. So the way we think about it...

Unknown Analyst

Corporate margin as the benchmark, how much lower and then do you need to go much lower -- like lower margin initially near term to drive higher margin or is it going to be volume driven in terms -- for your margin expansion going forward because that's very important?

Charles O. Garner

Yes. So the question's really around margin shift and expectation. The way I'll describe it is this. If you think about our higher-margin solutions, which on the spend side of our businesses is our group purchasing organization and the revenue cycle side is the revenue cycle technology. Those tend to be 5 to 5.5-year or 3-year contracts, respectively. So because of that, they tend to be recurring, multiyear and that's a big piece of what's in that contracted revenue. So as you think about it over a period of time, whether it's a quarter, a year or several years, how does mix shift occur? So how mix shift can occur is as soon as we sell more of those type of products, but also if we sell more consulting engagements or more outsourcing or embedded solutions, that can have an impact. But again keep in mind that the large portion of the base of our business is already under contract with multiyear agreements. So I would not anticipate us seeing material short-term mix shifts. The place where we can see some blips up or down tend to come in the form of tomorrow we go sign a $5 million revenue cycle outsourcing agreement. That one agreement is pretty big impact, has a different margin profile than the rest of the business that will have an impact. We tend not to do a lot of those over a short period of time, so you tend not to see big swings. So I wouldn't expect to see a meaningful shift in a short period of time relating to our mix. But over the next several years as we go where I think the industry's going, more technology enabled services, right, it's the consulting, it's the advisory and the arms and legs plus the technology and the data. I think so what Chris and Gary talked about earlier, I think there's a reason why that's valuable. They want solutions and they want confidence in the results. People generally don't want to buy the pieces and parts today to put it together themselves. As the CFO, I don't want to do that. So it resonates to me as vendors approach me around solutions, I want technology enabled solutions. And so I don't think we'll see in the very near term a lot of fluctuation. But from time to time, if we do have a large deal here or there, that tends to be a large outsource deal that can impact the margin profile.

Unknown Analyst

At the business summit in Las Vegas last year you talked a lot about the population health management. You had the deal with net.orange [ph]. Didn't hear that much about that today. Where are you with that product and what's sort of going on. Maybe we didn't hear about it because we're still a year or two away from that being a meaningful contributor. Just an update there would be appreciated.

Charles O. Garner

The key there is the strategy and net.orange [ph] is one piece of really an objective for us which is to make sure that we fully understand that intersection I described between cost, quality and how ultimately providers get reimbursed for the care that they deliver. And so I think for us it's not really about one partnership. It's about an ongoing strategy to make sure that we're making, in some cases small bets and in some cases deeper bets in things like analytics to ensure that we can develop solutions to provide that kind of risk profiling and whether that becomes a service offering combined with those analytics or ultimately translates to software as we start to get into things like bundled payments, deeper analytical models which is part of the reason why we engage with net.orange [ph]. It's really about making sure that we're very crystal clear about where we want to play in population health and how we plan to be differentiated in the future. As we've been investing, we're learning, right? This is a space I think when people talk about population health, I guess, if I went around the room and asked everybody to describe what we mean by that, you'll get a bunch of different answers. And our customers are the same way and so it's really about making sure that we're aligned with customers, developing solutions that meet their needs and innovating where we can whether that's through a partnership or internally and part of the reason why we're investing in advisory solutions is because we believe the best way for us to learn quickly with a low level of investment is by getting smart people engaged with customers and making sure that we, on the ground, understand how to meet their needs directly. And it's not obvious yet, exactly what that looks like from an offering perspective. We're just pretty clear, at least with every customer we talk to, that they feel the pressure of that cost and they feel the pressure of that risk shift into their provider organizations.

Rand A. Ballard

One other comment. We decided to strategically to stay focused on some rational adjacencies, things that make just good common sense and so what we have learned is that there are very few contracts that are being deployed today where the provider's actually taking risk for the health of the patient outside the 4 walls. It doesn't mean that they're not coming. So there's more, but we'll get a chance to talk about it at HPS though, like patient engagement advisors which is turning out to be very successful. I think we have proposals in front of 80 health systems today. So it's not something we're sitting back on but we're trying to find the right pieces that are relevant.

Unknown Analyst

I wanted to -- something to give us a little perspective on the success in terms of cross-selling RCMs. We consistently heard the average number of modules per customer is around 3 and I believe on the last call you talked about 300 existing customers buying an additional module but I didn't know what -- what kind of perspective to really how to really think about that number. And if we think about RCM tech growth grew low double digits. How much of that's coming from cross-sell versus new customers?

Gregory A. Strobel

Certainly the existing customer base has always been a strong platform for us to sell into and it's been a significant portion of our add-on sales with our customers averaging a low single-digit number of technologies. That's been where we've been going and been very successful in those sales. Our core key revenue drivers continue to be, say our XClaim platform and our contract management platform accounting for, I would say, some of the largest portions of our revenue. We will continue to drive sales into the existing base but as I mentioned earlier, with additional focus in 2013 about obtaining new logos or new customer acquisitions and especially focusing into the 60% of the 3000 spend customers that we just don't do any business with today, so we think that's a great opportunity for cross-pollination.

John A. Bardis

We want to thank you all for being here and on behalf of all MedAssets employees and our senior team, we appreciate your faith in our company and thank you for investing. I want to say thanks to all of our employees for what was a great 2012 as well, and I think we have our best days as a company ahead of us and we continue to plug along and try to get the right kinds of disciplines as we tackle this market. So thank you very much for being here. We'll stick around afterward, if anybody wants to spend a little time.

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Source: MedAssets, Inc. - Analyst/Investor Day
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