July 2008 Budget Impact Projections Report Raw Materials

July 2008 Budget Impact Projections Report Raw Materials

TABLE OF CONTENTS Purpose 2 Introduction 2 Quick Facts. 3 Consumer Price Index Changes in the Past Two Years.. 5 Producer Price Index Changes in the Past Two Years. 6 Key Elements Influencing Prices... 7 Average U.S. Entergy Prices.. 8 Raw Materials Tables... 8 Price Change Tables... 5

Purpose The purpose of Novation s Budget Impact Projections report is to provide health care organizations with information to assist in the supply-related budgeting process and in more effectively managing supply costs. The report uses a number of resources, including Novation contract information, Novation portfolio executives, suppliers, raw material resources, the U.S. Producer Price Index and the U.S. Consumer Price Index. Introduction In January and July each year, Novation publishes a Budget Impact Projections report for Novation products and services. The July 2008 edition of the Budget Impact Projections report focuses on raw materials and includes Producer Price Index (PPI) and Consumer Price Index (CPI) data from the U.S. Bureau of Labor Statistics. In addition, a brief summary of key elements influencing prices is provided. Consumer Price Index and Producer Price Index Changes: The CPI and PPI are indexes that measure the average change over time in the prices of goods and services. The CPI measures price change from the purchaser's perspective, while the PPI measures price change from the perspective of the seller. The CPI and PPI data have been incorporated into the Budget Impact Projections report to provide additional resources to member health care organizations for budgeting purposes. Key Elements Influencing Prices: This section includes market details on the raw materials and resources that have an impact on supply chain costs. Raw materials covered include oil, gas, resins, latex, metals, paper, cotton and food. Price Change Tables: These product category specific tables summarize price change forecasts for the national market and Novation-specific contracts from January 2009 through December 2009. Note that the Novation market price projections are forecasts, not predictions. Forecasts are point-in-time estimates of price changes and are subject to changes in market conditions. Facilities may obtain additional price benefits and/or price protection through tier pricing or commitment. For more information on these programs, contact the portfolio executive listed next to the product category in this report. This document is compiled based on information gathered from many primary and secondary sources, which Novation believes to be accurate to the best of its knowledge at the time of publication. It is intended as general information only and is provided as an accommodation to members. Use of this data is at your sole risk. This information is presented AS IS and without any warranty or guarantee, expressed or implied, as to completeness or accuracy, or otherwise. Budget Impact Projections Report/July 2008 2

Quick Facts Consumer Price Index: Hospital services, including inpatient and outpatient services saw higher increases in inflation compared to the previous year. All three fall between the 7 percent to 9 percent range. Medical care commodities inflation remains below the overall CPI inflation rate. Gasoline price inflation experienced a drastic incline in inflation compared to the 6.3 percent that was experienced two years ago. Producer Price Index: The inflation of prescription drugs rose 5.7 percent compared to 2.5 percent the previous year. Gasoline and natural gas prices have both seen striking increases. Paper and plastic products have also encountered significant increases over the last 12-month period when compared to previous years. Key Raw Materials Oil and Gas In July, the Energy Information Association projects that in 2009 the average barrel of gas will be $133. The same report, projects that retail diesel fuel prices will average $4.48 per gallon in 2009 Paper/Pulp: The two key reasons for the upward price pressures in the paper industry are: Lower supply to (or below) the level of demand o current weakness of the dollar versus foreign currencies (more exports than imports) o an industry-driven reduction of paper making capacity (close to 2.0 million tons per year of manufacturing capacity eliminated since 2005). Energy prices pulp and paper production uses an enormous amount of natural gas and electricity. Diesel prices also play a major role. A truckload of paper weighs 44,000 pounds. Natural Rubber Prices will remain high as a result of their direct link to the price of crude oil. Production is now being revived to higher levels with more trees being planted at a sizeable rate due to the profitability of higher prices. Since July 2007, prices have increased almost 62 percent. In June 2008, the price of latex surpassed the high prices the market reached in the summer of 2006. Steel Prices continue to increase at a rapid rate attributable to high demand by developing countries, a weak U.S. dollar, higher energy cost, the global consolidation of the steel industry and unexpected plant shutdowns. Global steel is up 63 percent from June of last year and 60 percent since January. North American steel is up 75 percent from last year and 72 percent since January. Stainless steel prices seem to be the exception. From a base index of 138.05 in January 2005, the stainless steel index reached a peak of about 255 in April-May 2007 and has dropped to its current level of 196. Cotton Over the past 12 months, cotton prices have increased by 33 percent - largely due to decreased supply as U.S. acreage is shifting from cotton to corn, crop failures in Brazil and political instability in Pakistan Budget Impact Projections Report/July 2008 3

Food Increased global demand for food and biofuels, and the higher cost of energy and fertilizers, will continue to pressure food prices. Experts expect supply levels of corn to be low in 2009, further raising prices. The price of corn directly affects meat, dairy, candy, soft drinks and products made from corn. However, wheat supply levels are anticipating a sharp increase, bringing downward pressure on prices. Aluminum and Copper In the last year, aluminum has risen only 6 percent, but experts believe prices will rise 33 percent over the next two years. To date, copper prices have increased 13 percent in the last year and 54 percent in the last two years. Budget Impact Projections Report/July 2008 4

Consumer Price Index Changes in the Past Two Years Consumer Price Index information comes from the CPI Detailed Report, which is published by the U.S. Department of Labor, Bureau of Labor Statistics. The Consumer Price Index is a measure of the average change over time in the prices paid by urban consumers for a marketbasket of consumer goods and services. The CPI figures provided should be used as an economic indicator and as a measure of inflation. Novation uses this publication to summarize price changes that occurred in the consumer market from the 12-month periods of June 2006 through May 2007 and June 2007 through May 2008. The CPI for all urban consumers represents about 87 percent of the total U.S. population. It is based on the expenditures of almost all residents of urban or metropolitan areas, including professionals, the self-employed, the poor, the unemployed and retired persons as well as urban wage earners and clerical workers. The U.S. Consumer Price Indexes Urban increased 4.2 percent in the most recent 12-month period compared to a 2.7 percent in the previous 12-month period. 12-MONTH CHANGES IN PRICE INDEXES Consumer Price Index Consumer Price Index - Urban (CPI-U) Hospital Services 4.2% 2.7% 7.9% 6.0% Inpatient Services 7.5% 5.4% Outpatient Services 8.3% 7.0% Medical Care Services 4.7% 5.0% Medical Care Commodities 2.2% 0.8% Prescription Drugs 2.8% 0.8% Nonprescription Medical Equipment & Supplies -0.1%.1% Electricity 5.8% 4.1% Gasoline, regular 20.5% 6.3% 12-Month Percent Change Source: U.S. Department of Labor, Bureau of Labor Statistics Consumer Price Index May 2007 and May 2008 Budget Impact Projections Report/July 2008 5

Producer Price Index Changes in the Past Two Years Producer Price Index information comes from the PPI Detailed Report, which is published by the U.S. Department of Labor, Bureau of Labor Statistics. The PPI is an index that measures the average change over time in the selling prices received by domestic producers of goods and services. The PPI measures price change from the perspective of the seller. PPI data show price increases or decreases at various stages of processing and may serve as a barometer for price changes to come. For example, an increase in the cost of crude goods can translate into higher prices for intermediate (or component) materials and finished goods. Novation uses this publication to summarize price changes that occurred in the producer market from the 12-month periods of June 2006 through May 2007 and June 2007 through May 2008. The U.S. Producer Price Indexes Finished Goods increased 7.2 percent from June 2007 to May 2008, after experiencing 3.9 percent inflation the previous 12-month period. The overall hospital services inflation rate has remained relatively steady at roughly 3.5 percent for the past two 12-month periods. 12-MONTH CHANGES IN PRICE INDEXES Producer Price Index Finished Goods Hospital Services Surgical and Medical instruments 7.2% 3.9% 3.5% 3.3% 0.8% 0.2% X-ray and Electromedical Equipment -1.7% -2.1% Prescription Drugs 5.7% 2.5% Capital Equipment 2.3% 1.6% Gasoline 26.3% 11.4% Natural Gas 49.7% 9.5% Paper Products 8.9% 0.5% Plastic Products -0.1% 5.6% 12-Month Percent Change Source: U.S. Department of Labor, Bureau of Labor Statistics Producer Price Index May 2007 and May 2008 Budget Impact Projections Report/July 2008 6

Key Elements Influencing Prices Novation offers detailed graphs and tables that are updated quarterly, covering price adjustments on oil, gas, resin, paper, rubber, latex, steel and cotton. Oil Gasoline Natural Gas Electricity Oil markets remain tight, evidenced by rising prices, low surplus production capacity, and concern that global supply growth may not keep pace with demand growth in China, the Middle East and Latin America over the near term. Preliminary estimates indicate that higher oil consumption in the second quarter and a modest increase in production left Organization for Economic Cooperation and Development (OECD) commercial inventories below the five-year average at the end of June. Saudi Arabia plans to raise production from 9.4 million barrels per day (bbl/d) in June to 9.7 million bbl/d in July have not resulted in an easing of prices. Supply losses in Nigeria and heightened tensions between Iran and Israel raised new concerns about future supplies. World oil consumption is projected to grow by almost 900,000 bbl/d in 2008 and by an additional 1.4 million bbl/d in 2009, while U.S. consumption is expected to decline by 530,000 bbl/d in 2008. WTI prices, which averaged $72 per barrel in 2007, are projected to average $127 per barrel in 2008 and $133 per barrel in 2009. Regular-grade gasoline is expected to average $3.84 per gallon in 2008, more than $1 per gallon above the 2007 average price. The U.S. average regular-grade gasoline price, about $4.10 per gallon on June 30, is projected to remain over $4 per gallon until the fourth quarter of 2009. Retail diesel fuel prices, which averaged $2.88 in 2007, are projected to average $4.35 per gallon in 2008 and $4.48 per gallon in 2009. The Henry Hub spot price averaged $13.07 per Mcf in June, $1.42 per Mcf above the average spot price in May. Despite significant onshore production growth, the natural gas market continues to be pressured by high oil prices, low LNG imports, and a widening year-over-year storage deficit. In addition, summer cooling demand was strong in June (cooling degree-days in June were 15.7 percent more than last year and 23.5 percent more than normal), which increases the amount of natural gas used in the electric power sector. On an annual basis, the Henry Hub spot price is expected to average about $11.86 per Mcf in 2008 and $11.62 per Mcf in 2009. Inventories currently remain lower than previous years due to increased consumption. Within the past few weeks, a number of utilities have requested permission from state regulators to raise electricity rates in response to rapidly increasing delivered fuel costs for power generation. It is likely that most other utilities will soon need to pass through these increased costs to retail customers as well. As a result, the forecast for growth in electricity prices is significantly higher than it was in last month s outlook. Average U.S. residential electricity prices are expected to increase by 5.2 percent in 2008 and by 9.8 percent in 2009. Source: www.eia.doe.gov (Energy Information Administration) Budget Impact Projections Report/July 2008 7

Average U.S. Energy Prices 2004 2005 2006 2007 2008 2009 Crude Oil Prices ($ per barrel) Imported Average $35.99 $41.44 $48.90 $56.49 $59.02 $66.02 $67.13 $72.32 $119.44 $127.39 $125.69 $132.75 West Texas Intermediate Spot Avg. Gasoline Retail ($ per gallon) $2.58 $2.81 $3.84 $4.06 $1.85 $2.27 Regular Unleaded $2.70 $2.88 $4.35 $4.38 $1.81 $2.40 Diesel Fuel Electricity (cents per kilowatt-hour) 8.2 8.7 9.5 9.7 10.2 11.2 Natural Gas ($ per thousand cubic feet) $9.43 $11.34 $11.99 $11.30 $13.83 $15.51 Source: www.eia.doe.gov (Energy Information Administration) Notes: Prices exclude taxes, except prices for gasoline and natural gas. Forecasts are in italics. 180.0 Paper and Pulp 170.0 Index - Base Year 1982 = 100 160.0 150.0 140.0 130.0 120.0 110.0 Uncoated freesheet Pulp Source: Producer Price Index - Commodity Two key reasons for the upward price pressures in the paper industry are: Lower supply to (or below) the level of demand o current weakness of the dollar versus foreign currencies (more exports than imports) o an industry-driven reduction of paper making capacity Energy prices pulp and paper production uses an enormous amount of natural gas and electricity. Diesel prices also play a major role. A truckload of paper weighs 44,000 pounds. Budget Impact Projections Report/July 2008 8

750 Centrifuged Latex Price (Sen/Kf) Wet 700 650 600 550 500 450 400 350 300 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Source: Malaysian Rubber Board, http://www3.lgm.gov.my/mre/daily.aspx Jul-08 Natural rubber prices will remain high as a result of their direct link to the price of crude oil. Production is now being revived to higher levels with more trees being planted at a sizeable rate due to the profitability of higher prices. Since July 2007, prices have increased almost 62 percent. In June 2008, the price of latex surpassed the high prices the market reached in the summer of 2006. 220.0 215.0 Plastic Resins Index - Base Year 1982 = 100 210.0 205.0 200.0 195.0 190.0 185.0 180.0 Source: Producer Price Index - Commodity Weak demand for resins should keep prices steady and could possibly bring price decreases in late 2008 and 2009. In the last year, prices have increase 13 percent. Budget Impact Projections Report/July 2008 9

300.00 North American Steel Prices Index 280.00 Index - Base Year 1994 = 100 260.00 240.00 220.00 200.00 180.00 160.00 140.00 120.00 100.00 North American Steel Global Steel Stainless Steel Source: CRU, www.crugroup.com Steel prices continue to increase at a rapid rate attributable to high demand by developing countries, a weak U.S. dollar, higher energy cost, the global consolidation of the steel industry and unexpected plant shutdowns. Global steel is up 63 percent from June of last year and 60 percent since January. North American steel is up 75 percent from last year and 72 percent since January. Stainless steel prices seem to be the exception. From a base index of 138.05 in January 2005, the stainless steel index reached a peak of about 255 in April-May 2007 and has dropped to its current level of 196.2. 410.0 Aluminum and Copper Index - Base Year 1982 = 100 360.0 310.0 260.0 210.0 160.0 110.0 Aluminum Copper Source: Producer Price Index - Commodity Aluminum production is energy intensive causing producers to struggle with increasing energy costs, but healthy supply levels have helped keep price increases minimal. In the last year, aluminum has only risen 6 percent, but experts believe prices will rise 33 percent over the next two years. Continued growth in demand for copper in developing countries and high energy prices have caused the recent price increases, but new copper production and good supply levels may help keep prices from continuing to rise. Copper prices have increased 13 percent in the last year and 54 percent in the last two years. Budget Impact Projections Report/July 2008 10

85.00 Cotton "A" Index Cents per LB 80.00 75.00 70.00 65.00 60.00 55.00 50.00 45.00 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Source: National Cotton Council of America (http://www.cotton.org/econ/prices/monthly.cfm) Cotton is the primary raw material used in the manufacture of health care textiles (e.g., linens, patient/worker apparel, etc.). The textiles industry has been negatively affected by soaring cotton, energy costs and the U.S. dollar devaluation. For instance, the U.S. dollar has fallen against Chinese currency since January 2007, making Chinese textiles imports more expensive. China is one of the primary import markets for textiles suppliers. Over the past 12 months, cotton prices have increased by 33 percent. Decreased supply due to U.S. acreage shifting from cotton to corn (ethanol), crop failures in Brazil, and political instability in Pakistan has driven up prices. Food Prices 310.0 Index - Base Year 1982 = 100 260.0 210.0 160.0 110.0 60.0 Wheat Corn Fruit Vegetables Meat Milk Source: Producer Price Index Commodity Increased global demand for food and biofuels, and the higher cost of energy and fertilizers, will continue to pressure food prices. Experts expect supply levels of corn to be low in 2009, further raising prices. The price of corn directly affects meat, dairy, candy, soft drinks and products made from corn. However, wheat supply levels are anticipating a sharp increase, bringing downward pressure on prices. Budget Impact Projections Report/July 2008 11

Price Change Tables PRODUCT CATEGORY NATIONAL PRICE CHANGE PROJECTION OVERALL PRICE CHANGES NOVATION CONTRACT PRODUCT PRICE CATEGORY PROJECTION NATIONAL PRICE CHANGE PROJECTION NOVATION CONTRACT PRICE PROJECTION Anesthesia 4.8%.7% Laboratory 6.5% 4.6% Cardiovascular 1.1% -.9% Medical Supplies 4.3% 1.2% Environmental 11.3% 3.2% Office Supplies 5% 2.7% Services Food and Nutrition 8.9% 3.7% Orthopedics 5.5% 2.8% Imaging 0% 0% Surgical Supplies 3.3% 1.3% I.V. Solutions and Supplies 4% 3.5% Overall Market Price Change 3.6% 1.6% Budget Impact Projections Report/July 2008 12