Healthcare Supply Chain: Changing the View from Local to Macroeconomic

Over the past 30 years the United States healthcare supply chain function has clawed its way out from the hospital basement to becoming part of the executive team.?Today’s health system supply chain leaders require deep experience to develop strategies and tactics that meet the clinical, operational, and financial needs of their enterprise.?Many have been groomed for decades on the way to earning the top job—learning and supervising various purchasing, contracting, materials management, and logistics departments.?The most successful supply chain leaders help create a competitive advantage for their health system within the markets they compete.?

During this same time period, healthcare industry costs have greatly outpaced inflation and while health outcomes have improved, they came at a significant cost, with healthcare expenditures rising to nearly 18% of GDP.?It begs the question, what more could have supply chain professionals have done to help the healthcare industry??

Let’s take a step back.?During those past three decades, we’ve seen four major industry dynamics that directly affected the supply chain:

• Technology Advancements—the digitization of processes (eProcurement, real-time inventory management systems) and real-time data/analytics
• Group Purchasing Organization Influence—less regulation (safe harbors) and expansion of service offerings (contracts, systems, analytics, revenue cycle, pharmacy benefit management, etc.)
• Industry Consolidation—including health systems, medical/pharmaceutical suppliers, and GPOs
• Offshore Manufacturing—there has been significant growth in FDA approved medical/pharmaceutical suppliers in offshore manufacturing

In response to these market changes, healthcare supply chains have embraced technology advancements and have incorporated them into their respective enterprises as capital became available.?These efforts have greatly improved processes, cycle times, and quicker access to data/information for decision making within their own enterprises. ?

Almost all health systems continued to have GPO relationships, with a vast majority embracing their growth and expanded influence (including into the C-suites of their own enterprises). GPO strategies have changed over the past 30 years, focusing more on process improvement and quality.?But the more important trend was the concerted effort on supply contracts to ensure covering all supplier products being sold on the market (aka “all-play”), this not only ensured higher utilization of contracts, but enabled GPOs to maximize their revenue from administrative fees.?To make this transition, contracts were restructured with higher prices through “access” and extensive “multi-tier” pricing models to keep all suppliers willing to participate.?These changes have watered down the rigor of a strategic sourcing process, causing one to wonder why they would even engage in the process since it will not satisfy the goal of yielding market-leading pricing from suppliers.?Once the GPO contract price is established, suppliers are reluctant to allow health systems to negotiate more meaningful discounts even though all know better pricing is still available.

Apparently absent during this period was a strategically coordinated effort to address industry consolidation and increased offshoring of supplier manufacturing. This lack of focus was a missed opportunity to help control medical/pharmaceutical prices, which have greatly outpaced inflation.?In industries outside of healthcare, supply chains capitalize on the financial opportunity when they grow their purchasing volume (as happened in health system and GPO consolidation) and/or when suppliers offshore manufacturing to regions of the world with lower production costs.?Additionally, they would have been very active to ensure that supplier consolidation (which raises prices) would be minimized by helping to bring new market entrants and/or lobbying the government to block mergers before only a few powerful suppliers remain. In addition to increased costs, the risk to product availability has greatly increased. Expanding offshore manufacturing creates increased source-of-supply risks and reduced resiliency.?It’s not just longer lead times, it’s vulnerability of delivery of lifesaving products that need to arrive from very far distances, especially during natural disasters, pandemics, and political conflicts.

While the supply chain evolved at a “local” level, this was not the case at an industry (or macroeconomic) level. Why??Were national healthcare supply chain leaders ineffective, unaware, or distracted with other priorities? Is current leadership able to recognize these challenges and strategically address them??Most importantly, how do we ensure that supply chain leadership continues to evolve with a macroeconomic perspective??

More to come….

About the Authors

Mike Georgulis and Mark West have collectively over 60 years of supply chain management experience, with a vast majority in health systems, GPOs and commercial payers.?We’ve been fortunate to get a unique industry perspective based on our executive level, international, and company start-up experience.???They are currently collaborating on a book that looks through the lens of the supply chain and major challenges in the healthcare industry—in strategic alignment, cost and quality.

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