Innovative Health's Blog

Status on the US Healthcare supply chain – leaders prepare for tariffs while old structures erode

Written by Lars Thording | Dec 16, 2024 9:28:50 PM
4 years ago, the COVID 19 pandemic shook US healthcare and challenged the very way hospitals purchased and used equipment. Decades of focusing on cost reductions were replaced with considerations about device reuse, Personal Protective Equipment (PPE) shortages, and securing supply chain resilience. Single-source contracts went on the wayside while supply chain leaders sought novel (and creative) ways of securing the PPE they needed through multi-channel arrangements. Price meant less than supply assurance.

When we slowly returned to normal, hospitals quickly resorted to the old ways – the pendulum swung all the way back to focusing primarily on cost reductions. However, healthcare supply chain leaders took a lesson with them: While cost is king, we need to fundamentally update our supply chain system to reduce vulnerability and to bring hospital purchasing and consumption up to date with the newest technologies, data utilization techniques and forecasting tools. And we need to align our purchasing strategies with social and environmental forces that drive change across all industries in the country.

Now, December 2024, healthcare supply leaders once again find that their roles have become the possibly most important roles in US healthcare. Not because the demand for diversity spend is causing immense pressure – but because the incoming administration’s sable rattling about tariffs causes pandemic-like concerns about the availability of needed products. Hospital systems are buying as much as they can within disposable product categories that are either expensive or critical – or both.

 

Hospital systems are buying as much as they can within disposable product categories that are either expensive or critical – or both.

 

Supply chain leaders also know that they are fighting with their back against the wall. They are tired of being caught with their pants down, and they are fed up with organizational structures and cultures that insist on healthcare being the last industry to catch up. Healthcare supply chain leaders fear Walmart more than they fear pandemics – pandemics expose the vulnerabilities of the system; Walmart is like the little boy who yelled “the emperor has no clothes”: Healthcare does not have an advanced, updated system of selecting, purchasing, and utilizing products to maximize economic value, patient safety, and healthcare outcomes. Forget about considerations about the environment, social equities, and resilience. American retail has all this, healthcare does not.

The foremost healthcare supply chain leaders, however, do have a clear vision – if not a plan:

  • To catch up with technology, manage new product adoption, reduce risk, and optimize bargaining power, health systems cannot continue to act like islands. They need to congregate around the same platforms, and they need a system of mediation and aggregation of demand to successfully navigate market conditions. Individually, even the largest health systems have no negotiation power (the largest health system in the US is less than 5% of the market). All suppliers are ten times bigger than the biggest hospital buyer, and they are usually in oligopolistic markets. In addition, suppliers of medical supplies are so much more sophisticated in their sales processes than hospitals are in their buying processes. The Group Purchasing Organization (GPOs) became the primary conduit for healthcare purchasing to address exactly this. However, the GPOs do not perform this role. They have become administration fee administrators and little more - in the eyes of supply leaders. Healthcare needs a reborn GPO, a new GPO, or something different. Healthcare needs a better purchasing structure that transcends the individual health system. And health systems leaders are ready.

  • Operationally – other than cost containment - the strongest focus for US health systems today is on innovation and technology. This means creating a forward look the “life of supply” – having real-time visibility into supply and demand as opposed to historical numbers in the rearview mirror. Getting to advanced, actionable analytics is the key. This means leveraging generative AI and other advanced tools information technology. In terms of technology, healthcare has a lot of catch-up to do compared with other industries, but there are several examples of companies and solutions that enable  health systems to benefit from piecemeal technology modernization and with limited integration adopt newer technologies to make the supply chain more efficient and effective. Inventory management is an obvious place to start, but most compelling progress will be made with predictive analytics, demand planning, and better forecasting models. The most likely application of AI in the short term is in BioMed, Sterile Processing (SPD), and contracting and contract reviews.

  • The growing importance of Ambulatory Surgery Centers (ASCs) and other specialized care services like imaging, infusion, etc.) can be seen as a threat to hospitals that high-margin procedures may disappear, leaving hospitals with the low-margin procedures and a downward sprint to financial loss.  The reality is that more and more procedures are migrating out of the hospital and into other provider units. This happens on some key healthcare service lines like, orthopedics, spine, and cardiology. Most hospitals are still running with a 2% operating margin and they can’t afford this. On the other hand, this development also represents an opportunity for healthcare facilities to specialize and get the care closer to the patient. Fragmentation and decentralization of care is an opportunity for hospitals, and supply chain leaders know it should be embraced rather than feared. Additionally, this needs to be looked at from the perspective of capacity: Specialization helps with throughput. But hospitals must be deliberate and strategic in this development to retain revenue and not break the universe of healthcare. Hospital leaders could start by learning how successful surgery center systems manage centralized purchasing.

  • Supply chain leaders in healthcare are still battling the increasing cost of new technology pursued by doctors who insist on being on the forefront of their clinical fields. Value Analysis Committees were introduced in healthcare to ensure that when new (and usually more expensive) technologies were adopted, they actually made a difference in terms of patient care quality. They were not just a new shiny pbject that the physician liked. In reality, Value Analysis Committees are not very effective at doing this, as they often act as rubber stamping committees or even create additional inefficiencies due to outsized concerns for infection control. A Medical Device Technology Cost Efficiency Index – a standardized index that calculates cost/procedure improvement to elucidate the value of (new) technology – can become useful in the healthcare supply chain as an objective, data-based tool for deciding whether to adopt new technology. Currently, there really is no tool to scientifically evaluate new technology. This type of index could be used as an industry guide, but also as a tailored tool for the hospital that can enter its own pricing, etc.

2025 will start with a lot of focus on the new administration and its position on tariffs as well as healthcare system governance. Our very best healthcare supply chain leaders are ready for change. And I think we will see some very interesting developments in 2025, probably within the broader areas described here. And among these, the need for health systems to come together to strengthen purchasing power is evident.