By Connor Smith
Hello everybody! Welcome back to my series on how COVID-19 is forcing medical supply chains to change. In Part I I talked about how the pandemic is forcing the medical supply chains of the future to embrace digitization and automation and rep-less sales models for high cost implantable medical devices. If you have not checked out the first part of this series, you may do so here. Without further delay, let’s dive into two other ways medical supply chains will evolve.
3. Building Resilience through On-Shoring Production
It’s no secret that China is the world’s largest producer and distributor of medical supplies. Prior to the pandemic, China manufactured 48% of the United States’ personal protective equipment (PPE) and over 90% of certain active pharmaceutical ingredients (APIs). When factoring in other foreign suppliers, the U.S imports nearly $30 Billion worth of medical supplies every year, or roughly 30% of all its medical equipment. While this may seem like a fairly trivial portion of U.S total medical supplies, the pandemic has illustrated the profoundly negative consequences of relying entirely on foreign sources for particular items. There are over 25 drug shortages related to COVID-19 (17 of which are from increased demand) and critical shortages of PPE over six months into the pandemic.
Aside from the public health consequences posed by such disruptions, failure to make domestic supply chains more resilient pose a national security threat. Accordingly, shoring up medical supply chains is a priority for both presidential candidates for the upcoming election. President Trump recently announced an executive order aimed at increasing U.S domestic manufacturing and onshoring supply chains for pharmaceutical and medical supplies to protect against potential shortages. Similarly, Democratic Presidential Nominee Joe Biden put forth a 5 page plan articulating actions he will take, if elected, to rebuild domestic manufacturing capacity and ensure U.S medical supply chains remain resilient and geographically redundant in the future.
Likewise, the commercial sector has expressed similar sentiments. A recent study conducted by McKinsey & Company found that 93% of surveyed supply chain experts listed increasing resiliency across the chain as a top priority with an emphasis on supplier redundancy and near-shoring production. The U.S medical supply chains of the future will emphasize localization to mitigate as many disruptions as possible. Such regionalization will also make it easier to shorten the distance between suppliers and customers. As pointed out by Brad Payne of PCI Pharma Services, “Shortening the distance in the supply chain expedites deliveries and lessens room for complicating factors, like customs clearance”.
Forward looking supply chain leadership on both the provider and vendor sides will be investigating ways to leverage these new logistics and distribution paradigms to reduce their bottom line and improve the quality of their services. For example, technologies like Predictive Analytics can be used to improve last mile delivery for medical supplies manufacturers. Other industries have leveraged logistical data analytics in this manner to reduce fuel costs and improve the quality and performance of their deliveries. Healthcare supply chains of the future will leverage these technologies and other tools like RFID to provide more efficient deliveries and optimize procurement strategies.
4. Use Value-Based Procurement Strategies
Historically, providers received payment through a fee-for-service model in which they are reimbursed based on the number of services they render or procedures they order. This strategy made sense when it was instituted as the reimbursement mechanism for Medicare & Medicaid in 1965, but it has perversely affected the way healthcare is paid for today. Physicians are incentivized to provide as many billable services as possible and take a ‘defensive’ approach to healthcare, ordering procedures and tests just to be safe. Consequently, they may order unnecessary tests and procedures without hesitation, as neither they nor the patient are financially responsible, increasing the cost of care. Over the past decade, insurers have started implementing ‘value-based’ payment models that link reimbursement to patient outcomes in an effort to reduce the overall cost of care and improve patient outcomes. Early results suggest that value-based reimbursement can reduce the cost of claims by nearly 12% and improve chronic disease management. The benefits of value-based models by stakeholder may be seen below.
Prior to the pandemic, pure fee-for-service was expected to account for less than 26% of all reimbursements in the U.S by 2021. Given the immense financial impact of the virus, the impetus to reduce costs by transitioning to value based care has never been greater. Hence, value based procurement, or ensuring that the right product is delivered to the right patient at the right time and at the lowest cost, will be the norm of medical supply chains of the future. As members of HIMSS have pointed out, the future of the healthcare supply chain will emphasize connecting cost, quality, and outcomes to help realize the Triple Aim and optimize provider performance.
Similar to the adoption of rep-less sales models I described in Part I, the foundational technology underlying value-based procurement will be clinical supply chain integration. Connecting supply chain and clinical data sources enables providers to redefine how they administer care. Once integrated, predictive analytics can be used to guide procurement decisions based on the cost of the material and its outcome for the patient. Some hospitals have already saved over $15 Million from clinical supply chain integration. Additionally, EHR integration with supply chain data allows providers to assess clinical variance in treatment with granular detail. Such functionality will be critical as providers look to minimize the impact felt by the pandemic, and continue playing a key role in how they operate into the future.
I hope you enjoyed the second installment of my series on the future of U.S medical supply chains! I will be back next week with my final two insights as to what the future of these systems will look like. Interested in learning more or ways your medical supply chain could be improved? Feel free to contact us at Consensus Networks, where our HealthNet technology is being used to reinvent medical supply chains for the post-pandemic era. Until next week!