What’s in store for the global healthcare supply chain in 2025?
In his work as Chief Consulting Officer and Co-founder of Access Strategy Partners Inc., John Strong does a lot of industry number crunching to look for the key headwinds and tailwinds that affect the U.S. healthcare supply chain. As such, there’s no question in Strong’s mind that inflation has played the part of disruptor in the marketplace.
Over the last couple of years, inflation has driven the cost of med/surg supplies and drugs up approximately 21% to 22%. The good news is those percentages are coming down. The bad news is that any increases now are on top of those previous ones.
People are desperate to save wherever they can on supply purchases, said Strong. Unfortunately, this has led to a longstanding focus that’s now being magnified by buyers on price. For smaller purchases, such as commonly used items that are disposables, there’s not a lot of value analysis going on because the payoff is assumed to be small. “But this is where a lot of the price creep has occurred in my opinion,” he said. “These smaller purchases largely get ignored. They’re sometimes contracted by the GPOs. And even with the best intentions of the GPOs, there have been substantial price increases. And so, inflation has hurt everybody, including hospitals with their purchases.”
In the following article, Strong provided Repertoire Magazine with several other observations – and forecasts – of the global healthcare supply chain as 2025 nears.
Is onshoring a viable strategy?
During and after the pandemic, the government put more than $1 billion into creating onshoring opportunities for products like nitrile gloves and disposable masks. Many entrepreneurs also invested in these efforts.
The support from providers, it seemed, was there. In a recent Premier survey of 102 hospitals, 90% of respondents indicated that domestic manufacturing is a key element of shoring up the supply of goods.
But Strong said over the last year he’s observed a trend toward hospitals going back to overseas sources in China and Southeast Asia for these disposable products. “It’s led to about 70% of these domestic companies going out of business,” he said. “It’s also led to frustration from those still in operation today and who have built out an infrastructure to manufacture and distribute these types of products. Are we being penny-wise but pound foolish? We can save two cents a mask by buying it from China versus the U.S. market, but right now there are a huge number of supply chain risks out there in the world.”
Indeed, if the last several years have taught us anything, the next round of supply disruptions could be just around the corner. The U.S. imports around 30% of its demand for disposable medical supplies and equipment. Potential global disruptors and other threats include:
- The recent port strike that threatened food, medical supplies, auto parts and more.
- The recent Canadian rail workers’ strike that affected North American freight.
- Continued Red Sea shipping troubles with commercial ships being attacked by the Houthis and other groups.
- The ongoing war in Ukraine.
- Trade war with China.
- The growing hostilities in the Middle East.
Strong said the U.S. healthcare supply chain should consider some of the real economic costs that are incurred when shortages occur:
- Reduction of revenue. The Premier survey indicated that about $350,000 in lost revenue was incurred by mid-sized health systems – defined as five hospitals or 650 beds.
- Safety stock. The survey indicated that shortages can perpetually tie up $1 million of excess inventory.
- Delivery costs. Shortages inflate care delivery costs by $3.5 million from disruptions in care plans and the costs associated with mitigating shortages.
- The constant disruption and staffing requirements to source substitutes, both in the purchasing department and pharmacy. Some sources have estimated that shortages are costing the average 200-bed hospital about 1 FTE in lost time just looking for product.
“There is this never-ending list of bad things happening in the supply chain as far as logistics go,” Strong said. “If I were back in a hospital again running the supply chain, instead of saving a penny or two on certain commonly used items, I might be looking for more domestic sources of supply that can guarantee delivery in good times and bad, even if domestic sourcing costs a bit more. You can actually do the math and figure it out.
However, not all old habits have been hard to break. Strong said there’s been some movement away from Just-in-Time (JIT) delivery, and many larger health systems are adding additional inventory for certain products to ensure that they have a source of supply in the future. In a survey last year of healthcare providers, Premier asked respondents how many times they had to change, cancel or modify a surgical schedule because of a shortage of supplies. More than half of the respondents did have some modification or cancellation of surgeries due to supply shortages.
“All of that adds to the cost of doing business for the hospital,” Strong said. “It’s inconvenient for the patient and the staff, and it is very problematic. So, I think you’re seeing JIT backing off a little bit. People are keeping larger stores of supplies so that they prevent those kinds of bad things from happening in their hospital.”
Getting a better handle on expenses
Right now, supply chain leaders are trying to do more in terms of big cost items. Hospitals are generally doing a much better job today with service contracts than they did five years ago. Part of that is due to technology that now exists to help manage service contracts, but it also comes down to better control by the hospitals of who can sign service contracts and those types of things, Strong said. “And I’m not talking just services on capital equipment, I’m talking about services for whole departments such as the dietary services or food service department, as well as perhaps its biomedical engineering, housekeeping, or other areas.”
Medical device market watch
One of the hottest markets right now, if you’re looking at it from the supply side or from the med/surg manufacturer side, is organ transplantation, Strong said. “There are three or four companies coming out with new solutions to organ transplantation, and their stocks have performed very well. They preserve organs for much longer than just being packed on ice and put in a camping cooler and taking them across the country on an airplane. These are systems that preserve organs and they arrive in much better shape.”
Over the next five years, as these technologies emerge further, Strong believes we’ll see an increase in viable transplant organs for heart, liver, kidney, etc.
Another device market to watch is cardiovascular. “After close to 20 years of almost nothing happening in treating arrhythmias, we’re now seeing a move toward new technology called pulse-field ablation or PFA that is changing the arrhythmia catheter market. In Europe these catheters are being sold at about double the price of older technology, but patient outcomes can be significantly better. “You’re going to see even bigger improvements in those cardiovascular areas over the next five years as well.”
Looking ahead to 2025
Continued disruption in the supply chain will remain a key trend to monitor in 2025, Strong said. “We’re going to see more movement by manufacturers away from China, perhaps to other areas in Southeast Asia, or perhaps to North America, particularly Mexico.”
When it comes to value analysis, Strong said there’s going to be a closer look at new products that provide genuine innovation. “But the question then becomes at a certain price point, is the innovation such that we can afford it within our current cost reimbursement for patients?”
The third area for industry stakeholders to keep an eye on is the federal government’s continued involvement in trying to solve the drug shortages in this country. “There have been a number of articles both in The Wall Street Journal and The New York Times now about pharmacy benefit managers (PBM) and some of their management of costs for patients seem a bit questionable. In some cases, you may be paying more because the PBMs product selection benefits them more than the benefits to the patient, according to recent federal studies.
“Having said that, I believe the government is going to continue to look at other middlemen,” Strong continued. “They’ve already talked about PBMs, they’ve also talked about looking at the actions of group purchasing organizations and perhaps others. So, I think that’s going to continue to percolate, particularly if Lina Khan stays as the Federal Trade Commissioner in the new administration, whoever is elected.”
Strong believes AI could be the next dot com boom and bust. “There are things that artificial intelligence can do, particularly in the supply chain, but it still takes well-thought-out human strategies,” he said. “It still takes well-intentioned hard-working people. And artificial intelligence can’t solve all the problems we have within the supply chain today. It can be a help. I use artificial intelligence myself. I like using it, and it’s very quick and efficient, but there are also times when artificial intelligence hallucinates, and a total reliance on artificial intelligence in the healthcare system, whether it’s in supply chain or diagnosing patients or anything else, can lead to problems if there isn’t human intervention and management of them.”
Value props
To be successful in today’s and tomorrow’s marketplace, healthcare manufacturers must be able to do a good job of distilling their value proposition for the products that they’re trying to sell to their customers. And oftentimes, Strong believes, perhaps rightly, hospital buyers expect suppliers to be able to quantify in meaningful terms what that value proposition is.
Strong said there are several key elements. “First, what problem are you solving with this particular new product?” he said. “How does it benefit the clinicians and the healthcare provider itself in terms of value, cost, time, and those types of things? Does it impact reimbursement? And how does this impact the patients? Is it better for patient care? Does it reduce patients’ stay in the hospital? Does it reduce infections or length of stay, for example?”
All of those things have to be considered. If a manufacturer or distributor can document and quantify what those things are for their customers, they’ve got a much better shot of success in today’s market than simply dealing a sales pitch that doesn’t really have a measure of quantification and qualification attached to it.
“Because if it does end up going into the value analysis committee, they’re going to ask all those questions anyway,” said Strong. “So, you might as well have it in your bag in a very succinct form that you can take out and make your case based on facts, and don’t overwhelm the potential value analysis committee champion of your product with too much information. The 300-page VAC packs don’t cut it because no one has time to read them.”