Changes and Challenges in the Healthcare Supply Chain

Last Updated June 30, 2021

Supply chain—it’s how your favorite products (from that new smartphone to this week’s meal kit) make it to your front door or store shopping cart via a network of producers, manufacturers, distributors, transporters and vendors, taking that product from creation to delivery.

In healthcare, the consumers are patients and the product they want is their own improved health at the best, or most affordable, price possible. An injured patient in the emergency room isn’t thinking about how the physician’s preferences in the equipment all around him—from headlamps to surgical gloves, sutures to scalpels—and how that can make a difference in his health outcomes or his healthcare costs.

“Healthcare is not based on supply and demand. It can’t be ‘stocked’ like it’s a traditional product” says Mike Rip, Director of the Master of Science in Healthcare Management at Michigan State University. “So a hospital’s supply chain is very different from a business or company’s supply chain.”

The changing expectations of patients as consumers and the highly regulated nature of healthcare is creating unique challenges and driving change. At the heart of these changes is supply chain management with its strategic role within the affordability and quality of patient care, as well as in the cost structure of healthcare organizations.

Reimbursements and Costs

Supply chain management costs consistently rank as some of the largest expenses for healthcare and hospital systems, with a recent survey of healthcare executives and administrators revealing that productivity improvements and healthcare supply chain cost reductions are top priorities. With the value-based reimbursement model implemented by the Affordable Care Act incentivizing healthcare providers to coordinate patient care within Accountable Care Organizations (ACOs) with a “pay-for-value” model, based on performance and results, rather than the traditional “pay-for-service,” where the cost of care was often paid upfront, more healthcare leaders are looking at how they can provide an improved patient experience while reigning in costs.

More healthcare leaders are looking to the healthcare supply chain as one of the biggest areas for savings opportunities and taking into account the impact SCM planning goals can make, according to an article from XTelligent Healthcare Media. This can start with planning the budget around total landed supply costs—the total cost of getting a product from manufacturer to the hospital or physician’s office, which beyond the initial purchase price includes logistics costs, insurance, duties, taxes and other fees. Instead of merely “focusing on product costs, focus on distribution and invisible costs as well,” says James Spann, Practice Leader of Supply Chain and Logistics at Simpler Healthcare.

For larger hospital systems, this assessment has led many to become their own warehousers and distributors, bypassing vendors to cut costs. For example, the University of Pittsburgh Medical Center invested in a 150,000 square foot warehouse and management system, moving the volume and costs of 10 vendors to in-house self-distribution, according to a report in Forbes. Similarly, healthcare providers and systems often come together under the umbrella of Group Purchasing Organizations (GPOs), which leverage the collective purchasing power of the group to help lower costs.

A more holistic and end-to-end approach to the healthcare supply chain is not only about improving efficiency and reducing costs to the hospitals and healthcare systems, but about providing better healthcare in the least lead time and at lower costs to the patient. At Spectrum Health, recently ranked in Gartner’s 2018 Healthcare Supply Chain Top 25, supply chain requests “flow through a consistent process and are inclusive of clinical quality and outcomes, financial/reimbursement and operational assessments,” says Kurt Knoth, Vice President of System Supply Chain.

Knoth’s role with Spectrum Health is one example of how supply chain is gaining visibility in the healthcare C-suite, with many hospitals and healthcare systems recognizing the SCM impact to larger, system-wide strategic initiatives.

Efficient Data Collection and Analysis

“In a payment environment that reimburses for value, it has become more critical to understand exactly how much it costs to deliver patient care,” stated Doug Brown of Black Book Market Research in an interview with Xtelligent Healthcare Media. “Clumsy costing based on uncoordinated data will become perilous.”

In a 2016 survey conducted by Black Book, 69% of healthcare IT leaders said the healthcare supply chain is “the most valuable asset for actionable data mining,” even more so than electronic health records (EHR) or population health information.

Solutions for capturing and analyzing data along the supply chain can provide better indicators of product need, helping to reduce waste, stabilize inventory and, ultimately, bring costs down. However, there’s a lack of data gathering, modeling and reporting since many steps within the supply chain are still manual ones, particularly in hospitals. A 2017 Cardinal Health Hospital Supply Chain Survey of hospital staff fielded by SERMO found that 78% of respondents were manually counting inventory at some point in their supply chain and only 17% stated that their hospital had implemented an automated technology system to track products and inventory in real time.

Not surprisingly, those without automated resource planning and tracking systems were also less likely to have implemented other applicable technology, such as Radio Frequency Identification (RFID) technology and computerized provider order entry (CPOE) systems, which can make supply chain management more efficient and have become the standard in other industries, including sectors interdependent with healthcare, such as pharmaceutical manufacturing.

Besides providing invaluable data and greater efficiency, which can help reduce costs, an automated, technology-based supply chain can help improve patient outcomes by supporting a higher level of patient care. With more than half of the respondents in the Cardinal Health survey stating that the lack of a product or device had interfered with a patient’s care, inventory data can underscore the importance of the supply chain in value-based care and patient outcomes.

Physician Preferences and Procedure Processes

One of the biggest factors in supply chain costs can be the healthcare practitioners themselves. Different physicians, surgeons and healthcare professionals have different preferences for the products and tools that they use and how they are used during a procedure. While basing inventory management decisions on physician preference cards (an itemized list of all supplies required for an appointment or procedure) is not the most cost-efficient method, many organizations allow this to be the final say in many purchase decisions.

A lack of uniformity and failure to update physicians’ preferences once inventory, vendors or those preferences change can lead to an inefficient use of supplies, excess products wasted and a black hole of costs. Case in point, one of Kurt Knoth’s cost-saving initiatives for Spectrum Health reduced the different hand sanitizers used throughout the healthcare system from 30 down to three, saving over $30,000 per year.

While many physicians and healthcare staff may resist changing their preferred tools and supplies—whether that be a headlamp or a patient implant—demonstrating how that preference can be tied to both patient outcomes and costs can get physician buy-in for implementing improvements in the healthcare supply chain.

By using electronic health record (EHR) data to correlate supply costs to patient procedures, researchers at the University of California, San Francisco were able to develop a cost scorecard showing the median surgical supply direct cost for each procedure type performed within one “intervention” group of surgeons. The study published in JAMA Surgery showed that after a year of receiving the monthly scorecards, the group’s year-over-year savings stood at 9.95% for a total savings of $836,147.

With some estimates indicating that physician preference items account for over 60% of healthcare supply chain spending, moving the management of supply inventory away from physician preferences and integrating these steps into the supply chain can provide a more efficient solution, allowing the supply chain team to see inventory gaps and process repetitions and freeing up physician resources to focus on patient outcomes.

Meeting the Challenges

In response to these unique challenges and changes, future-focused organizations are elevating the strategic role the supply chain plays—from the rise of supply chain into an executive leadership function with VP or chief supply chain officers, to creating an experiential supply chain that can help turn patient care into a comprehensive healthcare experience—complete with concierge service, locally sourced organic produce, and shopping and dining experiences that can make a hospital stay feel more like a luxury hotel getaway.

Healthcare needs innovative leaders who are prepared to meet these industry challenges today and anticipate the expectations of tomorrow with a thorough end-to-end understanding of the healthcare supply chain and vision for the future.