Question

• Discuss how you would categorize or segment healthcare supply chain items and which segments need clinician interaction and communication.
• Discuss what can be done to limit the impact of drug shortages, and how this is beneficial.

Answer 1

The supply chain generally refers to the resources needed to deliver goods or services to a consumer. In healthcare, managing the supply chain is typically a very complex and fragmented process.

Healthcare supply chain management involves obtaining resources, managing supplies, and delivering goods and services to providers and patients. To complete the process, physical goods and information about medical products and services usually go through a number of independent stakeholders, including manufacturers, insurance companies, hospitals, providers, group purchasing organizations, and several regulatory agencies.

However, by promoting efficiency in the healthcare supply chain, hospitals and physician practices can create substantial cost-reducing opportunities across their organization.

Here is a look at what goes into healthcare supply chain management and how healthcare organizations can overcome major challenges to further reduce spending.

What is healthcare supply chain management?

Take a moment to think about what providers use every day to treat patients. Providers use a myriad of items, such as syringes, prescriptions drugs, gloves, pens, papers, and computers. Employees involved in healthcare supply chain management are responsible for stocking organizations with the products providers need and managing inventory.

However, managing supply chain is not as simple as making sure providers have enough gloves.

“Simply stated, supply chain is the management of upstream and downstream relationships with suppliers and customers to deliver superior customer value at less cost to the supply chain as a whole,” James Spann, Practice Leader of Supply Chain & Logistics at Simpler Healthcare, said in a 2015 interview.

“The challenge for hospitals is to align the supply chain to the care delivery model.”

The healthcare supply chain starts at the medical product manufacturer where items are produced and sent to a distribution center. Depending on the type of product, hospitals can either purchase inventory directly through the manufacturer or distributor, or the transaction can be conducted through a group purchasing organization, which establishes a purchasing contract with the manufacturer on behalf of the hospital.

Medical products are then sent to the healthcare organization, where the goods are stocked into inventory for providers and patients. The organization ensures that providers are not left without essential medical products and patients have access to potentially life-saving tools.

Another aspect of healthcare supply chain management involves the participation of regulatory agencies, such as the Federal Drug Administration, and healthcare payers, including Medicare and private health insurance companies. Regulatory agencies and payers determine if a medical resource is fit for consumer use and whether providers will be reimbursed for using it on specific patients.

Why is healthcare supply chain management so complex?

Healthcare supply chain management is unique because each stakeholder has their own interests to protect. Different stages in the supply chain flow may be focused on their own goal. Providers may want to use a specific product because they were trained with it, whereas hospital executives aim to purchase the most affordable quality items.

Since supply chain goals are not always aligned within an organization, the healthcare supply chain management process can be inefficient and fragmented. Healthcare organizations must take into account numerous requests and viewpoints to settle on specific product budgets.

Patients also have a voice in the healthcare supply chain management process. Healthcare organizations may be able to regularly order the correct sizes of gloves and keep them stocked, but some patients may need more customized medical products, such as latex-free options, depending on their health status.

Likewise, providers may prefer a specific brand or type of medical product, which could lead to cost concerns.

For example, providers may prioritize their own preferences for certain products, while financial managers attempt to cut healthcare costs and reduce out-of-date products. Oftentimes, hospitals face hoarding or squirreling away of certain products by providers.

“In most cases, clinicians just want the products when they need them,” Spann explained. “But to ensure that happens they oftentimes hoard or opt manage their own supplies. This can contribute to cost variance and off contract spending which are hard to uncover. One more invisible cost that is often overlooked is the time spent looking for supplies or waiting for someone to deliver what they need.”

Misaligned incentives and independent goals can disrupt the flow of the supply chain for many healthcare organizations.

How can providers overcome common challenges in healthcare supply chain management?

Some healthcare organizations have found success with supply chain management through cost transparency. By harnessing price and utilization data, healthcare organizations can track and manage inventory more efficiently and construct more informed purchasing contracts with manufacturers.

“Due to vertical internal structures, supplies and supply data historically have been siloed and firewalled so that information important for efficient business operations is fragmented,” Steve Kiewiet, Vice President of Supply Chain Operations at BJC HealthCare, told RevCycleIntelligence.com in June 2015. “We end up spending billions of dollars of inventory within these various silos because we live in a world where you can never run out of anything ever, in the interest of what is best for the patient.”

“When we have visibility of product from finished goods to the use on the patient and we actually capture demand and consumption versus capturing purchasing activity, we capture consumption activity,” added Kiewiet. “We significantly reduce waste and variation in the supply chain. Inventory levels come down for everybody. Product expiration can be virtually eliminated.”

Different automated tools can help organizations increase price transparency, such as computerized provider order entry systems, which can standardize and streamline physician orders, or Radio Frequency Identification technology that can capture volumes of data from a product’s barcode.

Getting all hospital departments on the same page is also a key strategy for optimizing healthcare supply chain management. In the era of value-based care, healthcare organizations are focused on reducing redundancies and eliminating waste, but providers also need to work together to effectively reduce costs and boost performance.

“The supply chain touches every department within the hospital,” stated Spann “You must look at the people in the organization, supply partners, and determine how you can get synergy and maximum productivity out of your clinical and supply chain staffers to achieve your supply chain goals.”

Engaging clinical staff can also help to establish cost-saving habits, discourage hoarding, and empower providers to keep cost concerns in mind when delivering care.

“Today, health systems must be willing to take risks,” continued Spann. “They have to be willing to hand over the keys and allow physicians to co-lead these strategies. Physicians will engage when they understand the issues, and it is very important to let them help craft a solution that they can stick to.”

Most health care organizations are not immune to drug shortages. In fact, 90% of hospitals say they’ve experienced at least one shortage in the past six months that affected patient safety, and 99% said a shortage forced them to purchase a more expensive alternative.

Drug Shortages on the Rise

The U.S. Government Accountability Office reports that the total number of active shortages, including both new and ongoing shortages from the prior year, has increased since 2007. According to a study on drug shortages, more than 80% of drugs in short supply are generics. Of those, 80% are injectables that treat cancer, cardiovascular disease, infection, central nervous system conditions and pain.

Underlying Causes

Determining the causes of drug shortages is difficult. In fact, the reason for nearly half of all shortages reported in 2013 was unknown. When shortages can be explained, they often fall into these categories: manufacturing problems (25%), supply and demand issues (17%) and raw material problems (2%).

• Manufacturing problems. More than half of the drugs on the shortage lists are manufactured by just one or two companies. This means there is little cushion when a production or quality problem develops during the complex manufacturing process.
• Supply and demand issues. Demand for drugs can be challenging to predict. For example, an unexpected spike in flu cases in January 2014 caused a shortage in IV saline solution. Because manufacturers typically run production lines at maximum capacity, it is difficult to quickly switch production schedules and stem a shortage of just-in-time products.
• Raw material problems. Of the active ingredients used by drug manufacturers, 80% originate outside of the United States, and 40% of the finished drugs that Americans take are manufactured overseas. When there is an issue with quality control or a raw materials shortage, the repercussions are felt far and wide. The pharmaceutical industry truly is a global business, and its players are interconnected and dependent on one another.

What’s Being Done?

The Food and Drug Administration (FDA) has implemented several initiatives, including the FDA Safety and Innovation Act and Strategic Plan for Preventing and Mitigating Drug Shortages, to help reduce drug shortages over the long term. According to the FDA, these efforts helped prevent 170 new shortages in 2013. In addition, the pharmaceutical industry has launched its own initiatives to better prevent and forecast shortages.

How Can Your Hospital or Health System Better Manage Shortages?

Receiving and communicating accurate and complete information is critical to managing a drug shortage. According to the Institute for Safe Medication Practices, more than 80% of health care practitioners surveyed said there is a lack of advance warning and information about the duration and/or cause of a drug shortage. To help your hospital better prepare for a drug shortage, consider the following best practices:

Have a plan. The director of pharmacy should consider developing a plan for managing drug shortages. According to the American Society of Health-System Pharmacists (ASHP), the plan should include three phases: assessment, preparation and contingency. It should outline responsibilities, communications and decision making during each phase. Additionally, hospitals should identify a point person who takes the lead in implementation, coordination and monitoring during a shortage.

Implement structured communications. Next, understand how your distributor communicates drug shortages. For example, that information may be available through reports and messages in your online ordering platform. If you are uncertain, your account representative should be able to help. After arming yourself with the right information, the next step is to provide timely communications to your team about potential shortages so they can act quickly to manage the risk to your organization and patients.

Ask the right questions. If a manufacturer has a limited supply of a drug, it may not be able to support a high-volume order from a distributor. As a result, you may not receive the product. To learn about the status of a particular drug, consider contacting the manufacturer directly and asking the following questions:

• Are you shipping your purchase orders to my distributor in full?
• Are any shipments delayed?
• Are you reducing shipment quantities to my distributor?
• If you have a limited supply, can you ship drugs directly to my facility?

Don’t feed the gray market. Purchasing products from unofficial supply channels not only puts your patients at risk, as products may be contaminated and stored improperly, but it perpetuates the problem by keeping gray market wholesalers in business.

Keep it balanced. Having the right amount of inventory is a true balancing act. Keeping inventory too lean can cause issues, but stockpiling a formerly scarce product once it becomes available is not a good practice either. Talk to your distributor about inventory optimization technologies and programs that can help you find the right solution for your needs.

Additional Resources

ASHP has a host of information to help your hospital or health system effectively respond to and manage drug shortages. Other resources that you may find helpful include:

• Industry Rx Backorder News
• FDA List of Drug Shortages
• Food and Drug Administration Safety and Innovation Act
• FDA’s Strategic Plan for Preventing and Mitigating Drug Shortages (PDF, 380 KB)
• Verify Wholesale Drug Distributor Licenses

In conclusion, drug shortages are a complex, global issue. To better equip your hospital or health system, consider the resources that you currently have at your disposal, including your pharmacy and supply chain leadership, your distribution partner and industry associations. They can help you find accurate and timely information on drug shortages to ensure that your actions are as effective as possible.