Executive Briefings

Healthcare in Crisis: Can Supply Chain Save the Day?

For all the raging controversy over healthcare in the U.S., let's see if we can't agree on one thing: the system is broken. If you don't believe that, then you must have been in a coma for the past 10 years.

Some facts: the number of Americans without health insurance rose to 50.7 million last year, or 16.7 percent of the population, according to the latest report by the U.S. Census Bureau. The U.S. spends more on healthcare than any other nation, yet ranks 49th in life expectancy. And the Kaiser Family Foundation reports that U.S. workers are paying 47 percent more for health insurance today than they did in 2005, with employers contributing 20 percent more.

There's plenty of blame to be spread around, to drug companies, insurers, government bureaucrats, poorly run hospitals and incompetent providers. Even business acknowledges its shortcomings. "A belief that our prices are too high, that we run misleading advertising, and that we care more about playing golf with doctors than about helping them understand our medicines - all of this has earned our industry a reputation near the bottom of all American institutions," Jeff Kindler, chairman and chief executive officer of Pfizer Inc., told the Economic Club of Chicago last year. (This was soon after Pfizer agreed to pay $68bn to acquire rival drug maker Wyeth, a move that had some industry observers asking whether bigger really was better.)

I'm all for universal healthcare, but I don't intend to argue the politics of the issue in this space. What I want to focus on is the healthcare supply chain, which is both a major cause of the industry's severe dysfunction and a potential source of its cure. A group of speakers at the recent Biotech Supply Chain Academy in South San Francisco, presented by the Bio Supply Management Alliance, offered some hope for change.

One bright spot is the Global Healthcare Exchange, a decade-old collaboration among 20 manufacturers, distributors, hospitals and group purchasing organizations, with the goal of promoting automation and cutting healthcare costs. According to Karen Conway, director of industry programs, GHX expects to take out more than $5bn in supply-chain costs over the next five years. In a $2.6 trillion healthcare system, of course, that's merely a drop in the hypodermic, but it's more than anyone else has managed to achieve so far.

Conway called the White House-backed Patient Protection and Affordable Health Care Act, signed into law last March, "a mixed bag." The basic idea was to shift from "a system that pays on volume to value." Good providers would be rewarded, and poor ones penalized. Yet Washington's recognition of the value of collaboration extended only to the provider side, she said. "My hope is for collaboration on the supply-chain side."

One possible source for change is the new Center for Medicare and Medicaid Innovation, administered by the U.S. Department of Health & Human Services, which will seek ways to improve the quality of care through collaboration with private industry. Conway says the initiative could address key issues on a national level, without having to go back to Congress for further approval. A related effort is the Cures Acceleration Network (CAN), inserted into the healthcare bill by Sen. Arlen Specter, the longtime Pennsylvania Republican turned Democrat who was defeated in the Democratic primary election last May. Part of the National Institutes of Health, CAN will support research to shorten the time between drug development and deployment.

Conway voiced some skepticism over CAN, noting that "when government gets involved, [healthcare] gets more expensive and more complex." What's needed, she said, is better integration of the financial, clinical and supply-chain aspects of healthcare. Information must be brought together from disparate systems so that providers can weigh the costs, benefits and potential harm from various strategies. Sounds like the challenge faced by any complex business, although healthcare remains far behind sectors such as high-technology and consumer goods in achieving that goal.

So who's doing a good job? Take at look at Gartner's Healthcare Supply Chain Top 25 for 2010. The top five companies are Owens & Minor, Johnson & Johnson, Sisters of Mercy Health System, Cardinal Health and Novartis. Wayne McDonnell, Gartner's research director for healthcare and life sciences, said these and other companies are under intense pressure to slash cycle times and customer costs, while making better use of working capital. Externally, they're ramping up collaboration with suppliers and customers alike.

The number-one challenge to healthcare supply chains is managing the cost of supply, which is growing at twice the rate of labor, according to Vance Moore, president and CEO of Resource Optimization and Innovation LLC (ROi), the supply-chain division of Sisters of Mercy Health System. "Materials should never exceed labor in a service industry," he said.

Readers of SupplyChainBrain will recall that Mercy ROi was the winner of the 2006 Supply Chain Innovation Award, presented each year by SupplyChainBrain and the Council of Supply Chain Management Professionals. The company was honored at the time for extending its optimized supply chain all the way to the patient's beside, and it hasn't stopped looking for ways to improve. Today it supplies nearly 30 hospitals, many of them in remote areas, with some 4,367 licensed beds.

Moore spoke of functional silos that will be familiar to just about any big business. In many hospitals, there's minimal interaction between floors; one might be expediting delivery of a critical part while another has the item on hand. A facility might have $100m in inventory on its shelves, with only half of it under active management. The consequences of this lack of visibility can be dire, both for patient and provider.

Moore claimed that Mercy ROi, a mid-sized organization with a 1.7-percent profit margin, has generated more than $22m in value by acting as a central point of purchasing and inventory control for its member hospitals. But there's a lot more to be done, and the company isn't waiting for legislated healthcare reform to save the day. Take it from Moore: "The traditional models are just broken."

- Robert J. Bowman, SupplyChainBrain

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For all the raging controversy over healthcare in the U.S., let's see if we can't agree on one thing: the system is broken. If you don't believe that, then you must have been in a coma for the past 10 years.

Some facts: the number of Americans without health insurance rose to 50.7 million last year, or 16.7 percent of the population, according to the latest report by the U.S. Census Bureau. The U.S. spends more on healthcare than any other nation, yet ranks 49th in life expectancy. And the Kaiser Family Foundation reports that U.S. workers are paying 47 percent more for health insurance today than they did in 2005, with employers contributing 20 percent more.

There's plenty of blame to be spread around, to drug companies, insurers, government bureaucrats, poorly run hospitals and incompetent providers. Even business acknowledges its shortcomings. "A belief that our prices are too high, that we run misleading advertising, and that we care more about playing golf with doctors than about helping them understand our medicines - all of this has earned our industry a reputation near the bottom of all American institutions," Jeff Kindler, chairman and chief executive officer of Pfizer Inc., told the Economic Club of Chicago last year. (This was soon after Pfizer agreed to pay $68bn to acquire rival drug maker Wyeth, a move that had some industry observers asking whether bigger really was better.)

I'm all for universal healthcare, but I don't intend to argue the politics of the issue in this space. What I want to focus on is the healthcare supply chain, which is both a major cause of the industry's severe dysfunction and a potential source of its cure. A group of speakers at the recent Biotech Supply Chain Academy in South San Francisco, presented by the Bio Supply Management Alliance, offered some hope for change.

One bright spot is the Global Healthcare Exchange, a decade-old collaboration among 20 manufacturers, distributors, hospitals and group purchasing organizations, with the goal of promoting automation and cutting healthcare costs. According to Karen Conway, director of industry programs, GHX expects to take out more than $5bn in supply-chain costs over the next five years. In a $2.6 trillion healthcare system, of course, that's merely a drop in the hypodermic, but it's more than anyone else has managed to achieve so far.

Conway called the White House-backed Patient Protection and Affordable Health Care Act, signed into law last March, "a mixed bag." The basic idea was to shift from "a system that pays on volume to value." Good providers would be rewarded, and poor ones penalized. Yet Washington's recognition of the value of collaboration extended only to the provider side, she said. "My hope is for collaboration on the supply-chain side."

One possible source for change is the new Center for Medicare and Medicaid Innovation, administered by the U.S. Department of Health & Human Services, which will seek ways to improve the quality of care through collaboration with private industry. Conway says the initiative could address key issues on a national level, without having to go back to Congress for further approval. A related effort is the Cures Acceleration Network (CAN), inserted into the healthcare bill by Sen. Arlen Specter, the longtime Pennsylvania Republican turned Democrat who was defeated in the Democratic primary election last May. Part of the National Institutes of Health, CAN will support research to shorten the time between drug development and deployment.

Conway voiced some skepticism over CAN, noting that "when government gets involved, [healthcare] gets more expensive and more complex." What's needed, she said, is better integration of the financial, clinical and supply-chain aspects of healthcare. Information must be brought together from disparate systems so that providers can weigh the costs, benefits and potential harm from various strategies. Sounds like the challenge faced by any complex business, although healthcare remains far behind sectors such as high-technology and consumer goods in achieving that goal.

So who's doing a good job? Take at look at Gartner's Healthcare Supply Chain Top 25 for 2010. The top five companies are Owens & Minor, Johnson & Johnson, Sisters of Mercy Health System, Cardinal Health and Novartis. Wayne McDonnell, Gartner's research director for healthcare and life sciences, said these and other companies are under intense pressure to slash cycle times and customer costs, while making better use of working capital. Externally, they're ramping up collaboration with suppliers and customers alike.

The number-one challenge to healthcare supply chains is managing the cost of supply, which is growing at twice the rate of labor, according to Vance Moore, president and CEO of Resource Optimization and Innovation LLC (ROi), the supply-chain division of Sisters of Mercy Health System. "Materials should never exceed labor in a service industry," he said.

Readers of SupplyChainBrain will recall that Mercy ROi was the winner of the 2006 Supply Chain Innovation Award, presented each year by SupplyChainBrain and the Council of Supply Chain Management Professionals. The company was honored at the time for extending its optimized supply chain all the way to the patient's beside, and it hasn't stopped looking for ways to improve. Today it supplies nearly 30 hospitals, many of them in remote areas, with some 4,367 licensed beds.

Moore spoke of functional silos that will be familiar to just about any big business. In many hospitals, there's minimal interaction between floors; one might be expediting delivery of a critical part while another has the item on hand. A facility might have $100m in inventory on its shelves, with only half of it under active management. The consequences of this lack of visibility can be dire, both for patient and provider.

Moore claimed that Mercy ROi, a mid-sized organization with a 1.7-percent profit margin, has generated more than $22m in value by acting as a central point of purchasing and inventory control for its member hospitals. But there's a lot more to be done, and the company isn't waiting for legislated healthcare reform to save the day. Take it from Moore: "The traditional models are just broken."

- Robert J. Bowman, SupplyChainBrain

Comment on This Article