Opinion: Top challenges for health care supply chain management

Americans concerned with the growing proportion of GDP devoted to healthcare would do well to consider the industry's supply chain. Soon the cost of drugs and medical supplies will equal the cost of labor and benefits in the U.S. healthcare system, a situation that could derail reforms aimed at increasing access and coverage. Professor Eugene Schneller, who heads the W. P. Carey School's Health Sector Supply Chain Research Consortium, offers his top 10 list of challenges for health care supply chain managers. This is the first in an occasional  series of opinion essays authored by experts at the W. P. Carey School of Business.

Opinion by Eugene Schneller, director of the Health Sector Supply Chain Research Consortium at the W. P. Carey School of Business. The supply chain associated with health care is rapidly expanding, with drug and medical supply costs on a trajectory to equal the costs of salary labor and benefits.

The nation is consumed with the growing proportion of GDP devoted to health care. But unless we slow the pace of increase in the cost of supplies, we will face a serious threat to the structure of health care delivery — regardless of the solutions we develop to bring broader and continued coverage to our nation’s population. The Health Sector Supply Chain Research Consortium at the W. P. Carey School of Business scrutinizes health care supply trends on an annual basis.

Our annual projections provide our members and the broader community of providers, payers, suppliers and policymakers with a window into areas where change is necessary and where proactive policymaking is likely to make a difference. We also hope that our projections will stimulate widespread discussion and evidence-based thinking to bring new solutions to the problem. Our goal has been to identify areas where our unique competencies can make a difference.

The lack of consistently accurate, standardized information about health care delivery organizations has been an obstacle to solving health care supply chain problems through evidence-based management. The Association for Healthcare Resource and Materials Management (AHRMM) has partnered with Arizona State University to establish SCMetrix™, an online healthcare supply chain benchmarking and performance improvements metrics tool to advance healthcare supply chain performance analysis.

SCMetrixTM promises to provide the community of providers with an opportunity to assess their performance against other hospitals and health care delivery systems. And, our focus on the management of expensive physician preference items is designed to assist health care delivery systems to design strategic supply chain efforts that will recast the hospital as an organization dominated by supply intensive procedures. Health care is an industry that is rapidly "informating," yet there is still little rigorous understanding in the field of the return on investment (ROI) for supply chain technologies.

This year’s projection of the top 10 supply chain trends for the U.S. health care sector highlights the challenges posed by the changing relationships between suppliers, physicians and hospitals. It also reflects the need to respond to practices that many have seen as less than ethical. It will be important to assess the degree to which revelations of impropriety can herald opportunities for reform, change, and new forms of collaboration.

Projected Supply Chain Trends for the U.S. Health Care Sector — 2008:

1. Continued growth in overall supply chain costs: The Consumer Price Index for materials will continue to grow. From a supplier's perspective there will be few changes attributable to the overall difficulties faced by the economy. From the hospital perspective there will be increased difficulties related to the inability of patients to pay for care.
2. Increasing focus on supply chain costs from payers: This awareness will lead to changes in reimbursement structure — especially around admissions for targeted diagnoses-related groups (DRGs). Recognizing new levels of supply chain scrutiny, hospitals will develop new strategies regarding supply chain costing.
3. Competition surrounding services will increase between organizations such as Group Purchasing Organizations (GPOs) and distributors: Lack of significant differences in pricing across purchasing platforms will lead GPOs to try to differentiate their services and business plans. New models bridging the supply chain channel entities will result.
4. Demand for Physician Preference Items (PPls) will increase: As a result of population aging and direct-to-consumer advertising there will be continued growth in supply intensive surgical procedures (SISP) — accompanied by one-day admissions for both hips and knees.
5. More attention will be paid to the return on investment (ROI) supply chain information technologies: A wide range of technologies to drive the supply chain have been developed with little attention to ROI. These technologies will be mapped and evaluated — with second-generation supply chain IT seen as enhancing the value of supply chain management as an organizational asset.
6. Supply chain metrics will be redefined: Traditional metrics have focused on the transactional aspects of supply chain management. The new metrics will be much more strategic, allowing cross-organizational comparisons as well as the assessment of relationships between buyers and sellers and the strength of executive resolve to manage supply chain costs. The relationship between supply chain management, clinical outcomes, safety and sustainability will be emphasized.
7. Price transparency will increase: Despite court rulings upholding contracting non-disclosure clauses, there is a drive for enhanced price transparency across the supply chain. Transparency will lead to changes in the relationships between buyers and sellers.
8. Role conversion will continue within the supply chain department in organizations from transactional to strategic: The role of supply chain managers has been transactional. A variety of smart sourcing strategies will refocus supply chain managers on supply chain outcomes rather than supply chain processes.
9. Executive suite focus and involvement: As CEOs and CFOs recognize the value of managing the supply chain, a new level of discipline will be brought to the field through the demands for accountability — both internally and externally.
10. Exposure of ethical dilemmas will provide opportunities for change: Disclosure of inappropriate physician/supplier relationship practices, inappropriate hospital charge practices and other ethical breaches across the supply chain will lead to a new level of compliance with codes of conduct.