Revise the Supply Chain to Reduce Costs, Experts Say

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The average wholesale price of a dose of seasonal flu vaccine is $10. But it costs $24.99, for the vial and the shot, at a local pharmacy like Walgreens. It is likely that it may cost you even more if you get at a doctor's office.

You may think that the drastic increase in prices is a consequence of operating costs and profit margins. Experts however say overheads apart, the health care supply chain also plays a major role in contributing to the increased costs.

Experts said the health care supply chain is broken and operates through several middlemen resulting in inefficiencies and higher prices.

Experts say millions can be saved if the health care supply chain adopts standards and becomes more efficient. Experts say millions can be saved if the health care supply chain adopts standards and becomes more efficient. “There is no true cost of a drug. It depends on who you are getting it from and where you get it,” said David Jacobson, lead pharmacy technician of Evanston Hospital.

He said things get worse towards the end of the year when the supplies thin down due to lower available stocks and bookkeeping procedures and the prices soar further.

“When that [year-end effect] happens, the lower priced generic drugs may not be available and pharmacies are forced to purchase name brand medication, which can be anywhere from 10 to 20 times the price of a generic drug,” Jacobson said.

The lack of consistency in pricing highlights the need for standards that would help to create a more efficient health care system.

A recent study conducted at the University of Arkansas, Fayetteville, shows that revamping the supply chain can significantly reduce costs. Calling the American health care supply chain inefficient and expensive, the study found that manufacturers, distributors, group purchasing organizations and providers are spending between 31 to 67 percent of their annual budgets to operate their supply chains.

Manufacturers, distributors, group purchasing organizations and providers are spending between 31 to 67 percent of their annual budgets to operate their supply chains.Manufacturers, distributors, group purchasing organizations and providers are spending between 31 to 67 percent of their annual budgets to operate their supply chains.The supply chain is the backbone for all third party relationships of an organization, but experts said constituents such as hospitals have ill-trained people ordering supplies without utilizing supply chain procedures, resulting in an ineffective system and escalating costs. The study, released in October, elaborated that an average health care provider alone spends approximately $72 million on average each year on supply chain functions, which is nearly one-third of its annual operating budget.

Michael McEvoy, pharmacy purchasing coordinator at the Evanston Hospital, said though his hospital’s processes are streamlined, there are times when the primary vendors are out of stock or do not sell a particular medication that he has to go through secondary suppliers.

“Almost 90 to 95 percent of our drugs come from primary vendors, but sometimes we have to go through other secondary suppliers and that is a headache,” he said. “You never get the same prices from secondary vendors. It can be anywhere between two to 10 times as much.”

The study, which surveyed 1,381 health care professionals in November 2008, showed that nearly half of the respondents in the survey acknowledged that lack of data standards is a hindrance to achieving supply chain excellence and reason for higher prices.

“It’s not as blatant as it used to be 15 to 20 years ago, but there are still problems,” said McEvoy. “It could definitely be better, but as long as there are no problems between the manufacturers and wholesalers it works fine.”

But this is not always the case. Something as simple as coded bars can sometimes become an issue of maintaining standards.

Heather Nachtmann, lead researcher of the study, compared the health care supply chain with the retail supply chain, saying the retail chain is rendered efficient by adopting global trade item numbers to identify and track products globally. These unique 14-digit numbers are used to look up product information in a database. The health care supply chain lags behind in adopting any such standards for inventories and procurement.

“In the health care industry we don't have anything like that,” she said. “Different distributors put different numbers on items and hospitals put their own internal numbers on items. This creates problems because we have multiple numbers in multiple databases for the same item.”

Industry experts agreed. “Each of them has their own unique identifiers,” said Andy Brailo, vice president of strategic accounts at the Premier Healthcare Alliance, a Charlotte, N.C. based GPO that works with nearly 2000 U.S. hospitals to improve health care. “Everybody speaking the same language is essential.”

“It is difficult to track because there are multiple decision makers,” said Ronald Michalak, supply chain solutions manager, Metropolitan Chicago Healthcare Council, an association of about 140 hospitals and health care organizations. “Unless the hospitals have a very complex system, it is difficult to identify them [transactions] all.”

Nachtmann said the supply chain organizations need to adopt widespread automation practices and ecommerce to make transactions smooth and error free. She said during her research she found that a large part of the transactions in the supply chain organizations still do not happen electronically.

Even President Barack Obama, in his health care reform campaign, has proposed massive efforts to modernize health care by making all health records standardized and electronic.

“There are a lot of transactions that are still happening by hand and paper that should otherwise be seamless,” said Eugene Schneller, co-director of the Health Sector Supply Chain Research Consortium at the W. P. Carey School of Business, Tempe, Arizona.

Moreover, the health care organizations had themselves identified the use of automation and electronic data interchange standards to electronically transmit data between organizations as a strategic initiative in the Efficient Health Care Consumer Response study in 1996.

However, the recent study showed that more than half of the surveyed professionals acknowledged that their organization has not attempted to implement those initiatives.

“One of the objectives of the study was to see where the health care supply chain has evolved since the EHCR study,” Pohl said, adding that though the health care organizations are working towards improving their service levels and invoice accuracy, they still have a ways to go in adopting the EHCR standards.

Wayne McDonnell, life sciences research director at AMR Research in Boston, Mass., said though e-records are important, they alone cannot solve the problem. “We have to solve a lot of business issues first and then support them with technology,” he added.

He said the health care supply chain does not measure the end-to-end transaction costs that are true for other supply chains. He said that while there are clear definitions of manufacturing and delivery costs the undefined transaction costs pose a major problem creating disconnect between the chain members.

“Sometimes simple items such as hip implants go directly from the manufacturers to the hospitals and sometimes they go through distributors,” he said, adding that such transactions result in unclear demand inventories causing inefficiencies.

Experts said the supply chain partners can resolve the issue by coming together and making standardization and cost reduction a collective goal.

The research showed that respondents still believe that their supply chains are immature in spite of moving towards adopting data standards. While more than half of all the respondents cited lack of trust as a barrier to collaboration, nearly 40 percent of the health care providers said competitive advantage prohibited them from collaborating more. Poor collaboration is also reflected by lack of feedback and unclear external customer expectations.

“Their [supply chain organizations] vision is very much their own vision and not a global one,” said Dr. Natalia Wilson, co-director of the Health Sector Supply Chain Research Consortium at the Arizona State University, Tempe, Arizona.

McDonnell, who provides advisory services to the supply chain organizations, agreed. “They[supply chain organizations] operate in their own four walls,” he said. “We tell organizations to approach each other with transparent business goals and bidirectional, shared business matrix.”

Michalak, however, said though there are challenges, organizations are implementing standards.

Brailo said he was optimistic with the progress being made in adopting standards.“We are going to get there pretty soon,” he said.

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