The healthcare system is transforming due to a myriad of internal and external factors. The challenge common to Integrated Health Care Delivery Networks (IDNs), Accountable Care Organizations (ACOs) and others can be summed up in a single word – reimbursement. A survey of thought leaders from these organizations found that over 70% expect their margins to decline 10-20% due to lower reimbursement. Manufacturers see significant supply chain improvement opportunities through the adoption of new technologies such as cloud computing to reduce costs and increase revenue. Quite clearly, healthcare in general and hospitals in particular need to rapidly change, adapt and embrace the benefits of supply chain management long employed by healthcare industry manufacturers and suppliers.
Pharmaceutical, medical device and other suppliers have incorporated supply chain management systems into their companies. A 2015 study found that supply chains are responsible for 25% of pharmaceutical costs and 40% of medical device costs. Cleary, there is work to be done here given the annual spend of $230 billion on pharmaceuticals and $125 billion on medical devices. If the healthcare sector as a whole adopted the systems used in other fast moving industries such as consumer and technology, it is estimated that costs could fall for the above two mentioned segments by more than $130 billion. The lead time from pharmaceutical plants to distribution centers is on average, 75 days. Contrast this to approximately a week, from order to deliver, for a shipment of laptops from sources in the Far East.
Suppliers of healthcare will likely find 2015 supply chain solutions in cloud computing. The Cloud offers a common supply chain platform that ameliorates many of the problems associated with implementing fully integrated, specialized supply chain systems and addresses the critical need for collaboration amongst all in the value chain, and yet, challenges remain. Cloud computing is very dependent on legacy systems and although Information Technology (IT) departments are asked to do more, they only spend on average 10% of their budget on new applications. As cloud computing becomes more widely adopted by large scale supply chains, they can look to enjoying the rewards of greater response speed, agility and resolving problems through greater collaboration between all stakeholders. These benefits can be expected to improve the bottom line, resulting in increased margins and revenue.
IDNs, ACOs and large hospital groups are faced with not only lower reimbursement, but the impact of legislation from the enactment of The Affordable Care Act (ACA), commonly known as Obamacare. This alone has morphed the reimbursement focus from being volume based to incentive based. Instead of being paid on the number of procedures performed, hospitals must embrace end to end healthcare delivery supply chains to manage procurement costs, monitor cost per case, re-admissions and other factors that could jeopardize their continued operations. It is a business tenant that you cannot manage what you do not monitor. Supply chain systems provide the data that can be turned into actionable management, system improvements and business critical cost savings.
Expect the distribution model to continue to change in response to market factors. Many IDNs and ACOs are adopting Warehouse Management Systems (WMS) of their own, rather than ordering from large medical supply distributors such as McKesson, Cardinal and others. Savings from these new procurement solutions is a significant opportunity for users. Simply put, it immediately eliminates the distributor markup on products and does so in a very fast period of time. It is estimated that with self-distribution, where hospitals purchase directly from the manufacturer and assume the distribution responsibility by implementing WMS’s, the payback can be in as little as six months by moving just ten vendors from traditional to new self-distribution systems.
Healthcare is an extremely fragmented and non-standardized industry relying on traditional methods and systems to successfully overcome today’s rapidly changing challenges. Utilizing new technologies such as cloud computing, WMS and fully integrating and refining supply chain management systems will help both suppliers and users of healthcare products to deliver better quality of health care at a lower cost. Collaboration among all those involved in the value chain, IT software suppliers, manufacturers and end users, to name a few, is essential for the healthcare industry to profit, evolve and prepare for the business challenges of 2015 and beyond.