The industry is circling the issue of escalating costs, still hoping that financially overstretched governments will continue to feed the beast of the healthcare industry. Outsiders wonder what it will take to change the cost of healthcare, but insiders know there are things that can be done — but that doing them requires a radically different approach to how supply chains are managed across the industry.
The Current Crisis
In spite of several laws passed in the last decade, we have not begun to scratch the surface of addressing the cost of healthcare. The Medicare Prescription Drug, Improvement, and Modernization Act1 signed in 2003, which has been forecasted to cost $1.2 trillion2 or more has increased costs to consumers and tax payers. This does not include other healthcare expenditures. That is the pharmaceutical cost for only seniors (admittedly the biggest consumers, but by no means all of the prescription drug users in the US).
This was followed by the Patient Protection and Affordable Care Act signed in 2008, designed to address coverage, with some theories about cost.3 In 2003 no discussions addressed cost. In 2008 a lot of discussions addressed cost, but whether this legislation does have an impact on cost is hotly debated.
Regardless of whether you are for or against these legislations and whether you think that they will cost us more or less, the fact is that they are really designed to address coverage. They still do not truly address the underlying causes of the overall cost of the Life Sciences supply chains. The methods for reducing cost have been left to the industry players. In Figure 1 you can see the current cost trend.
If there is an unending coverage model, there is little motivation for suppliers to actually address costs. However there are a few catalysts for change:
1. Provider’s shrinking share and the decreasing profitability of healthcare expenditures — there are some provisions that are somewhat directed to incent healthcare providers to reduce costs. Right now, many providers (hospitals) are the most affected and, in many cases, unprofitable and therefore, are one of the current catalysts for change. Take a look at Figure 2, a very typical procedure. In many instances the amount of reimbursement dollars no longer covers the cost of this procedure. And if I cannot get the ‘customer’ to pay, then I must turn to the supply chain for change.
2. Patent cliff — the patent party will soon be over for many mega-pharma companies that have a shortage of new drugs in the pipeline. The mega-merger flurry that occurred in the last decade helped a few companies buttress their share price somewhat, but savvy investors who are looking at the long-term value of these companies see the patent cliff, as well as the only marginal improvements in these companies’ operations. Thus, shareholder value in this once buoyant market has tanked.
3. Decrease in expendable income — wealthier people are often healthier people — they generally eat better, live more safely and go to the doctor for more preventative care. But this small population who is willing to pay whatever it takes for their healthcare cannot support the industry. And the middle class is opting for plans with less coverage and a higher deductible. They are also staying home from the doctor so they don’t have to spend their deductible — in essence returning to the defunct catastrophic plans that Romney care and Obama care banned. This potentially delays care until there is a serious problem in later life, and it falls to the Medicare system — the tax payer — and costs more money later on. For example, type 2 diabetes is a disease of which its most damaging effects can be mitigated by early treatment. However, if undiagnosed and untreated, it can lead to heart disease, stroke, blindness, and other complications.
4. Savvy consumers and healthcare reformers — there is a growing trend to a more educated population who not only turn to alternative medicines, but also healthier lifestyles. Mass education through the media is having an effect — from a new wave of doctor TV shows to the Biggest Loser and Extreme Makeover series.
5. Globalization — the US has been carrying the load for development costs, and that represents a lot of the extra margin. Developing nations can’t afford the primary research and nations with national programs — single-payer systems — negotiate price. Although the federal government has been trying to shut it down, consumers still go to Canada for those lower prices (though some border states have addressed some of the cost issues in their states).
6. Fundamental change in payer philosophy embedded in healthcare reform:
- Insurance plans and payments: tiered medical structure and cost sharing
- Healthcare provider systems and ‘lean’ methods
- Evidence-based payment: Medicare and Medicaid
- Audit of providers’ cost structures and methods
- Payment-integrity auditing
- Compliance with legislation
- State vs. Federal systems reconciliation
- Review of nationwide costs
With a national system, the cost per region of the country will eventually be addressed, which will lead to lower payments/reimbursements in some areas. This also will drive providers to seek cost reductions in their supply chains. And thus, the challenge. Can the Healthcare/Life Sciences industry go through the extreme makeover — transformation — we have seen in other industries such as high-tech, auto and consumer goods? Yes they can.
Not a Story about Shrinking
Other industries have gone through dramatic transformations and now they are bigger, with larger, more diverse markets than ever before. We all know the stories about computers, consumer electronics, automotive, and consumer goods. The price/performance ratio achieved in the last two decades is astounding. How did they do it?
- Supply Chain Expertise
- Lean models
- Managing demand volatility and mix
- Mass customization/personalization
- Mixed-mode manufacturing and flex factories
- Completely virtual/federated models
- Compressed product lifecycles
- Changing fulfillment models
- Demand Management
- Supply Chain Execution Systems
- Visibility Platforms
- Cloud/Network supply chain platforms
- RFID and Sensors
- Improved data standards
No doubt the cost crunch will visit healthcare supply chains. But coverage/access to healthcare also will increase the customer base, leading to more business opportunities. The high-tech industry is a great case in point.
The PC revolution brought billions of new customers into the market. Companies had to bring their costs down to gain access to that market.
Conclusion — Think of the Possible
In 1990 no one would have thought it was possible to produce a powerful computer for $600.00 (and now a smart phone for $100 or so). But it has happened. Fundamentally, in less than two decades this radical change did take place. (And those who clung to the old models are not here.) This is not a story about the race to the bottom, but of a world of new products, new customers, and happier customers.
What are the customer satisfaction/reputation ratings of HP, Apple, and SONY compared to an average big pharma company, for example? Consumers take the latter’s products every day. Often they do feel grateful that a program has changed their life — but trust and delight are often missing. In this series of smarter healthcare articles we hope to provide some pointers on how organizations, in large and small ways, can address their supply chain to become more effective, efficient, and re-align their costs in a changing global economy.
1 The provision can be read here. — Return to article text above
2 Washington Post article — Return to article text above
3 These theories include the value of prevention, an audit of methods and costs across the country, as well as an ‘all-in market’ which increases the customer base. — Return to article text above
To view other articles from this issue of the brief, click here.