Few phrases have seen as significant an increase in search interest across the world as “What is inflation.” Likewise, the term supply chain, once the domain of specialists, has firmly become
a part of consumers’ everyday vocabulary. While more people may know what these terms
mean, how they operate in specific contexts or in specific industries is far less clear.
That lack of clarity is what David Dobrzykowski, Claudia Rosales, and Andrew Balthorp seek to address in their recent whitepaper, “Inflation and Healthcare Supply Chains.” Healthcare supply chains, as they demonstrate, function differently from the retail
or manufacturing supply chains that many of us have learned more about over the past
couple of years. Likewise, inflation affects all members of the healthcare supply chain from equipment and pharmaceutical suppliers
to providers and patients alike.
How Healthcare Supply Chains Work
Despite its many nuances, the healthcare supply chain seems familiar on the surface
since it consists of three major sections: upstream, midstream, and downstream. Upstream
players consist of organizations that focus on the development of care: medical device
and equipment manufacturers, pharmaceutical manufacturers, and biotech firms. The
midstream sector focuses on two main types of organizations: distributors and purchasing
groups that make sure healthcare providers have the materials they need and firms specializing in financing and claims administration associated with the delivery
of care. Downstream are those who deliver care – physicians, nurses, hospitals, clinics,
home-health services, hospice – and their patients.
But that is where the similarity ends. Over the past 30 years, hospitals have “largely
outsourced key supply chain activities,” such as allowing Group Purchasing Organizations
(GPO) and other midstream players to handle their sourcing and contracting needs and
having medical device distributors cover transportation and distribution of the materials
needed to deliver care. Hospitals outsource these activities because they would rather
focus on their core competency: delivering care.
Surrendering these supply chain activities, however, exposed them to a few critical
risks that inflation has brought to the forefront. Two risks – asymmetrical price
stickiness and inadequate supply chain infrastructure – have become particularly noteworthy.
How Inflation Affects Healthcare Supply Chains
When suppliers’ costs increase unexpectedly, they can pass the cost increases, such
as fuel surcharges and other inflation-related costs, to their hospital clients. Across
the economy, input costs have increased by 14.3% whereas healthcare prices have increased
by 2.4%. Hospitals, however, cannot as easily pass those costs on to patients/payors
because fee schedules are typically set via annual or multiannual contracts. The hospitals
often just eat these costs. This dynamic creates textbook asymmetrical price stickiness.
Given that the median hospital profit margin before the pandemic was only 3.5%, the effects of unexpected cost increases on hospitals and clinics can be disastrous.
In addition to those cost increases, healthcare providers have also faced increases
in their staffing costs. These increases come partly from labor shortages caused by
a general tight labor market, loss of workers due to burnout, but also from wage increases
to retain and reward workers. The tight labor market and loss of workers due to burnout
have increased healthcare providers’ reliance on more expensive services, such as
traveling nurses.
It is no surprise, then, that a recent KaufmanHall report estimates that one-third of healthcare providers operated under negative margins in 2021. That represents a loss of $54 billion in net income. For comparison purposes, $54
billion is more than the annual GDP of many nations. Salaries, benefits, and expenses have increased for everyone, with
big players like Mayo Clinic reporting an 11% increase in year-over-year expenses and a 66% decline in operating income and the University of Pittsburgh Medical Center reporting a net loss of $844.1 million in the first half of 2022.
While cost increases in supplies and wages have hurt hospitals’ bottom lines, inadequate
supply chain infrastructure has reduced their ability to manage some of these cost
increases. Healthcare supply chains often lack the technology or expertise to handle
stock outs, product shortages, production delays, or other supply chain disruptions.
If I order something online and shipment is delayed, it’s frustrating; for hospitals
and healthcare providers, these delays cannot occur because patient care often cannot wait. Providers then, must purchase products “off
contract” from alternative suppliers or buy more expensive substitute products, which
means they cannot take advantage of GPO pricing. As before, hospitals cannot pass
these cost increases along easily, further tightening their margins.
It is hard to devote time and resources to develop expertise or invest in technology
to improve supply chain outcomes given these challenges. As one chief supply chain
officer said, “[we] are in a knife fight just getting product in the door” and don’t
have the capacity to make strategic or capital improvements to increase supply chain
resiliency. What, then, can actors in the healthcare supply chain do to improve processes
and reduce costs?
How to Strengthen the Healthcare Supply Chain
The bad news for the healthcare supply chain is that it will likely be affected by
inflation for the next 18 months. One way to mute these effects is by taking advantage
of new educational offerings and opportunities to develop expertise. Specialized knowledge
offered by master’s degree programs in supply chain management or in similar programs can “help healthcare leaders invest in skills they can leverage to bring innovation
that grows both revenue and efficiencies.” Developing more sophisticated thinking
around healthcare supply chain management, while not a quick fix, can unleash creativity
and create new opportunities for collaboration in the supply chain.
Other solutions include developing new revenue streams and finding new ways to improve
efficiency. Direct-to-employer strategies, bundling of services, development of private-label
manufacturing capabilities, consolidated service centers, and regional GPOs all represent
possible methods for increasing upstream, midstream, and downstream players. Given
the tight labor market, payroll pressure may force health systems to consider new
forms of automation, including wearable technologies to monitor patient health and
technology investments that monitor supply tracking and replenishment.
Across the board, the researchers expect more industry consolidation as the healthcare
sector tries to navigate its way through these headwinds. The secret to unlocking
more value in this supply chain – for patients, providers, and suppliers alike – may
come down to collaboration. As the researchers state, “regardless of an efficiency
or revenue-oriented strategy, collaboration through the supply chain will be the key
to success…[but] will require changes to existing [processes] and developing new clinical
and business processes.”
The organizations that put in the work building, rebuilding, and rethinking how they
do business now will undoubtedly reap the rewards in the years to come.
Post Researcher/Author:
David Dobrzykowski is an associate professor in the Department of Supply Chain Management at the Sam
M. Walton College of Business at the University of Arkansas. He has published research
on healthcare coordination in leading journals. Prior to earning his Ph..D, he served
in vice president and chief executive officer roles on the provider and insurance
verticals of the healthcare industry.
Claudia R. Rosales is an Assistant Professor of Supply Chain Management at University
of Arkansas. Her research interests include healthcare operations, risk management,
inventory management, cross docking/logistics, optimization, simulation modeling,
and analytics. Prior to her academic career she worked in manufacturing holding several
engineering positions such as productivity, process, and packaging engineer at Colgate
Palmolive, C.A. She obtained a Master of Science in Quantitative Analysis and a PhD
in Operations Management from University of Cincinnati.
Andrew Balthrop is a research associate within the Supply Chain Management Research Center at the
University of Arkansas. His present research focus is on the interaction between the efficiency of freight transportation and government policy. He has also done research in energy and environmental policy. He has published in the Journal of Operations Management, Journal of Business Logistics, Empirical Economics, and Energy Economics. Andrew received his Ph.D. in Economics from Georgia State University in 2012.
Ryan Sheets serves as the Director of the Business Communication Lab at the University of Arkansas'
Sam M. Walton College of Business and is the Editor-in-Chief of Walton Insights. He also teaches business communication classes to undergraduate and graduate students
at the Walton College.
He previously served as the Assistant Director of the Judith R. Frank Business Communication Center at the University of Iowa's Tippie College of Business. He worked in the oil and gas industry and insurance industries prior to returning to graduate school.
He received his B.A. and M.A. from the University of Alabama at Birmingham, and his Ph.D. from the University of Illinois at Urbana-Champaign.
