The Supply Chain: A Critical Component of Successful Healthcare Reform | GHX

Karen Conway

Executive Director, Industry Relations
Tuesday, July 27, 2010

The Supply Chain: A Critical Component of Successful Healthcare Reform

For those focused on the healthcare supply chain, the seemingly endless debate that eventually led to passage of the Patient Protection and Affordable Care Act of 2010 (more commonly referred to as the healthcare reform bill) was particularly frustrating, not so much for the divisive discourse as for the lack of consideration of the role the healthcare supply chain can play in achieving one of the bill’s primary objectives: the delivery of quality healthcare at a lower overall cost. But upon closer inspection of the final bill, there are a number of provisions that could push the supply chain to the forefront of efforts to meet that objective.

 Value-based Purchasing

A primary purpose of the healthcare reform bill is to move from a system that pays based on volume to one that pays based on value, e.g., reimbursement based on quality outcomes and efficient healthcare delivery as opposed to the number and types of procedures performed. The bill includes a long list of provisions that tie reimbursement to clinical quality, patient satisfaction andoverall costs. With supply chain expenditures making up between 20 and 50 percent of the total cost of care, hospitals will have to pay much closer attention to not only the price paid for the products, but also the costs associated with the process of sourcing, acquiring and using those products. This is especially important for hospitals that perform a high number of orthopedic procedures, where the price of the product can account for as much as 80 percent of the cost of the procedure.

We may also see some hospitals eliminating certain service lines and/or procedures, either because the costs are too high relative to anticipated reimbursements, or the hospital does not perform enough of the procedures to ensure quality. Greater specialization might reduce the number of customers for medical device manufacturers and technology vendors, but it may help them better segment and target their sales efforts.

Some financial analysts predict that greater hospital-physician alignment on cost containment, as supported by the bill, will create greater price pressure on suppliers and threaten stock prices. According to a recent article in the Wall Street Journal[1], one investor, David Giroux, who runs T. Rowe Price Group Inc.’s Capital Appreciation mutual fund, said he has avoided device companies selling big-ticket items because their prices could become vulnerable. But Medtronic chief executive officer Bill Hawkins has another take. In the same article, he predicts suppliers will work more collaboratively with hospitals and other providers to measure the clinical as well as economic value of their products.

Either way, hospitals and other healthcare providers will need to be able to gather data from various (clinical, financial, supply) systems to understand total cost of ownership (TCO) for the supplies they purchase.

Comparative Effectiveness Research

Both the healthcare reform bill and the American Recovery and Reinvestment Act (otherwise known as the stimulus bill) provide incentives and funding for increased comparative effectiveness research. The Institute of Medicine has issued a list of 100 Initial Priority Topics for Comparative Effectiveness Research, with most of them focused on the effectiveness of various treatment modalities, e.g., surgery, therapy or medication, for treating specific populations with specific medical conditions. But at least one of the 100 has a definite supply chain focus. It calls for the comparison of the “effectiveness of formulary management practices and usual practices in controlling hospital expenditures for products other than drugs, including medical devices.” We can also expect the private sector to propose comparative effectiveness research that focuses more on products themselves. At least one major healthcare system has already submitted a grant proposal to compare the effectiveness of drug eluting and bare metal stents.

National Device Registry

The creation of a national device registry, as called for in the healthcare reform bill, will also help gather data to understand the effectiveness of various products over time. This is particularly important when it comes to orthopedic implants, for which effectiveness may not be fully apparent for a number of years. According to the legislation, the registry is designed to facilitate analysis of post-market safety and outcomes data for covered devices. In accordance with creation of the registry, the Secretary of Health and Human Services may require manufacturers of covered devices to provide information to facilitate post-market assessments of device safety and effectiveness. Even without the law, many manufacturers are already working on initiatives to gather more evidence on the ability of their products to improve clinical outcomes, recognizing that they will need to compete in the marketplace on clinical effectiveness as much as, if not more than, selling price.

In addition to capturing data about products used, the registry will need to validate methods to analyze patient safety and outcomes data from multiple sources by linking such data with the information in the registry. Data sources will include, but are certainly not limited to, claims data, patient safety data and electronic medical records. 

Use of Unique Device Identifiers in Certified Electronic Medical Records

As hospitals across the country are implementing electronic medical records, they are recognizing the challenges associated with trying to include data in the EMRs about the products used in patient care. Increased use of industry standards for product identification can play an important role in enabling communication between enterprise resource planning (ERP) and materials management information systems (MMIS).

The two primary product identifiers used in healthcare today are the GS1 Global Trade Item Number (GTIN) and the HIBCC Label Identification Code (HIB LIC). Both are expected to suffice for compliance with the pending FDA Unique Device Identifier (UDI) requirement. In 2007, Congress passed legislation calling on the FDA “to promulgate regulations establishing a unique device identification system for medical devices requiring the label of devices to bear a unique identifier” that can “identify the device through distribution and use, and may include information on the lot or serial number.” The healthcare reform bill called on the FDA to issue its proposed rule for the UDI and the associated database within six months after passage of the healthcare reform bill, which would be this fall. The bill also called on the Office of the National Coordinator for Health Information Technology to adopt standards, implementation specifications and certification criteria for the use of the UDI in electronic health records.

Moving Care (and Supplies) Outside the Acute Care Setting

Finally, with 32 million more Americans expected to be insured as a result of the bill, there are a number of provisions designed to promote caring for patients in settings that are far less expensive than acute care hospitals. More patients will be treated by community health organizations, surgi-centers, retail clinics and in the home. As such, the supply chain will begin to expand far beyond the hospital walls. Suppliers and related service providers, such as third-party logistics companies, will need to prepare to deliver products to far more locations. This change will also increase the need for adoption of industry standards for location and organization identification, such as the GS1 Global Location Number (GLN) or HIBCC’s Health Industry Number (HIN).

While both are in place today, there is growing market interest in the former, with many group purchasing organizations and several large healthcare systems calling on the industry to use the GLN in business transactions and agreements by the end of this year. A similar call has been made for use of the GTIN by the end of 2012.

Supply chain leaders within the manufacturing, distribution and provider communities have an opportunity, if not a responsibility, to help their respective organizations meet the objectives and the challenges posed by healthcare reform. Healthcare will become increasingly complex, requiring greater coordination, collaboration and information-sharing among the various parties. Perhaps no other function crosses more boundaries or has the ability to synchronize what has historically been a highly segregated healthcare delivery system than the supply chain.’ By focusing on a common goal, the delivery of quality healthcare to more people at lower cost, the supply chain can deliver real and meaningful reform.

Considering that the final bill is nearly 2000 pages long, I am sure I have only scrateched the surface of implications for the supply chain. I welcome your comments on other relevant aspects of the bill, or perhaps more importantly how you and your organizations are getting ready for implementation. 

[1] Climate Changes for Medical Devices, The Wall Street Journal, May 16, 2010. 

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