The US healthcare supply chain: what's wrong?

I have waited a long time to write this column. Not because I don’t care or see no role for supply chain in solving the US healthcare crisis, but because it’s so politically sensitive I worry about stirring up a hornet’s nest. Well, if you want a pure supply chain view and can ignore the politics, read on.

The problem

From a supply chain perspective, it’s a paradox. More than any other sector, healthcare should have predictable demand, and yet we operate as though we’re always surprised. Unlike consumer products, which depend on people’s tastes, healthcare demand arises from sickness or injury. Demand for treatment, which no one really wants but everyone urgently needs, can often be predicted with precision using genetic, demographic and public health data.

The data itself is exploding in availability, just as our competence in digesting it is spiralling upward. Unfortunately, the byzantine system linking payers, providers and patients means that supply chains work with massively obscured or even irrational demand signals. This could explain recent drug shortages that would be regarded as insane in other industries.

Who is the customer?

Human health is fundamentally less costly to manage pre-emptively than reactively. From a supply chain perspective this is like using predictive maintenance techniques to optimise equipment uptime. Capital equipment makers from General Electric to Caterpillar are decades into doing this right. Doctors and public health officials totally get this, and yet somehow too many people do the exact opposite, waiting to go to the emergency room for chronic ailments that end up costing 10 times as much and hurt more.

The solution

Forget politics. Start instead with the innovation processes that find new molecules, mechanisms and delivery techniques for fixing human bodies. Supply chain design that targets this pressure point would emphasise deep supplier collaboration, solid intellectual property rules that reward the development of major product platforms, and cross-channel launch orchestration to assure that good science is available quickly and widely – just like a new iPhone.

Manufacturers in the healthcare sector certainly understand the concept, but with so many legal and regulatory pitfalls along the way, too much time is spent fighting through arcana rather than curing the ill.

And from an inventory flow perspective, healthcare could certainly work better. Bad demand planning coupled with huge risk aversion makes lean a near impossibility in today’s healthcare supply chain. Yet we have several obvious opportunities to build lean into the distribution network, including prominent healthcare distributors like AmerisourceBergen and Cardinal Health and also pharmacies at stores like Walgreens, CVS and even Walmart.

These players already have superb information systems, materials handling infrastructure and decades of experience getting by on thin margins. Given the right incentive to share information, they could do wonders. Add clean demand signals and it seems fair to expect big gains in both availability and inventory turns.

Finally, consider the poor provider. Point of sale is a critical element in supply chain design with huge gains wrought over the years by bar codes, e-commerce and value-added reseller channels. Doctors, nurses and clinicians are the point of sale in healthcare, and yet all are constrained by reimbursement rules that often leave both patient and provider unsatisfied. That’s not the way economics is supposed to work.

Demand signals direct from the customer should be read straight into a supply chain response as judged by the healthcare professional at the point of sale, not referred back to some rule book written in Hartford, Connecticut. Customer satisfaction could be higher, provider expertise could be better leveraged, and cash flow better.

The villain

As you may have guessed by now, my beef is with the insurance industry. It makes better margins than anyone in the chain (except pharmaceutical firms, which I think deserve to make good money) and yet offer most of us pure aggravation when we try to get what we’ve already paid for.

From a supply chain perspective the root problem is simple – appalling demand visibility. Institutionally, it comes down to how the money flows, and unfortunately that is not a supply chain problem.

The hero

Supply chain has been delivering 3-5% productivity gains annually across industries since 1996. In marked contrast, healthcare has become more expensive and more of a hassle during that time. Pioneers like healthcare provider Mercy and its supply chain arm ROi focus on bringing supply chain ideas into healthcare, despite the monumental challenges. I certainly believe they know what to do.

I wish I had the same confidence in our collective political will.