HIGPA: Is your supply chain ready to survive healthcare reform?

Don’t kid yourself. Changes to one part of healthcare can, and often do, affect the supply chain.

Recently I was invited to participate in a panel discussion titled “Examining Reform and the Economic Climate: Are You Ready to Survive the Impact on Your Supply Chain?” at the World Congress 5th Annual Leadership Summit on Health Care Supply Chain Management, in Orlando, Fla. Fellow panelists included Greg Meier, executive director, finance, Sisters of Mercy/ROi, St. Louis, Mo.; and Terry Woodbeck, chief executive officer, Tulsa Spine and Specialty Hospital, Tulsa, Okla.

The moderator, Frank Kilzer, vice president of material and facility resources at St. Alexius Medical Center, Bismarck, N.D., posed the following question to the panel: “What are the challenges facing the supply chain and why are they happening?” I enumerated the following challenges:

10. Physician Sunshine Payment Act.
9. Independent Payment Advisory Board (IPAB).
8. Comparative effectiveness research.
7. Medical device tax of 2.3 percent.
6. Physician payment formula/Sustainable Growth Rate (SGR).
5. Affordable Care Act: shift away from specialty and toward primary care.
4. Accountable care organizations.
3. The Health Information Technology for Economic and Clinical Health Act (HITECH Act)/incentives for IT/electronic health records.
2. Antitrust issues (implied, but not directly addressed, in healthcare reform).
1. Uncertainty of healthcare reform.

While not meant to be exhaustive (nor purely “supply chain,” per se), these items will have a huge impact on the nation’s $2.3 trillion healthcare system, and were meant to address the many issues facing the nation’s healthcare system including cost, quality and access to services. The list also suggests that changes in one part of healthcare can, and often do, have an effect on the supply chain.

Medical device tax
For example, the 2.3 percent tax on medical devices was enacted as part of the Affordable Care Act in order to help pay for the cost of healthcare reform. The tax is expected to generate approximately $20 billion over 10 years. Congressional authors of this provision explicitly targeted medical device manufacturers and attempted to avoid having this tax passed on to hospitals. It was only after the Internal Revenue Service advised lawmakers of the difficulty of implementing a gross receipts tax that lawmakers then changed this provision to make it an excise sales tax.

Realizing that an excise tax could be more easily passed on to hospitals by manufacturers (and that hospitals had already agreed to billions of dollars in Medicare cuts), lawmakers attempted to reduce the chances of harm. To that end, lawmakers extended the implementation date to 2013, so that existing contracts could expire and hospitals and device manufacturers could consider the new tax as part of negotiations for any new agreements. Complicating the matter is the fact that device manufacturers are expected to wage a political campaign to repeal the tax. It remains to be seen, however, where the $20 billion that the device tax would have generated will be offset if device manufacturers are successful in rolling back the tax.

‘Healthcare system?’ Really?
Perhaps even more interesting than the nature of the challenges facing the supply chain is Mr. Kilzer’s question about the genesis of these challenges, and why they are occurring. In summary, the phrase “healthcare system” is a misnomer. The recent healthcare reforms were an attempt to correct some of the historical distortions that have occurred as “work-arounds” to the nation’s problems concerning cost, quality and access. The primary goal of the Affordable Care Act is to increase coverage and reform the health insurance market. Taken together, all of the changes from the list above are just a first step toward setting the regulatory process on a path to:

  • Incenting prevention and primary care.
  • Aligning incentives in payment.
  • Increasing transparency.
  • Increasing efficiency and investment in information technology.
  • Rewarding value-based services.

The next phase of reform will be real cost-cutting, as the U.S. government, and governments around the world, are broke. With 25 percent (and growing) of the federal budget going toward healthcare, the government’s best hope is to align incentives, invest in prevention and primary care, and hope the wave of Baby Boomers doesn’t completely swamp the ship. All other roads could lead to single-payer healthcare and price controls.

In the meantime, however, the supply chain will need to move swiftly to keep up with its healthcare provider customers. The “new normal” will be based on Medicare rates, and private-sector cost containment will be the key to helping hospitals and other healthcare providers adjust.

To make economies of scale work in an environment featuring lower reimbursement, I predict that the healthcare supply chain will feature further consolidation at every level. In addition, vendors will need to rethink how their products fit into the new processes being developed for disease management and care coordination. GPOs will need to marry their data services to real-time clinical situations for their customers. Wholesaler/distributors will need to harness their existing data to new clinical requirements as well. Survivors will be bigger, more efficient, leaner, meaner and data-driven. All others risk being voted off the island.

Curtis Rooney About Curtis Rooney

Curtis Rooney is president of the Healthcare Supply Chain Association, www.supplychainassociation.org

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