By Susan DeVore, CEO, Premier Inc.
The sudden emergence and rapid spread of COVID-19 caught the nations of the world off guard. A global pandemic of this scale is unlike anything experienced in modern times.
While governments and private sector organizations were equipped with disaster plans and some form of stockpiles at the outset, COVID-19 exposed a number of supply chain vulnerabilities, including a lack of holistic transparency into supply sources, a fragmented approach to ordering and fulfillment, public/private partnership challenges and a reliance on offshore manufacturing for essential products.
In many ways, the pandemic has been akin to swimming in rough waters, with health care providers facing wave after wave of critical challenges. In this post we describe those waves and suggest ways that policymakers and stakeholders can avoid being submerged and can strengthen our nation’s response to this and future pandemics.
Wave Number 1: Overreliance On Foreign Sources For Critical Medical Products
Since diagnosis-related group codes (DRGs) were implemented in the 1980s, health systems have worked to reduce supply costs to account for decreasing reimbursement. These economics pushed many medical manufacturers overseas, where tax incentives and low-cost labor enabled cheaper production. Over time, this led to a dynamic in which 80 percent of all personal protective equipment (PPE) was sourced from Asia, primarily China.
This overreliance created major consequences as the pandemic spread, particularly when countries producing the bulk of these goods enforced export bans and shut down manufacturing—a problem that was particularly acute in the early Spring, when little was known about the infection rate and co-morbidities associated with COVID-19, and when even a single case in a community caused demand for PPE to spike between 300 and 1,700 percent.
Even though the COVID-19 census is increasing in some global locations, trade has largely resumed, and more capacity has been added to address surge demand. Supply chain organizations and manufacturers have partnered with government to address the shortfalls of the Spring and push through Emergency Use Authorizations for critical supplies such as respirators and isolation gowns. These same entities have also built a better understanding of exact PPE needs in the event of a community outbreak and of how to best transport those products at scale. As a result, the number of PPE products that are backordered and fulfilled on a limited basis has dropped from more than 11,000 in April to about 7,500 today.
While this is a positive development, sourcing these products still presents challenges, particularly as health systems resume elective procedures (which are now at 90-plus percent of pre-COVID-19 volumes), build stockpiles (either out of caution or as a result of a state government mandate) and manage current COVID-19 caseloads. At the same time, there’s also an added supply problem: Asian nations that produce our PPE have exploited their monopoly power to control availability and price, much like the Organization of Petroleum Exporting Countries (OPEC) has controlled the availability and price of oil.
While most of the supply chain works well and does not need alteration, that’s not the case across the board and certainly not for PPE. Given the dynamics at play, a new approach to managing the PPE supply chain is needed, one based on resiliency as well as domestic and geographically diverse manufacturing capacity – ideally on more than one continent, but certainly by more than one nation. As one of the nation’s largest health care supply chain organizations, Premier has monitored supply capacity and fill-rate data since the start of the pandemic. Coupling that intelligence with our experience in managing drug shortages, we concluded that for critical medical products—such as face masks, respirators, isolation gowns, commonly used medications, gloves and face shields—demand necessitates at least three global suppliers in the market from multiple regions, with at least one of based in the U.S. to protect against border closures.
Implementing this recommendation is not without challenges. Diversifying manufacturing and bringing more of it back to the U.S. is a complicated endeavor. It took three decades for capacity to concentrate and move offshore, so experts expect it will take at least several years and billions in investment dollars to alter the status quo. There’s also a financial challenge, as buyers (health care providers) are on fixed reimbursement incomes and may have difficulty absorbing price increases for products that are no longer made in the cheapest regions of the globe.
There are, however, a few public policy levers that could be pulled to expedite the process, including requiring government health care purchasers for the Veteran’s Administration, the Department of Defense, and the Strategic National Stockpile (SNS) to buy from American and geographically diverse sources. While a Presidential Executive Order is already in place to accomplish this for medications, it should be expanded to include PPE supplies as well. There is also a need for government-backed, zero- percent interest loans and tax incentives to manufacturers of critical medical supplies to help close the cost gap between U.S. and foreign sources.
With added domestic investments and capacity, as well as a new focus on supply chain resiliency, hospitals and health systems will have more purchasing options—and greater preparedness—in the future.
Wave Number 2: Panic Buying
Accompanying shortages is panic buying. As soon as the pandemic became a fact of daily life, consumers of all stripes took to the stores to “stock up” on supplies, whether they were needed or not. As this article in The Atlantic points out, even small modifications in the purchasing behavior of a minority of people can be disruptive to a just-in-time supply chain, and images of empty shelves can prompt many more to act, leading to a run on supplies.
Health care is not immune to the phenomenon, and just as store shelves were bare during the Spring, so were shelves that has contained lifesaving medical supplies. In exhibit 1 below, Premier graphed the number of supply requests received each day against the number of new COVID-19 cases reported by public health agencies. Interestingly, requests for assistance declined at the height of the pandemic, even though Premier’s supply data indicates that supply burn rates and reported shortages were more severe during this same time period.
What was correlated, however, was the request for supplies and the stock market volatility index. In other words, buying was more linked to perceived, rather than real, need. And even the perception of need is enough to trigger panic-buying that leads to shortages.
Understanding the facts and the psychology behind this phenomenon, we can begin to plan around it. While just-in-time inventories can be cost savers and conveniences on typical days, they are very problematic in a pandemic. Experience shows that for products needed in an emergency, a hybrid approach is probably necessary: buyers carry in-house inventory on a just-in-time basis, while manufacturers and direct sourcing companies take a just-in-case approach, reserving capacity for surge, retaining safety stock, and building rapid replenishment channels for restock.
This model is already in place for certain generic drugs. Through the ProvideGx generic sourcing program, Premier requires manufacturers of critical products to source from multiple, diverse locations and carry adequate amounts of safety stock in exchange for long-term, committed volume contracts. In the case of COVID-19, ProvideGx validated that suppliers had four to six months of active pharmaceutical ingredients on hand, as well as four to six months of finished dose form products. With safety stock on hand, it was possible to weather surge demand of more than 150 percent, even as health systems continued ordering just in time. This model works for low-margin generic drugs, suggesting it could work equally well for other critical, low-margin items.
In addition, panic buying could also be curbed with greater intelligence and improved technology that could estimate case load surge and automate the prediction of future supply needs. In this way, ordering would be more evidence-based, data-driven and rationalized to align with anticipated caseloads. Such systems exist today and will be crucial for rationalized buying for the second wave of the pandemic, as well as future emergency events.
Wave Number 3: Stockpile Inadequacies
Created in 1999, the SNS contains more than $8 billion worth of vaccines, PPE, medicines, and medical equipment necessary to respond to emergency events. The SNS was activated on January 30 to assist with COVID-19 supply shortages. The House Oversight and Reform Committee released documents showing that about 90 percent of PPE in the stockpile had been distributed to state and local governments by April 8.
The SNS was conceptualized as a temporary supply bridge, meeting demand for short bursts of time when state or local stocks were depleted. And since the SNS disbursed its cache of products, the government has repeatedly stated that the federal stockpile is not intended for use by states or individual hospitals in those states.
However, the state and local stockpiles that the federal government had hoped would serve as a first line of response weren’t fully or reliably stocked in the Spring, if they existed at all. Instead, these stockpiles are being built now; nearly 90 percent of Premier members report that they are building one-to-two month supply caches of product, either to comply with a state mandate or to prepare for future surges in COVID-19 cases. While this added emphasis on preparedness is a positive step, building myriad stockpiles puts the private sector, states, and the federal government in competition to outbid one another for the same inventory, driving up prices.
Moreover, not every emergency is short-lived, and a national stockpile of products may be the only way to ensure care needs are met during sustained, global events. Realizing this, the Administration announced plans to augment the SNS for future pandemics in mid-May. Critical to this effort is ensuring that inventory levels in the SNS are reasonable and based on actual utilization. To this end, the SNS should maintain a minimum 90-day supply of critical medical supplies and drugs, based on surge demand from hotspots such as New York.
To manage the SNS, both during a pandemic and between events, the government should partner with supply chain organizations and distributors capable of managing products to better prepare for clinical requirements, demand levels, and surge planning; these organizations should also focus on rotating out soon-to-expire stock in favor of in-date alternatives. In addition, a plan is needed to outline federal and state responsibilities to coordinate across stockpiles. These few measures alone should improve supply levels and prevent distribution of expired and unusable goods.
One of the major problems with the SNS was that many governors and members of the public did not realize what inventory it had and what it lacked it was until it was too late. Because the SNS is a national security asset, there is reason to maintain some confidentiality around its products and supplies. At the same time, moving forward—and certainly during a public health emergency—the SNS should be more transparent with local governments, disclosing current supply levels as well as what supplies will be distributed where, and in what quantities. During a public emergency, these types of communications should happen weekly, if not daily. Finally, the states need streamlined, consistent rules for accessing the SNS to avoid any confusion or slowdowns amid a crisis.
Wave Number 4: Opaque Supply Chains For Raw Goods
In addition to being too reliant on overseas markets, global supply chains have also become a labyrinth of manufacturers, assemblers, contract manufacturers, raw material suppliers, subcontractors and more. In many cases, companies selling finished goods know their immediate supplier partners but have limited knowledge of the locations of the raw goods and other sourced components.
This is a particular concern for pharmaceuticals. According to the U.S. Food and Drug Administration (FDA), 31 percent of all facilities producing the active pharmaceutical ingredients (APIs) used to make finished dose drugs are located in either China or India. What the FDA can’t say for certain, however, is the volume of APIs derived from these facilities; some estimate that this 31 percent could produce between 80 and 90 percent of the APIs for certain drugs. Even less is known about where the raw materials for those APIs are produced.
There have always been huge risks associated with relying on estimates and not knowing the facts. After Hurricane Maria hit Puerto Rico in 2017, the FDA was surprised by massive shortages of critical supplies, such as IV fluids. Even though the agency was aware these products were produced on the island, it did not know the market-share leader produced nearly all of its supply there. Because of this knowledge gap, a proactive response to conserve existing supplies, secure safety stock, or ramp up manufacturing in other locations was not possible before the hurricane made landfall.
The only answer to this problem is greater upstream visibility, requiring manufacturers and their supply chain partners to disclose where each component that goes into a finished product is made, and in what quantities. Until we know the location and production process for critical medical products, it will be virtually impossible for the country to assess the threat of shortages in an emergency.
At a minimum, the FDA should expeditiously implement new authorities granted by the CARES Act to require manufacturers to disclose their API sources and locations of the manufacture of finished dosage drugs. The same information needs to be collected from med-surg distributors that frequently use contract manufacturers to produce PPE. This visibility alone will help the private sector supply chain organizations understand risk potential and contract for greater diversity of supplies.
For manufacturers supplying products to the SNS, the bar should be even higher, with requirements to disclose not just ingredient or component makers, but also sources for raw goods and materials, such as silicon, cotton or copper. In addition, as discussed under Wave 1, the nation also needs transparency to ensure an adequate number of geographically diverse suppliers, and to assure that at least one of the manufacturers for critical items is U.S.-based. Manufacturers should also disclose the sources of their products to group purchasing organizations, who play an overarching role in overseeing the health of the provider supply chain.
Wave Number 5: Ancillary Supply Issues
A corollary to needing more intelligence about the raw materials that go into drugs is having more visibility into the production of ancillary supplies, such as vials, swabs, reagents, needles, and syringes. While these items are not at the heart of medical technologies, they are essential to ensure that the supplies can be used and administered as intended.
For instance, just as the United States started to ramp up COVID-19 testing efforts in early March, the nation quickly depleted all supplies of nasal swabs needed to collect samples. Unbeknownst to most, nasal swabs required for the tests were all produced by a single manufacturer in Italy, a country that at the time was fighting a serious surge in cases. The company did attempt to increase production, but it did not have the capacity to meet the demand, and still does not. While this was ultimately addressed through an Emergency Use Authorization that allowed for alternatives to come to the market, the interim period resulted in testing restrictions at a time when increased testing was acutely needed. This shortage and the resulting limitations it placed on the national response were completely unexpected, proving that the supply chain is only as strong as its weakest link.
Learning from the swab shortage, many have started asking whether the country has enough ancillary supplies to administer a vaccine in the future, including vials, syringes, alcohol prep pads and needles; these supplies are also produced in highly concentrated markets served by a handful of manufacturers. Fortunately, these questions are being posed far enough in advance that preparations can be made, and the government has already initiated advance ordering for these supplies to avoid any hiccups in the distribution of a vaccine.
To avoid any issue across the board, purchasers of goods should insist upon knowing the sources of all the components necessary for a final critical supply technology, including vials, stoppers, needles and tubing, and should ensure that ancillary supplies are adequately sourced and procured from diverse regions. Those same disclosures should be required of all manufacturers planning to supply the SNS, as well. Moreover, ancillary supplies need to be factored into the domestic manufacturing strategy for the nation.
Improving our response to pandemics and addressing future problems that could arise is a tall but achievable, order. Moving forward, I’m confident that the nation can learn from these experiences and emerge stronger than before. The critical steps we take now will help us avoid or minimize the shortages that marked the early days of the pandemic. Our nation’s hospitals and health systems, federal agencies, public health officials, and private industry experts will all play an important role in working together and bringing solutions forward to bolster the U.S. supply chain, improve response efforts, and create a safer environment for care.
This article ran in the Health Affairs Blog on September 30, 2020.