Inflation has affected all aspects of the global economy, including the healthcare supply chain. Per the Consumer Price Index, the average price of consumer goods increased by 7.9% between February 2021 and February 2022 – a 40-year high.
Labor costs rose between 4-8%, and according to the National Hospital Flash Report by Kaufman Hall, labor expense per adjusted discharge rose 14.6% from December 2021 to January 2022.
As energy, resin, cotton, metal, and oil prices keep surging, manufacturers and suppliers are raising prices on the supplies, equipment, and services delivered to hospitals.
Key Reasons For Supply and Service Inflation
There are several reasons for climbing healthcare supply costs and supply chain challenges leading to the higher-than-normal inflation currently experienced by the market. This includes:
1. Fall-out from pandemic lockdowns and labor shortages
The manufacturing sector experienced drastic labor shortages during and following the pandemic, as did the healthcare industry itself. High-demand labor groups, including pharmacists, nurses, and ICU physicians, remain in short supply. Wages are higher, cascading across the entire supply chain.
2. Global logistics backlog
While most countries have ceased lockdowns and restrictions, ports and suppliers are still dealing with the backlog. The Port of Yantian in China, one of the world’s largest container ports, is still experiencing shutdowns due to COVID outbreaks, while Malaysia (one of the world’s biggest exam glove suppliers) has also locked down several times. There’s also the fall-out from the Russian invasion of Ukraine, shortages in the land transportation industry, capacity shortages, and container availability issues that have pushed up prices, led to delays, and caused longer lead times.
3. Raw materials, finished product shortages
Prior to the pandemic, raw material pricing was relatively stable. Covid led to increased demand for manufactured goods, while intense storms in 2021 damaged the oil refineries at the beginning of the plastic supply chain, which decreased production and pushed prices up. The global supply of resin has also tightened, impacting the production of medical devices and components, while persistent lockdowns in Shanghai led to a shortage of contrast dye.
The Impact on the Medical Supply Market
The medical supply industry has been dramatically impacted by inflation. Fluctuating oil prices, labor shortages in the transportation industry, and the aforementioned port backups will continue to drive up the cost of transporting products to the relevant locations. As supply chain costs account for one-third of healthcare provider operating budgets, pressure has been placed on purchasing managers to hedge against rising costs.
While GPOs and self-negotiated contracts have kept pricing stable, there will likely be high single to low double-digit price increases in the coming year as bottlenecks, and rising raw materials costs will not improve in 2023.
According to a survey by McKinsey, many healthcare leaders are resigned to a decline in operating margins, while payer and provider executives expect drops in margins of between 25-75%, implying that earnings could be wiped out, leading to layoffs and rate increases. The total risk to industry profits across the board is an estimated $370 billion by 2027, which would make healthcare less affordable for patients.
Healthcare providers need to take action, and fast, to weather the storm ahead.
How the Medical Industry Can Take Action Against Inflation
While inflation is not within the healthcare industry’s control, there are a few actions that can be taken, including:
- Diversifying the supply base. Overdependence on single suppliers or a single location can have devastating consequences in an uncertain market. Expanding to other products, especially domestic producers, will strengthen resilience in the market.
- Add redundancies to the supply chain. While keeping costs as low as possible, it may be prudent to add more redundancy to supplies and hold more reserves to minimize the impact of inflation and disruption.
- Track supply chain issues. Keeping a watchful eye on raw material pricing. For example, if the price of rubber has increased, the cost of gloves will likely rise in the future.
The most prudent action any healthcare company can take is to improve inventory management. By tracking and optimizing inventory and linking with more suppliers, interruptions can be avoided and fluctuations in pricing mitigated.
While 2022 likely experienced the worst inflation we’ll see in a long time; prices will continue to climb slightly and steadily between 2023 and 2026. Healthcare companies should take action sooner rather than later to mitigate the effects and protect their bottom line.
Supply chains haven’t stabilized yet, but by adopting smart inventory management tactics and diversifying their supplier base, it is possible to manage the inflationary fall-out and rising prices.