By Anastasia Gnezditskaia
The US healthcare sector, already facing an upheaval from the pandemic, is dealing with more supply chain-related challenges coming from recent geopolitical events, including Russia’s war in Ukraine and friction with China.
These events, coupled with the rising inflation fueled by surging energy prices, resulted in shortages and logistical issues that have plagued the healthcare supply chain. So many challenges in such a condensed timeframe have brought to the fore multiple areas of concern involving medical supplies.
Medical supplies currently facing a shortage
While current global events primarily affect food availability and pricing, as well as fuel prices, the healthcare sector has also seen a direct and indirect impact. It came due to the fact that “many medical supplies are made in China,” said senior managing director at Merritt Healthcare Advisors Matthew Searles, adding that he believes the Russia war with Ukraine had mostly an indirect impact via “the increase in fuel and transport costs.”
In terms of medical supplies, the sector is currently facing component scarcities due to backlogged ports, transportation glitches and lockdowns in China as related to the spread of Covid-19. This results in a scarcity of certain medical devices and supplies, which had an impact on doctors’ offices and operating rooms across the US.
According to the Food and Drug Administration’s list of items that are facing a shortage, scarce products include automated external defibrillators, chest drains/suction canisters and autotransfusion systems, as well as a number of other dialysis-related, ventilation-related products, personal protective equipment, as well as testing supplies and equipment.
In addition, hospitals might face even more scarcity due to potential Taiwan-related disruptions. According to one executive representing a healthcare lender, “where China poses the biggest threat is on the topic of Taiwan. If China does to Taiwan what Russia did to Ukraine, I think we will see significant challenges not just in terms of pricing but also in mechanical functioning – think X-ray machines, MRI’s, robotic surgery, etc. Taiwan largely corners the market on chips and we already see today Taiwan has not been able to keep up with demand due to earlier disruptions in the supply chain.”
With car manufacturers already being affected by having to produce cars with one or two less features than would otherwise be found because of the chip situation, in case if China disrupts Taiwan directly “I would expect in the short to medium term, refurbished and basic medical equipment to become more expensive and expensive equipment to become next to impossible to obtain,” he said.
Russia’s war in Ukraine is also having an impact on medical supplies, via the impact on chip availability. It is disrupting access to raw materials utilized for semiconductor manufacturing, such as neon gas, rhodium, palladium, nickel, and titanium.
Semiconductors are used in medical equipment that includes chemistry and blood gas analyzers, patient monitors, MRI machines, pacemakers, blood pressure monitors, and others.
Also, disruption to crude oil and natural gas production and flow in Eastern Europe or Russia could also have a direct impact on the global supply and pricing of plastics. It is used in the production of multiple healthcare products such as specimen bottles, trays, syringes, and medication containers.
The impact on hospitals, service providers and the M&A market
As a result of current and previous conditions that lead up to these shortages, the hospitals are facing increasing costs. They are spending 19% more on drugs, 18% more on supplies and 21% more on labor compared to two years ago, according to recent data released by health management consulting firm Kaufman Hall.
A number of healthcare corporations have already mentioned the impact of adverse events on their supply chain situation when posting financial results. For example, Dutch medical gear maker Royal Philips had its adjusted earnings fall earlier this year as the company warned of persistent supply-chain challenges and said inflationary pressures may last for years. Similarly, GE Healthcare mentioned supply chain and inflation-related constraints in its recent earnings reports.
And, the M&A situation, the healthcare sector is also affected by the international events. In terms of the M&A market for provider services, which has been indirectly impacted by events in China/Russia/Ukraine, “we’ve seen a shift in activity towards strategic buyers – such as Optum, Humana – and away from private equity, as the latter have been reticent to sell their portfolio companies into this market,” said Aaron Newman, vice president of healthcare investment banking at Cain Brothers.
What can be done?
With all these disruptive factors that the healthcare providers are facing, they will likely have to consider adopting measures to proactively manage their supply chain situation. Among the measures proposed are investments that have to be made in supply chain automation and analytics as powered by AI algorithms, according to a recent study by Becker’s Hospital Review. Hospitals would also have to fully or partially let go of a just-in-time ordering model, instead planning supplies in advance as well as keeping more items in stock.
Companies would also need a boost in the use of advanced and continuous manufacturing technology for critical drugs and active pharmaceutical ingredients, according to suggestions by a group of US-based healthcare-related associations issued earlier this year. In addition, healthcare service providers would likely have to set up risk management plans that outline any risks that supplies of medical devices could possibly face.
While all these steps are advisable, in some instances few options are available to the health systems for avoiding disruptions in medical supply chains.
Said Searles at Merritt Healthcare Advisors, “Other than being resourceful, and efficient with the use of supplies, I think they are going to have to wait out the supply chain issues.”
