Supply Chain Frontiers issue #23. Read all articles in this issue
If the nation’s healthcare system had a 900-pound gorilla pushing innovation like Wal-Mart does in the retail industry, then it would be better at implementing more efficient processes and leveraging technology. This is one of the differences between healthcare and other industries discussed at the MIT Efficient Healthcare Delivery (MEHD) Group Research meeting in September 2007. Bridging the gap is one of the remedies for America’s healthcare systems ills being explored by the MEHD Group team.
The trend towards higher costs per unit of service in healthcare contrasts starkly with what is happening in a number of other sectors. “Industries such as electronics, retail and telecom have enjoyed huge performance improvements over recent decades,” said Mahender Singh, Executive Director of the MEHD Group. To a great extent the disparity can be attributed to a lack of innovative ways to improve the management of healthcare supply chains and operations generally.
The gap is widening in a number of areas. For example, one meeting attendee contrasted the semiconductor industry with the biologics segment of the pharmaceutical industry (where large molecule drugs are produced in large fermentation tanks). Semiconductor manufacturers achieve very high yield rates in the fabs where chips are made; in biologics, the yield rates are very low. Semiconductor fabs are equipped with sophisticated sensors and real-time monitoring systems to boost process efficiency. Such technology is largely absent in biologics facilities which follow what the attendee termed a “make it and hope” approach to manufacturing.
Pharmaceutical companies are as commercially keen as any enterprise, so why the difference? Two reasons were posited. First, drug makers tend to put more store in new drug discoveries than improved manufacturing processes when it comes to calculating ROIs. Second, government regulation promotes conservatism because changing a process can return the pharmaceutical company to the federal government’s drug approval maze.
Also working against change is deeply ingrained attitudes and working practices that frustrate efforts to introduce more standardization. One attendee cited a merger between two hospitals that was meant to save costs by rationalizing the products used by respective facilities. But the hospitals could not agree on common standards for relatively simple equipment such as hospital beds. Another example is that operating rooms may carry thousands of variations on treatments and supplies because of the individual preferences of surgeons.
Poor supply chain visibility is endemic in healthcare, in contrast with many other industries that have made significant strides in this area. A supplier to the industry noted that even though a medical product distributor might achieve a 97% fill rate, the hospitals it supplies still run out of items even when they carry 300 days worth of inventory. A lack of visibility and fragmented ordering processes are at the root of the problem.
Given these issues what kind of future does America’s health care system face? Three potential scenarios were outlined at the MEHD Group meeting. At the grim end of the scale is a system that collapses under the weight of the aging baby boom generation. In the middle ground is a system that continues to muddle through and succeeds in making some changes on the margins. The most optimistic scenario is where a new model emerges that harnesses best practices and provides efficient services.
The recently formed MEHD Group at MIT-CTL aims to find solutions that support the third outcome. The research agenda is divided into three tiers. A system dynamics tier is looking at the structure of the industry and future scenarios. A demand-side tier is considering the various demand channels for healthcare services, how patients navigate them, and ways in which these channels will evolve. Tier Three is focused on the supply side of the industry, and how players such as pharmacies and medical device suppliers can improve their performance.
“A great deal of research is needed before we can map a better future for healthcare, but we are optimistic that this can be done and hope more companies will join the MEHD Group to make this happen,” said Singh.
Members of MIT’s MEHD Group include CVS/Caremark, Cardinal Health, Pfizer, and Cephalon. For more information on the Group please contact Executive Director Mahender Singh.