COVID-19 and the health care supply chain: impacts and lessons learned

The COVID-19 pandemic is an extraordinary event that has impacted every nation, business, and supply chain on our planet. The pandemic left the health care system in crisis: hospitals on the verge of collapse with their capacity overflowed, critical item supply chains interrupted, and federal and state agencies struggling to take palliative and preventative measures. While governments and private sector organizations did have disaster plans and stockpiles in place, the pandemic exposed several major supply chain vulnerabilities, including shortages of personal protective equipment (PPE) and testing kits.

Of course, supply chain disruptions can be the result of many events, including natural disasters, acts of war or terrorism, supplier bankruptcy, labor disputes, cyberattacks, and data breaches. What’s different about the COVID-19 pandemic is the level of uncertainty and the length of the disruption as well as its simultaneous impact on various geographic areas. In addition, unlike most other disruptions, COVID-19 has been affecting not only the supply but also the demand for products and services.

In response to the pandemic, organizations across many different industry segments have attempted to stabilize their supply chains by conducting risk assessments and implementing business continuity plans. Many have diversified their product portfolio to respond to changing demands, making new products based on their existing resources. For example, some apparel manufacturers began producing PPE, and some distillers started making hand sanitizer.¹ Others have made their supply chains more responsive by utilizing 3D printing technology to make products closer to demand. Finally, several have emphasized the need to bring production facilities back onshore or engage in nearshoring.

To strengthen and stabilize the health care supply chain for the future, it’s important to first identify the challenges that resulted in the major supply chain interruptions seen during the pandemic. Next, health care organizations and pharmaceutical companies need to assess which strategies can help them mitigate supply chain disruptions during major emergencies without incurring exorbitant costs. For example, while holding extensive amounts of safety stocks for a wide variety of health care items and/or reshoring production of a wide array of items would improve resiliency, they would be extremely costly strategies, and therefore not practical. Finally, solutions cannot just come from the private sector. Emergency preparedness is a public health imperative, and federal, state, and local governments need to assess what policy prescriptions they should enact in the wake of this experience as well.

Identifying the challenges

There were a variety of factors that led to the health care supply chains’ slow response to the COVID-19 emergency. These include:

• Port chokepoints and trucking bottlenecks that slowed down deliveries of critical supplies;
• Not having enough workers to produce and transport products because workers were out sick or were not showing up to work;
• Export bans put in place by countries where protective garments, medical equipment, and pharmaceuticals were manufactured, which limited supply to importing countries;
• Panic buying and stock piling of critical supplies leading to shortages for areas that truly needed the products;
• Lack of overall resiliency in the health care supply chain due to companies pursuing cost-focused strategies at the expense of creating redundancy in the supply chain;
• Reliance on a few manufacturers of essential products;
• Over-reliance on offshore manufacturing for essential products and raw materials;
• Lack of transparency to assess existing centralized supply, such as the U.S. Department of Health and Human Services’ Strategic National Stockpile (SNS); and 
• Poor alignment and coordination among federal, state, and local agencies, as well as health care organizations, leading to a fragmented approach to ordering and fulfillment.

These shortcomings impacted clinical care resulting in insufficient testing capability, lack of care coordination, and supplies rationing. Key stakeholders have recognized this problem. Even the World Health Organization released a statement on March 5, 2020, warning that global supply chain disruptions for PPE left health workers dangerously ill-equipped for handling the pandemic.²

One of the root causes of the challenges facing the U.S. health care system is that it has long attempted to reduce supply costs to counter decreasing reimbursements from Medicare and Medicaid as well as commercial insurance plans. The effort to drive down costs has pushed many medical manufacturers offshore to take advantage of low-cost labor as well as tax incentives.³ Over time, this has led to the United States being overly dependent on offshore manufacturing for many essential health care items. For example, 80% of all face masks are manufactured in China.⁴ This dependency created major consequences as the pandemic spread. In particular, the U.S. struggled to procure enough face shields and masks when countries producing the bulk of these items shut down manufacturing and enforced export bans. Furthermore, the global nature of health care supply chains makes it even harder for hospitals to receive accurate data pertaining to current production levels or incoming shipments, which inhibits its ability to foresee future shortages.

At the same time that the industry was facing these supply constraints, it was also experiencing large fluctuations in demand. Consider that a single positive COVID-19 case in a community can cause demand for PPE to increase from 300 to 1,700%.⁵ The resulting bullwhip effect (a distribution channel phenomenon whereby demand variability increases as one moves further up the supply chain) triggered more significant demand increases in the upstream supply chains causing even more severe disruptions. Responding to these demand spikes was especially difficult because of the limited number of manufacturers in the space due to supplier consolidation. For example, during the initial wave of infections in New York City, the COVID-19 swab was made by only two companies in the world.⁶

Recommended strategies

To increase supply chain resiliency and mitigate supply chain interruptions during major emergencies, we recommend that health care organizations and pharmaceuticals consider implementing the following strategies:

Build redundancy in the supply chain and change compensation programs accordingly. One way to increase supply chain resiliency is by adding redundancy in the supply chain, such as by carrying extra inventory of essential health care items, holding excess manufacturing capacity for producing critical items, or contracting with backup suppliers.

Redundancy, however, can be counterintuitive for most supply chain professionals, as it comes at a cost, and supply chain professionals have largely focused on efficiency in the past. Sourcing managers, for example, rarely get rewarded for risk management, instead they are often rewarded based on cost-focused metrics, such as inventory reduction and supply base rationalization. Unless the reward system is modified, it would be unrealistic to expect sourcing leaders to focus on measures that would make supply chains more resilient.

This does not mean sourcing leaders should completely abandon their focus on cost management. Instead, sourcing leaders should be measured on cost savings and supplier risk management. Balancing cost and resiliency would ensure that companies implement supply chain resiliency measures that are cost-effective. For example, strategic positioning of safety stocks in a supply chain (rather than holding safety stocks throughout the supply chain) can provide much needed resiliency, without incurring exorbitant costs.

Utilize technology solutions. Employing a range of digital and analytics solutions can improve supply chain resiliency at a reasonable cost. For example, cloud-based supply platforms improve cross-entity collaboration by enhancing information sharing and helping companies avoid price gouging. Real-time network visibility solutions (such as 5G technology and blockchain) can help integrate data across the entire supply chain. Artificial intelligence and natural language processing can be used for supplier monitoring.

Create a holistic view of inventory. By employing better cooperation, information sharing, and alignment among its members, health care supply chains could create a holistic view of essential medical supplies. Having such a view can ensure global optimization of the highly fragmented health care supply chains. Similarly, if both private and public organizations had a more centralized distribution system, they could more effectively align potential demands to constrained supply by avoiding excess in some regions and shortages in others.

For example, the U.S. Food and Drug Administration (FDA) could create and maintain a list of essential supplies and qualified suppliers. The recommended approach for sourcing essential products would be to have buyers carry in-house inventory on a just-in-time basis, while suppliers/manufacturers hold safety stocks, reserve capacity for any surge, and build rapid replenishment channels for restocking.

Gain greater upstream visibility by mapping and monitoring the supply network. While mapping out the supply network for essential medical products can be time-consuming, it does help organizations better anticipate how disruptive events will impact their supply chains.

The first step for supply network mapping is identifying where your first-tier and second-tier suppliers are located. Next, understand the flow of inbound materials and outbound products in your supply network, and identify potential choke points. It is important to continually monitor the current status of the supply chain by having close communications with suppliers. Companies should also take steps to identify and qualify alternative suppliers to ensure supply can be ramped up to the volume and activation time required. Finally, ensure that your first-tier suppliers have comprehensive risk management programs of their own (for example, that they are mapping and monitoring their own suppliers and have alternative sources for their own highest risk suppliers).

Diversify the supply base. Some have called for the health care industry to reshore production from Asia (in particular, China). But this approach is no panacea, given the industry’s desire to serve the huge Chinese market. Furthermore, since China is a sole source for thousands of items, reducing dependence on it will take substantial time and investment. For example, for certain drugs 80–90% of active pharmaceutical ingredients are produced in China or India.⁷

Health care organizations, however, can improve supply chain resiliency by dual sourcing raw materials, if possible, and onshoring more of the manufacture of critical medical products such as face masks and shields, respirators, isolation gowns, commonly used medications, and gloves. To respond effectively to changes in demand, companies will need to have multiple suppliers from multiple regions, with at least one based in the U.S. (or their home country) to protect against border closures. Before undertaking this strategy, it is important to realize that diversifying the supply chain is as challenging as it is time-consuming and requires significant investment. In addition, health care providers on fixed reimbursement incomes (as opposed to those being paid on a “fee for service” model) may have difficulty absorbing price increases for products that are no longer made in the low-cost regions.

Achieve network agility. Companies can improve their agility by setting up alternative manufacturing sites and assembly nodes across the globe. Those dependent on off-shore production should move some manufacturing onshore or closer to their core markets. At the same time, regulators should scrutinize mergers and acquisitions between essential supply manufacturers to help avoid the monopolization of mission-critical supply chains. In all cases, developing tailored solutions for each segment of the supply chain, rather than pursuing one-size-fits-all approaches, will improve performance and cut costs.

Improve visibility/transparency of the Strategic National Stockpile (SNS). The SNS is the United States’ national repository of antibiotics, vaccines, chemical antidotes, and antitoxins as well as other critical medical supplies. At the start of the pandemic, many governors and local government leaders did not realize which products and supplies were available in the SNS and which were lacking. Because the SNS is a national security asset, there is reason to maintain some confidentiality around its products and supplies, but during a public health emergency, the federal government needs to ensure that the SNS is more transparent, perhaps by creating a free, open-source platform that health care systems can access. Health care systems and manufacturers should also “open their books” and make their inventory lists available to one another so that backorders are prevented and contingency plans are employed.

Public policy recommendations

The ability of the health care system to be resilient in the face of supply chain disruptions also depends, to a large degree, on public policies and existing public capabilities.

The ideal public policy during a pandemic can be conceptualized as a coordinated effort among multiple actors in both the private and public sectors to minimize expected societal losses across two dimensions: health (cases, hospitalizations, and deaths) and socioeconomic activity (lower income and consumption, lower profits, and more limited social interactions). In general, stronger restrictions on social and economic activities lead to better expected health outcomes, so there exists a trade-off and an optimal set of policies that keep a proper balance between the two dimensions. The question is: How far has public policy in the United States been from this ideal? We believe that it has been quite far.

In contrast to most countries, the coordination and regulation of business and social activities in the United States during the pandemic has been heavily decentralized, with the federal government playing only a limited role. As stated on the Department of Homeland Security website, the approach has been “locally executed, state managed, and federally supported.”⁸ The result has been poor alignment of incentives between the private and public sectors, fierce competition among states for scarce supplies, and a wide variation and volatility in regulations across state lines. All of these factors have worsened the supply chain disruptions that have arisen as a result of the pandemic.

It is important to note that the decentralization of decision-making is not necessarily suboptimal. State and local governments are generally better equipped to identify the most vulnerable groups and can provide a more agile and targeted response to the needs, preferences, and circumstances of the local population at a given point in time. For example, local governments can identify lower socioeconomic groups and minorities that are particularly vulnerable to both the health and economic aspects of COVID-19.⁹ As a result, they are able to employ resources more efficiently for a corresponding rise or fall in cases and hospitalizations.

On the other hand, the federal government can generate greater economies of scale for the procurement of health care equipment and supplies (such as testing equipment, ventilators, and vaccines) and can, at least in principle, allocate scarce health care capabilities in a more efficient and equitable manner. This is because when policymakers independently select policies to mitigate the risks faced by their own constituencies, those actions may not be aligned with the ideal social policies for the entire country. When each policymaker chooses what is best for their particular constituency, the nation at large may end up in a more vulnerable position. The country may see some areas with shortages of many essential items while other areas have an excess supply. Additionally, some areas may see more congested health care facilities and more limited economic activity as a result of the spread of the disease.

New York’s governor noted the harm related to competing with other states for ventilator machines, describing it as “like being on eBay with 50 states bidding for ventilators … it’s the Wild West.”¹⁰ Instead of securing protective gear and equitable distribution of health supplies to pivotal areas of the United States, competition eroded the ability of the federal government to lessen the health risks of some constituencies more than others.¹¹

Ultimately, the best bureaucratic organization to respond to a national emergency depends on the particular circumstances of the country. In a large and highly heterogeneous country, like the United States, some level of decentralization is likely to be efficient. However, it seems evident from the COVID experience that greater coordination and centralization of certain activities would be highly beneficial.

Capacity and capability recommendations

The U.S. health care system also faced supply chain disruptions because there was not enough surge capacity for critical supplies, such as PPE, when the pandemic hit. Although surge capacity is critical for effectively responding to pandemics, it is often missing in health care systems in the United States due to hospitals’ fragile financial health. Many hospitals operate on increasingly razor-thin margins. One report showed that for more than 800 hospitals, average operating margins have dropped over 150% from year to year.¹² As a result, hospitals consider unused capacity or supplies as inefficiency or waste and try to reduce it.¹³

Hospital supply chains, therefore, prioritize efficiency and price for fulfilling normal demand, and when demand exceeds supply, health care systems are forced to scramble.¹⁴ Hospitals traditionally acquire supplies like PPE from a few trusted distributors that, in turn, contract to third-party manufacturers for fulfilling their supply. Health systems are typically reluctant to use other, unvetted sources for purchasing hospital supplies. Furthermore, the distributors that they do work with do not often buy from the open market, nor do they regularly pay higher asking prices for equipment (given concerns about not making up for uncovered costs). These practices limit access to nontraditional sources of supply when demand spikes above normal levels.

Clearly, the U.S. health care system does not always prioritize forward-thinking public health measures. Indeed, only about $19 per capita is spent on public health, in contrast to about $11,000 per capita spent annually on treatment.¹⁵ Such policies can have deleterious effects even during otherwise normal, nonpandemic times. One example is burn centers. In 2018, there were only 1,800 burn beds and 25 active burn surgeons in the United States, inadequate for properly responding to a surge according to one expert, Dr. James Jeng, from the American Burn Association.¹⁶

Even before the pandemic, there was an increasing awareness among stakeholders of the need to improve emergency preparedness in the U.S. health system. For example, when the U.S. Defense Agency rolled out its Military Health System multi-year plan, one of its four main aims was to improve the readiness of its medical treatment facilities. This focus on preparedness has intensified this year due to the pandemic. One example is a new self-assessment tool developed by the Institute for Healthcare Improvement to help hospitals improve their ability to respond to another surge in COVID-19 patients. Part of this assessment tool focuses on evaluating the hospital’s policies for procuring and stocking critical supplies and PPE.¹⁷ 

In order to be better prepared for future pandemics and other public health crises, hospitals must do a better job of balancing cost control and emergency preparedness. If traditional distributors cannot meet the growing demand of a hospital system, other fair and equitable sources should be used including equipment clearinghouses (for example, GetUsPPE.org for PPE) and safe crowdsourcing platforms. Stockpiles of critically necessary materials should be held at local, state, and national levels, and advanced technology should be used to create accurate, real-time, highly visible platforms that allow for the seamless redistribution of resources across all levels of the supply chain.

The federal government should also play an active role in ensuring the resiliency of health care supply chains. After the 2008 financial crisis, both the U.S. government and European Union instituted a stress test for banks to guarantee that they had the ability to survive a future crisis. Perhaps health care supply chains should also be required to pass stress tests—provided that lives are not jeopardized in the process.

Exposing market failures

The COVID crisis has brought to the surface lingering market failures in the health care sector and has exposed the need to rethink new ways of managing health care supply chains. Some organizations will no doubt use the policies recommended here to come out on the other side of the pandemic as more agile and innovative. Others will just assume that COVID-19 is a “one-off” public health crisis and choose to not adjust their strategic priorities—an approach that increases risk and squanders an important learning opportunity.

We hope that the lessons learned from the COVID crisis will lead to better alignment and coordination among federal and state government agencies as well as hospital systems and manufacturers. We also hope that these lessons will help us avoid turning health care systems and state governments into rivals, competing for the same constrained supplies. Indeed, we anticipate that significant COVID-19 related supply challenges will continue to arise in the coming years. Successful vaccination efforts, for one, will rely on learning from the early lessons of the pandemic. The successful distribution of vaccines—and the successful navigation of future public health emergencies—will be achieved only if we can implement efficient team-based coordination, advanced technological systems, public-private partnerships, and health system collaboration.

Notes:

1. M. Landry, “COVID-19 Supply Chain Disruption: The Short-Term Challenges and How You Can Overcome Them,” Genpact Blog (March 24, 2020): https://www.genpact.com/insight/blog/covid-19-supply-chain-disruption-the-short-term-challenges-and-how-you-can-overcome-them

2. “Shortage of personal protective equipment endangering health workers worldwide,” World Health Organization (March 3, 2020): https://www.who.int/news/item/03-03-2020-shortage-of-personal-protective-equipment-endangering-health-workers-worldwide

3. S. DeVore, “Surviving the Waves of a Pandemic Storm: How to Fix the Supply Chain Flaws Exposed by COVID-19,” Health Affairs Blog (Sept. 30, 2020): https://www.healthaffairs.org/do/10.1377/hblog20200928.305253/full/

4. P. Boykoff and C. Sebastian, “With No Shipments from China, Medical Mask Suppliers Have to Choose Whom to Supply,” CNN Business (March 6, 2020): https://www.cnn.com/2020/03/06/business/medical-masks-china-shortage-suppliers/index.html

5. “Premier Inc. Survey: As COVID-19 Spreads to New Hotspots, Hospitals Should Prepare for up to a 17X Surge in Supply Demand,” Premier Inc. (April 1, 2020): https://www.premierinc.com/newsroom/press-releases/premier-inc-survey-as-covid-19-spreads-to-new-hotspots-hospitals-should-prepare-for-up-to-a-17x-surge-in-supply-demand

6. A. Chang, “Swab Manufacturer Works to Meet ‘Overwhelming’ Demand,” NPR News All Things Considered (April 1, 2020): https://www.npr.org/sections/coronavirus-live-updates/2020/04/01/825499508/one-of-the-few-manufacturers-of-the-special-swab-for-coronavirus-tests-speaks

7. DeVore, 2020.

8. “Coordinating the Federal Response,” Department of Homeland Security: https://www.dhs.gov/coronavirus/federal-response

9. B. Burstrom and W. Tao, “Social Determinants of Health and Inequalities in COVID-19,” European Journal of Public Health 30 (2020): 617-618.

10. S. Mervosh and K. Rogers, “Governors Fight Back Against Coronavirus Chaos: ‘It’s Like Being on eBay with 50 Other States,” New York Times (March 31, 2020): https://www.nytimes.com/2020/03/31/us/governors-trump-coronavirus.html

11. Similar instances involving pandemic supply chaos as a result of lack of collaboration and coordination between the federal and state governments are well-documented in M. Bender  and R. Ballhaus’s article, “Try Getting it Yourselves’: Trump Sowed Pandemic Supply Chaos,” The Wall Street Journal (September 1, 2020).

12. “National Hospital Flash Report,” Kaufman Hall (April 2020): https://flashreports.kaufmanhall.com/national-hospital-report-april-2020

13. B. Carr, “Creating a Culture of Readiness within the Healthcare System,” Modern Healthcare (April 21, 2020).

14. P. Mehrotra, P. Malani, and P. Yadav, “Personal Protective Equipment Shortages During COVID-19—Supply Chain-Related Causes and Mitigation Strategies,” JAMA Network (May 12, 2020): https://jamanetwork.com/channels/health-forum/fullarticle/2766118?utm_source=twitter&utm_medium=social_jamaforum&utm_term=3338033363&utm_campaign=article_alert&linkId=88472331

15. K. DeSalvo, A. Parekh, G. Hoagland, A. Dilley, S. Kaiman, M. Hines, and J. Levi, “Developing a Financing System to Support Public Health Infrastructure,” American Journal of Public Health, (September 2019): https://ajph.aphapublications.org/doi/10.2105/AJPH.2019.305214

16. “Engaging the Private-Sector Health Care System in Building Capacity to Respond to Threats to the Public’s Health and National Security,” National Academies of Sciences, Engineering, and Medicine (2018): https://www.ncbi.nlm.nih.gov/books/NBK531827/

17. “Hospital Preparedness for a COVID-19 Surge: Assessment Tool,” Institute for Healthcare Improvement: https://www.ihi.org/resources/Pages/Tools/Hospital-Preparedness-for-COVID-19-Surge-Assessment-Tool.aspx