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National Academies of Sciences, Engineering, and Medicine; Health and Medicine Division; Board on Health Sciences Policy; Committee on Security of America's Medical Product Supply Chain; Shore C, Brown L, Hopp WJ, editors. Building Resilience into the Nation's Medical Product Supply Chains. Washington (DC): National Academies Press (US); 2022 Mar 3.
Building Resilience into the Nation's Medical Product Supply Chains.
Show detailsAs discussed in Chapter 4, medical product shortages in the United States are a routine occurrence in clinical care, despite efforts to decrease their frequency and blunt their effects. These shortages have profound effects on the health care system, including increased risks to patients, increased health care costs, and threats to clinical research. Routine shortages ultimately affect the health care system’s ability to function effectively during both routine operations and public health emergencies. Making medical product supply chains more resilient during routine conditions will make them more resilient during public health emergencies.
Mitigation measures play a critical role in preventing and minimizing disruptive events that can trigger shortages (Figure 7-1). As described in the conceptual framework (Chapter 5), mitigation measures include (1) hardening measures that reduce the likelihood or magnitude of disruptive events within stages of the system, by promoting quality and reliability, and (2) diversification measures that create redundant processes and product sources to reduce the risk of catastrophic failure.
FIGURE 7-1
Medical product supply chain resilience framework: potential mitigation measures.
This chapter discusses specific actions key stakeholders can take to harden and diversify the day-to-day medical product supply chains, and culminates in a recommendation for actions that health systems1 can take to increase the resilience of these supply chains. Given the prevalence of chronic drug shortages in U.S. hospitals and the enormous consequences these have for patients and health systems alike (Fox et al., 2014), this chapter focuses on mitigation measures for drug products where their implementation can make the most impact. However, many of the described measures may be generalizable across all medical products.
INCENTIVES FOR QUALITY AND RELIABILITY
In most markets, shortages are self-correcting because consumers are willing to pay higher prices when a product is in short supply. Higher prices then attract more suppliers, and more supply rectifies the shortage. However, this often does not occur in markets for medically necessary drugs. In medical product markets, consumer demand for services is largely unaffected by changes in price, because consumers typically purchase drugs and services through health insurance contracts that have prenegotiated rates, and there is a high barrier for new manufacturers to enter a market (FDA, 2012). Therefore, the interests of medical product suppliers and manufacturers, which align with maximizing profits and minimizing costs, can lead to insufficient supply and inadequate quality of medical products causing supply shortages (NASEM, 2018b).
In 2020, the U.S. Food and Drug Administration (FDA) Drug Shortages Task Force noted that there is a “lack of incentives to produce less profitable drugs,” which is more often the case for older generic drug manufacturers that face intense price competition and contracting practices that incentivize the lowest price possible. Without information on the quality of medical products, consumers at both the individual and health-system levels are unable to exert their purchasing preferences for high-quality products and industry has little incentive to implement costly updates to manufacturing processes and facilities.
Additionally, the incentives health systems have to manage their supply chain are misaligned with those of manufacturers, and particularly with those of patients. For example, inpatient diagnosis-related group reimbursements do not incentivize the purchase of high-quality products; rather, they incentivize health systems to purchase the lowest cost products for inpatient use, effectively making generic medications distinguishable from each other only by price (FDA Drug Shortages Task Force, 2020).
Contracts focused on price alone can drive competitor products from the market in a “race to the bottom” pricing structure. This can lead to fewer suppliers, which in turn can weaken the resilience of the supply chain, as no options to fill the void are available if a quality or manufacturing issue occurs (FDA Drug Shortages Task Force, 2020).
The committee notes that the market incentivizes health systems to purchase medical products at the lowest cost, and on a just-in-time basis. These incentives increase the risk of shortages caused by supply chain disruptions, such as deviations in product quality or manufacturing problems, and conflict with the interest of patients.
HARDENING DAY-TO-DAY MEDICAL PRODUCT SUPPLY CHAINS
Over the past decade, stakeholders have developed sophisticated practices, policies, guidance, and tools to lessen the number of drug shortages, which peaked in 2011 (FDA, 2020), and to ensure medical products meet standards for quality (see Box 7-1). The committee acknowledges this extensive and ongoing related work; therefore, this section builds upon current efforts and highlights ways to bolster current mitigation measures, particularly for generic drug products.
BOX 7-1
Resources for Addressing Medical Product Shortages and Quality Concerns.
To mitigate routine medical product shortages and their effect on clinical care, manufacturers, suppliers, and health systems must improve existing processes throughout medical product supply chains. This hardening of medical product supply chains requires that manufacturers reliably produce quality medical products, and that health systems purchase these higher quality products for the patients they serve. Reorienting the market to value the quality and reliability of medical products, rather than cost alone, can realign incentives for manufacturers and patients and promote hardening of medical product supply chains.
Implementing a Drug-Quality Rating System
The FDA Drug Shortages Task Force recommended the implementation of a quality rating system to introduce greater transparency into the quality management systems behind the drugs that consumers purchase (FDA Drug Shortages Task Force, 2020). This rating system would measure the quality management maturity of medical product manufacturing facilities, and reward those that implement robust quality systems with a higher rating. This system would go beyond the minimum quality standards set by current good manufacturing practices (CGMPs), by rewarding manufacturers that detect and address key vulnerabilities, and implement continuous system improvement. Critically, all manufacturers of medical products and their constituent parts must be required to participate in such a rating system. FDA and pharmaceutical companies alike have expressed concerns that they have less control of and transparency into contract manufacturing organizations, sometimes being barred from entering sites to conduct inspections (The PEW Health Group, 2011). A quality rating system would offer consumers increased transparency into the quality of medical products and give purchasers the ability to distinguish between products based on their quality (see Chapter 6 for a discussion on transparency, quality and the need for a third-party rating system).2 In providing this transparency, the market will adapt to reward facilities that have a more mature quality system than their competitors.
In the absence of the quality rating system that the Drug Shortages Task Force recommends as an enduring solution to drug shortages, health systems can put pressure on suppliers to share more information on the quality of a product. For example, health systems could insist that group purchasing organizations (GPOs) investigate manufacturers for quality and include minimum quality standards in contracts negotiated on their behalf. At a minimum, health systems should know which company manufactured the medications they are purchasing and the manufacturing location, to enable additional research into FDA inspections and warning letters. This information is also essential for ensuring a more rapid removal of contaminated products from inventory when FDA MedWatch warnings are incomplete (FDA, 2017).
Accreditation organizations play an important role in ensuring quality at health care centers in addition to allowing health systems to participate in the Medicare and Medicaid programs. Currently, the Centers for Medicare & Medicaid Services (CMS) grants authority to public state survey agencies and private accreditation organizations—such as The Joint Commission (TJC) and the Accreditation Commission for Health Care—to verify that health care facilities receiving Medicare reimbursement comply with Medicare conditions of participation (CMS, 2021). These organizations evaluate health care facilities based on accreditation standards that meet or exceed Medicare conditions, and survey activities to verify compliance with CMS policy and regulations. Some accreditation organizations publish the results of their evaluations, which are available to the public to review (TJC, 2021). Guidelines pursuant to Medicare conditions of participation already consider a health care facility’s processes to alleviate medication shortages as a factor in accreditation (CMS, 2020). When a quality rating system for medical products becomes available, CMS could incorporate—under Interpretive Guidelines §482.25(b)(9)—a metric based on the quality and reliability of the drug supply that a facility purchases, as well as shortages that negatively affect patient care. Doing so would incentivize health care facilities to procure medical products with high-quality ratings.
Incorporating Quality by Design
Quality by design (QbD) can provide manufacturers a competitive edge by improving efficiencies, especially for manufacturers of generic products. Using QbD concepts also promotes flexibility in sourcing material and the overall adaptability of supply chains (Crowley and McCrossen, 2016). Moreover, QbD may be particularly attractive to manufacturers, as its implementation offers a return on investment by decreasing the likelihood of batch failures, and it reduces the need for controls over intermediates and final products, saving the manufacturer time and money (Zacché, 2020). Furthermore, any measures that incentivize quality, such as third-party ratings and incorporation of quality into purchasing contracts, will increase the attractiveness of QbD to manufacturers.
QbD can help medical product manufacturers to supply products that reliably meet high-quality standards, thus reducing the number of shortages triggered by quality and manufacturing failures. QbD as a concept posits that quality can be built into the medical product through the processes used to develop the product (Yu et al., 2014). QbD aims to improve product quality by implementing clinically based quality specifications and increasing the understanding and control of manufacturing processes. Risk management, root cause analysis, and postapproval change management are additional tools used to achieve QbD. FDA’s CGMP regulations incorporate elements of a QbD approach, emphasizing the transfer of product knowledge and understanding from the development phase to the ongoing manufacturing and any postdevelopment changes or optimization (FDA, 2006). The implementation of QbD approaches throughout medical product development and manufacturing would promote the use of measurable quality standards based on the clinical performance of the product. Moreover, QbD facilitates postapproval modernization and optimization through a comprehensive understanding of the product and related manufacturing processes.
Purchasing for Unexpected Events
Health systems often attempt to maximize inventory turnover because of a lack of space and to reduce carrying costs. Purchasing on a just-in-time basis places health systems at risk of shortages caused by short-term interruptions—such as weather delays in deliveries—and provides little cushion to prepare a management plan when longer-term shortages occur because of quality or manufacturing problems. Just-in-case purchasing aims to have sufficient product available in case of interruptions to normal supply or demand (Barocas et al., 2021).
Purchasing medical products on a just-in-case basis builds reliability and resiliency into the supply chain. However, because holding excess supply in stockpiles can be costly for health systems, incentives may be necessary to encourage just-in-case purchasing. Including availability of stockpiles for supply chain critical products as a metric under CMS’s Hospital Value-Based Purchasing Program3 could incentivize health systems that bill Medicare and Medicaid to convert to just-in-time purchasing. Additionally, much as the U.S. government invests in the Strategic National Stockpile, just-in-case purchasing in the private sector may require public investment (Barocas et al., 2021). Federal, state, territorial, tribal, or local governments may consider reimbursing health systems that invest in purchasing practices that ensure that excess inventory is retained to respond to unexpected events.
DIVERSIFICATION OF MEDICAL PRODUCT SUPPLY CHAINS
The consolidation and geographic concentration of raw material suppliers in medical product supply chains poses risks to the ability of manufacturers further down the supply chain to secure basic supplies to make their own products (NASEM, 2018a). Similarly, consolidation among manufacturers of low-margin products such as generic drugs, due to extreme price competition, has been a factor in many of the routine shortages that have occurred in recent years (FDA Drug Shortages Task Force, 2020). In some markets, diversification happens naturally. For example, if transportation costs are high for a product, it may be economical to produce it close to the point of use, which leads to many production locations around the world. However, for generic drug product manufacturing, incentives often induce production in the single lowest cost location, which leads to concentration, not diversification of product sourcing, and increases the risk of drug shortages.
Increasing sourcing diversity promotes the resilience of medical product supply chains by ensuring that manufacturers and purchasers have backup capabilities in the event of a disruption (i.e., parallel sourcing of a medical product component from more than one supplier). However, independence of sources is crucial to diversification strategies because it reduces risks of simultaneous failure. Promoting competition based on the quality and reliability of medical products provides incentives diversification, which can help counteract the market forces that have led to excessive consolidation of medical product manufacturers.
Active pharmaceutical ingredient (API) and raw material suppliers, medical product manufacturers, GPOs and distributors, and health systems all have a responsibility to improve diversification across medical product supply chains. Each of these stakeholders can facilitate diversification through different measures. For example, API and raw material suppliers can increase the geographic diversity of their operations, and health systems can build diversity into their supply chains by contracting with multiple suppliers for a given product. The ways in which diversification can protect supply continuity are complex. Regulation, incentives, and technology are available options to promote the diversification of a concentrated market, a few of which are highlighted below.
Diversifying Sourcing and Manufacturing Practices
Diversity in the location and firms in which raw materials, APIs, device components, and final products are manufactured can help to protect patients from shortages, but such diversity also provides benefits for manufacturers who would otherwise need to stop production until they are again able to acquire the needed material.
To be effective, a diversified market must have independent manufacturers and suppliers. An optimally diversified supply chain would use facilities in different locations operated by separate organizations. A supply chain with manufacturing facilities in the same location is vulnerable to localized events, such as natural disasters. A supply chain with manufacturing facilities in multiple locations, but run by the same company, is vulnerable to disruptions in company operations. Additionally, diversification is needed across the supply chain. For example, if a manufacturer maintains multiple final assembly plants around the world, but relies on a single supplier for a critical component, the entire supply chain remains vulnerable to a disruption if that one component goes into shortage.
Some manufacturers have begun to ensure diversity in their supply of raw materials to safeguard against stoppages and shortages when a supplier experiences a disruption (NASEM, 2018a). However, independently vetting suppliers for quality and reliability can be a costly and time-consuming process for manufacturers. Transparency and rating measures, like those discussed in Chapter 6, could help buyers recognize manufacturers with geographic diversification and give buyers reason to pay a reliability premium for the additional protection it provides.
Diversifying Purchasing Practices
Distributors, GPOs, and health systems can contribute to the diversification of medical product supply chains by purchasing from several suppliers of the same product. While this may lead to hoarding and duplicate orders during a crisis, it more importantly builds resilience into supply chains by providing alternative sources of medical products when a particular supplier experiences a disruption.
Furthermore, the reimbursement policies by payers may also incentivize health systems to overemphasize cost. For instance, bundled payments by diagnosis-related group reimbursement do not reimburse health systems for higher prices paid to suppliers with higher reliability. If health systems accurately account for the costs involved in finding substitutes for drugs in shortage, they will still have an incentive to pay a premium for more reliable supplies. Nevertheless, because of the intricacies of reimbursement plans, Medicare and private payers can contribute to improved resilience by considering the effect of their policies on the incentives for health systems to choose from a variety of reliable high-quality suppliers for drugs and devices. There is an opportunity for future research and pilot programs to determine the specific policy updates, which public and private payers can implement, to incentivize purchasing that rewards and promotes diversification. Because rating systems and accreditation organizations can influence health systems, these organizations can similarly promote resilience by crediting health systems with robust supply assurance systems as part of their rating and ranking processes.
Contracting
Most health systems belong to a GPO that provides access to a variety of contracts (O’Brien et al., 2017). State procurement codes often require a request for proposal (RFP) process if not using a GPO. These RFPs can be time consuming and impractical for accessing lifesaving products in a health system. Some health systems make individual contracts for specific products but most lack the resources to conduct RFPs and negotiate contracts for thousands of products.
To mitigate shortages, health care systems that do conduct RFPs can consider contracting with multiple suppliers for any particular medical product that is at a high risk of shortage. Alternatively, health systems that use GPOs could demand that contracts ensure sourcing from a diverse array of suppliers for high-risk medical products. These purchasing strategies not only help to protect health systems from experiencing shortages when supply from one source is disrupted, but promote competition between medical product manufacturers to provide a more reliable supply.
Many contracts do not require a committed purchase volume nor do they include failure-to-supply provisions (Gonsalkorale et al., 2012). However, newer subscription-type contracting opportunities are becoming available in which health systems make a long-term (e.g., 5-year) commitment to purchase a specific product at a specific volume. If purchase commitments are not realized, the health system faces a penalty. Similarly, if suppliers are unable to supply the health system with the products they ordered, the supplier incurs a penalty. This type of contracting adds resilience to many areas of medical product supply chains. The manufacturer has an assured volume of purchases for an extended period of time, allowing investments in the quality of production. The health systems receive a reliable supply of a critical product at a consistent price, and can devote fewer resources to developing shortage management plans for these products. Contracts that include long-term commitments can likewise counter the risk of just-in-time purchasing by providing health care systems with a more reliable supply that is therefore resilient to short-term disruptions.
One example of this model is Civica Rx.4 Civica Rx produces or procures generic drugs for over 50 health care systems, including the U.S. Department of Veterans Affairs and the U.S. Department of Defense (Dredge and Scholtes, 2021). The company, run as a nonprofit 501(c)(4) organization, utilizes a business model that is unique within the health care sector and strives to create more efficient and more equitable health care solutions for patients. By securing bulk orders from its various members, Civica Rx is able to offer lower drug prices spread out across its members. The scale and duration of Civica Rx’s contracts also enables the company to invest in larger stockpiles, better positioning it to weather short-term disruptions. Other companies that use similar models to provide low-cost generic drugs that are vulnerable to shortage include ProvideGx and the Mark Cuban Cost Plus Drug Company.5,6
Weighing Cost and Quality
Most purchasing is based on cost, with some consideration to contract compliance. In many cases, electronic purchasing programs guide buyers to purchase the product with the lowest cost. Automatic substitution programs from distributors—in which a lower-cost product is substituted for the ordered product—can also force purchases based on cost alone. Such programs are to be avoided as they can direct purchasers to buy products from manufacturers with a history of poor quality or shortages. Purchasers must also remember that managing a drug shortage has associated costs (Vizient, 2019). Responding to a shortage with product substitutions, additional labor, and delays in care is expensive to health care facilities. Before purchasing a lower-cost product from a new supplier, health systems can research the quality and reliability of the manufacturer or supplier. FDA publishes quality and production problems associated with drugs via MedWatch,7 as well as for devices via MAUDE (the Manufacturer and User Facility Device Experience database).8 Health systems, as well as patients, can also be vigilant about monitoring for product quality, reporting all defects to FDA and the manufacturer.9 Additionally, health care facilities must attempt to avoid purchases from suppliers with consistent levels of poor quality, regardless of FDA equivalence ratings.
RECOMMENDATION
Given that a high percentage of medical product shortages are the result of process disruptions caused by quality problems, particularly for generic drug products, incorporating information on drug quality and reliability into the contracting, purchasing, and inventory decisions of health systems is an opportunity to reduce the likelihood and magnitude of drug shortages. However, such a mitigation strategy requires overcoming the “cost only” inertia in current health system purchasing systems, as well as other barriers.
Drug shortages impose costs on health systems, so there are incentives for health systems to choose suppliers with reputations for quality and reliability. Previous reports have issued recommendations that call for manufacturers to adopt updated manufacturing processes that would improve the quality and reliability of medical products (see Appendix B). The subsequent recommendation builds on these reports, by tasking health systems with actions, that when taken together with manufacturers and suppliers, can build robust mitigation measures into medical product supply chains.
Recommendation 3 (Resilience Contracting by Health Systems). Health systems should promote a more resilient market for medical products by deliberately incorporating quality and reliability, in addition to price, in their contracting, purchasing, and inventory decisions. When quality ratings for medical products are available, accreditation organizations for health systems should use the ratings of the products sourced by health systems in their evaluations and ratings, as well as the frequency of shortages experienced at a health system that negatively affected patient care. Specifically,
- a.
Health systems should fortify their contracts with medical product suppliers by including failure-to-supply penalties for contracts requiring a committed purchase or purchase volume, preferentially awarding contracts to suppliers that can demonstrate superior quality and reliability, awarding contracts to multiple suppliers of the same medical product, and requiring these same standards in contracts that are negotiated by group purchasing organizations on their behalf.
- b.
Health systems should budget to adequately reward select groups of products (e.g., low-cost, low-margin, off-patent, small molecule) if guarantees are met for higher quality and assured supply levels.
- c.
Health systems and medical product wholesalers should routinely enter into emergency purchasing agreements for a specified list of emergency supplies or products that guarantees product delivery in the event of an unexpected supply demand or a substantial supply disruption. They should have a good understanding of the supplier’s ability to meet demand, considering commitments to other buyers.
REFERENCES
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.ashp.org /drug-shortages/shortage-resources . - Barocas J, Gounder C, Madad S. Health Affairs Blog. 2021. Just-in-time versus just-in-case pandemic preparedness.
- Cleveland Clinic. Inpatient pharmacy leaders lower costs with dashboard tool. 2017. [October 15, 2021]. https://consultqd
.clevelandclinic .org/inpatient-pharmacy-leaders-lower-costs-dashboard-tool/ - CMS (Centers for Medicare & Medicaid Services). State operation manual: Appendix A: Survey protocol, regulations and interpretive guidelines for hospitals. 2020. [October 20, 2021]. https://www
.cms.gov/Regulations-and-Guidance /Guidance/Manuals /downloads/som107ap_a_hospitals.pdf . - CMS. FY 2019 report to Congress (RTC): Review of Medicare’s program oversight of accrediting organizations (AOs) and the Clinical Laboratory Improvement Amendments of 1988 (CLIA) validation program. 2021. [October 20, 2021]. https://www
.cms.gov/files /document/qso-21-12-aoclia.pdf . - Crowley P, McCrossen S. Quality by design for generic products: Opportunities and challenges. 2016. [November 8, 2021]. https://www
.europeanpharmaceuticalreview .com/article/46471/qualitydesign-generic-products-opportunities-challenges/ - Dredge C, Scholtes S. New England Journal of Medicine Catalyst Innovations in Care Delivery. 2021. The health care utility model: A novel approach to doing business. doi:10.1056/CAT.21.0189.
- FDA (U.S. Food and Drug Adminstration). Guidance for industry: Quality systems approach to pharmaceutical CGMP regulations. 2006. [October 19, 2021]. https://www
.fda.gov/media/71023/download . - FDA. Standards for securing the drug supply chain: Standardized numerical identification for prescription drug packages. 2010. [November 9, 2021]. https://www
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- Gonsalkorale R, Beracochea E, Dias V, Gregoire S, Quick JD. Ch 39: Contracting for pharmaceuticals and services. In: Embrey M, editor. MDS-3: Managing access to medicines and health technologies. Arlington, VA: Management Sciences for Health; 2012. [December 21, 2021]. https://msh
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.pharmamanufacturing .com/articles /2019/the-advantages-of-a-quality-by-design-approach-in-clinical-and-commercial-pharma-development/
Footnotes
- 1
For the purposes of this report, the flow of goods, manufacturer to wholesaler to purchaser, applies just as much to community pharmacies and other purchasers of medical products as it does to health systems. The committee chose to focus on where the most severe medical product shortages occur and where its recommendations could make the most impact, which primarily occur in health system settings (Fox et al., 2014).
- 2
This quality rating system would distinguish based on maturity of the quality system, which indirectly relates to product quality. However, it is not a product quality assessment. This latter assessment would come from testing the product itself or certification of compliance.
- 3
For more information, see https://www
.cms.gov/Medicare /Quality-Initiatives-PatientAssessment-Instruments /Value-Based-Programs /HVBP /Hospital-Value-Based-Purchasing (accessed January 24, 2022). - 4
For more information, see https://civicarx
.org/about/ (accessed October 21, 2021). - 5
For more information, see https://www
.premierinc.com/providegx (accessed October 21, 2021). - 6
For more information, see https:
//markcubancostplusdrugcompany .com/ (accessed October 21, 2021). - 7
For more information, see https://www
.fda.gov/safety /medwatch-fda-safety-information-and-adverse-event-reporting-program (accessed October 21, 2021). - 8
For more information, see https://www
.accessdata .fda.gov/scripts/cdrh /cfdocs/cfmaude/search.cfm (accessed October 21, 2021). - 9
For more information, see https://www
.fda.gov/consumers /consumer-updates /how-report-product-problems-and-complaints-fda (accessed October 21, 2021).
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