In mid-February, Supply Chain Matters provided commentary regarding a looming legal showdown as U.S. governmental regulators began a crackdown on major drug distributors and larger corporations to fight rampart prescription drug abuse in the U.S..  Specific incidents involving four pharmacies located in the Sanford Florida area suspected of selling “staggering” volumes of the controlled drug oxycodone lead to strong suspicions of a huge black market in this specific area.  The U.S. Drug Enforcement Administration (DEA) took the unusual step of targeting the supplier to these pharmacies, Cardinal Health Inc., the second largest U.S. wholesale pharmaceutical distributor, by seeking to block distribution of controlled substances from Cardinal’s distribution facility located in Lakeland Florida. The DEA alleges that Cardinal has failed to follow agreed-to procedures to monitor misuse of controlled substances such as oxycodone. The DEA also targeted retail chains CVS Caremark Corp. and later Walgreens in this effort.

This morning, the Wall Street Journal is reporting (paid subscription or free metered view) that Cardinal has agreed to a settlement with the DEA that involves a two-year suspension of its DEA license to ship controlled substances from its Lakeland Florida distribution center, along with efforts to improve this distributor’s anti-drug-diversion procedures. The WSJ also reports that this new settlement could also affect DEA’s ongoing litigation with CVS , which alleges that the drug retailer’s  two retail facilities in Florida sold suspiciously large volumes of pain pills received from the Cardinal Lakeland distribution facility.

While further details will follow, this report would indicate that the DEA and U.S. regulatory agencies are placing serious teeth to the ongoing efforts of flagging and enforcing obvious illicit drug distribution through available U.S. retail channels.  It is an obvious sign that distributors and retailers had better invest in analytical tools that can flag unusual or excessive patterns of controlled substance retail sales, coupled with actionable regulatory reporting and mitigation control.

Bob Ferrari

With all of the focus on the current ongoing legislative debates for passing a comprehensive healthcare reform system within the U.S., I thought it would be appropriate to initiate some ongoing commentary related to current challenges concerning healthcare supply chains. I’m planning to provide commentary from a number of various perspectives- providers, customers, or suppliers, and encourage Supply Chain Matters readers to add in this commentary, either through exchange of comments or authorship of guest postings.

One of the most informative articles on this topic that I have read of late, Is Supply Chain the Cure for Rising Healthcare Costs?, was published in the September 2009 edition of Supply Chain Management Review (paid subscription is required).  The article was written by Mike Duffy, Executive Vice President of Operations at healthcare distributor Cardinal Health. Duffy is no stranger to our community, and came to the healthcare industry from his previous supply chain management roles in the consumer product goods (CPG) sector. In his article, he draws many parallels to the similar challenges that were ultimately overcome within CPG focused supply chains.

Duffy describes the healthcare supply chain system as an extremely complex “adsorption model” that moves products downstream with limited visibility into product demand at the point of use.  The outcome of the current model results in products that can be out-of-stock as much as 15 percent of the time.  He notes that there is some sentiment that transformation to performance standards currently experienced in the CPG and other industries is not possible.  Widespread information sharing and trust obstacles among trading parties and effective knowledge management are all lacking.  Many hospitals still rely on the bulk stockroom as the hub of their supply chain, often without any automation in inventory tracking and management.  Critical products are either unavailable when hospitals and physicians need them, or products have far too much excess inventories. Interesting enough, my own conservations with healthcare supply chain professionals further indicate that certain pharmaceutical suppliers often have large excess finished goods inventories which are also the result of a system of conflicting and fractured information relative to balancing demand with supply.

In the remainder of the article, Duffy contrasts three fundamental differences between healthcare and CPG supply chain principles.  They boil down to the following:

• A very fragmented and regionalized healthcare delivery system with no single player (think Wal-Mart) capable of influencing breakthrough changes in practices.
• Pricing and stakeholder interest models do not currently align, nor provide incentives to drive cost efficiency.
• A general lack of technical sophistication in supply chain management systems that is often found in other industry supply chains.  Duffy very perceptively points out that technology alone should not be viewed as the panacea for the healthcare supply chain.  Like all other successful transformation initiatives, getting business process, information, and reward system aligned precedes automation. 

The bottom line expressed by this industry insider is that transformation is not easy and will take some time.  Some innovators such as Lahey Clinic and Nebraska Medical Center have emerged, and the industry needs to continue to build on best practices knowledge.  Duffy’s final message is that the job of reducing healthcare’s value chain costs is bigger than any one player in the network.  Siloed thinking and old paradigms must be challenged, and the effort cannot wait much longer.

My goal in future posts is to provide viewpoints and commentary that address the current structural and operational challenges faced in healthcare supply chains.  You are welcomed to provide your own observations regarding these challenges in the comments area related to this posting, or provide references to others who have taken on these challenges.  If you would like to contact me directly regarding information sources, please email me at: bferrari at blog1 dot com.

Bob Ferrari