Health Care Economics and the Medical Supply Chain

A medical warehouse worker uses a tablet to monitor inventory.

The COVID-19 pandemic exposed the precarious state of the U.S. health care system. By the summer of 2020, barely half a year after the arrival of the virus in the U.S., 42 hospitals had either filed for bankruptcy or closed entirely. Health care systems as a whole suffered losses of over $202 billion in only four months, according to the American Hospital Association. This widespread collapse of the U.S. hospital system highlighted the urgent need for innovation in health care economics.

While shortages have eased as of summer 2022, service providers are struggling to cope with the backlog of delayed procedures from earlier in the pandemic. Demand for medical supplies is therefore still very high.

Health care providers need to drastically rethink many aspects of their operations, such as their supply chain and revenue cycle management strategies. To prepare for the future, facilities must hire managers and other experts in these fields as well as in inventory management, resource planning and logistics. An advanced degree in health administration can prepare professionals for these in-demand careers.

What Is Health Care Economics?

Like all institutions, health care facilities operate in the real world of budgets and scarcity. A central aspect of health care economics is balancing patient needs with the financial conditions affecting the supply of medical services. Experts in health care economics determine what resource management strategies produce the best outcomes for patients.

What Are the Sources of Revenue in Health Care?

Health care systems rely on revenue from several sources, including:

  • Governmental funding
  • Donations and endowments
  • Insurance premiums
  • Out-of-pocket patient payments

An important part of health care administration in the United States is managing the revenue cycle, the process of securing payment for patient services and treatments. Good revenue cycle management not only ensures hospitals’ and other institutions’ ability to provide care in the future; it also benefits patients by preventing surprise bills and unmanageable costs.

How Can Revenue Be Applied Efficiently in Health Care Systems?

To ensure that they’re applying revenue efficiently, health care administrators use the following techniques:

  • Financial planning. Administrators evaluate their organizations’ facilities to determine how effective and competitive they are. They might consider when to update technology, what supplies to stockpile and how many new staff members to hire to prepare for health care needs in the future.
  • Many institutions rely on maintaining tax-free status. Administrators must monitor their organizations to verify compliance with all federal and state legislation as well as to prevent fraud and other misconduct.
  • Income management. Administrators keep an eye on the market rates of the services the facilities offer, comparing their own institutions’ prices with those of other similar facilities. They might also weigh offering new services that could contribute to their institutions’ profitability.
  • Working capital management. By managing costs and comparing them to assets (cash, inventory, amounts owed, securities, etc.), administrators ensure the financial health of their organizations.
  • Negotiation with third parties. Administrators bargain with insurance companies and other third-party payers to ensure that providers receive the best possible compensation for their services while remaining accessible to patients.
  • Raising funds outside the revenue cycle. To keep their institutions running, administrators raise money from loans, grants and other sources, or use internal funds.
  • Risk management. Health care professionals make life-or-death decisions, so reducing the risk to patients and staff as much as possible is essential. This is, of course, an objective in itself, but also is necessary to reduce the possibility of lawsuits and maintain a facility’s reputation. By remaining a safe and reliable provider for patients, institutions can protect their economic survival.
  • Inventory and equipment management. Health care administrators make sure that their facilities are properly provisioned with equipment as well as consumable goods such as drugs and personal protective equipment (PPE).

During the onset of the COVID-19 pandemic, health care administrators found that their institutions were entering a crisis. Not only did the coronavirus pose a massive threat to the lives and health of their patients and staff; it also threatened some overburdened facilities with financial trouble that affected their ability to give care.

For many, the revenue cycle was in upheaval, with higher rates of denial of insurance coverage and a higher percentage of patients on Medicaid. Some hospitals reported a greater number of uninsured patients and a steeper rate of bad debt. In addition, the pandemic also disrupted the medical supply chain, causing a dearth of the equipment and goods needed to prevent contamination, severe illness and death.

Sound health care economics relies not only on financial management in individual hospitals, but also on the medical supply chain’s resilience.

What Is the Medical Supply Chain?

Like any modern, large-scale economic system, the American health care system relies on global supply chains. Manufacturers purchase components (chemicals, electronics, raw materials, machined parts) from their contracted suppliers, and then use labor to transform these materials into equipment, medications and supplies. These manufacturers and suppliers may be domestic or international with respect to their markets.

Finished products are then sent directly to hospitals and other institutions or to distributors who in turn sell them to health care facilities. Contracts act as the connective tissue among these various players in the supply chain, determining what and how many products are made and sold.

Health care institutions rely on the efficient and timely production of goods and equipment, and their movement along the medical supply chain, to stay provisioned and treat patients. Unfortunately, as mentioned above, the supply chain has proven ill-equipped to cope with major disruptions, with momentous consequences for medical workers and patients.

Challenges During the COVID-19 Pandemic

The COVID-19 pandemic has forced health care economics to reckon with the global medical supply chain’s unpreparedness for a worldwide emergency. Pre-pandemic, suppliers, manufacturers and facilities cut costs by following a just-in-time method — that is, not stockpiling inventory beyond their likely immediate needs. This approach left very little slack in the system to account for medical supply chain disruptions.

The COVID-19 pandemic’s upheaval of manufacturing in many industries also affected the production of medical supplies. Early on, factories in Asian countries that exported PPE and other consumables to the West faced major disruptions. Well into 2022, while PPE has become much more available, other vital equipment has remained hard to obtain.

The results of applying the just-in-time strategy to health care are now well known from news media reporting and common experience: dire shortages of PPE necessitating the reuse of N95 masks and other vital protection by medical personnel; lack of ventilators for extremely ill patients, forcing medical staff to ration lifesaving care; and a dearth of COVID-19 tests that could have helped track the spread of the disease and aided in quarantine efforts.

The lack of available PPE for medical personnel also exacerbated the staffing crisis. Doctors and nurses suffered high rates of illness and mortality; others, spared infection, quit their jobs because of burnout and their employers’ perceived lack of care for their safety.

As has been widely acknowledged, the pandemic also called attention to — and worsened — health inequities: the gulf between industrialized and developing countries, the global gender gap in treatment and serious racial disparities in access and outcomes in the U.S., for example.

Innovation in Response to the COVID-19 Crisis

These disruptions have had severe consequences, but the pandemic also spurred lifesaving innovation. Health care administrators now stress significant changes in the industry that will enable health care systems to cope with future emergencies and address systemic inequities.

  • Telemedicine has become common, increasing flexibility in scheduling and reducing wait times for patients and lowering costs for facilities.
  • Doctors and researchers have begun employing artificial intelligence to extract medically useful data from patient records. Currently, programmers and doctors are seeking ways to use AI to eliminate systemic bias.
  • Particularly relevant to health care administrators, medical professionals have urged adopting new models of care (earlier diagnosis and action, shifting from cost-efficiency to long-term planning) and public-private partnerships to deal with current and future crises.

President Joseph Biden’s 2021 Buy American rule aims to boost domestic manufacturing by directing the federal government to purchase more U.S.-produced goods. This measure should increase the supply of medical equipment and consumables in the event of a similar disruption by cutting reliance on foreign suppliers.

Medical Supply Chain Jobs

The medical industry has a chance to transform its approach to services and the supply chain. Health care facilities will need to fill many positions to ensure the timely distribution of medical goods and equipment. The growth of medical supply chain jobs will present opportunities for upwardly mobile administrators.

Purchasing Director

Purchasing directors, sometimes working with teams of inventory specialists, are responsible for preventing understocks of medical products at their facilities. They communicate and negotiate with distributors and suppliers, regularly monitor stocks and conduct audits, keep product prices current, act as a contact point for customers and develop cost-efficient solutions without compromising preparedness.

Supply Chain Analyst

Supply chain analysts gather information on the supply chain to identify areas that could be streamlined. They check quality, help ensure compliance, maintain relationships along the medical supply chain and report to leadership. A good supply chain analyst may anticipate interruptions before they happen, ensuring sufficient stocks on hand or working with purchasing directors to identify alternative products.

Contract Negotiator

Contract negotiators act as facilitators between medical purchasers and suppliers. They must have enough background (scientific, technical) to be able to research the goods being purchased to make an informed decision when negotiating, as well as possess knowledge of negotiation techniques. They may also be called upon to evaluate different vendors on behalf of customers. They should be able to document all stages of the negotiation and draft complete contracts.

Enterprise Resource Planning Specialist

Enterprise resource planning (ERP) integrates the various systems in an organization to work in synchrony and streamline communication. ERP can help hospitals improve workflows by breaking down communication barriers among human resources, accounting, inventory and financial planning systems.

ERP is also transforming the drug manufacturing process by shifting from batch to continuous production. Continuous production — in which quality testing is automated, eliminating the need to halt manufacturing and take samples — allows for a more agile response to demand.

Those interested in becoming ERP or health information technology specialists should learn systems like Align, Pact or Oracle.

How Does the Medical Supply Chain Affect Health Care Economics?

Good medical supply chain management has a direct positive effect on patients, as well as health care economics and providers. Efficiency is not merely a matter of profitability; it also reduces stress on medical staff and allows them to treat patients’ health more effectively, while safeguarding the future of the hospital or clinic.

The devastating impact of shortages on an unprepared medical care system during the pandemic has already been discussed. Clearly, the COVID-19 pandemic has shown that the just-in-time approach is not always sufficient to prepare for emergencies.

However, finding an alternative strategy is a complex challenge for health care administrators. While undersupplying risks health and life during emergencies, oversupplying can lead to a waste of critical provisions. When different facilities are competing for the same goods and equipment — a problem that also arose during the COVID-19 pandemic, with even states forced to outbid one another — one institution’s oversupply can lead to another’s shortage. This competition further drives up the prices of critical supplies.

Supply Chain Management for Better Patient Outcomes

Health care administrators can manage their end of the supply chain to improve outcomes in several ways.

  • Managing inventory. Supply chain personnel can leverage new technology to streamline purchasing, auditing and maintenance. They can identify possible supply problems in the future and choose substitute suppliers in case of shortages. Examining historical data can help administrators determine the right amount to order to prevent oversupply while taking advantage of volume discounts.
  • Sharing information. Greater transparency about the supply chain among vendors, distributors and buyers can increase the accuracy and timeliness of administrators’ supply-demand models. Data-sharing among these stakeholders can help supply chain staff monitor shifts in demand and remain adequately stocked.
  • Vetting vendors. Administrators can evaluate their suppliers for effectiveness and transparency and identify alternatives if necessary. Health care facilities may select some preferred vendors with whom to have a mutually beneficial business relationship, promising to buy from these vendors first in exchange for discounts or other advantages. Of course, purchasing directors need to thoroughly investigate such vendors to guarantee their integrity and good reputation.
  • Leveraging GPOs. Many health care facilities belong to group purchasing organizations, consortiums of buyers that use their collective power in negotiations. These facilities can leverage the GPOs’ influence to keep down vendors’ costs and avoid the competition trap that drives up prices.

To expand on the last two points: preferred vendor relationships and GPOs can offer powerful leverage, but they have potential downsides. An agreement with a preferred vendor may prevent a purchasing director from finding a better deal elsewhere, for example.

GPOs largely seem to have aided hospitals and clinics during the COVID-19 pandemic; according to a report by Kaufmann, Hall & Associates, 89% of responding institutions found that their GPOs were somewhat or highly effective in helping obtain important medical supplies. However, some sources say that GPOs can actually force manufacturers to favor lower prices over supply chain strength, while others point to the lack of recourse for hospitals whose GPO-approved suppliers fail to deliver.

Conclusion: Boosting Health by Making Medical Supply Chains More Efficient

Ultimately, efficiencies in the medical supply chain improve public health in numerous ways. Most obviously, patients benefit when their health care facilities have the right equipment, goods and pharmaceuticals on hand to provide the care patients need. Proper equipment is also vital to providers’ health — mental and physical.

Furthermore, skillful health care administrators can leverage their purchasing power to counteract skyrocketing medical costs, passing savings on to patients and keeping their own institutions in good financial health.

For those interested in pursuing a career in health care economics, USC Price offers an executive MHA degree. This program is especially for clinicians, managers and executives who want to advance in their professions and improve their leadership skills. Students take courses in health information systems, quality of care, efficiency processes, risk management, patient engagement and other topics essential to the changing health care economics system.

A healthier future will require thousands of skilled administrators who can oversee the transformation of facilities and the medical supply chain to maximize patient benefit. USC can impart the skills administrators need to cope with the challenges ahead. Find out how you can be a part of this crucial transition.


Recommended Readings

Emergency Operations Plan: How Health Leaders Can Prepare Hospitals for Disasters

Health Care Economics in the United States: Key Insights for Upcoming Leaders


Becker’s Hospital Review, “Supply Chain Issues Are Here to Stay: Health Leaders Share Predictions, Strategies”

Becker’s Hospital Review, “What Will the Healthcare Supply Chain Look Like in 2022? Supply Chain Sherpas Founder Joe Walsh Weighs In”

BoardEffect, “Objectives of Financial Management in Healthcare”

Definitive Healthcare, “Revenue Trends at U.S. Hospitals”

Deloitte, “2022 Global Health Care Outlook”

Economist Intelligence Unit, “Healthcare in 2022: The Aftermath of Coronavirus”

Gartner, “Supply Chain Pressures Will Dominate 2022, but Equilibrium Is Coming”

Harvard Business Review, “One Way to Build More Resilient Medical Supply Chains in the U.S.”

Healthcare Finance, “Buy American Final Rule Should Strengthen Medical Supply Chain”

Indeed, Supply Chain Analyst Job Description: Top Duties and Qualifications

Independent Journal Review, “Pritzker Claims States Are Competing for Medical Supplies: ‘It’s a Wild West’"

KaufmanHall, “2021 State of Healthcare Performance Improvement: COVID Creates a Challenging Environment”

Locus, Predictive Analytics, Personalization and Patient Centricity: Top Six Healthcare Supply Chain

Predictions of 2022

Medical Economics, “3 Things to Address to Ensure a Stable Supply Chain for Your Practice”

Multiview Corporation, “Why Healthcare Organizations Need a Fully Functioning and Integrated ERP System”

Premier, “Report: The Current State of Healthcare Supply Chain Disruptions”

Rand Corporation, “Medical Device Supply Chains: An Overview and Description of Challenges During the COVID-19 Pandemic”

U.S. National Archives and Records Administration, “Federal Acquisition Regulation: Amendments to the FAR Buy American Act Requirements”

World Economic Forum, “Predictions 2022: What Are the Biggest Healthcare Shifts? Here’s What Health Experts Think”