June 1, 2022

We’re all aware of the increasing prices at the gas pump and the grocery store.  It’s a wonder how most Americans are currently able to make ends meet.  The financial strain that many in our society are facing right now is concerning, and many in the halls of government and the boardrooms of Wall Street are telling us to brace for even severer hits to our wallets in the months ahead.  Naturally, the same financial stresses that face the average American citizen are also affecting the nation’s bastions of healthcare delivery.  In other words, America’s hospitals are feeling the financial pinch, as well.

In a recent report generated by the American Hospital Association (AHA), analysts pointed to what they termed “skyrocketing expenses” for hospitals over the most recent completed three-year period (2019 to 2021).  The report follows the rise in costs in three areas: supplies, drugs and labor.  The chart below, originating from the AHA report, illustrates the rate of cost increased for each of these categories.

Medical Supplies

The U.S., like most countries in the world, relies on global supply chains for goods and services. This is especially true for medical supplies used at hospitals and other healthcare settings. Everything from the masks and gloves worn by staff to medical devices used in patient care come from a large network of global suppliers. Prior to the global pandemic, hospitals had established relationships with distributors and other vendors in the global healthcare supply chain to deliver goods as necessitated by demand. After the pandemic hit, many factories, distributors and other vendors shut down their operations, leaving hospitals, which were on the front lines facing surging demand, to fend for themselves. In fact, supply chain disruptions across industries, including healthcare, increased by 67 percent in 2020 alone.

As a result, hospitals turned to local suppliers and non-traditional suppliers, often paying significantly higher rates than they did prior to the pandemic. Between fall 2020 and early 2022 costs for energy, resins, cotton and most metals surged in excess of 30 percent; these all are critical elements in the manufacturing of medical supplies and devices used every day in hospitals.

Drugs

According to the AHA, prescription drug spending in the U.S. has “grown significantly” since the initial stages of the COVID-19 pandemic.  In 2021, drug spending increased 7.7 percent, which was in addition to an increase of 4.9 percent in 2020.  In the words of the report, “While some of this growth can be attributed to increased utilization as patient acuity increased during the pandemic, a significant driver has been the continued increase in prices of existing drugs as well as the introduction of new products at very high prices.”  In other words, hospital drug expenses have hit the roof.  Total drug expenses were 28.2 percent higher by the end of 2021 than pre-pandemic levels.  Drug expenses per patient compared to pre-pandemic levels in 2019 saw significant increases, with a 36.9 percent increase through 2021. 

Among the major drivers of these drug cost increases, the AHA report lists the following contributors:

• Drug Treatments for COVID-19 Patients, such as Remdesivir, which accounted for over $1 billion in sales in the fourth quarter of 2021.  While the cost of this drug was initially picked up by the government, hospitals must now take care of the purchasing.
   
• Since July 2020, several of the largest drug manufacturers have denied 340B pricing to eligible hospitals through pharmacies with whom they contract.  Because of these actions, many 340B hospitals, especially rural hospitals who disproportionately rely on contract pharmacies to ensure access to drugs for their patients, have lost millions in 340B drug savings.
   
• Health plans and PBMs have steered hospital patients to third-party specialty pharmacies to acquire medication necessary for clinician-administered treatments.  This practice, known as “white-bagging,” adds to administration, storage and handling costs, as well as creating serious liability issues for hospitals.

The rising costs of supplies and drugs cannot be overstated and remain a serious challenge for America’s hospitals and health systems.  Another huge contributor to the surge in hospital expenses is, of course, labor.  Because of the intricacies of this budgetary component, we will take a look at labor costs in a separate article to be produced next week.  In the interim, if you have questions about this article or about our services, please contact us at info@miramedgs.com.