Handbook of Healthcare Analytics

8 Healthcare Supply Chain

Soo‐Haeng Cho¹ and Hui Zhao²

¹Carnegie Mellon University

²Pennsylvania State University

8.1 Introduction

One of the biggest concerns in the healthcare system in the United States is its ever‐increasing spending and its impact on the economy and social welfare. Though there are many reasons for this increase, supply chain costs are unarguably one of the major driving forces. Supply chains now account for nearly 25 percent of pharmaceutical costs and more than 40 percent of medical device costs (Ebel et al., 2013). For healthcare service providers, the supply chain is the second largest and fastest growing expense after labor cost (Pennic, 2013).

Such high supply chain costs are driven by the unique characteristics of healthcare supply chains. First, healthcare supply chains are usually long and complex, involving many parties and unique intermediaries, such as a Group Purchasing Organization (GPO), as well as very different products, such as brand and generic products. For example, major players in the pharmaceutical supply chain include manufacturers, distributors/wholesalers, pharmacies who buy from wholesalers and dispense to patients, pharmacy benefit managers (PBMs) who manage claims and set up networks of pharmacies, create drug formularies, and negotiate discounts and rebates with drug manufacturers, and health plans, covering prescription drugs for patients. According to research done by the USC Schaeffer Center for Health Policy & Economics ...