April 20, 2023
Supply chain fragility became starkly apparent when the COVID-19 pandemic reared its ugly head and reminded a public with unlimited access to products, whether innocuous or lifesaving, that those products are delivered through complex, global supply chains which can breakdown. During that time, the world was exposed to what happens when a supply shortage can be life-threatening; as it was when personal protection equipment was low, and ventilators rationed.
However, in the years since the virus changed healthcare in many ways, issues with the supply chain have persisted, as do questions on how to build resilience to disruption.
The National Academies of Sciences, Engineering and Medicine (NASEM) published a report examining the causes of shortages of medical supplies and proposed ways to enhance resilience during public health emergencies and other disruptive circumstances. The report, which was the product of a year-long study by an ad hoc committee established as a measure that Congress included as part of the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act, highlighted that there is no silver bullet to solve supply chain problems.
Instead, Wallace J. Hopp, PhD, chair of the NASEM Committee on Security of America’s Medical Product Supply Chain, said, a “host of coordinated activities by medical product supply chain managers, government agents, and medical providers” will be needed to make the US more resilient.
Onshoring isn’t a fix-all
Onshoring, also known as reshoring, has become a popular answer to fix these issues. While onshoring medical manufacturing is part of a strategy to bolster the United States medical supply chain, it’s definitely not a fix-all, and, according to Joan Stephenson, PhD, its implementation is not very realistic.
Stephenson, who wrote an article response to the report in the JAMA Health Forum, noted that there is a reason supply chains have become more globalized over the years. Globalization of the supply chain has helped achieve “lower prices, higher quality, and a wider variety of choices,” she said. However, she conceded that having different stages of production over many locations have more opportunities for failure than short domestic alternatives.
The reality of onshoring increasing costs and reducing affordability of medical products was brought into full view when the US companies that stepped up to produce N95 masks early in the pandemic struggled financially after health systems resumed purchasing from non-US suppliers to reduce costs when access to those suppliers improved. Additionally, the report wrote that the concentration of production within the US means that the supply could be threatened by local or regional disasters, like hurricanes, floods, and tornados. Even if manufacturing is moved onshore, many upstream raw materials come from overseas, creating potential barriers to supply chain security.
Another factor is the cost and time it takes to onshore manufacturing companies. It can take several years to onshore as supply networks have to be reconfigured. The estimated costs to update existing finished goods manufacturing sites can be up to $100 million, and the cost to build new facilities with advanced manufacturing capabilities could reach $1billion per site.
Tax considerations like incentives and subsidies to offset higher fixed and variable costs will become major leverage in a bid to onshore in the US. Specifically, tax provisions that could be considered include subpart F, global intangible low-taxed income (GILTI) and local country tax consequences related to exit, including tax incentive clawbacks; the impact of potential exit taxes on a company’s foreign tax credit (FTC) position; the potential benefits of foreign-derived intangible income (FDII) deduction for products manufactured in the US and exported abroad; and the impact to transfer pricing paradigms of allocating profits across the value chain.
Boosting company transparency
In the committee’s report, they urged better awareness of supply chain vulnerabilities by requiring transparency from manufacturers and regulators. To do this, they asked the FDA to make information about sourcing, quality, volume, and capacity publicly available for all medical products approved or cleared for sale in the US. Drug and device manufacturers would then have to publicly disclose manufacturing locations and other data. Additionally, NASEM suggested that the FDA, in collaboration with other US government agencies, create a publicly accessible database containing the gathered information to be “used as a tool to help federal agencies assess risks to the total supply of particular medical products in both normal circumstances and emergency scenarios.”
Using product purchasing to mitigate supply disruptions
Using the public information collected through their proposed database, the committee also envisions it to be used by health systems in order to make better product purchase decisions while enabling policy makers to focus on vulnerabilities to the supply chain. The report noted that health systems should incorporate quality and reliability into their purchasing systems and in contracts with medical suppliers in addition to price. Specifically, they suggest adding “failure-to-supply’ penalties in contracts along with awarding contracts to multiple suppliers of the same product.
Managing the Strategic National Stockpile
The report noted that the management of the Strategic National Stockpile (SNS) needs to be more effective. SNS is a “part of the federal medical response infrastructure and can supplement medical countermeasures needed by states, tribal nations, territories, and the largest metropolitan areas during public health emergencies,” according to the Administration for Strategic Preparedness & Response.
Calling on the Office of the Assistant Secretary for Preparedness and Response (ASPR) and the FDA, they suggested developing strategies for capacity buffering as a complement to stockpiling. Capacity Buffering could include advanced arrangement contracting with manufacturers to provide emergency capacity. An example of this would be automakers assembling medical ventilators during the pandemic.
“This would provide incentives for firms to find creative ways to deliver pop-up capacity during emergencies,” the committee wrote.
Navigating the last mile of the supply chain
Finally, the committee discussed the need for improved response measures after an event occurs — on both a local and global level. At a local level, the report pointed to the need for products to get through the last leg of the supply chain and be distributed to end users like hospitals, clinicians, pharmacies, and patients. To do this, they recommended ASPR and the Centers for Disease Control and Prevention create a working group which identifies strategies “to ensure that end users are able to respond in the event of medical product shortages.”
Globally, the US government and other nations exporting medical products should negotiate an international, plurilateral treaty prohibiting bans or restrictions on critical medical products and components, according to the report, which wrote, “Any country that violates the terms of this agreement should be subject to sanctions by other signatories of the agreement.”
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