From boardrooms to kitchens, the reverberating cost effects of rising oil prices may well be the hottest topic of conversation among those trying to live within a budget. And now a forthcoming report from the Health Industry Distributors Association, or HIDA, suggests hospital supply-chain budgets may soon feel the pinch of fuel-related increases in the cost of producing and delivering goods.
The study, due out this summer, analyzed several cost indicators, including benchmark delivery costs from FedEx Corp. and UPS, according to HIDA President and Chief Executive Officer Matthew Rowan. Researchers found the couriers fuel surcharges more than doubled for air-freight delivery between May 2007 and May 2008. Whats more, the average cost of filling up a tractor-trailer for ground delivery has tripled to nearly $1,300, Rowan said.
I think its a perfect storm, where the cost of key ingredients for healthcare products has gone up as well, said Rowan, who noted that healthcare-commodity suppliers are seeing increases in petroleum-based raw materials such as plastic and latex.
According to the Bureau of Labor Statistics, the unadjusted Consumer Price Index for energy increased by 15.9% during the 12-month period ended April 2008. And while group purchasing organizations wont reveal pricing for their contracted products, Jeff King, market research project manager for Novation, said his GPO has projected inflating supply prices attributable in part to rising gas prices. Novation projected a 1.6% increase in the overall price of medical supplies between July 2008 and June 2009.
That figure is more than a half-point higher than the 1% increase projected for the July 2007 to June 2008 period. While the price increase may seem minor compared with other product categories, King noted that products contracted under GPOs tend to inflate more slowly because of locked-in price agreements and volume purchasing. Also, price increases are significantly higher for goods purchased off-contract, he said.
Those fuel-related cost increases could soon result in ballooning delivery fees and medical-surgical product prices for hospitals, said supply-chain experts. In some cases, providers are already experiencing pressure from their suppliers to help bear the expense.
What weve seen this year is a 12% increase in freight expenses, which is a little over $600,000, said Bill Byron, spokesman for Phoenix-based Banner Health, which owns and operates 20 hospitals in Alaska, Arizona, California, Colorado, Nebraska, Nevada and Wyoming. Most of that increase we attribute to higher fuel costs.
Gene Byerly, vice president of the medical-surgical products division for GPO Amerinet, said that most vendors are talking more about fuel-related cost increases rather than passing them on to hospitals.
But, he said that some suppliers have increased their pricing. Were hearing from vendors who are saying, You have to accept a price increase, or were canceling the contract, Byerly said. He said that two Amerinet vendorsone providing latex gloves and the other plastic productsrecently sought to renegotiate pricing before the expiration of their contracts. We looked at their offer and went back and talked to our membership about what the options were. In those cases, our membership recommended we accept the new pricing, he said.
James OConnor, vice president of supply chain for Detroits Henry Ford Health System, said that while his health systems contracted prices are currently stable, he expects vendors whose costs are escalating as a result of higher petroleum costs to increase their pricing as soon as their contracts expire. He said that fuel typically represents 2% to 3% of the average medical-surgical suppliers overall costs, but that its often a significantly higher percentage for suppliers whose products are petroleum-based. Nevertheless, a 2% to 3% increase in cost for a vendor would translate to a 1% to 1.5% increase in pricing for his four-hospital health system, OConnor noted.
A 1% increase in med-surg products would mean a couple of million dollars for us, but it doesnt stop there, OConnor said. Fuel costs are also affecting our food costs. Thats because a number of farmers are diverting their corn crops to bio-fuel manufacturers who pay better than feedmakers or grocers. As a result, a shortage of corn is pushing up the cost of feed and other replacement grains, making meat and food-designated grains more costly. Theres been a slight yet not insignificant increase in food costs for us this year, OConnor said.
But OConnor and others said suppliers for the most part have looked for opportunities to save costs in other areas before raising their prices. I think manufacturers are trying to make adjustments like streamlining production before they raise prices, he said.
Large suppliers such as Cardinal Health and McKesson Corp., which distributeand in some cases also manufacturehealthcare products, echoed that assertion. I can tell you that the rising cost of fuel is impacting business across the country, and McKesson is no exception, said company spokesman James Larkin of the drug distributors fuel woes. The company is taking a number of steps to manage fuel expenses, including redesigning delivery routes to improve efficiency and using smaller, more fuel-efficient trucks where possible. As a last resort, we are sometimes forced to pass some of the increased cost to customers, Larkin said.