When COVID-19 throttled overseas supplies of masks, gowns, gloves and other personal protective equipment last year, U.S. health systems quickly stood up local supply chains.
Onshoring offered a short-term solution that was more reliable and transparent, albeit more expensive, than international manufacturers, while insulating providers from shady pandemic profiteers. Ideally, neighboring health systems would pitch in to help transition these improvised U.S.-based manufacturing ventures into long-term sources of critical supplies.
While some health systems have invested in building out more domestic PPE manufacturing, many haven't committed long-term funding or garnered broad support for these projects, in part because PPE supplies have largely replenished. As local supply chain endeavors have scuttled, industry observers worry that the U.S. healthcare system's tendency to favor the lowest-cost option will once again prove fatal when pandemics and other disasters strike again.
"The industry has a very short memory," said Jim Boyle, executive vice president of sales at Medline, which manufactures and distributes PPE and other healthcare equipment. "A year from now when we have way more production capacity in exam gloves, the price point will dive dramatically. The question becomes will the industry pay five- to six-times more for the product to be made in the States. Today, we're saying absolutely, but it has to be a multipronged approach."
Last year, Bon Secours Mercy Health transformed an Ohio cheerleader uniform factory idled by COVID-19 into an isolation gown manufacturer. The Cincinnati-based integrated health system secured a fabric supplier in South Carolina to bolster its supply chain for reusable gowns. The company then looked to other nearby health systems to scale up and support the venture.
Bon Secours Mercy had similar ad hoc PPE manufacturing outfits in Indiana and South Carolina. But those lines weren't geared for mass production and other health systems weren't interested in expanding them, said Dan Hurry, chief supply chain officer of Bon Secours Mercy and president of its group purchasing organization Advantus Health Partners.
"There was no way to boost the scale and it was not of core interest. It was just seen as a gap filler," he said. "That being said, what we were able to put together under duress will help us come up with a sharper equation around volume and production going forward."
PPE-producing factories in Asia shut down as COVID-19 cases began to multiply in the U.S., which had lethal consequences, research shows.
At least 35% of California healthcare and other essential workers who contracted COVID-19 were infected at work amid PPE shortages, according to a University of California, Berkeley study. More than 3,600 U.S. healthcare workers have died from COVID-19, Kaiser Health News and The Guardian have tracked. A number of healthcare workers have sued their health system employers for allegedly conserving N95 respirators and jeopardizing their safety.
Encompass Health, one of the largest inpatient rehab providers, paid significant premiums to get PPE during the pandemic. The company has since transitioned from a just-in-time inventory strategy with about two weeks of reserve supply in critical products to a three- to four-month reserve for each of its 140 hospitals, said Elaine Prince, vice president of operations support at Encompass.
"We have built some flexibility there, but there could still be a benefit of long-term domestic manufacturing and reducing our risk. We're still in the infancy of looking at it," she said, noting that Encompass is creating a full-time position for supply chain resiliency and vendor management.
Ochsner Health is renovating a facility and building a new plant near Lafayette, Louisiana, which will primarily produce nitrile gloves and sell them to healthcare providers across the country. Ochsner jointly invested $150 million in the project with Trax Development.
While the prices of most PPE have stabilized, the cost of exam glove was up 225% from March 2020 to March 2021, according to Premier data. Demand for nitrile exam gloves currently exceeds capacity by 40% and supply will be constrained into 2023, the group purchasing organization estimates.
While healthcare executives recognize that solely relying on overseas suppliers for many types of PPE is risky, there is doubt that providers will pay more for a predominantly local PPE supply chain. Many providers bought locally produced PPE during the SARS outbreak from 2002 to 2004, but most reverted to the lower-cost Chinese products when the crisis subsided, executives said.
Hiring practices show that more employers are bolstering their U.S.-based workforce, at least for now. The U.S. brought a record 109,000 jobs to the States from overseas in 2020, according to the Reshoring Initiative. This was the first time that reshoring exceeded foreign direct investment job announcements since 2013.
Around 82% of pharmaceutical and life science executives said they planned to reshore components of their supply chains within five years, according to a September PricewaterhouseCooper's survey.
"This isn't going to be the only pandemic, I hate to say it. There will be a lot of good reasons to onshore, one of which is quality control," said Lyndean Brick, CEO of healthcare consultancy Advis. "Cost will be paramount, but health systems had so much trouble with the standardization of product coming out of China. Some systems are still refusing to buy from them now, even though they are paying more."
President Joe Biden's administration is targeting the pharmaceutical sector when it comes to domestic manufacturing. HHS will invest $60 million via the Defense Production Act to, in part, increase U.S.-based manufacturing capacity for active pharmaceutical ingredients.
Around 87% of generic drug ingredient facilities are located overseas, which has reduced costs but also caused persistent shortages of widely used medicines, according to a recent White House report.
Reshoring could stabilize the supply chain if the government develops incentives for domestic manufacturers to collaborate, said David Dobrzykowski, associate professor of supply chain management at the University of Arkansas.
Still, just making something in the U.S. doesn't ensure that it's high-quality or that it will mitigate shortages, said Erin Fox, senior pharmacy director at University of Utah Health. Most of the generic injectable drugs in shortage at U.S. hospitals are domestcally made, she said.
"Products like contaminated liquids that have caused real patient harm were also made in the U.S.," Fox said. "However, the [White House] report makes a good case for onshoring some items, especially since FDA knows that foreign drug manufacturers don't register their facilities, which really limits FDA's ability to provide oversight."
Medline is manufacturing face masks out of its Lithia Springs, Ga., plant, in part, thanks to a $6 million contract with the Defense Department. Overall, the company has invested $1.5 billion in domestic manufacturing and distribution from 2018 and 2020.
The company has opened eight distribution centers over the past three years to help health systems centralize their distribution network, with plans to add more than 10 million square feet in warehouse space over the next four years.
"Right now, there is a big scaling in supply in lots of products—some domestic, some international. If demand goes way down, it becomes very expensive to have a facility running at 10% capacity," Medline CEO Charlie Mills said. "We are taking some risk by setting up some manufacturing that we may not need forever. In the short run, with our Georgia plant making face masks, we have customer commitments. However, if they frankly don't need the volume they committed to, they may need to eventually say uncle."
Many of Medline's integrated delivery network customers committed to purchasing domestically made masks that were double the pre-pandemic cost, Boyle said.
When it comes to gloves, the nitrile butadiene rubber predominantly comes from Malaysia. It would take a sizable investment and a significant amount of scale to produce the rubber in the States, Boyle said.
"We are going to see some health systems carve out a percentage of PPE that has to be onshored, especially in the near term," he said. "The question will be: Will those production facilities stood up in the States be able to sustain themselves once the market normalizes?"
Bon Secours Mercy and Advantus talked with some integrated health systems and distributors last summer about producing nitrile butadiene rubber in the U.S. While they thought adding more U.S.-based and nearshore suppliers was prudent, they were reluctant to put most of their resources into domestic PPE manufacturing, Advantus' Hurry said. Still, talks are ongoing.
"They kind of had a foot in each side," he said. "We weren't getting much comfort in the notion that folks would pay a premium to produce them here."
Short of producing more supplies in the U.S., many health systems are carrying more PPE reserves. Bon Secours Mercy has months of excess inventory of supplies and drugs, beyond what's stored at its facilities.
"The cost of that inventory does not supersede the risk," Hurry said. "We've had a permanent shift from just-in-time inventory."
Onshoring will not fix the root causes of supply chain inflation or ongoing shortages. Overseas PPE is cheaper, in part, because of wage disparity and automation. But hospitals, and even departments within hospitals, often use different versions of gowns or masks, which drives up prices, Hurry said.
While Bon Secours Mercy isn't there yet, it has made some progress around certain commodities, he said.
"Once we can do that, the lowest-cost option is in the States because logistic costs are significantly reduced," Hurry said. "The reality is the appetite is out of the market. But it is incumbent on us to understand what inflates prices and how we can help bring them down."