COVID-19 Supply Chain Risk in Europe
Global healthcare systems are experiencing one of the most significant shocks of our modern-day existence. Coronavirus disease 2019 or most commonly known as COVID-19 is wreaking havoc across communities while threatening lives and livelihood across the globe. According to the World Economic Forum (WEF), the global economy and international trade are facing steep demand reductions in many areas, and spikes in others mainly healthcare. A drastic contraction in foreign investment is happening in every major economy. Moreover, in healthcare as the demand and supply for medical equipment and products is mismatched across countries, there is a very strong possibility that countries will suffer the brunt of supply chain breakdowns.
Within Europe, which is the epicentre of the disease with 993,009 cases reported and 102,845 deaths (Apr 21, 2020), it is becoming increasingly critical to curtail the rise in infections while managing the supply chain for healthcare products and services. In recent days, many of the European countries have reported shortages of ventilators, personal protective equipment (PPE), and testing kits – especially in Italy, Spain, the Netherlands and France where there are very high coronavirus patient loads requiring intensive care. Additionally, there has been growing debate about the health of pharmaceutical supply chain within the European continent. To ease off pressures on supply chain, the EU Commission has stepped up co-ordination between countries and has introduced measures such as temporary waiver of customs duties and VAT on imported medical devices and protective equipment. However, each country needs to plan and purchase goods directly with bidders in the market.
For health systems to better prepare and plan for the months ahead, we have created a risk-based framework to understand the gaps in supply chain and the evolving demand in each of the European markets. The sole objective of the supply chain risk scoring is to focus on the most vulnerable parts of the health systems in Europe and facilitate decision making as quickly as possible. Before we dive into global healthcare supply chains and the risk scoring framework, we need to first understand the mechanics of healthcare financing in the EU in the context of underlying changes on account of global financial crisis of 2008.
Healthcare financing in the Europe
In Europe, health systems perform a vital social security function. The demand for health care is growing as a result of ageing populations and rising public expectations about delivery and quality of care. The combination of demographic changes and technological developments increases the cost of provision.
There are two principal forms of health care organisation within the member states: the ones that are tax-financed national health service systems and those operating with social insurance in which insurance funds may be independent of the government. All systems rely on a mixture of funding sources, but the majority of funds are state-controlled, whether directly or indirectly. Only a small proportion comes from direct fee-for-services.
However, one common streak that connects healthcare systems is that they employ a third party to pay or to insure health expenses for beneficiaries for the times when they are patients. The core and shared objective is to distribute the costs for medical care between the sick and the well and to adjust for different levels of ability to pay. This mechanism of solidarity reflects consensus in Europe that health care should not be left to a free market alone.
In the EU, the allocation of healthcare resources and overall utilisation have huge variations across countries. Product preferences, payer mechanisms, regulations and distribution channels differ widely by country reflecting political and social norms within the country. Across and often times within member states, there are significant differences in how products are being secured and distributed, as well as the nature of stakeholders involved in the sales and distribution process.
The financial and economic crisis
Health care expenditure as a share of national resources, measured by Gross Domestic Product (GDP), has increased in all EU Member States since the 1960s. However, 2008-2009 financial crisis put a heavy toll on all European economies and drastic cuts on account of big austerity programs were introduced across all sectors of the economy, including healthcare. After a number of years of slow or even negative health spending growth across Europe following the economic crisis, growth rates picked up again in nearly all countries in recent years. Across the European Union as a whole, health spending per capita increased by around 1.9% each year in real terms (adjusted for inflation) between 2013 and 2017, compared with an annual growth rate of only 0.6% between 2009 and 2013.
During the crisis, ten EU countries saw expenditure on health retract in real terms with only Bulgaria and Romania among the member countries continuing to see growth above 5% per year. During the subsequent four-year period, there has been a large-scale turnaround with all but two EU countries seeing some growth in health spending, although the growth has remained slow in most of the countries. It is important to highlight that changes in health spending often reflect changes in GDP, though there is a lag before changes in economic conditions are reflected in the health spending. When overall economic conditions rapidly deteriorated in many European countries from 2008 onwards, overall health spending was initially maintained or even continued to grow. As a result, the health spending to GDP ratio in the European Union jumped sharply to reach 9.6% – up from 8.8% in 2008. After a slight decline – as countries introduced a range of measures in attempts to rein in government health spending and reduce burgeoning budgetary deficits.
Even though the ratio of health spending to GDP has returned back to pre-crisis levels in most countries. Greece, Hungary, Ireland, Luxembourg, and Romania are the exceptions. Additionally, a closer analysis of the components of health spend reflect the growing priorities across the bloc. In 2016, EU member states spent almost 60% of their health expenditure on curative and rehabilitative care services, 20% went on medical goods (mainly pharmaceuticals), while 13% was on health-related long-term care. The remaining 7% was spent on collective services, such as prevention and public health as well as the governance and administration of health care systems. The biggest casualty has been the preventive care spending across the member states, which increased between 2004 and 2008 across the EU, but then contracted by 1.4% on average through the crisis years, despite countries’ intentions to protect public health budgets.
Capital spending in infrastructure and medical equipment has been an increasingly important factor in production of health services. However, the level of resources invested in buildings, machinery and technology tends to fluctuate more than current spending on health services, often responding to the economic climate whereby investment decisions may be postponed or brought forward. Despite the economic crisis, capital spending continued to increase fairly steadily in countries like Austria, Belgium and Sweden. France has seen spending levels generally maintained over the period, and are typically 50% higher than in 2005. On the other hand, a number of European countries experienced severe reductions in capital spending. In Greece, spending in 2016 was still less than half its 2005 level, dropping to about a quarter of the level in 2012 and 2013. In Italy, investment has also continued to drift downwards since 2010. While capital spending increased in the United Kingdom in the immediate aftermath of the crisis, spending in 2015 and 2016 was still 20-30% down in real terms on 2005 levels.
With years of austerity measures in place and massive spending cuts enacted, there is ample evidence that austerity has had massive effect on the health system ability to cope with intense shocks such as the one we are experiencing now. Moreover, to divert money to acute care, preventative and social care has been severely curtailed across EU countries and this can have long-term implications. As support systems are routinely cut, more and more people are putting off regular checkups and preventive healthcare measures, leading them to costly visits later, mirroring how healthcare in the US and other developing countries work.
Supply chain in the healthcare industry
Declining economic output and reduced healthcare spending on account of the recent financial and economic crisis still weigh on healthcare companies. Additionally, to even further complicate the picture regulatory reforms and shifting of reimbursement models have greatly impacted supply chains within the industry.
Healthcare supply chains across the globe are fragmented and incomplete, with weaknesses that put patients at risk, cost billions in value, and reduces the health-care sector’s ability to take on challenges such as a pandemic outbreak. Supply chain now account for nearly 25 per cent of pharmaceutical costs and more than 40 per cent of medical-device costs. It is important to highlight that for a typical pharmaceutical manufacturer it could take an average of about 75 days of replenishment lead time from pharmaceutical plants to distribution centers.
Pharmaceutical and medical device companies typically run a one-size-fits-all supply chain model whereas in reality there can be significant differences in profitability, overall demand, drug / device importance in care pathways, and customers’ cost-to-serve. It is due to this reason that oftentimes some products are in excess inventories while others are in short supply. Additionally, most of the industry’s supply chains are not built to withstand changes in demand patterns and customer wishes, and often have high operational costs to induce change.
Within that context, the overall healthcare supply chain within member states is a vast, disintegrated network of products and players, loosely held together by manual and people-intensive processes. Managing the flow of information, supplies, equipment, and services from manufacturers to distributors to providers of care is especially difficult and costly in a systemic shock scenario.
The supply chain crisis – COVID-19 pandemic
Due to the outbreak there has been a surge in demand and shortage (on account of long lead times and country closures) of medical supply manufacturing. Additionally, there is an increase in medical protectionism and threat of fake goods entering the supply chains. A recent analysis by WTO highlighted 11 countries plus the EU and SACU applying export restrictions. The EU export certification requirements for medical protective equipment require a 10 day delay which could at the least increase overall bureaucratic burden and worse could lead to drop in exports.
Countries like India, which accounts for 10% of restricted medicine and 26% of generics exports to the Europe, have imposed export restrictions. However, there is pressure building on India, from Europe and the US, to ease of some of those measures. On the medical device front, due to severe shortages of medical resources on the front line, only diagnosed patients in serious conditions are being hospitalised with only symptomatic and supportive treatment as there is no full scope treatment solution at the moment.
Respiratory support systems such as life-support machines, oxygen generators, diagnostic equipments for continuous temperature measurement, nucleic-acid and anti-viral test kits, face masks, and sanitizers have experienced a massive surge in overall demand from hospitals and health systems across the European countries. However, the shortage of key materials has restricted the production of these at scale. The Chinese government has launched emergency approval procedures for the registration and application of medical devices urgently needed for epidemic prevention and control.
Most of the global medical device and pharmaceuticals companies have manufacturing centers in China, India etc. and have heavy reliance on the fragmented supply chains. To boost and to even shift production, these organisations will require upstream enterprises such as aluminium, integrated circuits, lithium batteries, pneumatic fittings, and raw material manufacturers to increase their supply lines. However, many of them are not fully operational and some will need parts that need to purchased overseas. Globally, buyers are scrambling to find alternative manufacturers and locations. The existing medical devices and the pharmaceuticals will not be enough to treat all patients if the number of infected people continues to increase globally or there is a surge in patient numbers during the phase-2 of the pandemic.
Healthcare Supply Chain Risk Scores
To better manage the changing market dynamics and the volatile demand for pharmaceuticals, medical devices, and other products, we have created a risk framework to quickly assess evolving needs within each hospital, city, and country in Europe. We extracted five years of purchasing history from Vamstar’s AI-based contracting platform across 2,830 hospitals from 28 countries in Europe. We examined purchasing trends across 600 categories including viral detection kits, digital and mobile health platforms, face masks, remote monitoring systems, surgical gloves, respirators, ventilators, sanitisers etc. We normalised the data on a log scale with a base 2.2 and then ran a log regression model to measure the fit of the data.
Our goal is to understand the “pandemic preparedness toolkit” both from a macro (ability) and micro (willingness) levels needed to manage a pandemic like Covid-19. We want to measure and track the robustness of a country’s health system, in comparison with other countries across Europe, before the crisis took hold and during the progression of the pandemic. This toolkit includes necessary items such as face masks but also digital platforms that will aid in patient and population health management across these countries as it undergoes a rapid transformation. Additionally, we also wanted to understand which countries have (or are) developing preventative infrastructure and share the findings.
For developing the macro level risk – population and health system – we extracted five indicators from World Bank annual datasets namely: (1) population density; (2) population above 65+; (3) GDP per capita; (4) current healthcare expenditure per capita; and (5) number of hospital beds. These indicators have been in various studies statistically proven to have an impact on a health systems’ ability to cope and manage a crisis like this one. We also took a running count of the total number of COVID-19 cases and total deaths to understand the severity of the crisis in each of the countries under study and the overall need for additional resources.
Moreover, we wanted to ensure that the risk framework provides a basis for analysing the markets on a forward looking basis and for that we have taken into account the data from the Institute for Health Metrics and Evaluation for the projections of ICU beds and total number of deaths on a week-by-week basis. Through a weekly update cycle, we will use the supply risk framework to forecast and predict countries and hospitals that might need urgent attention and could suffer severe supply shocks, if the situation deteriorates further.
Analysis and Results
For conducting a country level analysis, we have divided the supply chain risk into three parts: (1) population risk; (2) health system risk; and (3) COVID-19 supply risk.
Population risk gives us an indication as to the spread of the overall virus by taking into account factors like population density and population above 65 years of age that represents one of the vulnerable groups. On that risk metric, Malta, Italy, and Germany pose the highest risk and it is no surprise that the pandemic gained strong momentum in Italy with one of the largest older populations in Europe.
Health system risk provides an indication about the preparedness of a health system both from resourcefulness and the overall ability to cope during a supply crisis. We studied factors such as GDP per capita, number of hospital beds, current healthcare expenditure per capita, and the overall purchasing patterns of 600 categories of products and services that are vital to managing the pandemic. Bulgaria, Romania, and Macedonia are the countries that have been cutting costs across their healthcare delivery chains on account of slow recovery from the financial crisis. These countries pose a significant supply chain risk, if the infection rates starts to peak up again as the pandemic enters phase-2, during the August to end of year timeframe.
Additionally, we have developed an overall supply risk metric by taking into account factors such as total number of Covid-19 cases, number of deaths due to pandemic, and overall projections of death and availability of ICU beds on a weekly basis. The United Kingdom, Italy, and Spain score high on the supply risk as Spain and the UK are expecting death rates to soar with increasing pressure on overall supplies.
It is important to highlight that as the pandemic moves across countries with different timings of peak for the phase-1 of the infection, ending end of June, it is the Central and Eastern European (CEE) countries that could now face the next level of supply shortages. Additionally, supply levels are anyways stretched on account of infection and extended demand levels in Italy, Spain, and the UK. However, it’s beginning to appear that the number of deaths in these countries are slowly reaching peak due to ongoing containment policies.
Within Europe, social distancing — the main containment strategy for the coronavirus pandemic — is showing tentative results. In lowering the rate of transmission every country has implemented various levels of controls for social distancing across four policy parameters namely: (1) stay at home order; (2) closure of educational facilities; (3) closure of non-essential services; and (4) tighter travel restrictions.
There is a strong fear that the virus might come back with increases in the number of infections, a phase-2 of the pandemic, when lockdown restrictions began to be eased but before a full return to normal conditions. This next phase and its success will depend on including more testing and a beefed up local health system, intended to allow a gradual easing until a vaccine might be developed. Additionally, during this phase it will be critical that countries ramp up supply levels of essential resources needed to manage the fallout.
Conclusion
The Covid-19 outbreak is one of the most deadliest pandemics of our lifetime and is therefore one of the major threats to the global economy. This is one of the black-swan events that economists talk about and has the potential to shake up our very foundation of existence. Within Europe, the pandemic has taken centre stage, with increasing number of cases and deaths.
Increased demand from hospital beds to protective equipment is having a tremendous impact on our health system’s ability to cope with crisis. Most countries have only just started to recover from the previous financial and economic crisis with reduced capacities across the board. Supply shortages are occurring in almost all parts of the system leading to increased risks in delivery of care.
In today’s connected world, our supply chains have become highly complicated and vital to the success of our organisations. However, due to the interconnectedness they have also become vulnerable to risks, with more failure points and less margin of error. Healthcare supply chains have become even more fragmented on account of supply chain optimisation in the last decade so as to reduce costs. With reduced inventories and long lead times, it is no surprise that our health systems are trying to catch-up with increasing demand on account of the pandemic.
Vamstar has created a Supply Risk Ratings toolkit to help suppliers and buyers understand changing demand and supply patterns across various European countries. We have analysed more than 600 categories of products and services that are vital to Covid-19 response, both directly and on the system’s ability to continue to deliver care in the phase-2 of the crisis and beyond. With this, suppliers and buyers can plan weeks ahead so as to organise resources before shortages start to appear in the overall delivery of care to the most vulnerable parts of our health systems. Additionally, we are using our technology to predict demand and match the relevant suppliers so that every person gets the care they need as soon as possible. Our survival depends on our collective ability to come together and solve this challenge!
