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Deloitte's Life Sciences & Health Care Blog

Hospitals look to strengthen the supply chain by producing some generics

In the late 1920s, Henry Ford owned rubber plants, coal mines, and iron-ore mines to guard against shortages from suppliers. He wanted to ensure that his manufacturing plants always had the raw materials needed to build cars.1

Similarly, some hospitals are looking into producing certain generic drugs to protect against shortages from suppliers that lead to postponed or canceled surgeries. Early this year, four large hospital systems and the Department of Veterans Affairs announced the formation of a new nonprofit organization that will manufacture some generic drugs that tend to be in short supply.

Why would a hospital administrator consider manufacturing generic drugs? The role of the hospital administrator today is far different than it was 20 years ago, and many of them already have their hands full. They are commonly trying to navigate new regulations and laws that impact how physicians are paid. There also is a growing focus on value-based care and a trend toward viewing patients as consumers. Add to that the potential constant stress of being acquired or merging, or considering a joint venture. Despite all of this, many hospital administrators understand that they need to have a stable supply of drugs on hand to maintain their ability to treat patients.

In a recent survey of more than 300 surgeons, nurses, directors, and supply chain decision makers, 45 percent said they have had to cancel a surgery due to a lack of medical supplies, and nearly 70 percent have had to reschedule a surgery.2 A majority of respondents (64 percent) admitted to hoarding supplies. An informal survey conducted by the American Society of Anesthesiologists found that 98 percent of members regularly experience shortages of anaesthesia drugs.3 The American Society of Health-System Pharmacists (ASHP), has identified 139 compounds that face shortages.4

Hospital leaders want to support the critical mission

In a recent blog post on this topic, my colleague Faith Glazier acknowledges that shortages could be driving hospitals to consider in-house production of some drugs. But she also suggests that the move might also be a strategy to prompt drug manufacturers to lower their drug costs. However, hospital leaders aren’t likely interested in developing the next generic cholesterol medication, or in generating a new revenue stream. They are mainly interested in fulfilling the mission of the hospital. That includes helping ensure that patients have access to the drugs that are essential for surgeries, or to alleviate patient pain.

Self-manufacturing also could allow hospitals to oversee quality. Compared to a pharmaceutical company that generates $500 million a year in drug sales, the volume that a hospital, or a coalition of hospitals, could produce would likely be minimal. Moreover, the portfolio of generics that hospitals might consider producing would likely be limited to mission-critical drugs that tend to be in short supply. These include: 5

  • Norepinephrine, which is used for some cardiac procedures and in anesthesiology
  • Vancomycin, a common antibiotic that has been in use for many years
  • Pain medications such as fentanyl and morphine

While these pain killers and antibiotics are effective, they sit at the opposite end of the profitability spectrum compared to specialty drugs. The low margins tied to these drugs might be why manufacturers have bowed out of continuing to produce them. 

Pharmaceutical manufacturers probably don’t see drug-producing hospitals as much of a threat, and hospital leaders likely don’t want to compete with generic drug manufacturers. Many hospitals leaders see drug manufacturing as a strategy to guard against potential shortages, not as a potential new line of business.

Vertical integration is a business strategy that goes back 100-years. However, it is generally a new concept for hospitals. By producing some essential generic drugs in-house, I believe that hospital systems could protect patients from drug shortages ultimately fulfilling their primary mission to protect patient care.

4 https://www.ashp.org/drug-shortages/current-shortages
5 https://www.ashp.org/drug-shortages/current-shortages

Author bio

Swati is a Specialist Leader in the Life Sciences and Health Care industry with a focus on pharmaceutical supply chain. She has more than 10 years of experience leveraging a pharmacy background to assist health systems with sustainable margin and performance improvement engagements. She has assisted more than 80 clients in drug-expense management, contract negotiations, optimizing technology, evaluating productivity and maximizing revenue cycle. Her experience includes 340B implementation and pharmacy practice optimization. Her breadth of pharmacy experience has been leveraged for clients in the pharmaceutical industry, pharmacy benefits management, pharmacy distributors, and retail pharmacy chains.