Reforming the Supply Chain of Japanese Health Care

ABSTRACT

One of the main factors behind the rise in the US GDP growth rate from 3.8 percent in 2002 to 4.8 in 2003 was the health care industry. Health care, in the US, has been the locomotive powering the economic recovery. In order to see our health care market become the engine for economic growth that it has been in the US, it is necessary to take steps to industrialize the sector. As stated in my last report, entitled"The Creation of New Integrated Health Care Network,"the industrialization of health care does not necessarily imply the transformation of hospital management into stock companies. The three requirements that would be established through industrialization are 1) that with a wide area health care market of at least 1 million people, the integrated health care network would be able to generate its own funds and not require aid from the government, 2) that there is a mechanism in place that recycles health care revenues back to the regional residents, and 3) that efficiency improvements in the supply-chain proceed along the lines of other industries. This last requirement, the possibilities of supply chain reform in the health care sector, is the focus of this report.

One important mechanism in promoting supply chain efficiency is the Group Purchasing Organization (GPO), private networks of hospitals that pool their purchasing power to negotiate better prices. GPOs not only form large purchasing groups by bringing together smaller health care markets, but also create regional and even national purchasing networks through further alliance between themselves. In the US, GPOs have been steadily emerging since the '90s and approximately 800 exist at present (2003). GPO purchases make up approximately 70 per cent of hospital purchases, and with a consequent savings of approximately $19 billion, it is clear that the system contributes greatly to the cost efficiency of the supply chain. One reason why GPOs are so successful in the US, moreover, is that doctors, and not just administrators, are involved in the selection process of the procured drugs and medical supplies.

Integrated health care networks (IHNs) also have the potential to bring about greater efficiency. As they themselves are made up of multiple health care related businesses, they possess an even greater group purchasing capability than the external GPOs. Furthermore, IHNs have the potential to adopt the point-of-sale system that has been so effectively utilized by Japanese convenience stores. The most ideal supply chain system in terms of its efficiency and cost effectiveness, POS systems would directly notify the manufacturers each time a drug or medical supply is used. The hospitals supply stock would thus be replenished immediately and automatically on an as-needed basis.

In order to reform Japan's health care supply chain, it is necessary to create and establish a clinical protocol that would, among other things, become an infrastructure for supply item selection. In addition, there must also be a mechanism to prevent over investment in single health care regions - e.g. equipment overlap amongst hospitals within the same vicinity. For this reason, it is critical to establish a health care agency that would integrate the management and governance of public hospitals within the same region, and thus eliminate the wasteful effects of vertically divided bureaucratic management.