Wes Wheeler: There’s no doubt that more of your drugs, more of the vaccines, more drugs for just normal therapeutic indications and disease states—more and more of these drugs will be made in this way. They’ll be derived from cell culture. They’ll be derived from proteins. They’ll be derived from animal cells. And they’ll have to be maintained at a certain temperature for the duration of its life until it’s actually administered.
Erika Grotto: The future of cold chain, supply chain, today on HFMA’s Voices in Healthcare Finance podcast. Hello, and welcome to the podcast. I’m your host, Erika Grotto. Today, I’m talking with Wes Wheeler, president of UPS Healthcare, about the safe and efficient transfer of pharmaceuticals at ultra-low temperatures. But first, let’s find out what’s happening in healthcare finance news. Here’s HFMA Senior Editor Nick Hut and HFMA Policy Director Shawn Stack.
Nick Hut: Hey, everybody. Right now, I’m surrounded by more healthcare financial expertise than I ever thought was possible. You hear from Shawn Stack in all of these segments, and then in this segment, we get to welcome back to our podcast Chad Mulvany, who loyal listeners may remember from Beyond the News segments going back a couple years. So Chad, welcome back.
Chad Mulvany: Well, thank you, Nick. It’s good to be here.
Hut: Tell our listeners what you’ve been up to in the year and a half or couple of years since you departed HFMA.
Mulvany: Yeah. I left HFMA. It was a hard decision. I made the transition to the California Hospital Association, where I took a role as a vice president of federal policy. And so in that role I am fortunate to help our over 400 hospital members in the state really navigate some of the thornier regulatory issues at the federal level that our members are facing. And so much like the work I did at HFMA helping them with proposed and final rules from CMS and payment rules…also I have had the, I guess you could call it “pleasure,” air quotes, of helping them navigate through the No Surprises Act and also sharing with CMS our members’ perspective on that. And then unfortunately, because of the ongoing COVID-19 public health emergency, trying to work through the myriad of provider relief fund issues and then also now more recently sort through FEMA for our not-for-profit and governmental entities. So it’s, you know, always an adventure and always something new. It’s certainly a great membership base to work for, and much like at HFMA, I’ve been very thankful for the very strong team of colleagues that I have at CHA.
Hut: I bet. Never a dull moment, I’m sure, just like was the case with HFMA. So a couple question for both of you guys. And for those who don’t know, we’re live on the scene at our Annual Conference in Denver, and a few of the trends that have really sort of captured people’s attention and just sort of dominating the news to some degree for our audience is first of all, margin pressures for hospitals. What are you guys hearing about, and what should folks know?
Mulvany: Nick, as you rightly tee up, this is something all hospitals are feeling acutely right now, and I’ll use my members as an example. In 2021, roughly half of California’s hospitals had negative margins, and this bakes in any scraps of federal relief they picked up. And you know, the reason for this is pretty obvious. Everyone’s experiencing it, right. Median expenses per discharge are up 15% in California in 2021, and it’s driven by higher labor costs coming in at 16% over prior year, supply chain shortages up 41%, mostly around pharmaceuticals, and then basic supplies at 19%. And so again, same witches brew that everybody’s dealing with.
Shawn Stack: Yeah, I would agree, Chad. I mean, I’ve been meeting with our executive councils the last two days, and workforce challenges and workforce costs are way up. I’m hearing that supplies are up even though hospitals have a much better handle on supply chain now with advanced systems that they’ve built and, you know, multiple layers of vendors that they’re using. But those costs and the blended approach of securing those supplies really hasn’t changed much and will not change much after the pandemic because they want to build in those reserves. But I don’t think costs are going to go down in supplies in the near future, or maybe not at all again. Maybe down a little bit but definitely not down to pre-pandemic costs, right. So still a lot of challenges out there for hospitals. Days on hand for cash have definitely decreased across the board for most of our hospitals, and we’ve seen a lot of community hospitals hit hard by this inflation or forces.
Mulvany: And unfortunately, as you saw in the proposed rules, our members saw in the proposed rule, we’re not getting any help from Medicare. So the 2023 market basket update was 2.7% before you add in that deposited adjustment for docket voting, and that’s through account for prior year clawback, so I don’t think that should rightly be put in. And unfortunately, this has been on brand for Medicare. Between 2016 and 2021, CMS’s market basket update has underpaid hospitals by a cumulative 6.9% compared to growth and risk adjusted cost per discharge from the cost report. While I would expect the market basket update and the final rule will float upwards some, even if they just continue to use the traditional process, it won’t be enough unless they select another source of data, which I know is something CHA asked them to do, and we wanted it in a very specific direction. I know Premier made the same ask. AHA made the same ask as well. So we’re all rowing in the same direction. I know HFMA did the same, and hopefully CMS will listen.
Stack: Yeah, and to compound on top of that, the outlier cuts.
Stack: I mean, the outlier increases are astronomical to a lot of health systems, where they think it was a decrease of 1.8 or 1.9%. In an area of healthcare that is probably most likely going to correct itself somewhat over the next two years anyway, so that drastic increase to outliers could really be detrimental to hospitals in the next one to two to three years. We’re hoping that CMS really takes a hard look at their data to analyze the outlier volume that occurred simply from COVID-19 diagnosis codes. It’s very disheartening.
Mulvany: Yeah. You know, on the outlier piece charade, that’s a good point because the outlier is budget neutral.
Mulvany: And so what they’ve done is, they’ve taken that market basket adjustment on the outlier and said, if we don’t get the projected 5.1% or 5.11% in this year’s rule, we don’t get these funds back because they’ve set the threshold too high. The other challenge, at least on the revenue side, is—and this is anecdotally that I’m hearing from hospitals not only in California but across the country—those who have open contracts or ongoing contract negotiations with plans, the plans are really pushing back aggressively on the requested rate increases, and in some cases, people asking for haircuts. And this is…I’ll call it frustrating and be polite, because despite the fact that many plans are continuing to enjoy strong margins as they have throughout the pandemic, and so when you think about, what are hospitals doing about it, you know, we’ve known all along that fee-for-service wasn’t going to be sustainable, and I think this has just turned the heat up on the pot of water. And so, where there’s opportunity in the market, you’re starting to see more expiration of risk where you’ve got the capabilities of the system and you’ve also got a willing partner, and that willing partner from the payer side is certainly important. The other piece is then the expenses, right. You’ve got the tight labor market, so you’re kind of stuck there. The thing is, it’s working with your HR department to try to figure out how to get nurses, clinical staff hired in so that you can decrease your alliance on template. You’re also thinking, in places where you had that flexibility—which unfortunately you don’t in California because some of the staffing ratios—to use labor differently and also to make sure that you’re using everyone’s full capability. Because if you can sort of move off of that, that at least takes some of the contract labor pressure off.
Stack: You know, I think we’re going to see a lot of creativity here, really, truly in the next year to address both of those issues—not only contracts but nursing costs. What we’re hearing from a lot of our larger systems here at HFMA are, you know, some of the CFOs and some of the leadership are just taking hard cuts, and they’re saying, we’re no longer going to be paying these triple hourly rates if we have to be understaffed and we have to cut back beds, it’s just the way it’s going to be. So we’re starting to see that trend, which is disheartening, but I certainly understand that it’s happening. And then with contracts, I am hearing some creative approaches to contracts that payers seem to be engaging with providers on where they’re backloading those three-year increases and percentages from maybe not an 8,5,3 but a 3,5,8, and payers have been really starting to be receptive on that fee. So it’s definitely going to be a year of creativity to see folks survive and strive.
Mulvany: You know, the other thing that I’m hearing—and this is, you know, it can be concerning, especially depending on what type of system you are and where you are—is that this is pushing a lot of organizations that haven’t looked at unprofitable services to think about whether you take a hard cut at that, and also looking at the marginally profitable services, thinking about maybe how you rationalize and consolidate those. And while that is the right thing to do from a financial standpoint, that’s a hard thing to do when you think about your mission statement. A lot of these facilities that haven’t done that yet, they haven’t done it because it’s in the mission statement that you’re going to serve these underprivileged communities or underserved communities. So once that access goes away, you have to wonder who’s going to care for these patients because certainly there’s not anybody else who’s going to step in and do it, most likely. And so that’s something that we’ve been trying to educate MedPAC and CMS about, given the administration’s focus on addressing healthcare disparities because my sense is that once that capacity is gone, it’s going to be hard to bring it back. So it’s a tough spot.
Hut: And just to drop in a quick bit of news regarding that, the Inpatient Prospective Payment System, the Supreme Court did hospitals no favors last week when it ruled that HHS can continue to interpret the formula for making disproportionate share hospital payments as it’s been doing for the last almost 20 years now. There was, I want to say, an $800 million proposed cut for FY2023 and certainly, given the ruling, hospitals can expect continued constraints on those payments going forward.
Grotto: Cold chain supply chain has gotten a lot of attention because of the COVID-19 vaccine. But it’s not a new concept, and indeed is something we’ll have to pay greater attention to going forward, according to my guest today. Wes Wheeler is the president of UPS Healthcare and recently, he sat down to talk with me about the challenges and how the industry can improve.
Wheeler: Over the last 20 years, the research and manufacture of drugs has transformed quite significantly away from traditional pills and capsules that you typically take for your medication at home. And these drugs that have been developed over these last 20 years are derived from biologic material. They’re organic material that can be derived from human cells, from animal cells, from plant material. They could be synthesized as a biologic drug. We call them large molecules. And the reason why I say that is because that has completely transformed the pharmaceutical industry in the last 20 years. These drugs are no longer chemicals. They’re now biologic material, and biologic material requires a special handling. I call them fragile. Instead of being pills in a bottle, we’re talking now about liquid in a vial. And liquid in a vial or a syringe or in IV form, which includes sterile water, for example, all have to travel at a temperature that’s not ambient, so below ambient temperature. That’s what we call a cold chain. These drugs have to be maintained at a certain temperature in order to retain their stability. Stability means purity, so if something goes out of stability, it’s no longer useable, and the FDA and all the regulatory bodies around the world follow the same format. If a drug is manufactured in a cold format, in a liquid format, in a sterile format like many of these new drugs are, they have to move and they have to be stored at temperatures below ambient. That would be 2 degrees Celsius, up to 8 degrees Celsius or -20 degrees Celsius, which is more like frozen temperature. And then some of the new drugs that are coming out, which we’ll talk about, I’m sure. Cell and gene therapies, which are being moved at -70 to -150 degrees Celsius. And these drugs all have to be stored and moved at that temperature in order for them to be viable.
Grotto: What industries are doing this well? Food is the thing that jumps out to me, but perhaps there are others.
Wheeler: Food, flowers, believe it or not, come from South America and parts of Europe. They have to be traveling at refrigerated temperature, which would be 2-8 degrees. That’s the standard range, and ice cream, of course, moving at frozen temperature. But the industries that do it well, and have to do it well, are the pharmaceutical industry. We have no choice. We’re moving biologic drugs and vaccines now, and we’ll talk about vaccines, I’m sure, in a minute. But these drugs have to move at these temperatures. And if they go outside of their temperature range, as I said before, they’re just, from a regulatory perspective, cannot be used. It cannot be administered.
Grotto: So let’s talk about vaccines for a second. The COVID-19 vaccine has been the one that has gotten a lot of attention, but there are a lot of vaccines out there. Are there others that spring to mind that need to have this special treatment?
Wheeler: More than 50% of all drugs today in development and probably 8 out of the top 10 drugs sold today around the world are in a sterile format, so they’re either monoclonal antibodies, they are purified proteins, they’re drugs derived from cells and now of course we have cell therapy and gene therapy derived from DNA that have converted to RNA. All these drugs—and more and more of these drugs will be coming in the future—are required to be traveling in cold chain. So it’s not new. I think the first monoclonal antibody was discovered in 1975. We’ve been growing ever since. We’re probably up to 50 drugs that are approved now for various indications. But we’re going to see more and more of this, where you’re taking less tablets, less capsules, and more sterile syringes being administered at home or at the clinic.
Grotto: You mentioned that this is not new. This is something that’s been happening over the last couple of decades. What progress have you seen in healthcare? Do you have any examples where it’s being done really well, or do you want to talk about the risks of when it’s not done well?
Wheeler: Yeah. So the biggest issue we have is that many of the monoclonal antibodies, many of the drugs being developed in sterile format—for cancer, for inflammatory disease, infectious disease, cardiovascular disease, even kidney transplant—many of these drugs that are being developed are developed in stages, and the stages don’t always come from the local manufacturing plant. They’re coming from India and they’re coming from China, and now more and more of even the biogeneric drugs that are being manufactured are coming from South Korea. So the problem that gives us in the logistics industry is to make sure that we can not only store these special drugs in finished format, and all the steps ahead of it, in certain temperatures at the manufacturing source, but now we have to figure out a way to move them at that temperature across the world. And so we’re talking now about the majority of generic drugs—this is the generic versions of the biologics, of the monoclonal antibodies that are being made in South Korea, that are being made in Taiwan and Japan and partly in China—we’re having to move those drugs all the way to the U.S. And that means we have to have packaging, we have to have transport vehicles, we have to have contingency measures, we have to have temperature controlled aircraft and vehicles to make sure that the five- or seven-day journey from a place like Seoul or Tokyo can make it all the way to Chicago at temperature. And so the challenges we have now and we had during the vaccine distribution—and we still have them today—is tracking the temperature and tracking the time that it takes to get these drugs in finished format from these faraway locations all the way to the U.S. and to Europe.
Grotto: And what about once they arrive? Because they don’t just arrive and are distributed right away, right? They go to different healthcare organizations, providers, whatever, and I imagine it just continues from there.
Wheeler: Right. So I’ll use vaccines as a great example because this is where it all got highlighted. The Pfizer vaccine, which we distributed probably half the Pfizer vaccines around the U.S. during the Covid period for Operation Warp Speed. Those drugs are being manufactured in Kalamazoo, Michigan, and they were being transported to Louisville, our central Louisville hub in Kentucky. And from Kentucky they had to be moved all the ZIP codes around the U.S., including the Pacific Islands, including all the Army outposts all over the world, and they had to be transported at -70 degrees Celsius. That is ultra-low temperature. And most of the locations around the country and in these far-off locations did not have an adequate way to store the vaccines when they came out of the ultra dry ice box that we were moving it in. They didn’t have enough dry ice at the location. They didn’t have enough local freezers that they could store these things. So the importance of rapid administration became the critical factor in the vaccine distribution for all of us. We had to make sure that the pointed use, the ultimate pointed use where you got your vaccination, either could use the drug in time so it didn’t go out of stability or had something local like dry ice or like an ultra-low freezer to store the vaccines. That became a major factor in the successful distribution of vaccines in the U.S.
Grotto: And it seems, as you talk about it, that there’s more of this coming. There are more of these kinds of drugs being manufactured. And if we think about COVID—it’s not just a U.S. issue, right. It’s a worldwide problem. We’re talking now about distributing vaccines around the world, trying to get this under control. And who knows what’s coming next? I hate to say that because we’re still in the thick of all of this, but as other things occur that we need to have drugs, we need to have vaccines, and they need to be distributed worldwide, what is the challenge going to be? Or how are we going to meet that challenge, I guess is a better question.
Wheeler: There’s two ways to answer the question. First is a regulatory aspect, and then secondly, there’s a logistical aspect. From a regulatory perspective, you have to make sure that there are treaties in place to allow countries in Africa, for example, to receive a drug that’s not approved in that country. So that was the first step. When Pfizer was moving and when Moderna was moving their vaccines to Africa, all over Africa—which is a continent, by the way, still well behind the rest of the world in terms of vaccination rates—we had to make sure that those countries could receive them from a legal perspective and clear customs. And once they’re there, we had to make sure that first of all, time in transit was important. The packaging that we move these vaccines in has a limit of about 96 hours before it goes out of stability. That packaging can maintain temperature at -70 degrees or -20 degrees up until about 96 hours. After that, you’ve got to get it somewhere. And so we worked with many of these African countries. I’ll just name a few—Nigeria, we worked with Cameroon, Ethiopia, we worked a lot with Ghana. We’re doing more and more for the African union now to make sure that these locations have ultra-low freezers—local freezers, local dry ice manufacturer—to keep the vaccines at temperature. This has been our major issue because the manufacturing of these things are coming out of the U.S. and Europe and not necessarily local.
Grotto: What do you think is the outlook for the future when we’re thinking about cold chain supply chain management?
Wheeler: There’s no doubt that more of your drugs, more of the vaccines, more drugs for just normal therapeutic indications and disease states—more and more of these drugs will be made in this way. They’ll be derived from cell culture. They’ll be derived from proteins. They’ll be derived from animal cells. And they’ll have to be maintained at a certain temperature for the duration of its life until it’s actually administered. And the biggest problem we have now in the industry is that there’s a limited number of locations these can be manufactured in, that all the pharmaceutical companies are finding alternative ways to make these in different locations, perhaps low-cost locations, perhaps places like India and China and South Korea and Taiwan and possibly Vietnam. Getting these drugs manufactured and moved and stored at temperature within time is going to be our major logistical challenge. And that is why UPS Healthcare was created. We’ve been in the business of healthcare for 15 years now, but for the last two and a half we’ve focused primarily on making sure we have storage locations where we need them around the world. We have an air and ground network that can maintain temperature throughout its journey, and we have locations close to the points of use so that we can make a worldwide network capable of getting drugs from anywhere to anywhere else in the world. That’s been our major challenge, and we’ve added a lot of square footage. We’ve added at least 4 or 5 million square feet of GNP space around the world, continued to add coolers and freezers everywhere. We make dry ice now. We have multiple packaging options that we can offer to our clients to make sure that we can maintain stability throughout its journey from wherever it is in the world it’s being made.
Grotto: So, we have a lot of members of our organization in provider organizations. What do you think is the takeaway for them? What are their to-do’s here?
Wheeler: There is, right now—by the way, the FDA does track drug shortages. I’m not sure if you knew that. But the drug actually maintains on the FDA website number of drugs that are in shortage today. There’s 172 on the list today; 90 of those are sterile, which means they’re temperature controlled, probably derived from cell cultures and biologics like we talked about. And I think there have been issues with supply and with the shutdown of Shanghai, which I hear is just being lifted in a few days, and the COVID shutdowns we’ve had around the world and the labor shortages we’ve had in the U.S. and the supply chain issues we’ve had, say, in Long Beach, California—these kinds of disruptions are going to continue, and if we have a limited number of manufacturing sources, hospitals and doctors and clinics are going to see shortages of some of these key drugs. And so nearshoring is something you’re hearing about. Finding ways to get vaccines manufactured locally. I’ll give you a few examples. The Canadians, the Japanese found themselves in a difficult situation where they were reliant upon other countries to supply their drugs, and so the Canadians and the Japanese have made recent movements towards encouraging pharmaceutical companies to build plants locally, and I think you’ll see a lot of that coming in the future to prevent any kind of shortages you see coming out of China or India or faraway places. So I think that’s really the big takeaway.
Grotto: That’s interesting. So you think that will happen in the U.S.?
Wheeler: Yes, I do. So let’s talk about baby formula. That’s a good example.
Wheeler: Everybody knows we’ve had a big shortage of—who knows in this day and age we would have a baby formula shortage in the U.S. It’s crazy to think about that. But there’s only four companies that make that material, and they’re not all interchangeable, as you know if you’re a mom. Only a couple of sites could make Similac, for example, and that major factory was shut down by the FDA for technical reasons and not opened for many weeks. I think we have to be very, very careful about duplicating, expanding the number of sites that are qualified and certified to manufacture these key drugs, in this case baby formula.
Grotto: Thank you so much for joining me today and for sharing your perspectives on these issues. These are things that our members are caring a lot about, they’re talking a lot about, and certainly not something that we’re going to stop talking about anytime soon. So Wes Wheeler, thank you so much for joining me today.
Wheeler: Thank you very much for having me.
Grotto: Voices in Healthcare Finance is a production of the Healthcare Financial Management Association and written and hosted by me, Erika Grotto. Sound editing is by Linda Chandler. Brad Dennison is our director of content strategy. Our president and CEO is Joe Fifer. And if you’d like to talk with our team, go ahead and reach out. You can email us anytime at firstname.lastname@example.org.
I almost got through that in one take.