Outsourcing in Healthcare System

Yuan Gao

Blog Submission #4

Outsourcing in Healthcare System

From my health system class, I learned the U.S spends far more than any other industrialized country on pharmaceuticals. Drug pricing runs the gamut from $48 per year for generics at Walmart to $1,500 per year for the common cholesterol drug Lipitor to $409,500 per year for Soliris (treat paroxysmal nocturnal hemoglobinuria). One reason for such a high cost will be the R&D cost: The average cost of developing a single drug is 1.3 billion, and only 1 in 5,000 compounds are successful. However, production cost and salary for hiring experts during & after the drug is developed is still way higher than other industrial countries.

Traditional pharmaceutical/Medical Devices companies usually are “Fully Integrated Pharmaceutical Company” (FIPCo). They have in--house research, development, manufacturing, clinical, regulatory affairs, data management, sales and marketing, etc.

One solution to reduce cost is outsourcing some of the R&D and production line. There are three popular outsourcing strategies:

1.     Contracting with an independent firm to accomplish a defined task required for the discovery and development of a new drug

2.      “renting” expertise rather than “buying” it

3.     Contract Research/Manufacturing CRO’s and CMO’s (CO’s), now exist to handle activities from early research and pre development to clinical development and post--NDA approval activities

A complex medical device may call for hundreds of components and materials, each with specific requirements, associated standards and applicable regulations. A large, global design, and manufacturing services companies typically have robust supply chains that they qualify, strictly monitor and proactively manage on an ongoing basis. In fact, Medical device outsourcing is projected to reach $44.7 billion by 2017, according to Global Industry Analysts, Inc. Cost reduction and faster time to market are the major factors why companies want outsourcing their R&D and manufactory.

With Healthcare Reform, many policy changes come for a majority of hospitals around the nation. Strategic sourcing is becoming more important in the healthcare industry because healthcare institutions are looking for ways to ensure that they can provide the same level of care to the communities they serve, despite what is likely to be diminishing revenues. Hospitals and health supplier turn their attention to outsourcing (which is the easiest on to implement), help their organizations save up to 10% on their capital equipment purchases, equating to possibly millions of dollars in savings.

Pros and Cons For Outsourcing

Advantages:

-       Convert fixed costs to variable costs

-       Rent expertise as needed

-       Reduce overhead/infrastructure costs

-       Faster to get on the market

Disadvantage:

-       Possible data leak (especially for patent application or clinical trail data)

-       Lose some of control of the progress

-       Less efficient communication over professional topics

It is true that outsourcing the medical devices/medicine can reduce cost for pharmaceutical/medical devices firms. However, how to develop a secure and accountable partnership with manufactory? Although there are patent protect the brand drug/devices about 12 years, but most of the patent is issued before FDA approval, and when it come to production, there is only 5 year left. Outsourcing may result in leak information/data and emergence of early generic competitors.

Reference:

1.     http://www.mddionline.com/article/outsourcing-design-and-manufacturing-services-medical-devices-gains-momentum

2.     http://www.mpo-mag.com/contents/view_features/2014-05-14/full-service-outsourcing-building-lasting-partnerships/

3.     http://www.mdtmag.com/articles/2010/05/challenges-medical-device-manufacturers-and-how-outsourcing-partners-can-help