As a capstone exercise for my MBA, I wrote a book chapter on transfusion economics. It was a real eye-opener for me as I calculated the total cost of blood products, which can be 4 to 8 times the purchase cost when you fully account for all the associated resources and for the impact of transfusion related adverse events.2 I co-authored the chapter with an economics professor from Butler, Dr. Kathy Paulsen-Gjerde. As economists like to do, Dr. Paulsen-Gjerde explored the market dynamics for blood products in the U.S., drawing supply and demand curves which described price sensitivity, called price elasticity of demand. When a product has inelastic demand, large price increases have a relatively small impact on reducing consumer demand, e.g., a 20% increase in price leads to only a 5% decrease in demand.
This occurs when consumers view the product as essential, with no good alternatives available. The classic example is gasoline, since increases in price at the pump cause little changes in driving behavior, at least in the short term. Because blood products have shown this type of economic behavior in the past, with steady price increases having no impact on hospital blood consumption, we used a blood- oil analogy throughout the chapter. In fact, we stated that blood is the oil of the healthcare industry, lubricating the gears of healthcare delivery to support surgical and medical services. However, price elasticity of demand can change over time if the price hits a certain “pain” threshold and/ or if alternatives become more available or economically feasible. For a variety of reasons, it now appears that we are at the tipping point for blood supply and demand, and the U.S. blood industry is facing the perfect storm.
Blood use in the United States has generally increased by 2- 3% per year since the 1980’s, and blood prices have almost tripled in the past decade. The price increases were a logical combination of increased production costs incurred by the blood suppliers along with the usual market supply and demand forces. While hospitals didn’t like the price increases, they viewed blood as essential with no available alternatives. Meanwhile, blood centers continued to expand and faced no real economic pressures themselves. Since hospitals continued to tolerate increases in blood use and costs, it was a seller’s market, with no external pressure to innovate or become more efficient. While writing our book chapter in 2004, Dr. Paulsen-Gjerde came to the conclusion that the blood industry was very inefficient, with a tremendous amount of market duplication and excess capacity. She asked me why the blood industry was so inefficient, and my answer was simply “because it can be.”
In the past two years the U.S. has experienced a flattening of blood demand, likely due to a combination of factors.2 First and foremost, many hospitals have seen a significant decline in admissions and elective surgeries due to the economic downturn, resulting in less blood use. As blood demand softened in hospitals, collections continued unabated, resulting in a relative oversupply of blood products. Blood suppliers now find themselves with decreased demand and increased inventory, while they are stuck with the fixed costs of running their collection facilities. They also find themselves competing with other blood providers for the available business, meaning a buyer’s market is developing. Hospitals have also felt the pinch of the recession, along with the push for healthcare reform. A prime cost reduction target for hospitals has been “non-labor associated” cost savings, focusing heavily on their supply chain. Hospital laboratory directors have been pushed by their administrators and supply chain consultants to rein in blood costs, since blood is the biggest single cost within a lab. Hospitals are now sensing “blood in the water” and for the first time they are aggressively pushing back against price increases. These market forces are also predictably driving consolidation in the blood collection industry at an unprecedented rate.3
The final front in this storm is perhaps the most interesting, and that is the demand for blood management programs. A recent survey commissioned by the National Blood Foundation explored the impact of blood management programs on hospitals and blood centers.4 Notably, 81% of surveyed hospitals showed significant reduction in blood use and blood costs as a result of their blood management programs. While all of the hospitals surveyed listed quality and outcomes as the primary drivers, it is telling that the key decision makers to initiate blood management programs were usually the lab and supply chain based upon cost concerns, which mirrors our experience as blood management consultants. Although the lab typically initiates the process, it is our view that comprehensive blood management programs are clinical initiatives that require physician and nursing buy-in and ownership. The survey results were presented in a panel discussion at the NBF CEO forum at the AABB this year, along with discussions on the impact of blood management on the blood collection industry.5 Ten blood centers were also included in the survey for their involvement with hospitals on blood management initiatives. While the sample size was small, the summary and conclusions of the NBF survey have the potential to reshape the blood collection industry in the United States. All of the blood centers surveyed predicted high demand for blood management services over the next 3- 5 years, one center stating that “every hospital we serve wants a blood management program.”4 The primary benefit to the blood center was that it moved the discussion with its hospital clients from cost to value, since providing direct or indirect blood management support was seen as a significant value add. In fact, the conclusion of the survey was that since the demand for blood management will grow, blood centers that provide blood management services will have a competitive edge. There are well documented opportunities for improvement both on the blood collection side and on the hospital side for better blood management, all the way from donor to patient. The model of suppliers partnering with customers to better manage their supply chain has been a staple in other industries, so it appears that the time has come for a blood management vein-to-vein value chain.
Note to blood center CEOs: call me.
Submitted by: Timothy Hannon, MD, MBA | Founder & President, Strategic Healthcare Group, LLC
- Hannon TJ, Paulson-Gjerde, K. Contemporary economics of transfusions. In: Perioperative Transfusion Medicine (2nd ed), 2005, Spiess BD, editor. Williams & Wilkins: Baltimore.
- Levenson D. Supply is the new demand: How facilities are meeting blood needs in the recovering economy. AABB News, August 2010, pp. 6- 10.
- Calm Before the Storm: America’s Blood Center 2009 Annual Report. Available at: http://www.americasblood.org/download/file/ABC09_AnnualReport_1v12(1).pdf
- National Blood Foundation Blood Management Strategies Survey Results. Available at: http://www.aabb.org/programs/nbf/Documents/swan.pdf
- Fuchs E. AABB-NBF CEO summit homes in on health care innovation. Available at: http://www.aabb.org/events/annualmeeting/attendees/63amonline/Pages/nbfceosummit.aspx