Healthcare Supply Chain Challenged by Both Mother Nature and Human Beings
Review of Third Quarter 2024
The highlights of the third quarter are 1) labor market softening and 2) the start of a Fed fund rate cutting cycle. Healthcare leaders who follow this column received a clear heads-up regarding potential job market pressures, in terms of both wages and employment, in the previous article. Regarding the Fed reversing the course and timing of that policy changing, this column series since the start of this year has indicated how the third quarter, and specifically the September meeting, would be consequential in determining the future of interest rates and the economy in general.
What both highlights of this quarter have in common is their heavy toll on the public’s sentiment and psychology. Although the impact of layoffs and job insecurity is clear, it could be augmented this time around as it coincides with the kickoff of this Fed easing cycle, which historically has been associated with a J-shaped growth curve, where fears about the future fuel the initial slowdown phase before people get reassured about the economy and then start to spend and invest.
As the 2024 presidential election nears, it begins to shape major developments and decisions. This time around it came in the weird combination of lame-ducking and political ping-ponging, as shown in this quick rundown of major events in the third quarter:
Federal budget. A three-month-long, temporary funding extension was agreed on by both sides of the aisle in Congress. A new agreement or a more permanent solution should be reached before the current one expires on December 20 of this year.
East and Gulf coasts dockworkers strike. This is yet another problem that remains unsolved and deferred, potentially because of politics. The strike was not avoided, but the good thing is that it continued in the 36 ports for only a few days, which limited repercussions in terms of financial losses (a few billion USD per day) and mostly spared the supply chain, as indicated in the Department of Health and Human Services’ initial assessment,(1) which is of the utmost importance for the healthcare industry.
Hurricanes Helene and Milton. In this series, weather conditions are regularly touched upon because of their direct impact on all aspects of the healthcare industry (e.g., care, operations, financials, among others). This is exactly what FDA Commissioner Robert Califf most recently admitted to in front of the agency’s scientific advisors meeting this October when he said, “We are seeing shortages and supply chain interruptions, often due to climate change or international strife.”(2)
The nation has faced alarming level IV fluid shortage following flooding at a Baxter manufacturing plant in North Cove, North Carolina, which supplies 60% of the nation’s demand for various IV fluid lines.(2) As a result, the FDA declared shortages of certain parenteral fluids (dextrose 70% IV solution, lactated Ringer’s IV solution, and peritoneal dialysis solution) and issued a new guideline titled “Temporary Policies for Compounding Certain Parenteral Drug Products.”
Taken together, those two measures affect 1) importation and outsourcing processes, and 2) compounding, making it easier for compounders to formulate those scarce IV fluids with less restrictions all while potentially complying with the 1938 Federal Food, Drug, and Cosmetic Act (Sections 503A and B), which essentially prohibits compounding and outsourcing of commercially available and FDA-approved medications, respectively, as long as those drug agents are not on the FDA list of drug shortage.(3) Those products also will enjoy the benefits of FDA guidance on Section 503A (2021 revision), which removed restrictive provisions that limit distribution of compounded medications to a 1-mile radius and stipulate use within 24 hours.
The CDC also has issued an official health advisory through its Health Alert Network to healthcare administrators, providers, and pharmacists to assess supply and develop mitigation plans to limit the impact of the IV fluid shortage on patient care and operations.(4) Many hospitals had already put plans into actions by postponing elective surgeries.(5) In addition, medical associations such as the American Thoracic Society, American Society of Pediatric Nephrology, and American Society of Anesthesiologists have all released specialty-specific recommendations.(6)
Zooming in on macroeconomic indicators, the overall picture of the economy looks fine despite some pressures in the job market, discussed in the following sections.
Gross Domestic Product
In line with the optimistic outlook for the second quarter that was laid out in the most recent report, the second quarter gross domestic product (GDP) has almost doubled at 3% (third estimate) compared with its predecessor. Healthcare remains a key contributor to the growth of the U.S. economy and the undisputed leader in the service sector, despite the significant drop in its contribution to the real GDP during this quarter (i.e., more than halved, from 0.76 down to 0.35),(7) yet the top position in the services segment remains reserved for healthcare, followed by transportation and housing.(8) With regard to the third quarter GDP, a conservative outlook is maintained.
Fiscal and Monetary
The Fed cut the interest rate during the September meeting in an unprecedented move since the early days of the COVID-19 pandemic over four years ago.(9) The fund rate went down by 50 basis points, to a target range of 4.75% to 5.00%. For the last two meetings of the year, the moves are anticipated to be less aggressive, with the possibility of a pause well into the first part of the next year, although this probability is quite limited.
On the monetary policy front, the news everyone has been waiting for during the third quarter is the impact of tax policy plans proposed by both presidential candidates. Although one of the two contenders has made such plans a bit clearer, both should rush to finalize and lay down their vision before the countdown comes to a close. While both candidates agree on things such as exempting tips from income tax, generally, Vice President Kamala Harris (D) is focused on taxes of high-income brackets and former President Donald Trump (R) is going hard on tariffs.(10,11) Healthcare organizations are advised to review their tax strategies and products once a president is elected.
Inflation and Prices
Third-quarter 2024 U.S. Price Indices (healthcare) are shown in Table 1.
The Producer Price Index (PPI) came up with a slightly mixed picture during the third quarter when compared with predictions. Although wholesale inflation has shown signs of slowing down, this does not seem as fast as most analysts have anticipated, resulting in an expectations–results mismatch.
During July, the PPI went up by 2.2% (on a yearly basis), whereas the core PPI stood higher, at 2.4%. This move can be attributed primarily to the 0.6% increase in final demand goods, which withstood the 0.2% drop in services prices.(14) The picture went exactly the opposite way the following month, where the PPI grew by 1.7% compared with August 2023, thanks to the 0.4% increase in prices of services and steady goods prices. The September numbers were in line with August, with a 1.8% increase in annual PPI.
Importantly, volatile components, particularly the drop in energy cost, were among the biggest contributors to the PPI cooling off. However, the following two factors should be considered:
The core PPI remains considerably higher than the 2% indicator, which aligns with the Fed targets; and
The inflationary impact of the Middle East wars and tensions is significant, and it seriously threatens gains made in the disinflationary path of the U.S. economy. As a result, the Fed might need to take the “expectant management” approach with a pause in rate cuttings during its upcoming meetings.
Switching over to discuss consumer inflation, as manifested by the consumer price index (CPI), there are three points to note during this quarter:
This third quarter is the first to have a CPI breaking below the 3% mark in over three years (since March 2021).(15)
The disinflationary path here is quite consistent, as illustrated by a comparison of the CPI for July, August, and September:
July: 2.9% YoY; 0.2% MoM.
August: 2.5% YoY; 0.2% MoM.
September: 2.4% YoY; 0.2% MoM.
The largest contributor to inflation in all of the quarter’s three months was shelter. This is a significant milestone and a good sign that the economy is on the right track of its deflationary journey. It signifies that the restrictive monetary policy has crippled pricing power across sectors and rendered the one that depends the most on interest rate, (i.e. shelter and housing), the biggest player.
It is worth mentioning that the favorable energy and gas prices during the third quarter have made that milestone attainable, but it also potentially could be a double-edged sword. The volatile nature of energy prices could threaten that milestone and achievement; however, it is predicted that oil prices will remain in check until the end of 2024 unless a major black swan comes out of the Middle East.
Personal consumer expenditure (PCE) grew by 2.5% (YoY) and 0.2% (MoM) during July.(16) Healthcare was the leading sector responsible for the 0.2% increase in the services segment contribution to the GDP and economy. In August, the PCE came down on both annual and monthly basis, at 2.2% and 0.1%, respectively.(17) Nondurable pharmaceutical products led the spending on goods, increasing by 0.1%.
Labor and Productivity
Information on third-quarter 2024 U.S. employment situation (healthcare) is given in Table 2.
During the third quarter, all eyes were on the employment situation, which had a wild ride. Starting with July, a sharp decline in job growth rate stirred fears of recession, with 114,000 payrolls added. Unemployment leaped 20 basis points, to 4.3%. Almost half of that payroll number (55,000) was added by the healthcare sector, consistent with the prior 12 months’ average of 63,000. Out of those 55,000 newly added healthcare payrolls, 22,000 were in healthcare services, 20,000 were in hospitals, and 9,000 were in nursing and residential care facilities.(21)
The August actual numbers fell short of expectations, with 142,000 new jobs created, which helped take the unemployment down rate to 4.2%.(22,23) Healthcare employability dropped significantly during August, with only 31,000 payrolls added, half of the previous 12-month average of 60,000. Ambulatory care and hospitals boosted jobs by 24,000 and 10,000, respectively.(24)
The last month of the third quarter, September, was a real blockbuster, with a whopping 254,000 payroll positions added and a 4.1% joblessness rate.(25) The healthcare sector came second after hospitality (i.e., food services and drinking places), with 45,000 jobs added in that month, which is below the 57,000 mean value reported between September 2023 and September 2024. Details of healthcare payrolls are as follows: home healthcare services (+13,000), hospitals (+12,000), and nursing and residential care (+9,000).(26)
Inching toward the last quarter of 2024 the outlook for employment situation is promising.
Looking Towards Fourth Quarter 2024
Recalibration will be the theme of the fourth quarter, leading up to the 2025 opener. During this first quarter, of what seems a prolonged rate easing cycle, some “knee jerk” responses are anticipated, triggered by:
Demand–supply imbalances (e.g., spiking consumer spending, hike in real estate demand as mortgage rate cools off), and
Psychological factors such as fears about job stability for low-skilled workers and concerns about the overall health of the economy.
References
Statement by U.S. Department of Health and Human Services on Strike at East Coast and Gulf Coast Ports. United States Department of Health and Human Services. October 1, 2024. www.hhs.gov/about/news/2024/10/01/statement-by-us-department-health-human-services-strike-east-coast-gulf-coast-ports.html .
Tin A. As IV shortage continues after hurricane, U.S. invokes wartime power to speed recovery. CBS. October 15, 2024. www.cbsnews.com/news/iv-shortage-hurricane-defense-production-act/ .
U.S. Food and Drug Administration. Hurricane Helene: Baxter’s manufacturing recovery in North Carolina. Updated on October 17, 2024. www.fda.gov/drugs/updates-2024-hurricane-season/hurricane-helene-baxters-manufacturing-recovery-north-carolina .
CDC Health Alert Network. Disruptions in availability of peritoneal dialysis and intravenous solutions from Baxter International facility in North Carolina. Atlanta, GA: Centers for Disease Control and Prevention. October 12, 2024. https://emergency.cdc.gov/han/2024/han00518.asp .
Nirappil F, Roubein R. IV fluid shortage due to hurricane prompts hospitals to postpone surgeries. The WashingtonPost. October 14, 2024. /www.washingtonpost.com/health/2024/10/14/iv-fluid-shortage-baxter/ .
Yasgur BS. Hospitals reeling from IV fluid shortages in the aftermath of Hurricane Helene. Medscape. October 16 2024. www.medscape.com/viewarticle/hospitals-reeling-iv-fluid-shortages-aftermath-hurricane-2024a1000iwa?form=fpf .
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