Navigating Supply Chain Disruptions
Orthotics & Prosthetics
on March 01, 2022
By Craig Douglas, VP, Payer and Member Relations, VGM Government Relations
Since the onset of COVID-19, there have been challenges facing DME/HME providers, not the least of which was a sharp increase in costs pertaining to several facets of their business. Acquisition costs for many products have been rising steadily in the form of incremental price increases. Fuel costs, delivery vehicle costs, and labor costs have also been on the rise. Hiring and retaining qualified and reliable staff has proven difficult for many industries, and the healthcare and DME industries are no exception. In a recent poll conducted by VGM, providers indicated they have been experiencing increases in delivery costs of between 19% and 43% this year, depending on the region.
Costs Increase Across the Continuum
Suppliers are not the only companies experiencing increased costs in the industry. Manufacturers are also experiencing many of the same cost increases. The increased costs for the manufacturers are primarily attributed to their own rising costs of the raw materials used to manufacture their products—aluminum, steel, nickel, copper, PVC, etc., are all experiencing double-digit cost increases of up to 40%. Manufacturers are also experiencing spikes in labor costs and a sharp rise in shipping costs, especially from overseas.
According to Cass Information Systems, a company that tracks and trends several freight related costs, they expect a 34% overall increase for their Cass Freight Index (Expenditures) during 2021. That same index was flat in 2019 and actually decreased by 7% in 2020. Little did they know, at that time they were on the precipice of an unprecedented storm. From a shipping cost perspective, the cost to bring products from overseas has skyrocketed throughout 2021. Companies are paying upwards of $25,000 to $30,000 per shipping container compared to just $3,000 to $4,000 in 2020.
More than 40% of all shipping containers that enter the U.S. come from China, which is also home to seven of the 10 largest ports in the world. During the pandemic, when much of the world was on lockdown, a large percentage of the world’s population was unable to go out and spend their money on anything other than the bare necessities. Discretionary spending was stymied for several months. A few months later, the ports began to clog up with shipping containers and there weren’t enough workers available to help offload the backlog.
There are many DME/HME products sold in the U.S. that are manufactured in countries such as China, Taiwan, Vietnam, and Korea. Fully loaded container ships from those countries are being forced to wait in line at U.S. ports. As recently as October, there were over 70 ships idling at sea waiting their turn at the port of Long Beach, Calif., alone, as well as several more ships doing the same at other U.S. ports. The ships can idle at sea for 7-10 days, and on top of that, could wait another 1-2 weeks to be fully unloaded.
A Full-Blown Shipping Crisis
There have been other events that have further contributed to the shipping crisis. Earlier this year, a massive cargo ship was stranded in the Suez Canal, causing many ships to either wait for it to clear or be re-routed or even delayed from being launched. China’s two largest ports have both experienced shutdowns due to COVID-19. Simply getting the ships to land at a port in the U.S. isn’t the end of the delays. Getting the containers off the ships and to their final destination is often a task carried out by our railroad and trucking transportation companies.
Those companies have not been immune to COVID-related issues, either. Union Pacific Railroad, a major U.S. railroad system, earlier suspended all container movements from the West Coast for one week, and BNSF, another massive U.S. railway carrier, also had to cut back on routes for two weeks in July to relieve backlogs. The availability of truck drivers is also at its lowest point in over three years, with roughly 200,000 fewer drivers available as compared to previous years.
These major delays and shipping cost increases are causing the manufacturers to pass along their higher costs to their customers in the form of either price increases or surcharges. Recently, several major manufacturers of DME have announced surcharges that have already been implemented or will be implemented within the coming weeks and months. The DME supplier community cannot simply absorb these price increases and continue to provide products to the patients they serve.
These are not the first surcharges since the pandemic began and likely will not be the last. This latest round of surcharges is of greater significance due to the breadth and depth of the product lines impacted. It is estimated that the manufacturers who have recently imposed surcharges represent approximately 65% of the total market for some of the product categories. The surcharges aren’t coming from just one or two manufacturers, nor are they impacting just one or two product lines. They involve a growing list of several major manufacturers and distributors, and they impact dozens of product lines, many of which are high-volume products such as wheelchairs, hospital beds, walkers, and lift chairs.
Many of the surcharges are in the 20-30% range of the price of the product, and in some cases, the dollar amount of the surcharge alone exceeds the current reimbursement from Medicare for that item itself. In other industries, when a surcharge or price increase is incurred, the cost is usually passed on to the end user purchasing that product. In this case, the DME supplier is incurring the increased costs but is unable to pass those additional costs on to the Medicare beneficiary due to the fee schedules being, for the most part, fixed.
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