In medical equipment, processed plastics produced from oil range from the most life-critical technologies to esoteric supplies, such as exam and surgeons’ gloves.

The era of low-cost energy is over. In the last year alone, the price of oil skyrocketed 35 percent. According to some estimates, the world has reached “peak oil” – a point in our earth’s geological lifecycle where oil production can no longer be increased. The high cost of oil is changing fundamental aspects of how hospitals and vendors serving healthcare facilities do business through traditional, established supply chains.

In the years to come, the healthcare industry will be impacted in three distinct ways if oil prices continue on their upward trend: the cost of products that are produced and packaged utilizing petroleum-based raw materials will rise, the costs of transporting goods throughout all levels of the supply chain will face similar increases, and lastly, a hospital’s operating costs directly related to energy consumption will continue to rise.

Impact #1: Petroleum-Based Raw Materials
Virtually every item consumed in a hospital today is to some extent reliant on oil in some form along its developmental continuum, from production to use. Petroleum, a key ingredient in the polymerization and vulcanization processes that are responsible for producing all plastics, resins and rubbers, has a wide range of applications in the medical world. On average, approximately 8 percent of the world’s oil supply is consumed in the manufacturing of plastics.   

In the realm of medical equipment, processed plastics produced from oil range in importance from the most life-critical technologies such as heart valves and pacemakers, to esoteric supplies, such as exam and surgeons’ gloves, intravenous tubing and surgical drapes. Surprisingly, the lowest-cost supplies, including exam gloves and drapes are raising the biggest cost issues for hospitals.

Although these supplies cost mere pennies per item, on an aggregate hospital level, these expenses can become enormous. Consider a 200-bed hospital that uses, on average, approximately 16,000 gloves per day – or 6 million per year – creating an annual expense of $162,000. As the prices of exam gloves has risen from $2.70 to $3.80 per box of 100 latex gloves over the past two years, this increase has taken a noticeable toll on the bottom lines of hospitals.   

Until manufacturing science can find a way to eliminate the need for petrol-based products from some of the most important consumer staples and plastics, the price of oil will remain inextricably linked to the high cost of healthcare.

Impact #2: Transportation and Pass-Through Costs
The single most visible energy statistic to American consumers is the retail price of gasoline. The cost of unleaded gasoline hovered around $4 per gallon for the better part of 2008. While consumers may have certain options, including switching to hybrid vehicles or compact models with better fuel economy, the manufacturers and distributors of medical supplies have no such luxury for lowering their transportation costs.

The U.S. manufacturing and distribution industry relies heavily on flatbed trucks for transporting products from manufacturing plants to distribution centers and then ultimately to the end-users. These transporters, whose trucks run on diesel fuel and are an integral link in this segment of the U.S. healthcare supply chain, have taken the most severe hit in the past year. For instance, one year ago, it would cost less than $870 ($2.89 per gallon) to fill up the 300-gallon tank of an 18-wheeler with diesel fuel. Currently it costs just over $1,400 ($4.76 per gallon) for that same vehicle; a price increase of nearly 65 percent in one year.    

Distributors utilizing container ships, which use a less refined fuel than diesel trucks, have seen similar price increases tied to the cost of crude oil. Depending on size, container ships can use anywhere between 50 and 200 tons of fuel per day, and may cost hundreds of thousands of dollars to fill up before a long voyage.    

The increased costs incurred at each leg of the healthcare supply chain eventually add up. Consider a supply chain where a good is sold and changes hands a number of times on its way from the point of production to the ultimate point of consumption. Because each participant at each touch-point of any supply chain incurs various costs and needs to make a profit, the price normally increases with each successive transition of goods; thus, the highest prices are usually passed onto the end-user. In the case of the healthcare supply chain, however, this is not always the case.

Hospitals, vendors and distributors are all vulnerable in their own ways that are tied to the group purchasing organizations (“GPOs”) and the contracts they enter into for member hospitals.