Chinese territorial conflict could spike healthcare supply costs

In November, China unilaterally redrew its air defense identification zone to include areas controlled by South Korea, as well as long disputed islands claimed by Japan, China and Taiwan. This obligates planes flying in the area to report a flight plan and identification, and to obey orders from Chinese authorities. Naturally, this expansion has met with strong opposition from the U.S. and its allies.
Beyond national security, this issue may have an effect on healthcare. By current estimates, the healthcare industry is incredibly dependent on Chinese supplies; China has captured 90 percent of the U.S. market for vitamins and nutritional supplements, antibiotics, analgesics, enzymes and amino acids. In fact, China makes 70 percent of the world's penicillin, 50 percent of its aspirin and 35 percent of its acetaminophen.
Meanwhile, drug companies purchase 40 percent of their active pharmaceutical ingredients from nations like China and India – with some estimating this may reach 80 percent within 15 years.
China has a lock on our medical supplies because of cheap labor and low production costs. But, if China decided to push the air defense issue by halting healthcare exports, there would be few places to fill the supply void. Such a situation could lead to insurance premium or co-pay increases, already criticized as unaffordable, to cover the extra expense of supplies. Increased healthcare costs could also threaten the U.S. deficit as the largest payer of healthcare reimbursements. Moreover, such a move could result in supply shortages for critically needed medicines and other supplies, affecting patient care.
Caving to Chinese demands isn’t the answer, as that would just encourage further predatory practices. However, the battle underscores the fact that we are overly dependent on Chinese manufacturing, particularly for the materials we depend on to treat illnesses. In the quest for savings, we have put our healthcare system in jeopardy and left strategic supply just one policy shift away from a severe crippling.
No easy solution can fix this problem. At a minimum we can start sourcing raw materials from multiple geographies. Even better would be to explore new, North American sources of raw material and to build manufacturing capabilities here at home using advanced technologies that would decrease our dependence on cheap foreign labor, create new jobs and reestablish the United States as a center for manufacturing.
Tax credits to encourage domestic manufacturing expansions would make up for some of the labor wage gap while keeping the overall markets for goods strong. Similarly, tax cuts to match the Organisation for Economic Cooperation and Development rates could stimulate growth and investments in technologies that improve U.S. competitiveness. Although a near-term drain on the budget, investments could be recouped later with higher taxable corporate profits and employee wages.
Equally important, purchasers need to consider diversity of sourcing, safety and reliability of supply. My company, Premier, develops hospital purchasing contracts worth more than $40 billion a year. We examined our critical supply contracts, and discovered we had far too many imports. We took steps to diversify to several regions of the globe, adding domestic manufacturers to our portfolio at an affordable price. If more followed this example, we’d be better prepared to shift purchasing to other sources and avoid shortages before they affect care.
Healthcare companies have a moral imperative by virtue of the business they are in and the patients that depend on them to ensure a ready supply of products. Paying the "China price" may have a short-term impact on cost, but overdependence can produce long-term problems.
If we don't significantly reduce our dependence, a single military conflict, trade dispute, economic recession or policy shift could put the entire healthcare system at risk.