Price of Key Materials Used in Healthcare Products Expected to Rise as Credit Crisis Eases

To help its 2,300 not-for-profit hospital members better estimate supply cost inflation during their budget processes, the Premier healthcare alliance has released the March edition of its semiannual Economic Outlook analysis.

According to insights from raw materials experts cited in the analysis, in the next 12 months cotton, plastic and oil – three key materials used in many healthcare products – will experience price increases as the international economy rebounds, the value of the dollar increases and demand exceeds supply.

As a result, annual market inflation rates will increase on average between 1.6 percent and 4.6 percent across categories such as cardiovascular services, facilities, imaging and nursing. Premier's existing contracts, excluding foodservice and pharmacy, are expected to increase by about 1 percent on average in the next year, lower than overall market increases which are predicted to be an average of 3 percent during this time frame.

“While the overall economic picture is improving across the healthcare industry, what is less clear is the impact health reform and reimbursement declines may have on our nation’s not-for-profit hospitals,” said Premier Purchasing Partners president Mike Alkire. “Given the gradual recovery we are seeing, developments in these areas will be of critical importance to their future financial health. Premier’s projected contract inflation estimates remain well below that of the industry. This is due to our overall contracting strategy, including the price protection clauses that are a part of the majority of our contracts, allowing prices to be held firm for the life of these agreements.”

The Economic Outlook projects rates of inflation for the ensuing 12 months. Premier produces a new analysis every six months to ensure projections are reflective of changing market trends. The analysis helps alert Premier alliance hospital members to market forces that could drive price changes in the coming months and years. It compares Premier’s contractual price protection against supplier price inflation estimates to deliver a detailed estimate of projected supply costs.

Premier polled approximately 500 of its contracted suppliers to obtain market inflation estimates. Additional inflation estimates by category include clinical laboratory services, foodservice, IT/telecommunications, pharmacy, support services, surgical services and women and children's.

The analysis includes accurate predictors of price inflation through an Inflation Calculator in Premier's Supply Chain Advisor®. The online calculator allows members to estimate their facility’s total inflation impact by taking into account individual utilization patterns and the price protection offered by Premier's contracts.

Raw materials overview

Cotton market

Cotton prices have rebounded after the steep decline that coincided with the onset of the credit crisis.

According to Cotton Incorporated’s supply chain economist Jon Devine and senior manager of supply chain initiatives Jan O’Regan, much of the rebound in cotton prices can be attributed to a supply deficit in the current 2009/2010 crop year. With corn and soybeans offering farmers more attractive returns for the past several seasons, cotton acreage and production have declined worldwide for the past three crop years. Despite the reduction in production last crop year, the reduction in consumption brought about by the weakness in the global economy kept prices low. Due to large numbers of cotton farmers and low cotton prices last year, governments in China and India made significant purchases to reduce excess supplies and support prices. 

As the global economy has strengthened over the past 12 months, demand for cotton re-emerged and it is expected that that the amount of cotton consumed in 2009/2010 will exceed that amount of cotton that was grown by 13.5 million bales (about 12 percent of 2009/2010 world consumption). Making up this production deficit are cotton stocks. Virtually all of the cotton that was accumulated by China and India has since moved out into the market. When stocks are drawn down, prices tend to increase and this is a major reason why cotton prices have rallied in recent months.

Devine and O’Regan predict:

-- In the short term, which can be defined as the time period before next crop year’s harvest becomes available in the fall, prices can be expected to at least maintain their current trading range due to the production/consumption gap.

-- In the longer term, the question is whether the expected increase in cotton production in 2010/2011 will be large enough to overcome both the production/consumption inherited from the 2009/2010 crop year and any consumption growth in 2010/2011. With cotton prices the most favorable they have been in years, current forecasts project a more than 10 percent increase in world cotton acreage and production in 2010/2011. World cotton consumption is forecast to increase 2 percent in 2010/2011.

Devine and O’Regan emphasize that planting decisions, which are currently being made in major cotton growing countries, and the weather throughout the 2010/2011 growing season are principal sources of uncertainty in the current cotton market. Updates related to 2010/2011 production and coverage of other factors related to the cotton market are freely available in Cotton Incorporated’s Monthly Economic Letter.

Plastic market

-- Changes in the crude oil and natural gas markets have a direct impact on plastic product prices as plastic resins are ultimately derived from these raw materials.

-- Plastic is included in products such as can liners, exam gloves and high-tech invasive cardiovascular equipment, and is the predominant packaging material for medical and pharmaceutical products.

According to Michael Greenberg, CEO of The Plastic Exchange, 2009 saw record levels of plastic resin exports that offset dwindling domestic demand and drove prices higher. “In 2010, exports are down due to rapidly rising feedstock costs, which have made U.S. resin uncompetitive in the world market,” Greenberg said.

Polyethylene is the highest volume commodity resin and used to make many non-durable goods including bags, bottles and packaging. Greenberg suggested that resin prices and feedstock costs, which include ethylene and propylene monomers derived from crude oil and natural gas, could peak around the end of the first quarter of 2010.

“Since feedstock production issues are beginning to resolve, and assuming no new problems develop, we are likely currently witnessing the highest resin prices of the year,” Greenberg said. “The anticipated price relief would be welcomed downstream.”

Joseph F. Oberle, group marketing director, and Ralph Pena, plant manager, for Medical Action Industries Inc., a supplier of medical and surgical disposable products, suggest continuing price increases from resin producers due to the current state of the market and forward-looking projections for raw materials.

Oberle and Pena said the recession had a dramatic effect on demand for plastic-based products; as a result there was a period of time in late 2008 and early 2009 where supply outpaced demand. Due to economic conditions, unplanned outages and decline in demand, several production facilities have been permanently closed, reducing available inventory. Limited production has supported resin cost increases, which have been successfully implemented month after month.

Oil market

Healthcare provider use includes:

-- Shipping and transportation

-- Manufacturing of supplies including rapid diagnostic test kits for influenza, molecular analyzers, urinalysis analyzers and blood glucose meters for diabetics.

Crude oil prices will continue to fluctuate, according to the U.S. Energy Information Association (EIA). The West Texas Intermediate (WTI), the basis for the EIA’s crude oil projections, increased from $69.48 per barrel on December 14, 2009, to $83.12 on January 6, 2010, and then fell to $72.85 on January 29, 2010. The EIA expects the crude oil market to strengthen again this spring with WTI rising to an average of about $81 per barrel over the second half of this year and $84 per barrel in 2011.

Due to the rising crude oil prices, the EIA forecasts that the annual average regular-grade retail gasoline price will increase from $2.35 per gallon in 2009 to $2.84 in 2010 and $2.97 in 2011. Projected annual average retail diesel fuel prices are $2.95 and $3.16 per gallon, respectively, in 2010 and 2011.

 

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