On December 17, 2017, the price of a single Bitcoin hit a dizzying record high of $19,783, fueling individuals and institutional investors to ask: "What is Bitcoin and how do I buy one?"1
While the recent spectacular rise of Bitcoin – and the volatility displayed in the temporary loss of value shortly thereafter – has caught the imagination of many, the real story is in the value of the technology that underlies Bitcoin and the other forms of "cryptocurrency" – digital financial vehicles that can be used by parties seeking a trusted medium in commerce, free of significant government oversight. The true economic value of cryptocurrencies originate from the underlying technology known as "blockchain."
What Is Blockchain?
Blockchain is, at its heart, an electronic distributed ledger. For years, people had wanted a means of engaging in electronic transactions without needing a trusted middleman, typically the bank. The need for that trusted party increased cost and introduced delays. The theory was that if a process could be developed where transactions could be sufficiently transparent, the need for the trusted third party could be obviated. The greatest problem to be overcome was so-called "double-spending," where a given asset is spent more than once. In mediated transactions, the trusted third party confirms that the asset has been transferred to the buyer, or returned to the bank, as determined by the transaction, and thus cannot be spent again by the spending party. In electronic transactions, without the third party, there was no way to control against the problem of double-spending.
In 2008, a paper was published by "Satoshi Nakomoto" that described a solution for the double-spending problem. Through the use of digital signatures and one-way, non-reversible mathematical calculations that are transparently recorded simultaneously on a distributed network, it is possible to conduct trusted electronic transactions without the use of a trusted third party, saving time and money.
Blockchain Basics
Consider traditional approaches to financial transactions. Company A wishes to purchase 200 widgets from Company B. Company A advises Company B and arranges for payment through a financial process, such as a check or electronic funds transfer. The bank that holds Company A's funds confirms that there is sufficient money in Company A's accounts and transfers those funds to Company B's account. Company A must compensate the bank for the costs of that transaction, and Company B must wait for the bank to complete the process before it receives the funds. Thus, there is a cost to the use of the bank as the trusted third party, in both time and money.
Blockchain avoids the need for a trusted third party. Blockchain records transactions on a distributed network of computers that are visible to both Company A and Company B. When Company A wants to purchase widgets, it simply issues a digital transaction, which is simultaneously sent to the computers on the network. The computers have a record of the assets that are available to Company A and engage in mathematical calculations to confirm that Company A is able to pay Company B. Upon confirmation, the digital transaction is simultaneously recorded on every single computer on the network, creating a “distributed ledger" – essentially, a spreadsheet that is replicated across a network of trusted computers or devices. The blockchain network is trusted because to change the transaction would require simultaneously being able to change the entry on every single computer and remember that each transaction is describing using an irreversible mathematical equation. Every transaction that occurs on the network is added sequentially to every computer on the network, and any attempt to change any transaction would be immediately apparent. The distributed ledger is systematically reconciling and updating the "spreadsheet" across all the computers each time a new transaction occurs.
Supply Chain Needs Blockchain
After labor costs, supply chain is typically the second highest expense for a health care provider. As reimbursement rates from both private and public payors continue to tighten, finding efficiencies that result in improved care and cost savings are mission critical. So how can blockchain help health care improve supply chain?
Modern supply chain transactions are complex, involving a number of suppliers and requiring multiple touchpoints, all of which must be reflected in various documents: purchase orders, change orders, receipts, bills of lading, etc. A lost form results in a delay, and it is relatively easy for forms to be compromised. Using blockchain to manage supply chain data has the potential to provide much needed efficiencies. Because each step of the transaction is transparent, all parties can monitor the progress of an asset through supply chain touchpoints. Transactions are immutable and thus fraud resistant. Products can be identified with certainty, both as to provenance and with respect to the conditions of carriage. The progress of a product, from the moment of creation through delivery to the end recipient, can be tracked with granularity. In this way, all components of the supply chain have the necessary information to confirm that the product is the right product, delivered by the right process, to the right customer, at the right time.
For health care providers, a particularly promising area for blockchain is the pharmaceutical supply chain. Pharmaceutical supply chains are immensely complex and suffer from data "blind spots" as products move from the supplier and manufacturer through quality assurance and regulatory checkpoints, to the clinical provider and on-site location. A supply chain built with blockchain would capture data at each step. Through the process, these steps represent the opportunity to immediately and effortlessly verify the product quality, volume, price and regulatory compliance. For example, Mediledger, a collaboration between various technology and pharmaceutical companies, is focusing on building a blockchain ecosystem that includes critical pharmaceutical supply chain functionalities. By 2019, Mediledger will be able to ensure that all saleable returns have verified an authentic serial number and that all inventory moved by serial numbers have automatically reconciled exceptions.2 The use of blockchain makes this possible through the immutability of the transactions and distributed ledger technology.
Blockchain also has potential to address the increasingly difficult and costly problem of counterfeit and gray market pharmaceuticals. The World Health Organization estimated sales of counterfeit drugs around $75 billion in 2010.3 In response, the U.S Food and Drug Administration has mandated, under the Drug Supply Chain Security Act, that systems for pharmaceutical product tracing be in place by 2023.4 Blockchain may be one approach to meeting this challenge. By uniquely identifying and tracing a pharmaceutical product from production, through each step of the delivery chain to its delivery to the ultimate recipient, blockchain can meet the requirements imposed by the Drug Supply Chain Security Act. The possibilities of fraud are minimized because each transaction is transparently recorded on the distributed ledger and is immutable. Any attempt to modify the transaction after it has been recorded would require that every transaction on the distributed ledger would have to be simultaneously modified. Because of the encryption and process used by blockchain to confirm and "stack" transactions, this is not possible.
Another potential benefit of blockchain in supply chain is the use of smart contracts. A smart contract is merely code that is stored in the blockchain that specifies conditions that all parties to the contract agree upon. When the conditions occur, the agreed-upon actions occur. A simple example of a smart contract in the context of supply chain is payment. In traditional supply chain transactions, a product is ordered, shipped and received. After receipt, an invoice is provided, and then the invoice is processed and payment is made. Using blockchain, the product would be automatically tracked from creation to delivery. With a smart contract, upon delivery, if all agreed-upon conditions (e.g., it is the correct product and all transport requirements such as temperature, date of receipt, delivered to correct location, etc.) were met, payment would be automatically authorized. However, if the blockchain transaction data indicates that the conditions were not met (e.g., the product was not kept at required temperatures during transit or the consumables were delivered late), any agreed-upon penalties would automatically be credited to the customer.
Blockchain Next Steps
While blockchain shows promise in supply chain, and some technology and logistics companies are actively engaged in blockchain "proof of concept" testing, there remain some barriers to full-scale use of blockchain in supply chain operations. Blockchain must be appropriately scaled to an industry that accounts for almost 18 percent of the United States gross domestic product.5 Blockchain also requires an information technology infrastructure coordinated across multiple levels of stakeholders. Blockchain promises to not only be a disruptive technology but a new foundational technology for economic and social systems.6 The time necessary to validate transactions can take over an hour; this can consume significant technology resources and may not be acceptable for certain types of transactions. Further, it is reasonable to anticipate the development of regulatory standards. While blockchain may not be ready for full-scale implementation in the health care supply chain, it presents potential and is worth considering as an emerging option.
This article is educational in nature and is not intended as legal advice. Always consult your legal counsel with specific legal matters. If you have any questions or would like additional information about this topic, please contact:
• Melissa Markey at (248) 740-7505 or mmarkey@hallrender.com;
• Ammon Fillmore at (317) 977-1492 or afillmore@hallrender.com; or
• Your regular Hall Render attorney.
Melissa Markey and Ammon Fillmore are attorneys with Hall, Render, Killian, Heath & Lyman, P.C., the largest health care-focused law firm in the country. Please visit the Hall Render Blog at http://blogs.hallrender.com/ for more information on topics related to health care law.
1 By way of comparison, on December 17, 2012, the price per Bitcoin was $13.41. https://charts.bitcoin.com/chart/price
2 Mediledger: About Us: https://www.mediledger.com/#aboutus
3 Growing threat from counterfeit medicines: http://www.who.int/bulletin/volumes/88/4/10-020410/en/
4 U.S. Food and Drug Administration: Are you ready for the Drug Supply Chain Security Act? https://www.fda.gov/Drugs/DrugSafety/DrugIntegrityandSupplyChainSecurity/DrugSupplyChainSecurityAct/ucm427033.htm
5 https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical.html
6 Harvard Business Review: The Truth About Blockchain: https://hbr.org/2017/01/the-truth-about-blockchain
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