Pharmacies are CFOs’ secret weapon in the cost-cutting war
By Nancy Brock, Executive Healthcare Financial Consultant, McKesson Pharmacy Optimization
Think your hospital’s pharmacy is just a cost center? Think again. For hospital CFOs to meet today’s steep challenge of cutting operational expenses by as much as 20 to 30 percent in some cases, there’s an urgent need to look at the pharmacy and pharmacists’ clinical role with fresh eyes. CFOs might be surprised by the opportunities they’ve been missing and how certain pharmacy cuts actually can end up costing them more.
Faced with increasing operational expenses as well as payment cuts – like reduced reimbursements and Medicare readmissions penalties – many hospital CFOs are stuck between a rock and a hard place when it comes to finding further savings. The reality is, after a decade of working to improve productivity throughout the hospital, the low-hanging fruit is gone. One area that’s typically overlooked but has significant potential to help save – and even make – hospitals money is the pharmacy. CFOs need to better understand how more clinically integrated pharmacists can result in overall cost savings, as well as identify the most profitable business model for their hospital’s pharmacy.
Pharmacists help reduce readmissions
Perhaps the top motivation for hospitals to invest in the pharmacy today is the high cost of readmissions. The federal Agency for Healthcare Research and Quality states that there are more than 4 million avoidable readmissions each year, at a cost of nearly $31 billion.1 It’s estimated that as many as 69 percent of these readmissions stem from failed drug therapy – patients who either stop taking prescriptions or don’t take them correctly. In the second year of the Medicare readmissions penalty program, that’s translating to $227 million in hospital fines.2
Studies show3 that the pharmacist’s role is key to improving medication adherence, reducing adverse reactions and, therefore, reducing readmissions. Yet hospitals continue to underutilize pharmacists in areas that directly affect medication adherence, including disease management, medication management, discharge counseling, medication reconciliation, transitions of care and more.
Part of the reason is a misperception that nursing staff can perform these services more cost-efficiently. Another reason is that pharmacy staff has typically been cut to a point where there simply are not enough people to do the work. Clearly the existing approach of limiting pharmacists to filling prescriptions needs to change, particularly in light of healthcare reform challenges.
Pharmacists help keep drug costs as low as possible
Drug costs are high and keep growing year over year, which means pharmacy inventory is a significant portion of a hospital’s expenses. However, cutting pharmacy staff actually can result in drug costs going up even higher. Clinical pharmacists working closely with physicians are able to recommend and set parameters for ordering and stocking the most cost-efficient drugs, such as generics. Without this strategy in place, many physicians order what they are familiar with, often at higher cost.
It’s also important that pharmacy staff stay on top of reimbursements for medications. Many times, hospitals do not receive full reimbursement for drugs purely because of administrative changes or errors — drug shortages not recognized by payers, NDC (national drug code) changes, miscoding, or failure to accurately capture charges for drugs dispensed in the hospital information system. Pharmacy staff can play a major role in accounting for these missing reimbursement opportunities.
Pharmacies help hospitals get reimbursed in ACOs
Hospital mergers and acquisitions are on track to outpace the rate of consolidation seen in the 1980s. Forming larger organizations, including accountable care organizations (ACOs), is becoming the norm in order for hospitals to survive in this fiscally challenging environment. To be reimbursed in an ACO model, hospitals need to track patient costs throughout the continuum of care. If you think about it, pharmacies really are the only departments in the system that can provide that continuity, from the hospital to clinics to in-home care. Without an ambulatory pharmacy, a hospital can’t track whether a patient filled his prescriptions after being discharged, which, as shown in studies, may lead to a readmission within the 30-day penalty period.
More profitable pharmacy business models
The inpatient pharmacy’s profitability is primarily capped, as hospitals are reimbursed at a set amount according to a DRG (diagnosis-related group) – no matter what the hospital spends on medication for a patient. Therefore, it’s important for financial teams to look at the payer mix and evaluate the feasibility of alternative business models, such as the addition of an ambulatory pharmacy or accredited specialty pharmacy operations.
- Outpatient/ambulatory pharmacy. The outpatient side of pharmacy has the potential for increased profitability. The addition of an ambulatory pharmacy may be a good model if a self-insured hospital’s benefits plan can capture the majority of hospital employee prescriptions as well as those of discharged patients. Other revenue-generating services include immunizations and screenings. The University of Wisconsin Hospital and Clinics is a good example of a mature ambulatory pharmacy model, with 12 ambulatory pharmacies offering targeted services based on the populations they serve.4
- Specialty pharmacy. Specialty pharmacies provide drugs that typically require special handling, administration, inventory management and a high level of patient monitoring and support. A good example of an institution that determined that specialty pharmacy would be a viable initiative is Vanderbilt. The Vanderbilt specialty pharmacy now captures 18,000+ prescriptions annually for self-administered specialty drugs that previously were being filled by outside specialty pharmacies, thus generating significant incremental margin for the enterprise.
In summary, there’s a big gap today between pharmacists’ knowledge and ability and decision-makers’ understanding of how these skills could significantly benefit hospital finances. What’s exciting for CFOs is discovering how the pharmacy can be a source of new cost efficiencies and increased collections from the outpatient pharmacy area. For this to happen, however, a cultural and operational shift needs to occur to better align pharmacy leadership with financial and executive teams.
Nancy Brock, formerly CFO at two hospitals within two large health systems in Texas, as well as VP of Operations for the hospital district in Houston, Texas, now serves as an executive healthcare financial consultant at McKesson. She also serves on the board of the Texas Gulf Coast Chapter of the Healthcare Financial Management Association (HFMA), the nation’s premier organization for healthcare finance leaders.