Expert Perspectives

Six ways hospitals are combating shrinking margins

How Pharmacy Departments Are Helping Meet the Challenge

Robert Scholz, MS, MBA, RPh,
Vice President,
McKesson Pharmacy Optimization®

With the most transformative period of U.S. healthcare delivery evolving, revenue and margins are a major concern for health systems everywhere. According to an April 2012 poll by HighRoads, around half of hospitals (55%) expect a decline in revenue because of ACA.[1] The American Hospital Association reports that more than one in four U.S. hospitals (28%) had negative operating margins in 2011. According to the Health Care Advisory Board,[2] the average 2% margins hospitals have now is below the 4% margin needed to sustain operations.

With increasing margin pressure, hospital leaders are actively identifying new ways to generate revenue, preserve or improve margins, cut costs, and improve quality. Many innovative hospitals are partnering with their pharmacy team to fundamentally change care delivery by reducing inpatient demand and succeed with payment systems requiring population health management.

Take a look at six ways that health system pharmacy teams are helping meet the margin challenge:

1. Ambulatory pharmacy. Healthcare leaders are beginning to realize how much ambulatory pharmacy can do for them. Not only can it be an additional source of revenue, but it also can help assist discharged patients with medication adherence,[3] a critical means of reducing avoidable readmissions. As the acuity level of services provided in the outpatient setting increases, the opportunity associated with ambulatory pharmacies is also on the rise.

  • Revenue growth. A recent survey of healthcare leaders found that over half (54%) plan to boost financial growth over the next five years by expanding outpatient services.[4]
  • Decrease readmissions. The Agency for Healthcare Research and Quality (AHRQ) suggests that when patients understand their post-discharge medication instructions, they are 30% less likely to be readmitted or visit the ER.[5] This may help translate into savings under value-based payment systems.

By providing services to the community, hospital pharmacies can also help develop new customer relationships. According to the American Society of Health-System Pharmacists (ASHP), 35% of the 5,000 hospitals in the country have at least one pharmacy that serves discharged patients.[6]

2. Streamline operations. Nowhere is the phrase “do more with less” heard more than in the hallways of today’s hospital. With the expansion of pharmacy services, streamlining operations is critical to help ensure that time and resources are well spent. Two examples of streamlining operations are:

  • Process improvement techniques. Through employing Lean Six Sigma methods, manufacturing giants, such as Motorola and Toyota, created highly efficient operations yielding nearly defect-free products. Today, hospitals such as Virginia Mason are leveraging Lean methodology to transform their organization and eliminate waste.
  • Drug spend management tools. At Georgia Regents Health System, Administrative Director of Pharmacy, Rehabilitation and Respiratory Care Services, Tad Gomez, employed tools and resources to efficiently analyze drug spend, implement clinical initiatives, and then track and document the savings. Over the course of a year, this led to a savings of more than $1.3 million. When asked for comment, Tad replied, “As the healthcare landscape evolves, we’re looking at ways to evolve with it. Bottom-line savings such as this help us focus our finances on medication safety and better patient-care outcomes.”

3. Accurate billing. More providers are taking a closer look at reimbursements, and pharmacy is certainly no exception. Improved margins can occur when billing and reimbursement processes are optimized.

  • Keep the pricing database aligned with changing regulations to ensure revenue integrity
  • Identify discrepancies between the amounts of medication purchased and dispensed
  • Find disparities between medications and the charges for particular subsets of drugs
  • Transition from retrospective underpayment analysis to real-time payment recovery
  • Normalize the pharmacy system and the chargemaster to improve financial performance
  • Standardize pricing for similar drugs across hospitals and systems

4. Drug discount programs. Patient assistance programs (PAPs) are programs sponsored by pharmaceutical manufacturers to provide financial assistance for low-income, uninsured and underinsured patients. But the complex nature of these programs means many hospital pharmacies don’t always capture all available cost-saving opportunities. E. Thomas Carey, director of pharmacy services at SwedishAmerican Hospital in Rockford, IL, outsourced PAP management and recovered $450,000 in replaced medications.[7] Outsourcing PAP management can be a promising way to benefit patients and help bolster the bottom line.

Another way for eligible facilities to help improve their margins is through 340B drug pricing programs. Some estimate that participation in 340B programs can generate savings in the vicinity of 20 to 50% of outpatient drug costs.[8]

5. Employee pharmacy coverage. Offering prescription coverage to employees through the hospital pharmacy provides a way to manage operating costs. Many hospitals have outpatient pharmacies, but they are often underutilized by employees. Leveraging the in-house expertise of hospital pharmacies can help reduce the cost of a hospital’s employee pharmacy benefit. Additional savings can be derived through GPO discounts on medications required by employees.

6. Drug diversion. Many hospital leaders are increasing their focus on drug diversion, requiring pharmacy leadership to implement procedures to insure safeguards are in place to identify and prevent it. To prevent drug diversion loss, pharmacies must consider what people, processes and systems are needed. Promising approaches include automated inventory-tracking systems, computerized recordkeeping controls and automated dispensing cabinets. A Lean Six Sigma engagement can also be used to identify areas of potential diversion risk.

Conclusion

Health systems are on a mission to achieve better care at sustainable costs in settings that are shifting more to outpatient services. While there is no one silver bullet to help reduce costs and improve margins, many options are now being found as pharmacy leaders and hospital leaders join forces and strategize on solutions that work. Forward-thinking healthcare suppliers and consultants can be helpful partners to support the quest toward better health of your health system.

The information provided here is for reference only and does not constitute legal advice. We make no representations with regard to the content. You are solely responsible for investigating and complying with all applicable laws that govern the operation of your business. The results of parties discussed above depend on a variety of factors that are unique to their business. There is no guarantee that your results will be similar to their results.

[1] “Hospitals and Health Systems Anticipate That the Affordable Care Act (ACA) Will Reduce Organizational Revenue,” April 18, 2012,
[2] “Forging a Competitive Identity for a Value-Driven Market Place,” Presentation on March 6, 2013, Chas Roades, The Advisory Board Company
[3] “Ambulatory pharmacies help improve adherence, quality of care,” Drug Topics, February 15, 2012,
http://drugtopics.modernmedicine.com/news/ambulatory-pharmacies-help-improve-adherence-quality-care
[4] Industry Survey: HealthLeaders Media 2013, January 2013
[5] AHRQ Preventing Avoidable Readmissions, http://www.ahrq.gov/legacy/qual/impptdis.htm
[6] “Hospitals Add In-House Pharmacies to Cut Readmissions,” FierceHealthcare, September 10, 2012 http://www.fiercehealthcare.com/story/hospitals-add-house-pharmacies-cut-readmissions/2012-09-10
[7] “Two Illinois Hospitals Find Lost Drug Dollars Using Patient Assistance Programs,” Pharmacy Practice News, November 2011,
[8] “340B Program: Opportunities for Community Pharmacy Involvement,” Drug Topics, January 15, 2011, http://drugtopics.modernmedicine.com/news/340b-program-opportunities-community-pharmacy-involvement

Note: The information provided here is for reference use only and does not constitute the rendering of legal or other professional advice by McKesson. Readers should consult appropriate professionals for advice and assistance prior to making important decisions regarding their business. McKesson is not advocating any particular program or approach herein. McKesson is not responsible for, nor will it bear any liability for the content provided herein.