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What CEOs don't know about pharmacy

August 18, 2017

    Earlier this month, I sat down with my colleague Rob Lazerow from the Health Care Advisory Board to discuss what CEOs don't know about pharmacy. Our goals were to address some of the common misunderstandings about health system pharmacy and to equip C-suite leaders with new ideas for engaging pharmacy in achieving health system goals.

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    Below is a summary of five key takeaways from our conversation. You can also download a recording of the conversation here.

    1. Not all drug spending is bad

    Health system drug budgets combine inpatient and outpatient drugs to maximize volumes and secure the best pricing. Most inpatient drugs are reimbursed under the DRG payment, so hospitals must carefully manage these costs to maintain profitability. In contrast, outpatient drugs are separately payable. Often reimbursement is based on the price of the outpatient drug plus a percentage markup. As a result, increased spending on outpatient drugs is correlated with increased revenues and is typically an indication of healthy growth in the pharmacy business.

    Outpatient infusion centers, retail, and specialty pharmacies are a large and growing source of revenue for many health systems. In fact, many health systems now spend more than 50% of their drug budget on outpatient drugs.

    2. Reducing undesirable inpatient drug spend requires a team effort

    Most inpatient pharmacy teams have already exhausted all of big opportunities to reduce inpatient drug spend that lie within their direct control (e.g. pricing, inventory management, waste reduction). They continue to search for new opportunities, but their efforts yield diminishing returns.

    To further reduce inpatient drug spend, health system executives need to partner with pharmacy to engage physicians in developing standardized drug protocols and utilization management programs. In addition, multi-facility health systems have opportunities to leverage scale—though these efforts require investments, such as in centralized pharmacy services and inventory, system-wide formulary and utilization management, and in-house compounding. (To learn more, read our research report, "Pharmacy System Strategy.")

    3. Ensuring infusion center profitability will require a new level of business discipline

    For most health systems, the biggest outpatient pharmacy revenue opportunity lies in infusion due to volume growth and the high and rising cost of provider administered drugs. Yet most infusion centers underperform financially due to fragmented processes and lack of accountability.

    At a typical health system, no one has full visibility into the infusion center business. Physicians prescribe the drugs, pharmacy purchases the drugs, infusion center staff handle prior authorizations, coding and documentation, and the central business office manages billing, denials, and underpayments. 

    As drug prices have increased, health plans have increased their efforts to manage drug spending. Common tactics include increasing prior authorizations and the documentation required to demonstrate medical necessity. Anecdotally, infusion centers report increases in denials and underpayments. However, few are tracking denials, appealing denials, or investigating—and correcting—their causes.

    Progressive health systems have begun to consolidate oversight and accountability for outpatient drugs, including revenue cycle operations, under a single service line, such as pharmacy or oncology. As a result, they are able to capture efficiencies, increase revenue capture, and gain insight into outpatient drug profitability.

    4. The U.S. health system routinely fails at medication management

    Even if patients are prescribed the optimal drug therapy, there are still myriad opportunities for complications and side effects. In fact, many experts believe that the U.S. spends as much money correcting the problems caused by medications as we do on medications themselves.

    Comprehensive medication management requires thinking more broadly about patients' needs and how best to support them during their course of therapy. Providers should consider questions including:

    • Access: Can patients afford their prescriptions? Do they have transportation to the pharmacy to pick up their medications?
    • Patient education: Do patients understand how and when to take their medications? Do they know what to do if they miss a dose?
    • Symptom management and ongoing monitoring: Do patients know what side effects to expect and which symptoms are cause for concern? If they do have problems, is there someone on the care team who is available to take address their concerns in a timely way?

    To address these challenges, progressive health systems are investing in medication therapy management services and bedside medication delivery programs.

    5. Although pharmacy has changed, pharmacy leadership structures remain stuck in the past

    Many health systems have neglected to invest in their pharmacy leadership and thus are missing opportunities to increase margins and improve patient outcomes. To achieve health system goals for cost and quality, progressive organizations are elevating their pharmacy leader to the C-suite and creating a corporate pharmacy leadership team to support them.

    Admittedly, not every health system needs a chief pharmacy executive. But health systems that are actively pursuing risk-based contacts, growing their retail or specialty pharmacy business, or seeking to standardize or centralize their pharmacy operations and services should strongly consider the investment.

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