Reducing Hospital Pharmacy Costs by Controlling Drug Spend

Drug spend is a significant cost driver for hospitals, making it a prime target for cost-cutting measures. Pharmacy is often a hospital’s second-largest cost center, and while labor can be expensive, more than 80% of an inpatient pharmacy’s spend goes to drugs. 

Yet it isn’t just the proportion of budget drawing hospital leaders’ attention to drug spend. Shifting market dynamics are challenging health system’s capabilities and their ability to manage this spend efficiently.  

Growing Need for Better Insights into Purchasing 

It’s old news that drug prices have been rising significantly for years, and a review from HHS shows the number of price increases in 2022 was higher than it’s been in seven years. More than 1,200 products exceeded the already outsized inflation rate of 8.5 percent –– with an average price increase of 31.6 percent in this category. 

At the same time, hospitals are under intense pressure to control expenses. Labor shortages, inflation, payment change, and shifts in service line profitability are tightening operating margins that were already razor thin. And while there has been some improvement following the start of the pandemic, many of these forces are ongoing.  

With these pressures on reducing healthcare expenses, hospital pharmacy management’s timely action on drug spend is imperative to the health of hospital finances. While clinical initiatives and formulary can help ensure the right medication choices are made at the patient level, most hospitals are falling behind in optimizing how that medication gets purchased as market volatility and complexity increase.  

Key Areas of Opportunity for Reducing Pharmacy Costs  

Hospital pharmacy management cost reduction efforts at DSH 340b hospitals typically focus on three key areas:  

Price and Contract Volatility  

While we typically see published “list price” increases each year in January and July, most hospitals will see 300+ price and contract changes every month –– just on items they already purchase. These updates can be due to contract changes, 340b ceiling price recalculations, or routine adjustments to costs from the manufacturer side. 

To be efficient, pharmacy teams need to monitor these price changes, identify new medications coming to market, and regularly review the competitive pricing on alternatives in the same operational class.  

Purchase Compliance and Reconciliation 

After an organization identifies a preferred product, the next challenge is to ensure appropriate purchasing. Product preference is often based on ideal assumptions, and it is easy to overspend if your hospital pharmacy management team is not watching accumulation rates for GPO and 340b purchases, ensuring your buyers are bringing in the right NDCs, and managing shortages effectively––especially when managing across multiple facilities. 

WAC Premium Exposure 

To stay competitive, hospitals will also need to examine wholesale acquisition cost (WAC) premium exposure. As WAC continues to develop as a space for generic competition and local contracting, focus on “Total WAC” spend is becoming less effective for measuring purchase efficiency. 

By focusing on medications where WAC prices significantly exceed GPO discounts (creating WAC premium), teams can isolate the products that are making the biggest impacts to costs.  

Data Points for Drug Spend Analysis  

Within these three key areas, identifying opportunities for drug spend savings can be a complex process. To drive the best outcomes for pharmacy business management, pharmacy teams will need to examine a variety of data points and their relation to each other, including:  

Classification of spend: How a drug is being purchased across WAC, GPO, and 340b, and where pharmacy departments are open to overspending in one of these classes. 

Distribution: How spend in a class or on a product is divided between sites and central distribution facilities. By aggregating purchasing, organizations can have greater leverage with their buying power – but it takes visibility into the facility level to make it stick. 

Contract details: Health systems are subject to layers upon layers of contracts, with each agreement competing for a rostering spot at their wholesaler. Keeping contracts organized and optimized, understanding when and why they change, and making sure each account is paying the same price is important. Pharmacy teams must manage a constant stream of changes from wholesalers for pricing, presentation options, and product alternatives in addition to monitoring contract adherence. 

Characterization of spend: Understanding shifts in purchase price, availability, accumulations, and utilization can make all the difference in how a pharmacy delivers a variance report.   

Value: Procurement teams are familiar with replacing products due to shortages when they must, but their time is limited for optimization. Prioritizing which opportunities to pursue depends a lot on the value to the institution, or the return on their valuable time. 

Analytics Capabilities Needed to Improve Pharmacy Business Management 

With so much data and so few resources, pharmacy teams have taken the brunt of this work on manually, depending heavily on custom spreadsheets or home-grown database tools.  

Because these tools can be labor intensive and time is of the essence, it’s not uncommon for health systems o take on several prioritization strategies and limit their evaluations to either frequent reviews of high-price drugs or full-scope analyses on a quarterly or annual basis, bolstered by a few ad-hoc reviews. 

As a result, pharmacy drug purchase decisions often get made using outdated or incomplete information. By the time pharmacy leaders determine the opportunity of a change in purchasing, there often has been a lag during which the organization remains paying more than it should. 

New Opportunities for Reducing Hospital Drug Costs 

Advances in drug purchasing analytics are creating new opportunities for hospitals to better manage spend. With the aid of the right analytics, hospitals gain the ability to quickly identify and prioritize complex purchasing opportunities across the spectrum.  

The right technology can help the pharmacy teams manage the breadth of data and layers of analysis to make faster and better-informed decisions to reduce costs.  

With improved analytics, the pharmacy team can look across total accounts and quickly identify: 

• Where the organization can purchase operationally equivalent medications at a lower cost, and where it makes the most financial sense to do so.

• Which areas are struggling with purchase compliance, and how best to intervene (for example, when buyer non-compliance is due to error, shortage, or distribution center issues, so the team can figure out the best intervention.) 

• Where utilization or accumulation trends are impacting costs––BEFORE they become bigger issues.

• What peer health systems are doing to improve efficiency, and how your health system can beat the curve. 

With the right perspective and support, pharmacy leaders can obtain real-time visibility and execute quickly to establish purchase oversight, meaningful price change discovery, and prioritization of opportunities to scale their efforts to make more impact than ever before.  

Looking to Improve Hospital Pharmacy Management at Your Organization? 

Let QuicksortRx show you how contract management and drug spend analysis can become faster and easier at your organization. Learn more about how QuicksortRx works, and sign up for a savings analysis demo today.