Have you ever thought the pharmacy charge structure could have been an intro to the Drew Carey Whose Line Is It Anyway? Well, that may be what most people think, but with the new price transparency regulations that are being pushed forward, understanding how the drug charges are set and optimizing the charge structure is more important now than ever. CMS cannot dictate how much a provider charges, which leaves little guidance for hospitals. This edition will walk through at high level some strategies to consider when establishing the pharmacy markup structures.
First and foremost! Charge enough so that the payer negotiated rate covers your actual acquisition cost. This may be a no-brainer, but is a common pitfall. Payer negotiated contracts should be taken into consideration when evaluating if the charge will recoup the cost. Take a deeper look at this simple example:
Payer negotiated rate: 20% of charge
Drug Cost: $1,000
Drug Markup: 1.5 x cost
Gross Charge: $1,500
This is also true when charged at a flat fee schedule rate to ensure the charge is greater than the fee schedule. If charge is submitted less then the fee schedule, likely you will receive the lesser of the charge or fee schedule rate. This would be dependent on contract language, but emphasizes the importance of understanding payer contracts when evaluating pharmacy charge structure.
Second, keep your strategy simple and justifiable. Markup structures range in complexity from very simple flat markups on cost to multi-cost tiers based on selected drug categories or methods. There are typically some basic elements to most charge structures. If not a straight markup, generally there are some form of categories or methods that drive drugs to selected markup formulas. Then, a base cost is selected (e.g. actual cost, WAC, AWP) and applied markup +/- additional fee.
The multiple NDC, prices and dosages can all impact the charge for a similar drug.
Drug categories or methods should be defined in a manner that can be consistently applied by all pharmacists, technicians or analysts who may build and maintain pharmacy charge records.
Utilize a cost basis that is easily updated and preferably can be an automated process. Various wholesalers and EHR define units of measures differently and can lead to an over or underinflated charge. For example, you may purchase a bottle of 100 tablets as 1 each and dispense each tablet. Ensure you validate the “each” price in the EHR calculates that correct charge based on what is dispensed.
Third, implement a routine maintenance process to ensure base cost is current. Updates or changes to the pharmacy markup structure should be a coordinated effort with the entities chargemaster and finance team. Small changes in drug markups may have large impacts on the hospital’s overall gross charge increase.
Review and understand drug markup structure and processes to ensure it is contemporary and definsable.
Keep methodology and markup formulas simple.
Updating pharmacy markup structures is a large undertaking and should be coordinated with the entity’s entire chargemaster charge updates.
Our goal is simple; we’re taking complex information and making it practical.
Until our next edition, this is Maxie Friemel and Agatha Nolen providing you with tips for increasing your Pharmacy Revenue.