From overall trends in U.S. prescription drug spending it is clear that drugs are the fastest growing element of U.S. healthcare costs. Spending for prescription drugs is projected to hit half a trillion dollars by year end.1 While this is challenging information on its own, the impact on hospitals and health systems appears to be disproportionate and presents an even greater challenge.
The American Hospital Association, the Federation of American Hospitals, and the American Society of Health-System Pharmacy commissioned a study, conducted by the research group NORC at the University of Chicago, to quantify the impact of rising drug costs in hospitals and health systems.2 The study included more than 4,200 U.S. hospitals and results were published January 15th.
Hospital drug spending increased by 18.5 percent between 2015 and 2017, far outpacing the overall rate of drug spending increase and confirming the disproportionate impact of drug costs on hospitals. Some key findings from the report included:
- The 18.5 percent increase significantly outpaced the rate of inflation, which was 6.4 percent during the same time period.
- Outpatient drug spending per admission grew 28.7 percent, and inpatient spending increased 9.6 percent between 2015 and 2017.
- Drug shortages and manufacturer price increases were key contributors to the cost increases.
- To address budget pressures caused by the rapid rise in prescription drug costs, 90.3 percent of hospitals found alternative therapies, while 25 percent cut staff and 17 percent reduced services.
In our consulting work across the country, we have the opportunity to work with hundreds of hospitals each year, and an unvarying focus for our clients is a defined strategy to address drug costs. Given the results of the NORC study, it would seem obvious that this should be front and center in strategy plans for all US hospitals.
From our work we offer several observations on the issue of drug costs as follows:
- Many organizations unwisely do not separate inpatient (IP) drug costs from outpatient (OP) drug costs.They look at total drug spending against some defined benchmark, which does not help with crafting an optimal strategy around drug cost management. We find that for virtually all of our larger clients, OP drug spending has now exceeded IP spending. It is important to consider IP and OP drug spending separately since the majority of IP reimbursement is capitated, which makes the focus for IP expense management. For OP however, since reimbursement differs, the focus should be on margin management.
- While the rising cost of drugs is a huge challenge it also presents a similar sized opportunity. As noted, OP programs are a margin business and revenue from retail, specialty and infusion services represents a significant opportunity to offset the cost impact of drugs. For many organizations, reimbursement of OP drugs is the only place that “dollar for dollar” reimbursement happens. Many of our clients are generating over $100M in annual revenue from their retail, specialty and infusion programs and are contributing a significant portion of the overall hospital bottom line. However, we regularly find additional opportunities for expanded services and margin around OP pharmacy programs. Many hospitals have not conducted a detailed business/market assessment to fully understand the opportunities and ROI resident in their OP pharmacy.
- Many organizations do not understand their own business when making formulary drug choices. The use of a biosimilar vs. innovator product is a good example. The biosimilar often represents a lower acquisition cost but, given payer mix, 340B status and utilization factors may not always represent the best margin. Hospitals need to function more like a business when making these decisions to optimize margin.
- Analytics addressing drug spending are not adequate for far too many hospitals. With the impact of rising drug costs, the majority of hospitals are attempting to manage this with limited analytics resources and capabilities. For IP drug spending, too many hospitals cannot tell whether increases are being driven by price, volume or utilization trends without significant manual intervention and time. This data should be at the hospital’s fingertips at all times. Strategies to address price, volume or utilization will differ, and hospitals should be managing these opportunities proactively –but that requires data analytics infrastructure and analyst resources.
- As noted in the NORC report we see drug shortages as a significant contributor to added expense. Currently, there are approximately 200 drugs in a shortage situation. This regularly forces hospitals to purchase alternative products that may be “off contract” and represent higher costs. However, there are also hidden costs associated with shortages. Back orders must be managed, computer systems changed to accommodate new drugs, labels and packaging changed, and automated dispensing system configurations changed which all take time and resources. Far too many organizations have not quantified the impact of drug shortages and defined a specific strategy and resources to address and manage this. Drug shortages are not going away anytime soon.
- Inventory management in pharmacy is often a source of opportunity. Traditional Materials Management Information Systems rarely work effectively in pharmacy due to the complexity of the pharmacy supply chain process. As a result, the majority of hospitals are running manual systems, which are producing less than 10 turns. Additionally, outdates, returns and waste are not routinely quantified and managed aggressively which when optimized can contribute significantly to expense reduction.
- Far too often there is no formal link or business relationship between the hospital pharmacy operations and the finance revenue cycle operations. We routinely see pharmacy operations that do a tremendous job of ensuring the right drugs/doses are prescribed and preparation/administration/monitoring performed correctly. However, their work is done once the charge is dropped from the pharmacy system. That should not be the case. There should be a close working relationship between pharmacy and rev cycle to ensure that all charges dropped are received, QBC calculations are correct, codes are correct, CDM links are correct and any denials supported to ensure that all revenue opportunities around drugs are optimized.
No doubt that rising drug costs at 18.5 percent represent a big challenge for hospitals and health systems but with all big challenges come big opportunities. Drugs are not only a major expense, they also represent a significant revenue opportunity. As the primary treatment modality for the majority of patients, they also present a significant quality/safety opportunity. Medication management and pharmacy services should be a key element of every hospital and health systems short- and long-term strategy.
- A Look at Drug Spending in the US. Pew Charitable Trust, Feb. 27, 2018, https://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2018/02/a-look-at-drug-spending-in-the-us, Accessed 01/17/2019
- Recent Trends in Hospital Drug Spending and Manufacturer Shortages. Final Report NORC at the University of Chicago. January 15, 2019.