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Opportunities in Wholesale Distributor Negotiations
June 2012 - Vol. 9 No. 6 - Page #8

In the past decade, the US pharmaceutical supply chain has undergone dramatic changes, moving from a competitive environment with dozens of distributors to the oligopoly it is today, dominated by three national, publicly held companies: Cardinal Health, AmerisourceBergen, and McKesson. These pharmaceutical distribution giants comprise 90-95% of the pharmaceutical supply chain revenue within the industry today, a market that has an estimated net worth over $250 billion.1-2 Clearly this represents an opportunity for pharmacy leaders to evaluate current wholesaler opportunities in the market with an eye toward expense reduction or service enhancement. 

Reasons to Consider Changing Distributors
As medication expenditures continue to rise each year at a rate generally higher than standard inflation, they consume a significant portion—approximately 10-20%—of any hospital’s overall operating budget.3 Furthermore, hospital pharmacies typically purchase more then 80% of their medications through wholesaler distributors. A hospital chief executive officer survey, conducted in 2000, reported that among a hospital’s largest financial challenges were drug costs.3-4 They also identified medications as offering the greatest opportunity for financial savings. With the expansion of drug inventory requirements in hospitals across the country, it is important for pharmacy leadership to utilize strategic planning and extensive collaboration with key leaders throughout the hospital to select a medication wholesale drug distributor offering the greatest opportunity for improved service and lower costs, while ensuring that patient care will not be negatively impacted.2

How To Proceed
A good way to begin this process is to develop a criteria-based request for information (RFI) document to learn as much as you can about potential vendors. The RFI is key as it will help in determining which vendors will be part of the final request for proposal (RFP) process. Once the vendor evaluation criteria and desirable characteristics are established, an RFI document must be crafted (see Figure 1). The RFI serves as the formal invitation for a vendor to be considered as the provider for the distribution and delivery of pharmaceutical products and services to your organization. The RFI should provide the vendor with a full profile of the hospital and the pharmacy department as well as detailed information about current medication and supply expenses. Request a detailed response to each service criteria, allowing the vendor to expand on their areas of strength. The contract terms and conditions should contain a long-term plan due to the complexity and time associated with switching wholesale drug distributors. Finally, the RFI must provide the potential vendors with a description of the decision process, an RFI review timeline, and a final decision date or deadline. 



It is not uncommon to feel overwhelmed by the RFI process, as it is an area where few pharmacists have any formal training or expertise. Likewise, the desire to create the perfect RFI request can become an obstacle. Although it is important to create a comprehensive RFI in order to fairly evaluate the vendors, pharmacy leaders should not be obsessed with perfection. Contacting colleagues at neighboring hospitals and asking them to share their RFI is a good first step to begin the process. If this is not an option, then obtaining assistance from pharmacy organizations (hospital associations, consortiums, and group purchasing organizations [GPOs]) for any tools they may be able to provide is a reasonable second step. Other common areas of concern typically include the potential time commitment, personnel’s resistance to change, implementation and training of new systems, and fear of the unknown.

Criteria For Consideration
Once you are ready to consider making the transition to a new wholesale distributor, you will need to review and weigh the criteria that are most important to you and your organization.5 In general, such criteria can be broken into three distinct areas: quality and service (see Table 1), operational processes and tasks (see Table 2), and financial considerations (see Table 3).


Click here to view a larger version of this Table

 


Click here to view a larger version of this Table

 


Click here to view a larger version of this Table

 

Quality and Service
Your vendor should have a long record of excellent performance. You can confirm vendor reputation by surveying their existing customers on performance or asking your GPO to provide you with any available data. Focus on reviewing order fill rates and obtaining past experiences from hospitals that have changed distributors. The idea is to obtain recommendations on areas of improvement and discover potential pitfalls so they can be avoided during the transition. Evaluating the vendor’s annual report provides information on financial stability and future sustainability.


Pharmacy leaders also should consider value-added services, especially those that are not available from your current distributor, or those that can be used to improve department operations, efficiency, or financial performance. Leveraging the vendor’s experience in areas such as budget forecasting, inventory management, medication safety enhancements, patient assistance programs, expense management, or revenue enhancement consulting may allow you to allocate pharmacy resources to other improvement needs. 

Operational Processes and Tasks
Core pharmacy activities that occur on a daily basis, such as medication ordering, delivery, receiving, and returning unwanted product, must be managed in a consistent and dependable fashion. Within each of these activities there are numerous logistical details that can either improve or disrupt pharmacy operations; frequently, many of these processes are computer-driven. Therefore, the ability of the wholesaler to interface with existing software and hardware systems within the pharmacy department and the hospital becomes an important evaluation step to ensure proper recording of drug inventory and received drugs, price updates, and payment of invoices, as well as potential improvements to pharmacy ordering and internal drug distribution processes.

Financial Considerations
In today’s economically restricted health care environment, developing financial criteria for evaluating wholesale distributors is critical. Consequently, hospital accountants or finance experts should establish optimal billing terms and pricing models. In addition, reporting functions that manage 340B drug discount programs, monitor price changes and ordering history, and identify and track hospital contract compliance are valuable surveillance tools for optimizing supply purchases.

The Decision-making Process
The RFI responses should be carefully reviewed, compared, and evaluated, to identify key differentiating factors. This information can then be used as leverage in the negotiation process. While the vendor responses may vary in their scope, depth, and complexity, it is also possible that they all will meet the criteria presented in the RFI. In that case, any selection would be suitable and the final deciding factor may ultimately be based on price. However, before making a final decision, it is prudent to verify the most important criteria (ie, billing options, return volumes, ensuring compatibility with all software, etc) and contact all reference sites provided for comment.

Implementation Challenges
Once the negotiation process is complete and a vendor has been selected, a significant amount of work will be required to ensure a successful transition. It is important to examine all the implications of changing distributors and the effects this will have on your workforce and on pharmacy operations during the transition. Internal assessment should include in-depth process flow analysis, personnel training, possible software systems updates, new interfaces, and an inventory review. 

During the implementation process, a vendor representative should be continuously available, ideally onsite, for support. There will be considerable ongoing work required of the pharmacy staff, so allocating additional dedicated staff during the implementation period will help to make the transition as seamless as possible. The cost of this additional staff expense frequently can be negotiated such that the vendor will cover it up to a certain level. Although this process will require upfront effort and expense, the result should benefit your organization both financially and with quality and service improvements over the long term.

Post-implementation, the vendor should maintain a high level of hands-on support and surveillance, including weekly onsite visits with key pharmacy leadership and purchasing staff. These meetings should address any issues that arise, which may be performance-, product-, or system-related in nature. 

Cast Change in a Positive Light
The prospect of a change of this magnitude may invoke some anxiety and it is common for individuals to be hesitant about, or even resistant to change, as staff is most likely comfortable with the current processes and vendor representatives. With any institutional change there will be a learning curve that will require additional time and effort from all affected parties; however, the employees who are most impacted also are those most likely to benefit from the switch, and this concept should be clearly conveyed. It is also important that they understand and are comfortable with the level of support that will be provided to them throughout the transition, both from pharmacy leadership and from the new vendor implementation team. 

An area of great concern for many frontline staff is potential software and hardware changes. Such implementations are almost always challenging given the time involved in learning new system requirements and software functionality. Therefore, it is important to work with your internal information system staff throughout the process to ensure the system requirements are feasible and deliverable within the desired timeframe. Setting up hands-on demonstrations and using Web-based and computer-based training are advantageous methods for quickly bringing staff up to speed with the new vendor ordering system.

Other factors that will impact your ability to enable a smooth transition include hospital administration and other key stakeholders’ willingness to support and collaborate on the project. Early involvement of these groups in the RFI decision process and frequent, ongoing communication will help remove obstacles and ensure buy-in with switching vendors. 

Conclusion 
The process of evaluating your existing wholesaler and the idea of switching wholesalers may seem daunting, but working through the RFI process can provide a formal structure to support the decision-making process and ensures all key stakeholders are on board. Once you receive responses to the RFI, it is important to evaluate each vendor and weigh the criteria most important to you, whether they are quality-related or financial. Vendor responses often can be leveraged for further negotiation to ensure optimal pricing and service. In any case, the implementation requires attention to detail, staff training, information system support, and vendor commitment to ensure all systems enhancements and requirements are completed as seamlessly as possible. 

There is a significant time commitment to changing wholesalers; however, the potential benefits should outweigh the time and costs associated with the transition. In the end, these benefits may include not only supply cost savings to your organization but also improved quality and service.

References

  1. Yost RD. New economics of the pharmaceutical supply chain. Am J Health-Syst Pharm. 2005;62:525-526.
  2. American Society of Health-System Pharmacists. ASHP Guidelines on medication cost management strategies for hospitals and health systems. Am J Health-Syst Pharm. 2008;65:1368-1384.
  3. Edwards R. In struggle to cut expenses, hospitals eye the Pharmacy. Hospitals and Health Networks. http://www.hhnmag.com/hhnmag_app/jsp/articledisplay.jsp?domain=HHNMAG&dcrpath=HHNMAG/Article/data/11NOV2011/1111HHN_FEA_pharmacy Accessed May 22, 2012.
  4. Hoffman JM, Li E, Doloresco F, et al. Projecting future drug expenditures—2012. Am J Health-Syst Pharm. 2012:69:405-412.
  5. May BE, Herrick JD. Evaluation of drug procurement alternatives. Am J Hosp Pharm. 1984;41:1373-1378.

Holly Libby, BS, worked as a corporate budget analyst at Brigham & Women’s Hospital (BWH) in Boston, for three years before transitioning to the department of pharmacy as the business & finance manager in 2011. Her primary areas of responsibility include budgeting, financial reporting, inventory management, and business operations. Holly received her BS in health care management and policy from the University of New Hampshire in 2005. 

Angela Triggs, RPh, has worked at BWH for 14 years as a perioperative staff pharmacist and supervisor. For the last eight years she has been the operations manager for central pharmacy distribution, including controlled substances and automated dispensing cabinets operations. Angela received her BS in pharmacy from Massachusetts College of Pharmacy in 1991.

Victoria Natcheva is a 2012 graduate of Northeastern University, Bouve College of Pharmacy. She has previously been employed at Dana Farber Cancer Institute and Spaulding Rehabilitation Hospital in the Boston area, and completed clinical rotations at Brigham and Women’s Hospital where she helped co-author this article.

John Fanikos, MBA, RPh, is director of pharmacy business and financial services at BWH. He also is assistant professor of clinical pharmacy practice at Northeastern University and at the Massachusetts College of Pharmacy (MCP). He earned his pharmacy degree at MCP and his MBA degree at Northeastern.

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