Pharmacy-directed Drug Cost Management

March 2013 - Vol. 10 No. 3 - Page #26

Given the degree of pending reimbursement cuts from Medicare, Medicaid, and private payers, paired with the uncertainty of coverage models under health care reform, health system administrators are aggressively pursuing cost control strategies within their organizations. Since drug expenditures are the largest component of every health-system pharmacy’s operating budget and often a meaningful portion of the entire hospital’s operating budget,  hospital pharmacy departments are facing close fiscal scrutiny. While the increase in medication costs in hospitals and clinics in 2013 is expected to be slightly less than in previous years, it is still projected to be as much as 4 percent.1

Riverside Health System (RHS) is an integrated health delivery network located in southeastern Virginia with pharmacy services managed by a third-party pharmacy management company. In addition to five acute care hospitals, the organization includes eight oncology infusion centers, a 500-member medical group, and a lifelong health division with 800 post-acute care beds, home-based services, and six Programs of all Inclusive Care for the Elderly (PACEs). Additionally, Riverside has nearly 9,000 employees, and is self-insured for health care coverage. With such a diverse organization, many opportunities exist for controlling drug costs, yet implementing such programs can be challenging given the differing needs of various patient populations. Thus, RHS has developed a systematized road map for continuous improvement in pharmaceutical cost containment. The road map focuses on utilizing data to understand drug expenditures and utilization patterns and then developing specific goals and outcome measures to monitor our progress.

Drug Cost Management Strategies
A range of drug cost management strategies exists within hospitals and health systems, including price, inventory, and utilization optimization (see Table 1). Some initiatives can be implemented within the pharmacy department and require little external collaboration, while other initiatives are more complex, requiring extensive collaboration and high-level strategic planning throughout the hospital or health system. In either case, a systematic approach is essential for all initiatives when identifying, prioritizing, and implementing drug cost management strategies. This method requires specific and detailed data on both drug purchases and utilization patterns. 

When selecting and implementing any drug cost management strategy, it is essential to first consider potential impacts to quality and safety. Our health system’s pharmacy-directed initiatives include purchasing and inventory management, while our interdisciplinary programs include formulary management, utilization management, and a focus on charging and reimbursements. Continuous improvement is achieved in each of these programs via ongoing data analysis and an organized, systematic approach.

Pharmacy-directed Cost Management Activities
When selecting drug cost management initiatives, purchasing and inventory management procedures are important areas to consider. In most organizations, GPOs play a major role in managing costs related to purchasing by leveraging aggregate purchasing power to negotiate more favorable pricing agreements with manufacturers. Pharmaceutical distributors often offer additional contract pricing that can be used to supplement best-price purchasing. Additionally, hospitals or health systems may negotiate contracts outside of the GPO, especially if volume from multiple facilities within the organization can be combined to drive additional discounts. Regardless of the method used to manage the cost of purchasing drug products, data review is essential to ensure discounts are maximized. 

Methods used by RHS to ensure purchasing practices are maximized include the measurement of both contract coverage and contract compliance percentages. Goals are established in each area and monitored for compliance on a monthly basis. Our GPO provides a monthly report of purchasing opportunities with the associated financial impact to the organization, which is reviewed by pharmacy leadership and the purchasing technician. It is also essential to validate that contract pricing is managed appropriately at the distributor level and that the distributor contract is being administered appropriately—taking into account cost minus discount based on dollar volume, prompt payment discounts, etc—to maximize benefits. Additionally, all purchasing agents and pharmacy operational leadership at RHS are required to complete basic purchaser training, which includes best practices for GPO purchasing.

Addressing Purchasing Challenges: Drug Shortages
Over the last several years, drug product shortages have posed a challenge to cost-effective purchasing due to contract vendor disruptions and global product unavailability. An effective, proactive shortage management program is key to minimizing both the patient care and financial impact of drug shortages. At RHS, we designated a system-wide lead for shortages management and have set up weekly conference calls with pharmacy leadership and purchaser representation to facilitate early identification of shortages and sharing of product between facilities within the organization. This strategy has proven effective at minimizing both the clinical and financial impact to the organization. 

Inventory Management 
Other drug cost management strategies include inventory management and waste reduction. RHS has focused in both of these areas as part of its overall drug cost management strategy. In the acute care facilities, RHS utilizes profile-driven ADCs to provide the majority of patient medications. When utilizing a decentralized dispensing model, the tendency to increase overall drug inventory and potentially increase waste is a concern. 

RHS carefully reviews data in an effort to ensure optimal inventory is on hand, both in the pharmacy and in ADCs. Data reviewed on a monthly basis includes inventory turns, ADC stock-outs, ADC vend-to-fill ratios, expired product loss, and purchases versus utilization. On a quarterly basis, an ADC inventory analytic tool provides recommendations for inventory adjustments within the cabinets. Additionally, we utilize inventory management tools provided by our drug distributor, such as minimum and maximum ordering.

Identifying Challenges in Inventory Management
Even with all of these measures in place, pharmacy leadership identified a need for improvement in inventory optimization. In early 2012, a five-day Kaizen event, run by trained Kaizen facilitators, was held to improve overall inventory management. Leadership and front-line staff from a large and small hospital within the health system were invited to attend, and representatives from our pharmaceutical vendor also participated. Goals were established for both inventory turns within the pharmacy and stock-outs in ADCs, and purchasing and utilization data was used to set minimum and maximum quantities for ADCs and department inventory. Evaluation of the data prompted an increase in some individual inventory levels, yet the organization realized an overall decrease in drug inventory, leading to increased inventory turns. Processes also were implemented to improve communication between front-line staff and the pharmacy purchasing agent to minimize product stock-outs related to the reduced inventory. Data is monitored monthly to track progress towards goals and to maintain the gains while ensuring that medications are readily available to care for our patients.

In 2013, Riverside Regional Medical Center, the largest facility within RHS, will implement a carousel system, allowing for automated management of inventory within the pharmacy. The processes implemented during the Kaizen event will be applied to this new technology, leveraging utilization data to set carousel par levels. The carousel implementation will close the loop connecting wholesaler ordering, receipt of product, and replenishment of ADCs. In the future, RHS plans to provide ADC replenishment across the health system through a centralized carousel model, further leveraging the new technology.

Waste Reduction 
Minimizing waste is another effective method to control overall drug costs. An opportunity identified within RHS is purchasing the most cost-effective size of a medication based on patient length of stay. Because we have a large post–acute care population, we recently began focusing on drug cost management strategies for those residents for whom we are financially responsible, while maintaining safe, effective care for all residents. For those patients in Medicare A skilled nursing facilities, insulin vial waste was identified as a target requiring remediation, due to resident length of stay combined with the 28-day beyond use date once the insulin vial is opened. We conducted an analysis of the average waste per vial and the cost per mL of moving from 10 mL to 3 mL vials where available. Similar analyses have been performed in the acute care area with inhalers and other patient-specific bulk packaging due to an average length of stay of just over four days. 

It is also prudent to evaluate opportunities to minimize or eliminate waste from products provided to patients that cannot be used. In the inpatient area, IV compounding waste is tracked monthly by the lead IV technician, and ongoing dialogue occurs between the lead IV technician and leadership to identify opportunities to minimize wasting high-cost IV products. For example, one opportunity identified was moving the compounding time for several medications to follow interdisciplinary rounds, minimizing the waste related to changed or discontinued orders. 

In the post-acute care area, the organization has partnered with a long-term care pharmacy provider that provides medications in daily convenience packaging so that no more than three days’ of medications are on-site at any time. Prior to the implementation of this process, and prior to the change to Medicare regulations regarding cycle filling in long-term care, up to 30 days’ worth of a medication may have been discarded for a resident. With the implementation of the daily convenience packaging over the last six months, an interdisciplinary team has started a monthly review of data to ensure that the goals established relative to minimizing waste and cost to the organization are being met.

Furthermore, an advantage of being part of a health system is the ability to share medications between facilities. During the weekly shortage management conference call, there is also discussion regarding any short dated, high-cost medications that may be used in another part of the organization, minimizing waste due to expiration dating. 

With an ongoing focus on effective cost management within health systems, the pharmacy department is facing close fiscal scrutiny. By implementing a systemized approach to identify, prioritize, and implement drug cost control strategies aimed at purchasing, inventory control, and utilization, pharmacy leadership is in a position to bring sustained drug cost savings to theorganization. 

Please see a coming issue of PP&P to read part 2 of this article, detailing the multidisciplinary drug cost management strategies implemented at RHS.


  1. Hoffman JM, Li E, Doloresco F, et al. Projecting future drug expenditures in U.S. nonfederal hospitals and clinics—2013 [published online ahead of print February 15, 2013]. Am J Health-Syst Pharm. 2013;70:e1-e15. 

Cindy Williams, RPh, received her BS in pharmacy from Virginia Commonwealth University and has completed the executive management program for pharmacy leaders at the Wharton School and The Pharmacy Leadership Institute at Boston University. Since 2001, Cindy has served as system director of pharmacy for Cardinal Health, supporting Riverside Health System in Newport News, Virginia. 


What does Kaizen mean?
Kaizen, Japanese for improvement, or change for the better, refers to a philosophy or practices that focus upon continuous improvement of processes in manufacturing, engineering, and business management. When used in the business sense and applied to the workplace, Kaizen refers to activities that continually improve all functions, and involves all employees from leadership to front line workers. It also applies to processes, such as purchasing and logistics that cross organizational boundaries into the supply chain. By improving standardized activities and processes, Kaizen aims to eliminate waste. In modern usage, when designed to address a particular issue over the course of a week, it is referred to as a Kaizen blitz or Kaizen event.


Like what you've read? Please log in or create a free account to enjoy more of what has to offer.

Current Issue

Enter our Sweepstakes now for your chance to win the following prizes:

Just answer the following quick question for your chance to win:

To continue, you must either login or register: