Health systems are continuously challenged with identifying new sources of revenue and controlling operating costs. And yet these undertakings must be balanced with initiatives that drive quality care and a positive patient experience. While many larger hospitals have established outpatient pharmacies to help strike this balance, smaller hospitals may not have considered the implementation of an outpatient pharmacy as a viable option. However, by developing a clear business plan that includes a financial return on investment (ROI) analysis, hospitals of all sizes may find outpatient pharmacy a successful revenue stream, business opportunity, and new quality care service.
Kettering Health Network (KHN) is a seven-hospital, Adventist-affiliated, nonprofit health system located in the Dayton, Ohio region. In 1999, the health system was considering selling or clossing its existing outpatient pharmacy due to underperformance. However, following the addition of a dedicated network director of outpatient pharmacy services and pharmacy benefits, a subsequent analysis of resources demonstrated that given proper management and a robust business plan, the outpatient pharmacy could become an asset. One year after the analysis, a decision was made to keep the outpatient pharmacy open. Thirteen years later, KHN has a successful network of 10 outpatient pharmacies along with a long-term care, closed-door pharmacy, all of which are a vital part of discharge services, employee benefits, and partnerships with outside entities.
Benefits of Opening an Outpatient Pharmacy
The most obvious benefit of a successful outpatient pharmacy is the impact on revenue and profit margin. Internalizing pharmacy revenues that are currently being sent to retail pharmacies is integral to success. In addition, the outpatient pharmacy can be a tremendous convenience to discharge patients and discharge planning, allowing patients to pick up their prescriptions before leaving the hospital. A well-designed outpatient pharmacy also can improve patient medication compliance by ensuring patients understand and can afford their medications. Moreover, improved medication compliance may help positively impact hospital readmission rates.
At KHN we operate under the theory that a patient’s first stop after leaving the hospital should be home. To achieve this, the outpatient pharmacy staff is responsible for making sure patients receive their medications prior to leaving the facility. Should there be an issue with a prescription, it is easier to address the concern immediately rather than after the patient has left the facility. Further to improved patient satisfaction and convenience, having outpatient pharmacy services available onsite also can improve employee satisfaction.
Identifying a Project Champion
Identifying the appropriate staff member to lead an outpatient pharmacy implementation project can be a complex decision. Inpatient pharmacy directors and managers may not have the time, knowledge, or desire to transition into an outpatient role, while supply chain and finance staff often do not have the pharmacy operational experience required to champion such a project. The human resources department will have expertise in managing the employee pharmacy benefit plan, but they may not have the necessary experience to manage a program from the retail perspective. Often, the project champion ends up being an inpatient pharmacist; alternatively, the finance team can contract with a consultant to manage the project.
Determining Your Customer Base
When considering the implementation of an outpatient pharmacy, begin by defining your projected customer base. Initially, the largest source of revenue may be driven by the employee benefits plan or by targeting discharge patients, if your hospital is eligible for 340B drug access. A self-insured hospital is optimally positioned to control employee prescription plan costs by designing a plan that will capture a high volume of employee prescriptions. Plan design changes that incentivize use can allow the outpatient pharmacy to capture approximately 75% of the employee benefit revenue that is currently directed to retail pharmacies, mail order, and specialty pharmacies. Although it is common for employers to focus on identifying discounts through pharmacy benefits manager (PBM) plans, a more effective strategy is to focus on appropriate drug utilization and generic substitution. A 1% increase in generic utilization will normally result in a 1% to 2% decrease in overall pharmacy plan costs.
Experience has shown that face-to-face interaction with a pharmacist is the most powerful tool in convincing patients to change behavior and become accepting of preferred brand or generic medications. Counseling employees may lead to the best control of pharmacy benefit costs, and is more effective than increasing copays on non-preferred medications or mailing letters asking employees to change medications. Because retail pharmacies can offer amenities like drive-through service and extended hours, outpatient pharmacies must devise creative ways to capture business. Aggressively marketing to your facility discharges is one way to boost outpatient pharmacy revenue, but it is important to utilize multiple strategies to drive business to the outpatient pharmacy. Consider how to attract patients during the initial admission process and when they are in the recovery area. Delivering medication directly to the patient’s bedside is another useful option. Finally, be sure the pharmacy is located in a discharge-friendly area.
An initial focus on outpatients may be wise as they are more numerous, given same-day surgery patients and their schedules tend to be aligned perfectly with pharmacy hours. Emergency room patients arriving outside of outpatient pharmacy work hours are more challenging to capture. Physician office buildings on the campus also are a potential source of referrals, provided they are in a convenient location.
Alternative Sources of Revenue
Outpatient pharmacy is typically focused solely on securing revenue within the perimeter of the hospital campus. However, you also may reap significant benefits from partnering with other non-profits in the community. County employees, school employees, and other large non-profit groups can potentially partner with the hospital outpatient pharmacy to serve as the preferred pharmacy providing access to acute contracted drugs. Be sure to review your ability to provide Robinson-Patman Act–protected hospital discounted drugs to the appropriate partners.
Building an ROI Plan
A common belief is that only large hospitals can successfully implement an outpatient pharmacy, but experience has demonstrated that a positive ROI can be achieved in smaller facilities as well. To create an ROI plan, begin by identifying and stating all program assumptions. Assumptions may include the basis or rationale for implementing the outpatient pharmacy, the anticipated benefits to the hospital, a plan identifying methods for aligning the outpatient pharmacy with employee benefits and hospital discharges to best capture revenue, information describing the hospital’s GPO contract eligibility, 340B access data (in 340B-qualified sites the pharmacy is more focused on the qualified patients as the best sources of potential margin), and prescription volume assumptions.
When developing a business plan for the outpatient pharmacy, ensure the relevant information is stated directly and succinctly. The style that is usually most welcomed by the chief financial officer (CFO) is one that includes a brief summary, followed by numbers (see SIDEBAR on page 30 for a sample ROI evaluation). A standard four-page executive summary should suffice. Page one should include the assumptions in the ROI, followed by capital details on page two. Capital costs normally include construction, pharmacy casework, pharmacy hardware and software, printers, additional workstations, fax, phones, and training. Inventory is often carried in a disposable inventory account and is not considered capital, but must still be considered. On page three, include a list of ongoing expenses, such as labor, hardware and software support, prescription packaging, general supplies, office expenses, etc. ROI financials should be included on page four. Start with the volume and revenue, flow through the expenses, demonstrate the margin, and finally calculate the five-year trend. Most CFOs will be particularly interested in how quickly the pharmacy will repay capital and in determining the five-year ROI projection.
In addition to the four-page summary, you may wish to develop a complete ROI presentation or PowerPoint slides that include full details. Build the case by reviewing the key statistics, assumptions, and rationale prior to presenting numbers. Be sure to address any identified barriers or challenges up front. The final outpatient pharmacy ROI presentation to the executive team will be the determining factor in whether the plan is implemented, delayed, or shelved, so be prepared for a thorough discussion on financial returns.
Resources are available to assist with many parts of this process. Major wholesalers, GPOs, and independent consultants with outpatient-specific experience can provide the necessary expertise to help build the ROI proposal for your hospital, as well as offer implementation services or even ongoing management with a turnkey solution.
The first step toward success for any pharmacy initiative is a clear business plan with a demonstrated ROI. An outpatient pharmacy can provide many benefits to patients and employees alike, but implementing one requires a thorough financial analysis to gain buy-in from administration. Careful planning and a robust presentation of the facts will best ensure project approval.
Jeffrey A. Post, RPh, has been the network director of outpatient pharmacy services and pharmacy benefits at Kettering Health Network (KHN) for the past 14 years. He received his BS in pharmacy from Ohio Northern University. Jeff has designed and opened 10 outpatient pharmacies, along with one long-term care, closed-door pharmacy for KHN. He also is president of Post PharmBen, LLC consulting services, which has assisted several health systems in opening new outpatient pharmacies and redesigning employee pharmacy benefits to improve transparency and provide cost savings with a custom plan design and formulary.
Sample Five-Year Pharmacy ROI Financial Review—Freestanding Outpatient Pharmacy
Sample Health System is self-insured and evaluating ways to control pharmacy costs and expand outpatient pharmacy services
Sample Health System associates generate x$ in total Rx revenues, plan costs x$
ROI on PBM plan costs at hospital-owned pharmacy (redirect retail and PBM profits)
Source for expanding revenue and improving margins within the hospitalOutpatient pharmacy staff influences pharmacy formulary, cost-effective prescriptions
Employee service and satisfaction
Patient customer service and satisfaction Assist discharge planners and homecare with patient medication compliance (Medicare No Pay on Readmissions 2012)
Outpatient Pharmacy Alignment:
Outpatient pharmacy qualifies for acute-cost medications under Robinson-Patman Act
Pharmacy will register with group purchasing organization (GPO) as an Institutional Outpatient
Outpatient pharmacy opens an account with inpatient pharmacy wholesaler using inpatient DEA (manufacturer contracts)
Own Use drug pricing for discharges, employees, students, and medical staff, plus all family members
Outpatient pharmacy manager reports to inpatient (with mentoring available from consultant as needed)
340B pricing is not included in this analysis (potential of 15% to 50% average cost of goods [COG] reduction for qualified patients)
ROI based on actual operations and margin compared to similar outpatient operations
PBM contract must move to Pass Through Pricing Model with administration fee (pharmacy claims and insurance payments match)
Pharmacy copay discounts at owned pharmacy (prefer $10 gap)
Mail and specialty pharmacy is directed to the outpatient pharmacy only when available
Employees still have 60,000 retail locations to choose from after hours and on weekends
Continue to use PBM for utilization, reporting, authorizations, etc
Allow hospital and outpatient pharmacy control of formulary in contract (custom formulary)
Outpatient paid by PBM—current retail/mail rates (understand the Rx plan costs, ROI at pharmacy)
All volumes based on actual utilization PBM results, with above PBM plan assumptions
Pharmacy is 1,200 to 1,500 sq ft with OTC section, located in retail location; or 600-900 sq ft dedicated to pharmacy if in the gift area
Employee retail Rx: 2013 $xx/Rx, 100,000 Rx, x% capture rate, x% inflation in Rx costs (generics/formulary)
Employee mail Rx: 2013 $xx/Rx, 10,000 Rx, 95% capture rate, x% inflation in Rx costs
Discharge retail Rx: $35-$40/Rx, minimal capture of xx per day (<15%)Capital Details
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