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Analytical Tools for Drug Cost Management
November 2010 - Vol. 7 No. 11 - Page #10

The drug budgeting process generally begins with an examination of the previous year’s budget data coupled with estimates of increases and decreases in inflation and utilization. However, a more ideal approach includes measuring actual drug costs against drug class and DRG benchmarks. Analytical tools can reveal cost containment opportunities, as well as help streamline the budgeting process. Keep in mind that prior to investing time and effort in these tools, make sure that your normal operating procedures include fiscal optimization programs such as auto-substitution programs, GPO price verification, and monthly rebate reconciliation.

Benchmarking Drug Costs
The first step in the process of examining overall drug spend is to review your drug costs by therapeutic group compared to a baseline figure. In the following example, the baseline is defined as drug cost values, based on cost per patient day, from the prior calendar year (see Figure 1). Using a simple color-coding system visually assists in identifying drug utilization trend changes. In Figure 1, green numbers indicate that drug costs are below historical values, yellow represents an increase of up to 10% over baseline, and red indicates an increase greater than 10% above the baseline.

Click here to view a larger version of this Figure

By starting at the therapeutic group level, pharmacy administrators get a high-level overview of what product classes make up the bulk of their pharmacy drug spend. This also allows for the identification of high-impact opportunities or drug groups that warrant deeper examination.

The next step is to delve into the therapeutic class to identify the drug products that are driving the costs in that group (see Figures 2 and 3). Having a program that provides the opportunity to drill down from therapeutic group to class to drug helps the user determine which drugs are actually driving the costs within that therapeutic class.

Click here to view a larger version of this Figure

By identifying the cost drivers, you can now target cost control and optimization opportunities. For the quinolone class of products, for example, I would recommend adopting market share agreements, which are generally provided by the pharmaceutical companies but are administered by group purchasing organizations (GPOs). With these agreements, product selection becomes an important component of reducing overall drug cost for this class. Signing a market share agreement for levofloxacin or ciprofloxacin/moxifloxacin (depending on your own GPO terms and antibiogram results) and reviewing this data quarterly to ensure you are meeting the terms required will ensure you obtain the maximum cost discounts possible. There also are opportunities for implementing an IV-to-PO switch program as a cost reduction strategy. Drilling down to the NDCs that are driving quinolone use can provide you with an estimate of your own hospital’s IV-to-PO ratio for these products. 

Reviewing drug costs by Diagnosis Related Groups (DRGs) provides additional opportunities to identify cost-saving opportunities. DRG codes are used by CMS and other payors to determine reimbursement for inpatient hospital services based on the diagnosed condition. Because payments based on DRGs are a flat fee, the overutilization (or inappropriate utilization) of drugs for the diagnosis can have a significant impact on the hospital’s bottom line.

Pharmacy administrators can determine their drug costs by DRG by combining pharmacy information system data, financial system data, and ADT patient data to create a complete record of the drug use in the hospital. With hospital-specific drug costs by DRG, pharmacy can conduct a thorough analysis of drug use and identify areas with high costs that warrant further investigation. Facilities that are part of a larger system can benchmark their costs against their member hospitals. In addition, proprietary software is available that allows you to benchmark your drug costs against other hospitals with similar acuity, census, and teaching affiliation (see Online Figure 1, and all other online figures referenced in this article, at ). In my experience, comparing costs against a benchmark of similar facilities crystallizes where the opportunities exist for greatest drug cost optimization. It also is a great motivator for medical staff and the P&T committee to act on utilization change when you can demonstrate that your facility’s costs are well above those for similar institutions for the same DRG. Peer pressure should not be underestimated as a tool for inspiring action; no facility wants to be on the far end of the drug cost bell curve for any DRG.

Once DRGs are identified for further investigation, the first step is to analyze the therapeutic groups to identify the drivers of the drug cost and then look deeper to identify the class(es) of drug driving the cost (see Online Figures 2 and 3). Drug use within that class can then be examined for cost-reduction opportunities (see Online Figures 4, 5, and 6).

It is important to note that drug cost is not the only factor that determines total pharmacy cost. Patient length of stay (LOS) should be reviewed when pharmacy costs seem high (see Online Figure 7). Because the drug costs for an acutely ill patient are highest during the initial days of hospitalization, it is possible to have a high drug cost, but if that is coupled with a shorter LOS, the hospital may still profit, since DRG payments are set no matter how long the patient is in the hospital. LOS data often can be used to demonstrate a cost-effective stay although the overall drug cost was higher than benchmark averages.

Physician-level Data Analysis
The most powerful way to impact prescribing change at a hospital is to review the physician-level prescribing data by DRG to determine which physicians are contributing to the expense included in your cost per discharge. This data can be useful to identify any physicians using the prescribed drugs inappropriately, and provide an opportunity to educate the physician on how to better use the valuable resources in the hospital more efficaciously. Physician-level data allows the pharmacy director to use a targeted approach to effect change. Rather than targeting all of the medical staff for an intervention related to a particular DRG code, pharmacy’s efforts become much more strategic and effective.

As an example, when reviewing DRG data, we found a cardiologist who was prescribing 60,000 units of erythropoietin at discharge. Upon further investigation, we discovered he came to this approach after reading an article about a group of patients doing better after discharge as a result of that medication therapy. However, the study was done with only 15 patients. After explaining the mechanism action of the drug, and the fact that the study did not have enough patients to be valid, the physician adjusted his practice and the cost per discharge for that DRG improved.

A clinical analytical program based on actual drug costs measured against drug class and DRG benchmarks can be extremely useful in providing data for the budgeting process. This process also can improve drug utilization within your facility. Hospital pharmacy administrators are tasked with analyzing data to drive drug cost opportunities. Planning for this analysis and using reliable benchmarks decreases the upfront work on pharmacy, and allows for a more strategic work effort that will produce faster, quantifiable results.


Getting Started

Prior to implementing analytical tools to manage your pharmacy drug costs, ensure that the following basic programs are incorporated into your normal operating procedures:

  • Inventory turns optimized
  • Tier market share agreements being met
  • Indigent care drug replacement program
  • 340B pricing program for eligible facilities
  • Auto-substitution programs
  • GPO price verification
  • Lowest cost alternative available products being purchased
  • Monthly review of general ledger
  • Clinical programs implemented, supported, and quantified
  • Rebate checks and credits, outdated return checks and credits, and borrow/loans reconciled monthly


Richard Rosenfeld, RPh, MBA, is the East Coast Solution Lead for the pharmacy solutions division of Cardinal Health. His responsibilities include oversight of consulting services for several major medical facilities. The pharmacy solutions group helps hospitals improve logistics and procurement of pharmaceuticals, identify clinical and GPO opportunities, optimize ADC use, prepare for Joint Commission regulations, among other services. Prior to his current position within Cardinal Health, Rick was the executive director of pharmacy for the ScrippsHealth Hospital System in San Diego, California for ten years. Rick earned a BS in Pharmacy from Ferris State University and a BA in Chemistry from San Diego State University. He holds an MBA from California State University, San Marcos. Rick is a member of the ASHP, CSHP, NCAP and SNPHA.

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