Medication Cost Management Strategies for Hospitals and Health Systems

526 Pharmacy Management–Guidelines

ASHP Guidelines on Medication Cost Management

Strategies for Hospitals and Health Systems

Because medication costs comprise the majority of health-

system pharmacy budgets and continue to increase faster

than other health care expenditures,

drug costs are a con-

stant target for cost containment initiatives. The purpose of

these guidelines is to provide guidance on medication-cost-

management strategies.

These guidelines recommend techniques to manage

drug costs in hospitals and health systems. The guidelines

focus on drug use in inpatient settings and hospital clinics,

where health-system pharmacies typically have responsibil-

ity for purchasing and distributing drugs. Strategies for other

settings, such as managed care and ambulatory care settings,

and strategies for revenue optimization are beyond the scope

of this document. Although revenue optimization and medi-

cation cost management are complementary approaches to

improving the financial performance of pharmacy depart-

ments, revenue optimization is best addressed through litera-

ture specific to that topic

2,3

and is not extensively reviewed

in this document.

These guidelines examine methods for nonlabor phar-

maceutical cost containment, focusing primarily on vari-

able costs (costs dependent on patient volume) and direct

drug costs. Fixed and indirect costs, such as labor to pre-

pare or administer medication, nonpharmaceutical materi-

als, and overhead, are also beyond the scope of these guide-

lines. There is also not an attempt to consider the impact of

drug costs and drug-cost-management strategies on other

hospital departments (e.g., laboratory, respiratory care) or

on the total health care costs once the patient leaves the

acute care setting. Although not discussed here, these shifts

in drug costs are important to consider as drug therapies

influence other health care costs, and pharmacists should

lead efforts to promote the value medications provide

across the hospital and health care system.

A broad range of drug-cost-management strate-

gies exist throughout hospitals and health systems. Some

approaches are relatively straightforward and can be

implemented within the pharmacy. Other approaches

are more complex and require high-level strategic plan-

ning and extensive collaboration throughout the hos-

pital. Successful drug cost management requires sys-

tematic attention to and integration of both approaches.

Because of the different nature of various drug-cost-

management activities, these guidelines present information

at different levels of complexity appropriate to the approach

being described.

When selecting and implementing drug-cost-manage-

ment strategies, it is essential that pharmacists remain mind-

ful of patient safety and the quality of patient care.

Drug-cost-containment initiatives must never compro-

mise the department’s ability to provide the best possible

care to patients. In many cases, it is prudent and necessary to

monitor and evaluate the safety and outcomes of drug-cost-

management projects. Fortunately, many drug-cost-contain-

ment strategies have little or no potential for detrimental

effects on patient care, and efforts to improve the quality

of drug use often coincide with cost-containment initiatives.

Trends in Medication Expenditures

Senior hospital administrators have recognized the impor-

tance of drug costs to the fiscal status of health systems. For

example, a health care consultancy reported that in 1996,

“managing hospital drug utilization and expenditures” was

not ranked in the top 20 concerns for hospital CEOs.

When

the survey was repeated in 2000; however, hospital CEOs

ranked drug costs as their seventh most important concern.

The 2000 survey also reported that among hospitals’ greatest

financial challenges, drug and technology costs were second

only to decreased reimbursement, and hospital CEOs said

that drugs offered the single greatest opportunity for cost

savings.

Although somewhat dated, these data illustrate that

drug-expenditure management presents health systems with

an important challenge that is recognized by senior hospital

administration.

Four primary factors drive growth in overall drug ex-

penditures: price, utilization, mix, and innovation.

Price inflation is an increase in the unit price of exist-

ing medications. Utilization is an increase in use of a drug,

such as an increase in number of users, days of therapy, or

dose per day of therapy. Mix changes when newer, more ex-

pensive therapies are used in place of older, less expensive

but equally effective drugs. Finally, a blend of the utilization

and mix factors increases drug expenditures when expen-

sive, new medications become available to treat conditions

previously untreatable with drug therapy (i.e., innovative

therapy).

The United States spent over $250 billion dollars on

prescription drugs in 2005, but total drug costs represent a

relatively small portion of total U.S. health care spending

(approximately 11%).

However, double-digit increases in

prescription drug expenditures have been common (e.g.,

15% in 2000, 18% in 2001, 12% in 2002, 11% in 2003, and

9% in 2004).

1,4,6

The rate of drug-expenditure growth has

frequently been higher than inflation, increases in wages,

and other health care spending, including spending for hos-

pitals, physician services, and total health care expenditures.

However, with the exception of 26% growth in 2001, the re-

cent rate of growth in hospital drug expenditures has been

less than the growth of total drug expenditures. Hospital drug

expenditures grew 4.9% in 2000, 26% in 2001, 9.7% in 2002,

6.3% in 2003, 7.9% in 2004, and 5.7% in 2005.

1,5–7

However,

the rate of growth in clinic drug expenditures has consistently

exceeded the growth of total drug expenditures. Clinic drug

expenditures grew 24.6% in 2000, 23% in 2001, 21.3% in

2002, 22.2% in 2003, 13.5% in 2004, and 12.4% in 2005.

1,5,7

While the rate of increase in prescription drug expendi-

tures moderated somewhat between 2004 and 2006, drug-

expenditure growth remains substantial. Long-range fore-

casts suggest that the rate of increase in total prescription

drug expenditures will continue to exceed the rate of increase

for total health care expenditures through 2014. Because

drug expenditures are the lar

gest component of every health-

system pharmacy’s operating budget and often a meaningful

portion of the entire hospital operating budget, drug expenses

Pharmacy Management–Guidelines 527

attract significant attention from hospital leaders. For these

reasons, it is apparent that drug-expenditure-management

will remain an area of focus and responsibility for health-

system pharmacists for the foreseeable future.

Systematic Approach to Medication-

Cost-Management Measures

A systematic approach to planning and prioritizing specific

drug cost management strategies is essential when imple-

menting initiatives that will influence drug expenditures in

a health system. Annual financial planning (i.e., budgeting)

is the most common planning approach, and specific drug-

cost-management strategies should be considered a part of

the budgeting process. However, longer-term strategic and

programmatic planning activities also have an important role

in managing drug expenditures.

A systematic approach to drug-cost containment re-

quires specific and detailed data on both health-system drug

purchases and actual drug-use patterns. Data must underlie

all types of planning to manage medication expenditures.

Systems should be established to have ready access to the

data and continually review and monitor these data.

It is essential to interact and collaborate consistently

with physician leaders from various specialties to success-

fully plan, prioritize, and implement medication-cost man-

agement efforts. Physician involvement must be sought

during the annual financial planning process and when do-

ing strategic or programmatic planning related to drug ex-

penditures. Appropriate physician representatives must also

be engaged in specific drug-cost-management initiatives.

During the annual financial planning process, physicians can

provide important information related to drug costs, such as

anticipated use of key drugs in the pipeline, programmatic

or new service implementation, anticipated recruitment of

specialists who may require high-cost agents, projections for

use of high-priority drugs, and insights for drug cost con-

tainment. Pharmacy leaders can also use this opportunity to

update physicians on the pharmacy department’s recent ac-

complishments and goals for the future.

Drug Budgeting. Although a complete discussion of the

drug-budgeting process is beyond the scope of this docu-

ment, several important suggestions are provided below. A

general approach to systematically developing the annual

drug budget is outlined in Table 1.

At the beginning of

each calendar year, the American Journal of Health-System

Pharmacy publishes a projection of drug expenditures for

that year.

1,5–7

Annual drug budgeting is a challenging exercise.

Unanticipated situations that result in extreme increases in

drug expenditures will likely occur and the pharmacy direc-

tor should be prepared to explain those situations. Better data

and

more experience will improve a department’s ability to

forecast institutional drug expenditures. Regardless of the

drug budget’s accuracy in forecasting the institution’s drug

expenditures, a well-planned drug budget should help the de

partment understand drug use patterns and identify opportu-

nities for drug cost management. Specific reports that can be

helpful in understanding drug use will be described below

During the annual financial planning process, it is im

portant to identify and focus on key drug expenditures. The

Pareto Principle, or 80/20 rule, applies to drug budgeting and

states that in nearly all cases, a few vital factors are important

and many are trivial.

A relatively small number of drugs (50–

60) typically account for 80% of most hospital drug budgets.

Therefore, budgeting and cost-containment efforts should

focus on those drugs, and the cost-management plan should

especially concentrate on those top drugs for which it is fea

sible to influence prescribing patterns. Much of this docu-

ment focuses on the need to develop a cost-containment plan

after initial estimates of drug costs are completed (T

able 1).

Medication-cost-management projects should be care-

fully selected and prioritized as part of an ongoing financial

planning process. Because drug-cost containment strategies

must be customized to each health system’s unique charac-

teristics, a global assessment of the pharmacy department

and the hospital must be conducted to identify opportunities

for drug-cost-management. This assessment must go beyond

a qualitative assessment of opportunities and must include

retrieval and analysis of both drug purchase and drug-utili-

zation data. Pharmacy departments may need to obtain and

develop resources, such as personnel and software, to ana-

lyze these data.

Despite the need to customize the strategy and tactics

to fit the needs of different hospitals and health systems, a

systematic approach to identifying, prioritizing, and imple-

menting medication-cost containment initiatives is neces-

sary and can be applied in any setting. A clearly defined list

of cost-containment targets should be established during

each financial planning cycle. To be successful, the number

of initiatives should be manageable and should focus on the

institution’s top expenditures. In many situations, multiple

approaches for cost containment will be necessary.

The foundation for effective cost-management strat-

egies, and the first stage of the systematic approach, be-

gins with determining current costs of medications, both

as ongoing expenses and those held as assets in inventory.

Understanding and tracking key medication-cost indicators

on an ongoing basis is necessary to determine the oppor-

tunities for medication-cost reduction. Examples of these

indicators may include:

•

Medication inventory per adjusted patient day

•

Medication inventory turnover rate

•

Contract coverage percentage

•

Contract compliance percentage

•

Intravenous-to-oral dosage ratio

•

Volume-adjusted total medication costs (e.g., cost per

adjusted patient day, discharge, etc.)

Table 1.

Steps for Developing Annual Drug Budget

Collect and review data (e.g., drug purchase data, drug

utilization data, workload and productivity data, other

financial statements).

Develop budget for high-priority agents (top 50–60 drugs).

Identify relevant new drugs and build new agent budget.

Budget for nonformulary drugs and lower-priority drugs.

Establish a drug cost containment plan (identify drugs going

off patent, opportunities for therapeutic interchange or

protocol development).

Finalize and present the total drug budget.

Continue the budgeting process throughout the year

through constant vigilance and monitoring of drug use.

528 Pharmacy Management–Guidelines

•

Volume-adjusted drug category costs (e.g., antibiotics,

anesthesia-related drugs, etc.)

•

Descending-order total purchase histories, tracked

over time

In addition, the use of external benchmarks may pro-

vide assistance in identifying medication-cost-reduction

opportunities. External benchmarks may be available as

a component of services provided by consulting or

ganiza-

tions, the pharmacy’s drug wholesaler or group-purchasing

ganization (GPO), or from professional published data.

Benchmark data should be used with care; however, be-

cause there may be important limitations to the applicabil-

ity of the data to a specific site. For example, difficulties

may exist in adjusting the data for the specific pharmacy

practice, such as models and intensity of services, and in

finding an appropriate peer group.

After cost-management opportunities are identified,

they need to be quantified. Dollar values should be as-

signed to each opportunity, including inventory reduction,

improvement in inventory turns, improving contract compli-

ance, therapeutic interchange of various agents, and others.

A specific goal and action plan should be set for each drug-

cost-management target. For example, one goal might be to

reduce expenditures for a drug class by 8% by establishing a

contract for a new, preferred agent and implementing a ther-

apeutic interchange program to shift use to the new agent.

Alternatively, the goal might be to slow the rate of increase

in use of a particular drug or drug class (e.g., based on cur-

rent patterns, use of this drug class is expected to grow 15%

in the next fiscal year, but the goal of interventions is to limit

the rate of increase to 10%). Monitoring is essential, so drug

cost containment targets should be consistently measured

and evaluated. Identifying and quantifying the opportunities

must be completed before prioritization and in-depth evalu-

ation begins.

Assessment and Prioritization. Once opportunities for cost

management have been identified and quantified, assessment

and prioritization can occur. There are many methods of pri-

oritization, but most of them contain two key elements: deter-

mining the potential benefit and estimating the relative ease

or dif

ficulty of attaining the benefit. Even though potential

benefit may be clear-cut, the degree of difficulty is often hard

to establish. Important points to consider when determining

the relative degree of difficulty and likelihood of achieving

benefits from a given drug-cost-management opportunity in

clude (1) the amount of time pressure (the time available until

the cost reductions occur), (2) key stakeholder (e.g., nurse,

physician) sensitivity and willingness to collaborate, (3) ex-

tent of leadership support for the initiative, (4) resources re-

quired, and (5) existing level of expertise within the organiza-

tion for the specific cost-management opportunity.

Drug-cost management strategies that are under the

direct and exclusive purview of the pharmacy department

(e.g., purchasing, inventory management, and waste re-

duction approaches) are generally easier to implement and

provide more immediate benefits. These activities, how-

ever, often provide smaller or one-time financial benefits.

Utilization management tactics (e.g., clinical practice guide-

lines and therapeutic interchange) generally provide greater

financial benefits, but these efforts have correspondingly

higher degrees of difficulty and complexity.

Because of the relative ease of implementation, cost-

containment opportunities in areas that are primarily under

the department’s control will usually be pursued first. After

these initiatives are underway, more complex techniques

that require collaboration with the medical staff and others

should be pursued.

These guidelines are structured so that the cost-man-

agement techniques are presented in the order in which

health systems often implement them. Components of a

cost-management program are listed in Table 2. An appen-

dix that lists specific cost management opportunities is also

provided. It is important to note that although these guide-

lines are separated into sections on purchasing and inven-

tory management and medication-use management, both

activities are integral and indivisible to drug-cost manage-

ment planning and the practice of pharmacy in hospitals

and health systems.

Purchasing and Inventory Management

When selecting drug-cost-containment initiatives, purchas-

ing and inventory management procedures should be con-

sidered first.

Drug Product Costs and Procurement. At the most fun-

damental level, drug costs are a function of unit costs and

Table 2.

Components of a Cost-Management Program

Pharmacy-Directed Activities

Purchasing

GPO contracts

Facility contracts

Wholesaler contracts

Inventory management

Wholesaler ordering

programs

Storage

Waste reduction

I.V. product waste

Returns

Interdisciplinary Activities

Medication utilization program

Clinical pharmacy services

Assessment of drug costs

Medical staff support

Formulary management

Therapeutic interchange

Guideline (protocol)

development

Pharmacist interventions

Plan implementation and

analysis

Reimbursement & Charging

Reimbursement

340B programs

CMS (DRG class)

Commercial insurance (payer

mix)

Outpatient infusion center

Charging

Coding and processing

Indigent care programs

GPO = group purchasing organization, CMS = Centers for Medicare

and Medicaid Services, DRG = diagnosis-related group.

Pharmacy Management–Guidelines 529

utilization. Drug-unit costs are a function of acquisition

costs (contracted or non-contracted), the external (in-bound)

distribution fee, inventory management costs, and internal

distribution costs.

Contracting. There are three main avenues for purchasing

pharmaceuticals at discounted rates: GPO contracts, facil-

ity contracts, and wholesaler own-use contracts. All facili-

ties should seek to maximize savings available from use of

generic products, and some may have other considerations,

such as use of 340B or indigent care programs.

GPO contracts. GPOs utilize the aggregate purchasing

power of many facilities in negotiating pricing agreements

with manufacturers. Most hospitals are members of a GPO.

While there are GPOs that focus exclusively on drugs, the

majority of GPOs offer contracts for medical and surgical

supplies, food, and other support products and services in

addition to pharmaceuticals. Most GPOs make their con-

tract portfolio available to members via hard copy, and some

GPOs have contract portfolios available on secure internet

sites. Considerations in contracting with a GPO are listed

in Table 3. It is also important to have routine surveillance,

preferably an automated service, that ensures that contract

prices are applied to all purchases.

GPOs are funded by one of two means. First, most,

if not all, GPOs collect a contract administrative fee (CAF)

from the manufacturers or distributors with which they con-

tract. The CAF is rarely greater than 3% of the dollar volume

of product purchased through the contract. Some GPOs re-

turn a portion or all of the CAF to its members. If any or all

of the CAF for a particular drug product is returned to the

facility by the GPO, it should be taken into account when

calculating the net cost of the drug. The second method by

which GPOs are funded is direct payment of fees by mem-

bers to the GPO. In this arrangement, all of the CAF is re-

turned to the facility.

Contracts through GPOs consider not only the unit cost

of the pharmaceutical but also include the allowable distribu-

tion methods for the pharmaceutical, payment terms, returns

policies, and supplier performance requirements. Many GPO

contracts, especially those for multi-source generics, include

simple line-item pricing, which only requires the purchaser to

buy and pay for the product. Other contracts are more compli

cated, with incentive rebates for all purchases or rebates for

achieving volume or market share tar

gets.

Typically, market share agreements are utilized when

two or more products can be used to treat the same disease

and no generic equivalent exists. The incentive, such as a

rebate, a lock-in of a current discount, or achievement of a

higher discount, is contingent upon attaining a given mar-

ket share for a particular product in the institution’s market

basket. To achieve the greatest financial advantage from the

contract (lowest net drug cost), the pharmacy must work

with the medical staff. This process requires a careful evalu-

ation of comparative efficacy and safety of the product and

its alternatives.

Some GPOs have multiple products on contract within

categories of pharmaceuticals, allowing the facility to re-

ceive discounted pricing on similar agents when prescribing

practices are not standardized to one agent. More aggressive

GPOs will sometimes contract for a single agent within a

particular class (e.g., for one fluoroquinolone or one lipo-

somal amphotericin B product to the exclusion of others) in

order to gain the maximum value for its members.

Successful use of GPO contracts requires a construc-

tive and collaborative relationship between the member, the

GPO, the manufacturer, and the distributor (i.e., wholesaler).

Potential advantages of GPO contracts are listed in Table 4.

In addition to the contracting portfolio, GPOs offer

services such as lost savings and compliance reports, rebate

and contract administrative fee reports, clinical utilization

management programs, and letters of commitment.

Lost savings and compliance reports. These reports

provide data and analysis of missed savings opportunities

in the user’s purchase history (e.g., items purchased off-

contract when a generically equivalent alternative item was

on-contract). These reports may also indicate the compli-

ance level, or the amount of purchases on-contract versus

the amount of purchases that could have been made on-con-

tract (drugs purchased on-contract plus the value of drugs

purchased off-contract when alternatives were on-contract).

These reports should be reviewed monthly to determine if

purchasing practices are effective.

Rebate and contract administration fee report. These

reports tally the amount of rebates and contract administra-

tion fees generated by the facility’s purchases of specific

products under contact. When evaluating the costs of two

or more equivalent products, it is important to include any

applicable rebates to arrive at net cost.

Clinical utilization management programs. These pro-

grams assist facilities in managing the utilization of vari-

ous drug products and classes, often through evaluation and

Table 3.

Considerations in Group Purchasing Organization

(GPO) Contracting

Fees (e.g., contract administrative fee)

Allowable distribution methods

Payment terms

Return policies

Supplier performance requirements

Rebates

Market-share agreements

Single-agent contracts

GPO services (e.g., lost savings and compliance reports,

rebate and contract administration fee reports, clinical

utilization management programs)

Letters of commitment

Table 4.

Potential Advantages of Group Purchasing

Organization Contracts

10,11

Standardization of products

Reduction of contract labor costs for institutions

Enhancement of member institution’s purchasing program

Enhancement of information sharing

Enhancement of purchasing expertise

Protracted periods of price protection

Coordination of contracting and budgeting process

Reduction of duplication of purchasing efforts among

institutions

Assistance identifying alternative or secondary products

during drug shortage

530 Pharmacy Management–Guidelines

comparison of product efficacy, safety, and cost, as well as

therapeutic interchange programs.

Letters of commitment. Letters of commitment (LOC)

available through GPOs should be evaluated and taken ad-

vantage of when appropriate. The LOCs usually contain

requirements for the pharmacy to do one or more of the fol-

lowing in order to gain lower pricing or rebates:

•

Declare that a particular drug is on formulary.

•

Declare that a particular drug will be on formulary and

will not be restricted.

•

Achieve a target periodic volume.

•

Achieve a target market share relative to competitive

drugs for a given period of time.

The LOC may not require significantly more purchas-

ing of the drug. If LOC requirements do not conflict with

formulary and utilization management strategies, the LOC

should be signed if there is a reasonable chance of meeting

the requirements.

Facility contracts. The alternative to GPO contract-

ing is individual contracting. This type of contracting may

be done at the facility or the health-system level. In some

cases, equal or better pricing than GPOs can be obtained by

individual facilities when contracting, especially large facili-

ties or integrated delivery networks (IDNs). Opportunities

for better pricing through individual contracting may exist

for specialized health systems (e.g., those focused on oncol-

ogy or transplantation), that purchase a large volume of a

selected drug and are able to commit to maintaining a market

share for the drug.

It is important to carefully evaluate the benefits of

individual contracting and its influence on the collective

bargaining power of the GPO. Continual use of individual

contracts that are in contravention to GPO contracts, in the-

ory, will eventually erode the GPO’s ability to consistently

contract aggressively for its members. Because of larger

GPO volume, manufacturers often will not offer the same

pricing or other terms to individual facilities or IDNs that

they offer to GPOs. Another factor to consider with indi-

vidual contracting is that a facility may require contracts

to be reviewed by attorneys, whereas the GPO acts as the

contracting agent of the facility, obviating the need for legal

review of each contract by the facility’s counsel. Finally, the

amount of time required to negotiate, write, and maintain an

individual contract should be weighed against the incremen-

tal value gained over what a GPO contract would offer. In

many situations, it may be more efficient and productive to

voice contract concerns to GPO representatives and become

involved in GPO committees rather than write multiple, in-

dividual contracts outside the GPO.

Some drug contracts, especially for sole-source

awards to generic manufacturers, call for the manufacturer

to reimburse the pharmacy for the difference in cost when

the pharmacy must purchase a product off-contract because

the manufacturer was not able to supply the contracted prod-

uct. The manufacturer-unable-to-supply reimbursement pro-

cess is time-consuming and the requirements can be rigid,

but submitting reimbursement to manufacturers under these

provisions can return additional funds to the pharmacy.

Wholesaler own-use contracts. Wholesalers are also

able to take advantage of special pricing on certain branded

and generic drugs and offer those products to their customers

in the wholesaler’s proprietary contract portfolio. This cre-

ates margin for the wholesalers that can be used to fund dis-

tribution discounts. Wholesalers also take advantage of cash

discounts and quick-payment terms from manufacturers to

increase their margin and to offer discounts to customers.

Generic Drug Savings Maximization. The expiration of

patents on widely used branded drugs can result in large re-

ductions in drug expenditures. It is important to be mindful

of the opportunities presented by the first-time introduction

of generics on high-spend branded drugs, both in budget-

ing and implementing rapid and effective uptake of generics

when they are introduced.

Budgeting. There are several sources for monitoring

patent expiration dates (off-patent dates) for branded drugs,

including www.drugpatentwatch.com and the GPO. The

GPO may also be able to estimate the potential initial sav-

ings from contracting for generic drugs that are first-time

introductions. It is also important to determine when the

first-time generic product will be available from multiple

manufacturers. The initial savings differential between the

branded and generic versions may be small because a single

generic manufacturer often has a period of exclusivity before

the generic drug becomes available from multiple sources.

In some cases the savings may be so insignificant that health

systems will choose to remain with the branded drug for

safety reasons and consistency in product supply. Changing

products several times within a short period of time could

confuse caregivers, so pharmacy managers should weigh the

benefits and risks of making such changes.

Operational considerations. Swift uptake of the ge-

neric product is necessary to maximize the savings after a

branded drug comes off-patent and multiple generic versions

are available. The following steps should be taken during

any product conversion, but they are particularly important

when converting from a brand name product to a first-time

generic equivalent product.

•

Contracting. Be sure that the health system has access

to contract pricing on a generic product on the first

date that the drug is available as a multisource item.

The contract pricing will usually be through the health

system’s GPO, but in some cases, the health system

may write its own contract for the generic product.

•

Contract Price Loading. The contract pricing for the

product must be loaded at the wholesaler with enough

notice to become effective. Up to 30 days notice may

be required before the contract pricing becomes effec-

tive through the wholesaler. Although the manufac-

turer or GPO typically send the contract information

to the wholesalers, when the hospital or health system

directly contracts for the generic drug, the contract in-

formation should be sent directly to the wholesaler by

the hospital or health system.

•

Demand Matching. Work with the wholesaler to en-

sure that there will be a sufficient supply of the generic

product at the local wholesaler distribution center to

match current purchases of the branded product, a pro-

cess called demand matching. Wholesalers will need

at least 30 days notice on demand matching to ensure

sufficient stock of the generic product on the off-patent

date. Working with the wholesaler on demand match-

ing also improves overall supply chain management

Pharmacy Management–Guidelines 531

by allowing the wholesaler to draw down inventory of

products that will be in less demand.

•

Autosubstitution. Some wholesalers allow pharmacies

to institute autosubstitution rules in the wholesaler or-

dering system to substitute a preferred generic product

for a branded product or non-preferred generic prod-

ucts. This process maximizes savings and contract

compliance. Care must be exercised in creating auto-

substitution rules to ensure correct product-to-product

substitution in chemical entity, dosage form, package

size, package form (unit dose, bulk oral, liquid), and

so forth, especially in cases in which a brand-name

drug goes off-patent. Autosubstitution rules may also

be implemented in the wholesaler ordering system for

medication safety reasons (e.g., reduction of sound-

alike and look-alike drugs) in addition to savings opti-

mization or contract compliance.

Other Considerations. Pharmacy managers should explore

whether the hospital can obtain pharmaceuticals at advanta-

geous pricing using 340B (disproportionate share) programs.

Because hospitals and health systems must meet specific

criteria to be designated as a 340B facility, pharmacy man-

agers should collaborate with the chief financial officer and

financial services department to determine if they can access

340B pricing for pharmaceuticals. Detailed descriptions of the

qualifications and benefits of 340B programs are also avail-

able through the Health Resources and Services

Administration Office of Pharmacy Affairs www.hrsa.gov/

opa/; the Pharmacy Services Support Center, pssc.aphanet.

org/; the Safety Net Hospitals for Pharmaceutical Access,

safetynetrx.org; and ASHP 340B Information Site www.ashp.

org/s_ashp/cat1c.asp? CID=3813&DID=6225.

Pharmaceutical manufacturers also continue to offer

indigent patient care programs for select drugs for qualified

patients on an individual basis. Although substantial sav-

ings can be realized through replacement drugs at no charge,

the process can be arduous and complex. There are inde-

pendent consulting services that specialize in assisting with

coordination of the program for hospitals and typically re-

quire payment as a percentage of the savings. Patients eli-

gible for Medicaid and other regional or local low-income

health insurance do not usually qualify for the indigent care

programs sponsored by the pharmaceutical industry.

Wholesalers and Distribution Fees. Most hospital phar-

macies purchase 80% or more (by dollar volume) of their

pharmaceutical needs from a drug distributor (wholesaler).

Hospital pharmacies can lower their costs by ensuring that

the distribution fee mark-up is as low as possible. To under-

stand the cost that wholesalers charge for drugs, and the dis-

tribution fee charged to hospital pharmacies, it is necessary

to understand wholesalers’ revenue streams and expense

drivers.

The adoption of the prime-vendor system, in which a

pharmacy procures a very large portion of its pharmaceu-

tical needs from one supplier, has led to great efficiencies

in the pharmaceutical supply chain. Through these efficien-

cies, wholesalers are able to offer low incremental fees to

their customers for distribution of pharmaceuticals. In many

cases, they are able to offer discounts to the contracted price

of the drug or “cost-minus” discounts to the wholesale ac-

quisition cost of the drug if it is not contracted.

Through automated inventory, stock replacement, and

order fulfillment, wholesalers have streamlined the deliv-

ery process and lowered pharmaceutical costs in the sup-

ply chain. In the past, wholesalers increased their margins

through speculative buying, which is buying pharmaceuti-

cals in large quantities and holding them past the date of fu-

ture manufacturer price increases. The products would then

be sold to customers at the higher price. These practices

have reportedly decreased since 2004.

However, at the

same time that speculative buying decreased, the wholesale

drug industry instituted inventory management agreements

with manufacturers, who in return for agreements regarding

product supply and demand, pay the wholesalers a negoti-

ated fee based on the percentage of the volume that the

wholesalers purchase from them. These methods of creating

margin through increasing revenue and decreasing expenses

can be translated into a cost-minus fee structure for the hos-

pital that is purchasing from the wholesalers.

Individual hospital factors that influence wholesaler

fee structure. Several characteristics of individual hospital-

pharmacy purchasing can affect a wholesaler’s revenue and

expenses and result in higher or lower distribution fees. To

some degree, a higher purchasing volume results in a lower

distribution fee. However, other factors, including deliveries

per week, dollars per drop, dollars per line extension, num-

bers of delivery sites per location, payment terms, and spe-

cial services, must also be considered. These factors should

be considered collectively and not in isolation. In addition,

most major wholesalers have supply, automation, and other

service and equipment divisions, and an institutional con-

tract with multiple divisions can provide additional savings.

Deliveries per week. The fewer deliveries from the

wholesaler per week, the lower the expenses for the whole-

saler, which can reduce the wholesaler distribution fee to the

pharmacy. Some large hospitals have up to 11 deliveries per

week, but other large hospitals are able to manage inven-

tory so that patient care can be well-maintained with only

5. Inventory and patient care can be well maintained at less

than five deliveries per week at small hospitals. Fewer deliv-

eries may require additional purchasing discipline, but some

wholesalers have programs to help pharmacies improve

their purchasing practices.

Dollars per drop. This factor is important to whole-

salers because the higher the number of delivery locations

(drops), the higher the wholesalers’ cost, and vice versa. For

a given dollar value of pharmaceuticals purchased, a whole-

saler’s expenses are lower, and margin is higher, for a lower

number of delivery points. This margin can be translated

into lower distribution fees for the pharmacies, particularly

for IDNs of multiple pharmacies.

Dollars per line extension. For each line of products on

an invoice that a wholesaler fills and delivers to a pharmacy,

there is an associated cost. The dollars per line extension

is the total dollars purchased by a pharmacy over a given

period of time divided by the number of lines of products or-

dered over the same period of time. Pharmacies with higher

dollars per line extension purchased can sometimes have

lower distribution costs than pharmacies with lower dol-

lars per line extension because it costs relatively less for the

wholesaler to service the pharmacy with the higher dollars

per line extension.

Secondary wholesalers. Secondary wholesaler rela-

tionships should be avoided if inventory levels meet patient

532 Pharmacy Management–Guidelines

care needs. Purchases from secondary wholesalers usually

carry a much higher distribution fee. Such purchases also re-

sult in a higher primary wholesaler distribution fee because

there are decreases for the pharmacy in its dollars per drop,

dollars per line extension, and total volume. Wholesalers

are increasingly requiring pharmacies to meet a minimum

monthly volume to maintain an account, and the costs of

maintaining the minimum volume at a significantly higher

distribution fee can be prohibitive.

Expanding the use of the wholesaler within the health

system may offer additional opportunities for cost sav-

ings. Hospital departments such as radiology, the clinical

laboratory, interventional cardiology, and anesthesiology

may procure pharmaceuticals directly from the manufac-

turer through the purchasing or materials management

departments. Utilizing the pharmaceutical wholesaler for

these products through a separate purchasing account does

not change the process of procurement or distribution but

reduces the unit cost through application of the wholesaler

discount. Because some of these products may be relatively

costly (e.g., contrast agents, blood factors, or anesthetic

gases), there is a potential for additional savings if these pur-

chases push the hospital into a higher tier of the wholesaler

cost structure. Pharmacy directors should communicate with

other department managers to determine how pharmaceuti-

cals are purchased, and it is usually best if all drug purchases

are managed by the pharmacy.

Payment method and frequency. Payment method and

frequency can also affect the distribution fee. Many whole-

salers offer a lower distribution fee to hospitals that pay by

electronic fund transfer (EFT). Pharmacy managers should

work with their accounts-payable departments to establish

EFT, which is usually a more efficient method of payment

for both the hospital and the wholesaler. In addition, the

more frequent the payment, the lower the wholesaler dis-

tribution fee will generally be. Since 2004, the amount of

speculative buying has waned and large discounts for more

frequent payments have decreased. However, many whole-

salers offer terms based on prepayment, or placing funds on

deposit with the wholesaler, and then paying invoices on a

go-forward basis. The advantage in lower distribution fee is

clear, but this gain must be balanced against the time value

of money for having the funds on deposit with the whole-

saler rather than drawing a return for the health system.

Most GPOs have wholesaler-distribution agreements

for use by their members. However, because of higher-than-

average dollars per drop, dollars per line extension, and

discipline in number of deliveries per week, large hospitals

and health systems can often get better pricing and terms by

dealing directly with wholesalers rather than through GPO

wholesaler agreements.

Other wholesaler tools. Most wholesalers provide

pharmacies with access to computer software or Web-based

solutions for product ordering, reporting, and inventory

management. The programs will allow the buyer to check

for lower-priced alternatives and contract compliance prior

to placing orders. Pharmacy managers should work with

their wholesaler representatives to be sure that these features

are available and utilized.

Some wholesalers produce contract compliance re-

ports. These reports can be used to gauge the effectiveness of

purchasing practices. Pharmacy managers should check with

their wholesalers to determine if these reports are available.

If they are, they should be reviewed monthly for opportuni-

ties to improve contract purchasing.

Some wholesalers have automatic substitution pro-

grams to assist pharmacy buyers in selecting the correct

product when multiple generic alternatives exist. These

programs allow the pharmacy manager to direct purchases

of less-preferred products (as determined by the pharmacy

management) to more-preferred items. For example, if one

brand of unit dose acetaminophen 325-mg tablet is on con-

tract as a sole-source award, the autosubstitution program

can allow for inadvertent orders for noncontract unit dose

acetaminophen 325-mg tablets to be substituted with the

preferred version. Such programs may not be available from

all wholesalers, and they should receive careful consider-

ation before being implemented.

Inventory Management. Inventory management is a bal-

ancing act. It involves meeting patient and internal customer

needs while committing the least amount of dollars possible

to drugs on the shelves or in automated cabinets. The rate of

inventory turnover (defined as total annual drug expenses

divided by the dollar value of the inventory assessed on an

annual basis) is dependent on many factors. Typically, the

pharmacies of smaller hospitals will have a lower drug in-

ventory turnover (8–10 turns per year) than the pharmacies

of larger hospitals (12–18 turns per year or higher) and some

specialty hospitals.

Many wholesalers’ ordering programs provide sys-

tematic methods for asset management (i.e., inventory value

optimization and increasing turnover). Wholesaler repre-

sentatives can assist in the initial setup of these programs.

Inventory items should be divided into high-, medium-, and

low-value products, and the minimum and maximum inven-

tory levels for at least the high- and medium-value prod-

ucts should be established. At the same time, reorder points

and reorder quantities should be established for at least the

high- and medium-value products. Systematic use of these

programs can decrease the time required for the ordering

process and increase inventory turns. The minimum and

maximum levels, as well as the reorder points and reorder

quantities, should be reviewed on a routine schedule and re-

vised when necessary.

When seeking to increase inventory turns, storage in

the central pharmacy and automated dispensing cabinets

should also be considered. Configuring pharmacy storage

locations so that each drug product has only one storage lo-

cation in the central pharmacy sometimes helps to free capi-

tal by reducing inventory. Automated cabinet inventories

should be regularly reviewed for appropriate turnover. Most

cabinet systems have report capabilities to optimize both

the products and the quantities that should be in a particular

cabinet based on the dispensing philosophy devised by phar-

macy and nursing departments. Cabinet manufacturers have

product specialists that consult with pharmacy management

to optimize use of the cabinets.

I.V. product waste. Many pharmacies waste a signifi-

cant quantity of drugs, particularly unused IV solutions, and

many do not have an accurate valuation of the amount of

waste because it is only sporadically monitored. Table 5 lists

strategies for reduction of IV product waste.

Returns. Most pharmacies use a third party (reverse

distributors or returns companies) to process wasted and ex-

pired drugs. However, not all pharmacies completely track

Pharmacy Management–Guidelines 533

and trend the drugs that are most commonly wasted, the dollar

value of the expired and wasted drugs, or whether credits were

received. The pharmacy manager and pharmacy buyer should

work together to utilize reports from the reverse distributor

to determine the opportunities for reducing the amount of ex

pired and wasted drugs and insuring that all credits due to the

pharmacy from the manufacturers are received.

Medication Utilization Management

Planning and Developing a Medication Utilization Man-

agement Program. An effective plan for medication utiliza-

tion management must provide the health system with a road

map for continuous improvement in pharmaceutical expense

management, with specific goals and outcome measures of

success. It is important to acknowledge that although one

purpose of medication-utilization-management is to add

economic value, the quality and safety of patient care are

foremost in the mission of pharmacy services and should

never be compromised for cost. Medication-utilization-

management must integrate evidence-based science with

the standards of medical practice within the health system.

Before embarking on a comprehensive medication-

utilization-management plan, goals must be established, a

reporting structure delineated, roles identified, measurement

tools developed, and implementation procedures established.

The successful plan is dependent on many levels of commit-

ment, including commitment to administrative and clinical

pharmacy management, the medical staff, and senior health-

system management. The director of pharmacy provides

leadership by facilitating the efforts of the medical staff, set-

ting priorities for the clinical pharmacy staff, and cultivating

the support of senior leadership. Clinical pharmacists with

advanced training and education must have dedicated time

to develop and implement the cost management initiatives.

They must also be empowered to monitor the program and

educate other staff to participate in therapeutic interchange,

medication utilization review, and other interventions while

encouraging the infusion of fresh ideas for pharmaceutical

cost management.

Role of Clinical Pharmacy Services in Drug Cost Manage-

ment. Clinical pharmacy services, activities in which phar-

macists provide direct patient care, are an important foun-

dation for a successful medication-utilization-management

program that is focused on managing drug costs. Clinical

pharmacy services have demonstrated an overall positive

financial impact. In a systematic review of original assess-

ments of clinical pharmacy services from 1988 to 1995,

Schumock et al.

reported that 89% of 104 studies reviewed

reported positive financial results. In the seven studies of

clinical pharmacy services where sufficient information

was available to calculate a benefit-to-cost ratio, the median

benefit-to-cost ratio was 4.09:1. Therefore, in these studies,

every dollar invested in clinical pharmacy services returned

four dollars. The systematic review was updated in 2003 to

review published assessments of clinical pharmacy services

from 1995 to 2000, and once again, the value of clinical

pharmacy services was demonstrated.

For this five-year

period, benefit-to-cost ratios could be determined from 16

studies, and when these studies were combined, the median

benefit:cost ratio was 4.68:1.

Some specific types of clinical pharmacy services

have also been associated with decreased drug costs. Bond

et al.

have used an extensive database of the outcomes of

clinical pharmacy services to show that drug information

services, medication admission histories, and drug protocol

management are associated with lower drug costs.

In addition, clinical pharmacists’ active involvement

is crucial to the success of many drug-cost-management

ini-tiatives. Many of the drug-cost-containment techniques

can only be successful with diligent and often daily sup-

port from clinical pharmacists. For example, successful

implementation of a clinical practice guideline as a drug-

cost-management technique will require the expertise of

the department’s clinical pharmacists to develop the guide-

line, and will also require the pharmacy staff’s consistent

enforcement of the guideline in their interactions with pre-

scribers. Similarly, it will often be the clinical pharmacist’s

responsibility to routinely carry out the hospital’s thera-

peutic interchange policies.

Assessment of Drug Costs

A successful pharmaceutical-cost-management program must

be data driven. GPOs, wholesalers, distributors, pharmaceuti-

cal manufacturers, and supply-chain divisions of multi-hospi-

tal systems need to track costs in a variety of ways. Advances

in information technology have made drug usage data more

accessible and sophisticated, and ef

fort should be spent to

manage and analyze these data. Pharmacy management must

also take advantage of the data available in its own facility

Table 5.

Strategies for Reducing I.V. Product Waste

Establish policies that are based on the most recent

literature for maximum i.v. bag hang-times and i.v. set

change frequency.

Institute an i.v.-to-oral switch program for both cost

reduction and patient care benefits.

Periodically audit the amount of i.v. admixtures being wasted

and log the date and time of waste, date and time of

preparation, the i.v. fluid type and drug admixed, quantity

of products, and the cost of the products. Review the log

and determine the most common occurrences.

Reduce i.v. batch sizes (creating more, smaller batches)

and reduce the amount of time between preparation of

the i.v. dose and the actual administration time.

Routinely monitor the status of i.v. drips that are adjusted.

Routinely return all unused i.v. admixtures to the i.v.

preparation area as soon as possible.

Consider the use of manufacturer premixed products where

advantageous, both economically and for patient care.

Compare the quality, economic, and regulatory (e.g., USP

chapter 797) differences within your practice site between

different administration methods such as i.v. syringe

infusion, i.v. intermittent infusion (i.v. piggyback), and

volumetric drip chambers.

Establish standard concentrations, dosages, and base

solutions for i.v. admixtures.

Ensure that there is an efficient process for communicating

changes in i.v. admixtures (e.g., rate, fluid, dosage) or

discontinuation.

Reduce total parenteral nutrition use by employing enteral

nutrition when possible, and establish standardized

total parenteral nutrient base solutions, hang times, and

related policies and procedures.

534 Pharmacy Management–Guidelines

through the materials management department, purchasing

department, and finance department. Internal and external

data sources are the foundation for the decision-making pro-

cess for medication-utilization-management and must be

examined closely prior to setting goals for cost-management

initiatives.

Because each health system has a unique mix of pa-

tients, services, and centers of excellence, the drug-cost-

assessment process must be customized to create a priority

list of initiatives that will provide the greatest value. Key

reports that should be considered are listed in Table 6. Once

the formulas for denominator data are established as consis-

tent across many facilities, a multihospital health system can

effectively benchmark drug costs.

Medical Staff Support. Any program that involves alter-

ing prescribing patterns to improve the cost-effectiveness

of drug therapy requires the support and engagement of the

medical staff. Although health systems have the ability to

negotiate discounted unit prices for pharmaceuticals, the ef-

forts of the GPOs and the increased availability of generics

have leveled the expense of many high-cost drug products

used in hospitals. Cost-management programs have there-

fore become increasingly dependent on the hospital’s ability

to manage utilization and prescribing, which will ultimately

influence market share and drug pricing. Several effective

strategies that can harness physician knowledge, cultivate

a collaborative relationship, and facilitate ownership of the

process by the medical staff are described in Table 7.

Once the medical staff is engaged and there is a

commitment from senior management for the medication-

utilization-management program, a detailed procedure for

initiative generation can be established. Key steps include

the following:

•

Designating clinical sub-groups based on categories of

the initiatives.

•

Identifying the lead physicians, clinical pharmacists,

and other key practitioners for each group.

•

Using evidence-based studies and the drug assessment

data to make decisions.

•

Defining the types and categories of the initiatives.

•

Creating a dashboard and a clear and concise reporting

format for communicating progress.

•

Facilitating the infusion of ideas through brainstorming

and other effective meeting and group techniques.

•

Defining measurable outcomes and benchmarks for

evaluation.

Formulary Management. The guid-

ing principles of a sound formulary

management system are well de-

scribed in two documents,

17,18

and

are concisely summarized in the fol-

lowing statement: a well-managed

formulary system ensures a close

relationship between the organiza-

tion’s medication-use policies, the

therapies offered by

the organiza-

tion, and the medication routinely

stocked by the pharmacy.

Although

the primary goal of a formulary sys-

tem is to promote safe and effective

drug therapy, it can be a

valuable cost

management tool and has inherent

medical staff support through

the actions of the pharmacy and

therapeutics (P&T) committee. The

medication-utilization-management

program is highly dependent on an

effective formulary system. Key

aspects of formulary management

in cost-management efforts are

described in Table 8. Once again, the

efforts of clinical pharmacists are

crucial to successful implementation

of the formulary system.

Methods of Pharmaceutical Cost

Management. Pharmaceutical cost-

management initiatives are typically

categorized by therapeutic class or

group or by method of implementa-

tion.

The latter is usually subdivided

into three or four different types:

therapeutic interchange (therapeutic

substitution), guideline (protocol)

Table 6.

Key Reports to Consider in Assessing Drug Costs

Report

Considerations

Wholesaler purchasing reports

Direct (nonwholesaler) purchase

reports

Interdepartmental purchasing reports

Cost (total drug costs or specific

drugs) per medical service or

hospital area

Cost per drug-related group reports

Cost per occupied bed, adjusted

patient day, admission, discharge,

or case mix index adjusted patient

day

Pharmacy-adjusted patient days

Cost per case, procedure, or

admission (e.g., surgical case,

cardiac procedure, dialysis

admission)

These are important based on the patient mix

and the drugs that comprise the greatest

costs within the health system. Physician

participation in the dissemination of the data

is essential.

Calculated using the same ratio of outpatient to

inpatient revenue but for drugs only, and may

also add specificity and value to comparative

data.

Adjusted patient days are calculated with a

standard financial formula that modifies

patient days with a ratio of outpatient to

inpatient revenue to correct for volume

changes and severity of illness.

External

and internal benchmarking is dependent on

these kinds of reports.

Available from internal sources (ideally) or fee-

based external vendors; distinction must be

made between using cost or charge data.

Drug-utilization data will be needed to produce

this report.

Available from materials management or other

departments that have internal transfers.

Available from the purchasing or finance

departments.

Fo r 80/20 analysis, by therapeutic class,

and of top 200 drugs; drugs with multiple

strengths and sizes need to be aggregated;

wholesalers can also provide monthly

trending reports and benchmarks from their

customers.

Pharmacy Management–Guidelines 535

development, and pharmacist interventions (clinical and

operational), such as parenteral-to-oral conversions, renal-

dose adjustments, drug restrictions, repackaging, dosage-

form changes, waste reduction, and others. Although the

terms are sometimes used interchangeably, therapeutic group

refers to a broad classification (e.g., anesthetic agents, anti-

infectives, or chemotherapeutic agents), whereas therapeutic

class is a narrower designation (e.g., beta-lactam antibiotics,

volatile anesthetic gases, serotonin antagonists). If the

decision is made to use therapeutic class, then each of the

methods of

implementation are used as appropriate within the

medication categories. An example would be selecting third-

generation cephalosporins utilizing a therapeutic interchange

for cefotaxime and ceftriaxone (therapeutic interchange

method). Third-generation cephalosporins may also be the

preferred class of antibiotics within a pneumonia protocol

(guidelines method). Examples of using the implementation

method rather than the therapeutic class would be to select

several drug classes for therapeutic interchange, some for

guideline development, and some for other intervention types.

Therapeutic interchange. ASHP defines therapeutic

interchange (TI) as “an authorized exchange of therapeutic

alternatives in accordance with previously established and

approved written guidelines or protocols within a formulary

system.”

This definition stipulates that the interchange is

between two or more drugs that are not generic equivalents.

Although FDA defines the term therapeutic equivalent to

include generically equivalent products, therapeutic inter-

change or substitution in the hospital setting generally re-

fers to drugs that are not generically identical.

The American College of Clinical Pharmacy (ACCP)

Guidelines for Therapeutic Interchange

contain a more re-

cent definition of TI:

Therapeutic interchange is defined as the dispensing of

a drug that is therapeutically equivalent to but chemi-

cally different from the drug originally prescribed.

Although usually of the same pharmacological class,

drugs appropriate for therapeutic interchange may dif-

fer in chemistry or pharmacokinetic properties, and

may possess different mechanism of action, adverse-

reaction, toxicity, and drug interaction profiles. In

most cases, the interchanged drugs have close similar-

ity in efficacy and safety profiles.

The ACCP guidelines also describe a comprehensive

five-part process for health-system TI implementation, with

an emphasis on patient safety; an extensive review of drug

classes appropriate for therapeutic interchange, including

specific evidence-based examples; discussion of legal and

regulatory issues; viewpoints of other professional organi-

zations, including the American Medical Association, the

American College of Physicians, and the Pharmaceutical

Research and Manufacturers of America; and medical and

pharmaceutical literature references.

The health system, through the action of the P&T

committee, must decide on the general policy for a TI pro-

gram, particularly regarding the authority and autonomy

of the pharmacy staff. The committee may define TI as an

automatic conversion by the pharmacist, may require con-

tact with the prescriber before the change can occur, or may

employ a combination of both. The prescriber may be in-

formed orally before the drug is dispensed or through writ-

ten communication in the medical record. Most commonly,

TI implies pharmacist autonomy once the P&T committee

has sanctioned the policy, but there may be exceptions based

on the level of clinical judgment required. A survey of the

prevalence of TI conducted in 2002 revealed that the vast

majority (88%) of hospitals use TI programs, and most of

those did not require the pharmacist to contact the prescriber

before making the conversion.

Categories of drugs that offer modest savings with

minimal challenge include various non-prescription groups,

Table 7.

Strategies to Involve Medical Staff

in Cost-Management Efforts

Enlist the pharmacy and therapeutic (P&T) committee to

review medication-utilization management issues as a

standing agenda item.

Identify the centers of excellence and work with individual

chiefs of service to gain support.

Meet with key medical staff departments and divisions,

including infectious diseases, anesthesiology, cardiology,

and oncology, as well as intensivists, hospitalists, and

interventionalists as appropriate.

Develop prescriber reports on the targeted high-cost drugs

and discuss methods for cost reduction.

Provide continuous feedback to the P&T committee

and individual departments and divisions on cost

management successes.

Provide hospitalwide expenditure data on the top 50 items

to the P&T committee.

Utilize evidence-based research to propose changes in

medication utilization.

Identify physician champions for specific initiatives.

Create a consistent procedure for developing prescribing

guidelines, protocols, care paths, and preprinted orders.

Table 8.

Key Aspects of Formulary Management

in Cost-Management Efforts

Policy for formulary drug addition and deletion through

evidence-based product selection, including efficacy,

safety, and pharmacoeconomic assessments

Policy for the use and monitoring of non-formulary

medications

Policy for medication-use evaluation

Limitation on combination, sustained-release, and long-

acting products

Policy for therapeutic interchange and prescribing

guidelines

Reduction of drugs in the same therapeutic group or class

Periodic house cleaning to reduce under-used and

discontinued line items

Policy for drug restriction

Procedure for consistently monitoring the use of new agents

particularly if there are specific guidelines for use

System to provide the formulary electronically with timely

updated information

Off-label or ad hoc use of medications

Restricted use (by indication, prescriber, patient care area,

patient)

Dose adjustment or discontinuation based on clinical

triggers or end points

Injectable to oral conversion

Therapeutic equivalence

536 Pharmacy Management–Guidelines

such as antacids, vitamins, nonsteroidal antiinflammatory

drugs, topical products, and cold and cough remedies. To

make significant gains in pharmaceutical cost savings, the

health system must consider the drug classes that comprise

the greatest proportion of drug expenditures, such as colony-

stimulating factors, antiinfectives, cardiac agents, and drugs

used in critical care settings. An abundance of literature

supports the success of TI programs, both in terms of qual-

ity patient outcomes and economic benefit. Based on the

literature, therapeutic classes offering the most opportunity

for success with the medical staff, as well as significant cost

savings, include histamine-2 antagonists, fluoroquinolones,

hydroxymethylglutaryl–coenzyme A reductase inhibitors, se-

rotonin antagonists, colony-stimulating factors, low molecu-

lar weight heparins, and proton pump inhibitors.

20–27

Although it is not the intent of these guidelines to delineate an

exhaustive list of all potential TI opportunities, the appendix

contains examples of the TIs that have proven successful.

Most of the evaluative studies on TI initiatives focus

on the economic value and quality improvement related to

standardization and formulary management. As the popu-

larity of TI programs increases in the acute care, managed

care, and ambulatory settings, an associated risk may also

increase due to substitutions along the continuum of care

and patient confusion regarding drug classes and duplica-

tive therapy.

28,29

The Joint Commission standard requir-

ing medication reconciliation can be partially traced to

anecdotal reports of the potential for medication errors as

a result of TI programs in various health care settings.

Pharmacists can play a vital role in supporting medication-

reconciliation activities through medication history assess-

ments and discharge counseling.

30,31

Guidelines. A variety of terms are used to describe

these tools, including prescribing guidelines, therapeutic

position statements, therapeutic guidelines, clinical practice

guidelines, protocols, or pathways. There may be subtle dif-

ferences beween these tools, but they all seek to enhance

patient safety, reduce variation in medical practice, and in-

crease standardization.

Guidelines can focus on a disease state, a thera-

peutic class, or a specific drug.

Published guidelines

are available for many drugs and drug classes.

33,34

The

Agency for Health Care Research and Quality maintains

an extensive online collection of published guidelines at

www.guideline.gov. A 2004 ASHP survey found that 83%

of U.S. hospitals use guidelines that include medica-

tions.

Successful implementation of such general guide-

lines often requires customization to meet the needs of

individual health systems, however. For example, local

guidelines should be developed that reflect the best avail-

able evidence, incorporate the opinions of local prescriber

experts when necessary, and are applicable within the con-

text of the individual health system.

Guidelines are also an important step leading to rules-

based computerized prescriber order entry (CPOE), which is

recommended by NQF in its 2006 Safe Practices.

CPOE

facilitates guideline adherence during the ordering process.

Steps to implementing an effective pharmaceutical

cost-containment program using drug-specific or drug class

guidelines mirror those for TI and include:

•

Utilization of evidence-based criteria.

•

Adoption of published, evidence-based, and peer-

reviewed guidelines from national organizations.

•

Solicitation of thought leaders and clinical experts

(e.g., physician specialists, chiefs of service, chief

medical officers).

•

Review and approval of the P&T committee.

•

Education of clinical staff.

•

Ongoing support from front line clinical pharmacist

staff.

•

Use of quantifiable measures.

•

Utilization of medication-use evaluation (MUE) to de-

termine compliance.

The last step is an important distinction between TI

and guidelines because what is approved by the medical

staff and what is done in practice may differ. Conducting

periodic MUEs with the approved criteria can determine

the thoroughness and consistency of the guidelines and

ultimately the success of this component of cost management.

It should also be emphasized that although guidelines can be

used to reduce drug costs, improving quality of care may

require more spending rather than less.

When guidelines reduce inappropriate prescribing, drug

costs will also be reduced. Due to the complex uses of some

drugs and drug classes, such as low-molecular-weight hepa-

rins, guidelines may be more practical and effective in man-

aging drug costs than

TI and other approaches.

Drotrecogin

alfa was one costly agent for which guidelines became

the standard of care in most acute care settings.

38–40

Other

successful guideline efforts have been demonstrated with a

number of drugs and drug classes, such as third-generation

cephalosporins,

statins,

antifungals,

43,44

albumin,

and

serotonin-receptor antagonists.

Drug shortages can also be an

impetus for the development and implementation of guidelines,

as was the case with the use of parenteral pantoprazole, which

may be used inappropriately and at a much higher cost in

place of histamine-2 antagonists for stress ulcer prophylaxis.

Although volatile anesthetic agents are often a top-20 item

in the pharmaceutical budget and offer a unique challenge

for guidelines or TI implementation, accurate evaluation of

cost savings can be accomplished by using the hourly cost to

maintain a minimum alveolar concentration.

Implementation of Medication Utilization Management

Initiatives. Careful thought and attention to the implementation

is required to successfully influence drug expenditures

through medication utilization initiatives, and multifaceted

interventions are often necessary. The active involvement

and support of clinical pharmacists and the medical staff

are crucial to effective implementation of these initiatives.

It is necessary to seek out ways to integrate or hard-wire

initiatives such as guidelines and TI into the care provided

at the bedside. For example, passive guideline dissemination

(e.g., simply posting to the hospital’s intranet site) is rarely

successful. Protocols, order sets, and pathways that reflect

the evidence in the guideline should be used to integrate the

guideline into daily patient care. The growing use of CPOE

systems and other technologies can also be leveraged to

implement medication-utilization-management endeavors.

CPOE can be used to guide prescribing in such straightforward

ways as leading prescribers to select formulary products or

recommended dosing frequencies.

CPOE can also promote

efficient medication use through more complex scenarios

such as prompting therapeutic interchanges or requiring

prescribers to follow interactive prescribing guidelines. For

Pharmacy Management–Guidelines 537

example, one institution established guidelines for activated

protein C use and utilized an interactive computer order

entry algorithm to implement the guideline.

Data Analysis. To ensure the validity of the medication-

utilization-management program, regardless of the method

of implementation, the estimated and actual cost savings

calculations must be grounded in accurate and consistent

data analysis. Unfortunately, there is no standard regarding

a method to determine the pharmaceutical cost savings with

programs such as TI. Hospitals have struggled for years to

balance practical considerations while striving for accuracy

and completeness.

Hospitals have to decide early in the

process whether to consider indirect costs such as devices

and other non-pharmaceuticals, price changes during the re-

view period, general drug price inflation, volume changes,

and labor costs.

Equivalent doses for all drug alternatives for each TI

must be established based on scientific evidence and cur-

rent practice standards, which may not be the same as FDA-

approved manufacturers’ recommendations. Most of the ref-

erences cited for TI above list the therapeutic equivalence for

the drugs in a specific class. Days of therapy is the common

method to compare equivalent costs of drug therapy within

a therapeutic class, particularly for antibiotics and other

classes that include scheduled drugs that are dosed multiple

times per day. For classes that include drugs with extended

half-lives and durations of action, weeks of therapy or cost

per course of therapy may be more appropriate. Examples

include colony-stimulating factors (e.g., epoetin versus dar-

bopoetin and filgrastim versus pegfilgrastim). Correcting for

equivalent strengths, sizes, and units of packaging is another

important step in cost-savings calculations, particularly for

liquid and parenteral products. The number of standard

doses available from a container of liquid medication or a

large volume parenteral medication varies based on the size

of the container. Medical staff input is important in deter-

mining equivalent doses, particularly if there is a divergence

between manufacturer’s recommendations and published

literature on dosing.

Once the methodology of data analysis is established, a

drug savings matrix should be developed. This becomes the

primary monitoring document that tracks the progress of each

initiative based on the changes in utilization. Purchase data is

the typical source for maintaining the cost savings matrix,

but it is essential to adjust and scrub the data before matrix

input. It is important to maintain a consistent common de

nominator. Utilization increases in certain targeted drugs may

be due to patient volume and may be appropriate. Correcting

for volume with denominator data and using ef

fective MUE

programs will assist with determining actual cost increases.

The elements of a standard drug-savings matrix spreadsheet

include the initiatives (TI and guidelines), savings targets,

baseline purchase dollars corrected for volume, current pur

chase dollars (after implementation) corrected for volume,

and actual savings monthly and year

-to-date. It is important

to be accurate and include both wholesaler and direct pur

chases, rebates, and wholesaler discounts.

To maintain commitment to and focus on the process,

it is paramount to provide consistent feedback regarding the

changes in the cost savings matrix to the P & T committee.

Some health systems also establish a reporting structure to

another oversight committee, such as a value analysis group

or similar body that has overall responsibility for non-labor

cost management.

Conclusion

Medication costs continue to rise and will continue to be a

target for cost management. Drug costs make up a majority

of health-system pharmacy budgets, and budgeting for these

expenses is an important function, but longer-term program-

matic and policy planning is also essential for successful

cost management. An effective plan for medication utiliza-

tion management must provide the health system with a road

map for continuous improvement in pharmaceutical expense

containment with specific goals and outcome measures of

success. Gathering the data to understand drug expenditures

and drug-use patterns is a prerequisite for cost-savings ef-

forts, and constant vigilance and monitoring of these data

are required.

A relatively small number of drugs usually makes up

the majority of the drug budget. Cost-management efforts

focused on these drugs will generally offer the best return.

Cost-management strategies that fall completely under the

pharmacy department’s control (e.g., purchasing and inven-

tory strategies) will be easiest to implement and should be

pursued first. Strategies that require an interdisciplinary ef-

fort (e.g., use of protocols or guidelines, therapeutic inter-

change, IV-to-PO switches) can be led by pharmacists with

the proper clinical background. Clinical pharmacy services,

such as participation in rounds, pharmacokinetic monitoring,

and renal dose adjustment, can also reduce drug expenses.

Cost management efforts should be coordinated. The

programs should contain a clearly defined and manage-

able list of cost containment targets with a goal and specific

targets for each initiative. Results should be measured and

evaluated, and this information should be shared with the

interdisciplinary team involved in the effort as well as with

health-system administration.

When selecting and implementing drug-cost-manage-

ment strategies, pharmacists must keep patient safety and

the quality of patient care in mind. Cost-management ini-

tiatives must never compromise the pharmacy department’s

ability to provide the best possible care. Fortunately, there

are many drug-cost-management opportunities that have

little or no potential for detrimental effects on patient care,

and efforts to improve appropriate use of a drug or drug class

often also offer opportunities for cost containment.

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Appendix—Therapeutic Interchanges,

Prescribing Guidelines, and Other

Interventions

Therapeutic Interchanges

The following are some examples of drugs and drug classes

for which health systems have successfully implemented

therapeutic interchange protocols:

Angiotensin-converting-enzyme inhibitors

Adenosine–dipyridamole for cardiac stress test

Amphotericin, lipid-based

Angiotensin-receptor blockers

Benzodiazepine hypnotics

Beta-lactamase inhibitor antibiotics

Cephalosporins: first- (oral), second-, and third-

generation

Cholesterol-lowering agents

Colony-stimulating factors (filgrastim and sargramos-

tim, darbopoetin and epoetin alfa)

Fluroquinolones

Glycoprotein IIb/IIIa inhibitors

Hepatitis B vaccine, pediatric strength

Histamine H

-receptor antagonists

Inhaled and intranasal corticosteroids

I.V. immune globulin

Insulins – various, including insulin aspart and insulin

lispro

Iron products, injectable

Low-molecular-weight heparins

Narcotic analgesics (fentanyl group) in anesthesia

Neuromuscular blocking agents

Nonbenzodiazepine hypnotics

Proton-pump inhibitors

Respiratory agents (tiotropium interchanged with

albuterol–ipratropium [Combivent, Boehringer

Ingelheim], albuterol–ipratropium [Duoneb, Day]

interchanged with individual drugs)

Respiratory spacers

Selective serotonin-reuptake inhibitors

Serotonin-receptor antagonists

Surfactants for newborns

Thrombolytics

Viscoelastic agents

Generic Substitutions

Generic products should be used routinely with few excep-

tions. The following are particularly important for cost savings:

Amiodarone

Fluconazole injection

Megestrol

Milrinone

Pamidronate

Propofol

Prescribing Guidelines

The following are some examples of drugs, drug classes, and

diseases for which health-systems have developed prescrib-

ing guidelines, protocols, or pathways in collaboration with

the medical staff and nursing staff.

Albumin

Anesthesia gas, low flow and guidelines for selection

Antibiotic surgical prophylaxis

Antibiogram and antibiotic guidelines

Antifungal (injectable) agents (voriconazole, itracon-

azole, caspofungin)

Aprotinin dosing

Carbapenems

Chemotherapy-induced nausea and vomiting

Colony-stimulating factor guidelines/monitoring

Drotrecogin alfa

Fosphenytoin

Heparin-induced thrombocytopenia

Intensive care unit sedation protocol

I.V. immune globulin

Levalbuterol

Nesiritide

Octreotide

Pneumonia protocol

Postoperative nausea and vomiting

Proton-pump inhibitors (i.v.)

Venous thromboembolism, use of anticoagulants in

acute coronary syndrome

Ziprasidone injection

Interventions—Other

Other initiatives or activities that pharmacists can collaborate

with the medical staff to reduce drug costs.

540 Pharmacy Management–Guidelines

Cost per case in anesthesia

Antibiotic monitoring, laboratory reporting of sensi-

tivities

Antibiotic restrictions

Eptifibatide waste reduction

Epoetin alfa waste reduction, prepare syringes

Pegfilgrastim is used in outpatients only

Approved by the ASHP Board of Directors on January 17, 2008.

These guidelines supersede the ASHP Technical Assistance Bulletin

on Assessing Cost-Containment Strategies dated September 27, 1991.

Developed through the ASHP Council on Pharmacy Management.

ASHP gratefully acknowledges the expert panel that devel-

oped these guidelines: Michael Rubino, M.S., FASHP; James M.

Hoffman, Pharm.D., M.S., BCPS; Larry J. Koesterer, M.B.A.; and

Robert G. Swendrzynski, M.S.

The bibliographic citation for this article is as follows: American

Society of Health-System Pharmacists. ASHP guidelines on

medication cost management strategies for hospitals and health

systems. Am J Health-Syst Pharm. 2008; 65:1368–84.