Hospital pharmacies find budgeting a challenging process this year

Lower bed counts, state budget cuts have impact

Hospitals from coast to coast are finding it more challenging to handle budgeting this year because of a variety of economic pressures.

On paper, hospitals in the past couple of years have seen the lowest predicted increase in drug expenditures in a decade or longer.1

Normally, this would make the budgeting process a little easier. But in reality, hospitals are dealing with budget cuts due to decreased hospital utilization, state budget cuts, and other economic pressures and byproducts of the national recession.

"Fewer and fewer patients are coming into the hospital, and our volumes are down," says Lee C. Vermeulen, BSPharm, MSPharm, FCCP, director of the Center for Drug Policy at the University of Wisconsin Hospital and Clinics in Madison, WI.

"Hospital pharmacies will definitely see their costs going down," Vermeulen says. "There is higher generic utilization overall due to more generics than before, but a lot of it is a straight-up change in patients' awareness and interest in generics."

It's one thing for patients to have someone else paying the bill and saying they won't consider a generic drug. But when patients have insurance that charges them $20 to $30 extra per month for a name brand drug, they'll choose a generic brand, he notes.

Also, increasing numbers of patients have no insurance, which means they will buy generic drugs if they can even afford those.

"The problem is that as patients lose their jobs they are losing their insurance," says Nadrine Balady-Bouziane, PharmD, director of pharmacy services at High Desert Health System in Los Angeles, CA.

When patients lose their insurance they delay doctor visits, which means delayed diagnoses, Vermeulen says.

"The long-term significance is that lower costs will translate into higher costs as patients let things go," he explains. "Patients say, 'I've got this symptom, but I won't see a doctor because it will cost me a lot to manage this thing,' so they wait, and then it gets much harder and more expensive to treat."

For many hospitals in the short term this trend means unfilled hospital beds and reduced revenues. For High Desert Health System the trend means an increase in patients since the hospital is funded through the Los Angeles County Department of Health Services and serves many poor and uninsured or underinsured patients.

It also means that a health system that has faced budgeting restrictions since it was initiated in 2003 now is experiencing its most difficult year yet.

"We're reducing the money we spend on drugs, and they're monitoring even pens and pencils that we have to order," Balady-Bouziane says. "So we mandate generics now except for thyroid medication."

The hospital's tight formulary means that physicians and pharmacists have to use generic substitutes or go through an exhausting process to justify the use of a more expensive option.

For example, there is a protocol and list of drugs physicians have to try before they can document that their patient failed on these and needs Lipitor®, Balady-Bouziane says.

"We can make exceptions just maybe after a myocardial infarction," she adds. "They may put the patient on a high dose of Lipitor for 12 weeks after a heart attack, but then they have to go back to generic drugs."

So the hospital's revised formulary will allow physicians to prescribe outside the protocol for a few months, but then they have to revert back even if research studies do not substantiate the switch, she adds.

As difficult as this sounds, the alternative is worse, Balady-Bouziane says.

"The alternative to that is closing clinics so patients don't have any access to care, and this is because the real estate and property taxes and our revenue in the county have been reduced, and our patient population is growing," she explains.

"We sent physicians and pharmacies e-mails to let them know of the change," Balady-Bouziane says.

But obtaining buy-in wasn't necessary: "In our case they almost don't have any choice because we don't have to worry about losing patients," she says. "We tell them that's the way it is and if you want to prescribe something else for your patient then your patient has the choice to go outside at cost, but if they get it from us it's free."

At Oregon Health & Sciences University Hospital and Clinics in Portland, OR, the budgeting pressures are present, but not tied to state funding cuts since the institution is not state-owned and operated, says Gae M. Ryan, PharmD, director of pharmacy services.

"We've had a difficult year like everybody else," Ryan says. "Our inpatient volumes have declined although the outpatient volumes have increased."

So the pharmacy is doing the same work in a different arena, Ryan says. "We have had layoffs twice this year."

It will be a difficult year to make a pharmacy budget, notes Janice Dunsavage, RPh, MAS, director of pharmacy at Pinnacle Health System in Harrisburg, PA.

"We've seen lower utilization; we've seen admissions decrease from time to time, but are not experiencing that right now," Dunsavage says. "We've seen drug shortages, which is our biggest problem."

Hospital pharmacies will be asked to tighten their budgets more than they have in the past, and they'll need to look for additional ways to impact the cost without compromising patient care, she adds.

So how should hospital pharmacists plan their budgets during these difficult times?

Pharmacy budgeting experts recommend that hospital pharmacists identify the trends that have the most impact on their hospital and proceed cautiously from that data point.

"What we recommend is that hospital pharmacies understand the data and their medication use patterns," says James M. Hoffman, PharmD, MS, BCPS, a medication outcomes and safety officer in the pharmaceutical department of St. Jude Children's Research Hospital in Memphis, TN.

"The challenge we always have is people often look at just the number and not the whole process," Hoffman says. "So we've done more this year of analyzing our drug expenditure trend and promoting the right drugs being used for our patients."

One of the regular budgetary pressures involves dealing with bundled products in order to get the best prices.

"We have four drugs by four different drug manufacturers, and one says, 'I want 60% of the market share before you get a good price,'" says C.S. Ted Tse, PharmD, MBA, clinical pharmacy coordinator at Advocate Trinity Hospital in Chicago, IL.

"That puts pressure on us to lean on one or two drug classes of medications before we can get a good price," Tse says.

It's also a continual challenge to manage the marketing pressures to use the more expensive new drugs, he notes.

"This era is a patient-driven market," Tse says. "Patients see the drug on TV at lunch time and tell the physician they want it, and the physician has no idea how much it costs."

So it's up to hospital pharmacists to learn as much as possible about new drugs and distinguish between those that are useful and those that are not, Tse adds.

Fortunately, there will be surprisingly few new inpatient drugs marketed this year, Vermeulen says.

Another budgeting issue is how the recession has caused people to postpone or cancel profitable elective surgeries, Hoffman and Vermeulen say.

In general, hospitals are seeing very clear decreases in utilization in predictable areas, such as medications like Botox® used in cosmetic surgeries, Vermeulen says.

"We're also seeing a decrease in hypertensives and in some other areas," he adds.

"We're seeing this manifest in two ways: through copayments and out-of-pocket," he says. "Beneficiaries are going to have to pay out-of-pocket more than they have before because employers are saying, 'I can't afford this, and you'll have to pay half the drug cost or a higher copayment.'"

"The downstream effect for the hospital pharmacist is trying to manage drug expenditures when these elective surgeries, which are very profitable and a good margin for the hospital, go away," Hoffman says. "If these go away then there's even more drug cost pressure on the hospital, and that's the end result of the world we live in right now."

Vermeulen and Hoffman, who are among the authors of the annual future drug expenditures report, have predicted a very low rate of growth in drug prices overall.1

"We're looking at price contraction," Vermeulen says. "We're hearing from GPOs (group purchasing organizations) serving hospitals that they're seeing some growth in prices."

But this could reflect the GPOs' desire to manage expectations more than the reality, he adds.

"The national data do not support this," Vermeulen says. "My experience is telling me that price growth is not the big factor that some GPOs think it is, and this is the lowest overall growth rate we've projected ever since we've been doing this."

The drug expenditure study points out two different trends in drug costs, Hoffman says.

"There's the trend of the traditional small molecules coming off patent," he says.

This pushes prices down. But then another trend holds prices high: "There's still growth in expenditures for clinic medications, new medications, biologicals, and specialty drugs," he explains.

"We wrote a lot about specialty medications in this paper, and that's still going to be a growth area, even with the recession," Hoffman says. "It's going to be a challenge for hospitals to provide continuity of care when patients who are on expensive medications are admitted to the hospital."

St. Jude Children's Research Hospital has addressed drug budgeting and costs at grand rounds as a way to educate clinical staff on national drug expenditures.

"A lot of what we discussed was how to promote rationale drug use for our patients," Hoffman says. "Medications are a big part of St. Jude's operating budget, and it's always a target for cost management."

There is one potential issue on the horizon that could impact future drug costs, he notes.

"What's really fascinating is biosimilars, the biologics, and specialty drugs," Hoffman says. "There are a number of barriers to an abbreviated pathway for copies to come on the market, so right now there are three bills in Congress to produce the law that will do that."

This long-term trend is one hospital pharmacists should watch because there currently are no generic versions of biologics, he adds.


  1. Hoffman JM, Shah ND, Vermeulen LC, et al. Projecting future drug expenditures — 2009. Am J Health-Syst Pharm 2009;66:237-257.