Pharmacoeconomics in rural hospitals
Pharmacoeconomics in rural hospitals
An in-depth look at cost control in small hospitals
By Pamela Lenhert, PharmD
Director of Pharmacy
Coalinga Regional Medical Center
Coalinga, CA
Physicians who practice in small, rural hospitals experience difficulties when trying to add med ications to the pharmacy’s formulary. There are forms to be completed, signed, and submitted, and never-ending questions from the pharmacist. What’s more, there are pharmacy and therapeutics (P&T) committee meetings to attend, and the wait for the final decision can be frustrating.
Physicians are asking only that the medication be available for patients — so why all the fuss? In fact, there are several explanations, including third-party reimbursement, budgets, purchasing agreements, and inventory control. Standards from the Joint Commission on Accreditation of Healthcare Organizations include sections pertinent to the formulary process and evaluation of medication, and state agencies examine the purchase and distribution of medications for evidence of regulatory requirements and/or diversion.
Finally, other factors influence the medication stocked in the pharmacy that you may not be aware of. Those factors include the physical location of the medical center or hospital, the surrounding communities, the staff physicians, and the type of patients.
o Unique features of small pharmacies:
Small hospitals in isolated rural areas often function as the gatekeepers to major medical care. The emergency department (ED) and/or attending physician determines which patients are transported to secondary or tertiary level hospitals. Unlike hospital personnel in metropolitan areas, rural hospital personnel may need to travel great distances to borrow necessary medications and supplies. Weather may play havoc with transportation in isolated areas.
The pharmacy must stock medications that will stabilize critical patients prior to and during any medical transport, as well as the standard medicines used in the facility. Many of these, such as antivenins, thrombolytics, and antidotes, are very expensive.
For example, the cost of three doses of Activase, one large dose of Digibind, and a 24-hour supply of rattlesnake antivenin may cost $10,000 to $12,000. Those three items may comprise 25% to 35% of the total value of the pharmacy’s inventory. The new antidote Antizol (fomepizole) has a purchase price of $4,000 per dose. Other bioengineered medications, such as Epogen or Neupogen, may be used infrequently but can add thousands of dollars to the pharmacy inventory.
o Inventory rotation:
The quantities and strengths of individual medications also must be considered. Having one strength of the majority of oral medications eliminates duplications and decreases inventory cost. The pharmacist also must consider "inventory rotation." Literature suggests inventory be rotated five times per year. The number of rotations can be determined by dividing the total yearly acquisition cost of medications by the amount of stock inventoried at the fiscal year end.
By limiting the formulary to frequently ordered medications, the pharmacist can maximize inventory rotation and minimize inventory cost. Stock ing limited quantities of medication and receiving deliveries daily from the wholesaler (known as "just-in-time" inventory) also decrease the total dollar investment in inventory.
Oral and topical medications that are infrequently used — but easily obtainable from local pharmacies — may not be stocked routinely. Selecting the strengths and quantities of injectable medications is more difficult, and frequency of use, patient safety factors, and therapeutic classification must be considered. For example, if ceftriaxone is the third-generation cephalosporin prescribed most frequently, multiple strengths may be stocked in smaller quantities than a similar agent that is less frequently prescribed.
o Costs by department:
Pharmacy costs per department vary. The surgical area may consume a large percentage of the pharmacy budget depending on the type of surgeries performed, the type of equipment used, and the practicing physicians. Newer medications used in surgery during anesthesia are usually non-contract items and are very expensive.
The ED, depending on the number of patients and common injury types, may have a large inventory consisting of small quantities of different medications. Usually medications in the ED and operating room (OR) are charged to the patient as used, and a significant amount of inventory dollars can be sitting on these shelves for prolonged periods of time. Both the ED and the OR may need "par levels" of medications established to encourage rotation of stock and tight inventory control.
In contrast, medications dispensed on the nursing floor for inpatients usually are administered quickly, allowing a quick recapture of inventory costs. Many hospital pharmacies dispense patient-chargeable medications to other departments with out transferring the associated costs, knowing the revenue eventually will return to the pharmacy. During periodic inventories, the pharmacy may include medications stocked in other departments as part of total inventory.
o Rebates:
Purchasing groups, purchasing agreements, and individual contracts may have major effects on hospital formularies. Purchasing groups and pharmaceutical manufacturers may provide rebate incentives to institutions complying with contracts. Those may include rebates based on the percentage of total dollar value purchased, cost reductions based on volume purchased, or multi-tiered systems. For example, one manufacturer may increase the rebate for its H2 antagonist, such as Pepcid and Zantac, as the hospital’s usage increases from 80% to 90% over other H2 antagonists. Similarly, the cost of a generic third-generation cephalo sporin available on contract may be discounted another 5% if the volume of usage represents 80% of the hospital’s antibiotic volume for third-generation cephalosporins. By switching from a newer, noncontract third-generation cephalosporin (ceftriaxone 1 gm/day) to a discounted antibiotic (ceftizox - ime 1 gm q 8 hrs), the pharmacy may save an estimated 10% to 20% of yearly purchasing costs.
o Bundling purchases:
Manufacturers also "bundle" drug products when negotiating with purchasing groups and/or large hospital corporations. This strategy allows for greater market penetration of the manufacturers’ products. For example, the manufacturer may bundle several of its generic products with a newer product.
The low price on the trademarked item entices the purchasing groups and institutions to agree to the "bundled" contract. With the advent of electronic records, compliance reports for each contracting hospital are generated and distributed to the hospital, wholesaler(s), purchasing group(s), and manufacturers.
o The formulary:
Selection of medications to be included in a formulary is a long process. Pharmacy literature is awash with pharmacoeconomic analyses that measure different endpoints. These analyses include cost-benefit, cost-effectiveness, cost-consequences, cost-utility, and cost-minimization studies.
Cost-minimization and cost-effectiveness are the most commonly used methods in larger institutions. Smaller ones may forgo this type of analysis for a simple "advantage/disadvantage" system, comparing two drugs side-by-side. This system is easily presented to the P&T committee and the medical staff.
o The decision:
The P&T committee is the gatekeeper of the formulary and pharmaceutical practice in the institution. The committee is charged with periodic review of the formulary, additions or deletions of medications, and ensuring rational use. When considering new formulary additions, the committee reviews the efficacy of the medication, cost, contract pricing, comparable formulary medications, impact on the pharmacy budget, estimated quantity and frequency of use, and prescribing information included in the manu facturer’s package insert.
In addition, the committee may request feedback from the medical staff, other hospital departments, and other institutions.
For example, during formulary consideration of an antibiotic, the laboratory may be contacted for the most recent microbiological profile and sensitivities. A respiratory therapist might be consulted when a new inhalant is being considered. During the decision-making process, the total cost of administration — including IV supplies, pharmacy preparation time, and nursing time — is considered. The committee also should consider the local standard of care.
The cost of the drug vs. the cost of future litigation also may be explored. If a drug is considered a component of the standard of care in the region, is excluded from the formulary due to cost, and a subsequent adverse patient event occurs, the hospital must consider the cost of any resultant litigation. Those considerations also must be discussed when an existing medication is being considered for an off-label use.
For example, a physician could request that Cytotec (misoprostol), an oral prostaglandin used to prevent gastric ulcers during NSAID administration, be available to be administered vaginally for cervical ripening and labor induction. The physician should be asked to provide sample policies and procedures, as well as published studies to support such a request.
The P&T committee must make provisions for obtaining nonformulary medications in a timely manner, either locally or from a distant source. Hospitals that use locum tenens, residents, or rotating physicians may need to stock a large number of nonformulary medications.
Small hospitals that are part of a larger corporation may need to justify requests for expanding the formulary medications beyond the "corporate" formulary. As the outpatient prescription formularies of large HMOs become more restrictive, the hospital pharmacy may follow suit as a cost-saving measure.
Patient satisfaction may decrease as the hospital pharmacy offers a substitute for a medication the patient has been taking for years. Hospitals with large numbers of indigent and cash patients may request that the hospital pharmacist submit reimbursement requests to the drug manufacturer’s indigent patient programs. The indigent patient programs are, however, limited and usually reimburse or supply hospitals for newer, expensive medications such as alteplase, filgrastim, and erythropeietin.
Rural hospitals’ formularies usually reflect those of larger hospitals, with the exception that larger hospitals have extensive formularies based on the services offered. Oncology, nephrology, neurology, and other specialized services determine the medications included on a large hospital’s formulary.
High cost, investigational, and limited-use medications usually are not found on small hospitals’ formularies. The prescribing habits of the physicians, the services offered, and the outpatient medications of the surrounding patient population drive a small hospital’s formulary.
o Returned goods:
Manufacturers have changed their returned goods policies drastically. Many will not issue full or partial credit for outdated medications. Those drugs must be disposed of as a medical or "hazardous" waste, depending on state and federal regulations. The processing and destruction of outdated medicinals has become a large, profitable business in recent years, as exhibited by the growing number of companies offering this service.
The medical disposal companies offer processing fees of up to 15% of the "estimated" return value. Smaller hospitals may have a greater percentage of outdated medications to inventory, increasing the cost of business. For example, a pharmacy may spend $200,000 on medications annually and end up with $15,000 (7.5%) worth of outdated and/or nonreturnable medications. Processing and disposal fees may total $2,000 to $4,000 annually. The cost of the nonreturnable medications, however, may be a tax-deductible expense for eligible institutions.
o Reimbursement:
The reimbursement rate for medications billed to patient accounts may be a factor in formulary consideration. Hospitals that contract with health maintenance or preferred provider organizations, which reimburse by capitation formulas or discount rates, may choose to examine acquisition costs of medications.
Although the hospital may contract with a small number of insurance providers, each plan may offer different "discount" rates or charging systems. That can result in several reimburse ment rates, presenting a challenge to the pharmacy to determine its actual ratio of dollars billed vs. dollars received. The finance department’s computer software may not be sophisticated enough to provide such detailed information.
o Revenue:
The hospital’s budget process may pro vide the P&T committee with financial guidance. Until recent years, hospital pharmacy departments have been a "revenue source" for hospitals, generating more income than expense.
In the past, pharmacy charges generally averaged about 10% of the daily total charges. The advent of new sophisticated medications may push the pharmacy charges to 20% to 30% of total patient charges. For example, double or triple intravenous antibiotic therapy charges may exceed $500 a day, while the patient’s medical/surgical room charge may be only $650 a day.
Pharmacy personnel also should be considered, and may comprise 25% to 50% of the pharmacy’s budgetary expenses. As those charges are included in the hospital’s budget, the pharmacy may be projected to provide 5% to 10% of the hospital’s total revenue, while the projected pharmacy costs, including personnel, would equal about 2% to 4% of the hospital’s total expenses.
o Buying groups:
Buying groups, such as Amerinet and Purchase Connection, may provide the hospital with projected inflationary indices. The inflationary index of pharmaceuticals has fluctuated from 2% to 6% over the last several years.
In addition, inflation affects different classes of medications at different rates. Historically, the prices of biotech medications have increased at a higher rate than brand or generic. Recently, generic drugs have experienced greater-than-expected price increases. The inflationary index is considered during the budgetary process, as well as price increases/decreases due to contract changes.
o Labor costs:
Personnel costs may rise as the small hospi tal adds clinical pharmacy services, requiring the addition of a technician. As costs rise, patient billing charges for medications also increase and, one hopes, provide more revenue. Because comparisons of prices and pricing structures between hospitals may be interpreted as "price fixing," pharmacists are reluctant to conduct surveys and publish data dealing with these issues.
The hospital’s finance department may be able to provide the pharmacist with historical information regarding actual revenue captured vs. actual expenses. At best, the pharmacist may be able to use actual expenses, projected expenses, and billed revenue when formulating the next year’s budget. Rural hospitals, which only recently have started pharmacy services, may not have pertinent budgetary data available for the pharmacist.
The costs associated with full-time pharmacists in small hospitals vary from state to state. Many small hospitals consider the personnel costs of a full-time pharmacist prohibitive and opt for "consultant pharmacists." For example, California’s code of regulations (Title 22) outlines the general requirements of a hospital’s pharmaceutical service, including the availability of a pharmacist 24 hours a day.
Furthermore, hospitals with fewer than 100 licensed beds may have a "limited permit" pharmacy or drug room, with a consultant pharmacist designated as "pharmacist in charge" (business and professions code sections 4035.1 and 4052.1). The consultant pharmacist is responsible for overseeing facility compliance with Title 22 regulations and must provide written reports to the institution’s chief executive officer.
However, these types of regulations may not specify how often the consultant pharma -cist must visit the facility, nor the emergency response time to the hospital. The facility may choose to contract these services with local retail pharmacists, specifying the number of hours or days per week the pharmacist visits the hospital.
With the advent of automated dispensing machines, the consultant pharmacist may live hundreds of miles away, with a very slow response time. Depending on the number of site visits, the consultant pharmacist’s fees may be 25% to 50% of the cost of a full-time pharmacist. However, the cost and amount of nursing time spent ordering, obtaining, replacing, and mixing medications is not usually included in that equation.
o Justifying the cost:
How do small hospitals justify a full-time pharmacist? Many facilities have examined the services a clinical pharmacist may provide, including development of medication protocols, educational presentations, preparation of intravenous medications, and pharmacokinetic services.
The addition of a "hospitalist" pharmacist may reduce medication errors, increase nursing skills, decrease pharmacy and "floor stock" inventory, promote the rational use of medications, and, depending on the pharmacist’s background, serve as an important resource.
Pharmacists also serve as risk managers, members of quality improvement teams, and supervisors of purchasing and/or other hospital departments. The personnel costs of a clinical pharmacist may be recaptured in decreased medication costs, increased nursing efficiency, decreased patient lengths of stay, and perhaps decreased litigation related to medication misadventures.
One also must include costs of vacation and on-call relief time associated with the pharmacist. Ideally, another local pharmacist can serve as "relief" during vacation and sick leave. If necessary, registry pharmacists can serve as relief pharmacists, increasing costs significantly. Hospitals vary in the payment of "on-call" and "call-back" time to their employee pharmacists, as well as "on-call" requirements.
Hospitals that require the employee phar macist to assume continuous on-call responsibilities without relief may have poor pharmacist retention, resulting in high recruitment costs, as well as huge registry costs during transition periods.
o Skilled nursing facilities:
The addition of a skilled nursing facility (SNF) to the hospital confounds the situation. If the SNF maintains budgets and financial data separate from the acute care facility, the pharmacy must make separate budgetary provisions. Again, the SNF may have a separate set of contracts with insurance providers, which may require the pharmacy to contract separately to provide medications.
Each state (and county) may have different requirements for the provision of pharmacy services, and the pharmacy may need to contract with separate buying groups, as well as modifying services, budgets, and formularies to meet the needs of the SNF.
o The evolution of pharmacoeconomics:
The study of cost containment, acquisition cost of medications, and patient medication charges has evolved into the field of pharmacoeconomics. The concepts of patient satisfaction, "customer" retention, quality of life, and serving the medical needs of the community are now being factored into the health care equation.
The forces driving the choice of medications for a formulary, as well as the availability of medications, are many and complex. As the practice of medicine evolves, and the influences of third-party payers and health maintenance organizations fluctuate, the dynamics of drug therapy will change. Those forces will drive the decisions affecting the practice of pharmacy and therefore the economic impact of the pharmacy department in small hospitals.
[For additional information, contact Pamela Lenhert, PharmD, Director of Pharmacy, Coalinga Regional Medical Center, 1191 Phelps Ave., Coalinga, CA 93210. Telephone: (209) 935-6400.]
Subscribe Now for Access
You have reached your article limit for the month. We hope you found our articles both enjoyable and insightful. For information on new subscriptions, product trials, alternative billing arrangements or group and site discounts please call 800-688-2421. We look forward to having you as a long-term member of the Relias Media community.