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Making the most of your hospital's pharmacy purchasing power | Viewpoint

Article

With better, unbiased data, hospitals can gain insights that will help drive improvements in pharmacy spending.

With the right data, a hospital can use its purchasing power to achieve improvements in pharmacy spending, Jason Mills writes. (Image credit: ©AS Photo Family - adobe.stock.com)

With the right data, a hospital can use its purchasing power to achieve improvements in pharmacy spending, Jason Mills writes. (Image credit: ©AS Photo Family - adobe.stock.com)

There's a simple rule amongst supply chain professionals: "own your spend."

An expanded way of saying this rule would be "understand how your department is using hospital resources and be able to concisely convey related key performance indicators (KPIs) around spend."

While this idea of owning your spend isn't new, especially in supply chain/materials departments, it's a challenging feat in the pharmacy world. The reason is largely twofold: There's limited access to data that properly informs KPIs for the pharmacy supply chain team and pharmacy spend is not very well understood by hospital executives.

Unless those leaders have had the opportunity to thoroughly review and discuss pharmaceutical spending, it's very easy to get lost within the nuances and caveats of purchasing medication for a hospital, including 340B program pricing, wholesaler cost of goods discounts, and reverse distribution. Furthermore, rule revisions tied to the Inflation Reduction Act of 2022 are likely to make pharmacy purchasing even more nuanced and much more complicated in the future.

What does this all mean to hospital leaders? The C-suite must have confidence in and trust those overseeing the pharmacy supply chain to properly manage purchasing and costs due to the rapid changes that can occur. Furthermore, pharmacy leaders should be empowered to leverage their knowledge and experience to do what is best for their hospital concerning the delivery of care and the financial bottom line.

One such initiative should be investing in resources that can provide unbiased data on the hospital's pharmacy spend. Historically, the pharmaceutical marketplace has failed hospitals in terms of providing good, usable, marketplace intelligence available at a user's fingertips. The intelligence provided to a lot of hospital systems is typically delayed in analysis and/or carries with it some bias. It is not uncommon for a third-party recommendation to appear to show cost savings in one area but end up much more costly for the organization as a whole.

When you look at an entire hospital's costs, pharmaceutical purchasing is one of the largest categories of spend, similar to the supply chain footprint. With unbiased data about pharmacy spend and marketplace costs, a pharmacy department can begin to understand and "own its spend" and then flex that incredible purchasing power to achieve improvements that can help with contracting, cost savings, budgeting, and other worthwhile initiatives.

Here are a few examples of how improved knowledge of pharmacy spend and marketplace costs can be leveraged to the benefit of a hospital.

Holding GPOs accountable.

If your data allows you to determine whether a GPO's contracts are priced competitively, you gain the ability to point out when those contracts come up short.

Consider a contract that covers multiple generics, but marketplace data comparisons reveal the costs for one or more of the contracted generics are much higher than what's available without a contract. In some cases, the off-contract generic may be priced so low that the savings would outpace any rebates or other monetary considerations had your organization taken the recommendation to go with a contracted option. With this information, you gain the ability to encourage the GPO to work harder to negotiate the costs of those generics.

Or consider a GPO contract with a company that your data indicates has consistently struggled to get a critical product into your organization. You will be in a better position to notify your GPO of the inability to fulfill orders for the contracted medication and make an informed suggestion of a medication that has been more consistently in good supply.

You will also put yourselves in a stronger position to adequately review any potential compliance penalties or loss of rebate dollars because you choose to purchase off contract to achieve cost savings or ensure you acquire the medications at a volume your hospital needs.

Assessing local agreement opportunities.

With transparent and current data, a pharmacy department can make informed decisions about whether to engage a manufacturer with local agreements as well.

Manufacturers are increasingly becoming more flexible in their ability to contract locally, and health systems are seeing a resurgence in regional generic competition for market share. To make sound financial decisions around whether to contract directly with manufacturers will require visibility into rebates, contracts, and potential loss of any cost of goods discounts.

Additionally, with regard to drug shortages, solid data will be imperative for understanding whether a manufacturer is able to adequately provide the medications your hospital needs and at fair price or whether you need to pursue alternative channels.

Accuracy in budgeting.

While all the opportunities described above are important for a hospital's ability to serve its patients while maintaining viability, pharmacy supply chain professionals often stress most about budgeting, including the current state of their budget and what next year's budget should look like.

Determining these figures has proven challenging because of outdated data and flawed assumptions, which often leads to significant friction between pharmacy and finance departments.

However, if you "own your spend,” you know where you've seen growth and what agents saw increased spend and what items had a decrease. This will provide a much more dialed-in budget estimate for the next year. If you consistently hit or are close to your budget year over year, that will impart trust with peers over in finance.

This is especially important when you need to request an increased budget because of a significant initiative, such as the addition of a transplant clinic. With current data, you gain the ability to clearly spell out what you're projecting in additional costs in a manner that is more readily accepted and understood by hospital administration as it is supported with line-item level data versus a generic percentage increase.

Lastly, the earlier you can identify an unexpected, unbudgeted, and unavoidable expense, the sooner you can inform your hospital's leadership about the situation and how it is projected to impact spend. While this may be a tough pill to swallow (pun intended), with good data, a pharmacy department can describe the variance proactively, helping to maintain the trust of the C-suite.

To own your spend, you must know your spend

Hospitals can wield their pharmacy purchasing power in many ways, but doing so has largely been difficult due to a lack of timely, accurate insight into that power.

Fortunately, we are seeing an emergence of marketplace intelligence solutions that empower pharmacy departments to own their spend and then use it to their advantage, both externally for the likes of contract negotiations and conversations with vendor partners and internally for improved budgeting and collaboration.

Supply chain departments have long benefited from access to unbiased, timely data. The good news is pharmacy departments are starting to reap the same rewards.

Jason Mills is a pharmacy account specialist with QuicksortRx, a technology company working with health systems on pharmacy purchasing.

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