It’s no secret that hospital leaders are faced with some serious challenges to keep their organizations financially viable while improving quality of care and safety. The Patient Protection and Affordable Care Act predicts revenue cuts: $110 billion to Medicare fee-for-service rates, $36 billion to disproportionate share hospital payments and 2 percent to Medicare spending. Value-based purchasing will tie quality and patient satisfaction outcomes to hospital payments, reducing payments further while raising quality requirements.


It is also no surprise that organizations will have to undergo transformational change to meet these challenges. A business-as-usual mindset will result in continued regression, and incremental change may help, but only in the short term. Organizations must change the way they think and behave to succeed in the future.

Untouched Revenue Opportunities in Pharmacy

Pharmacy is most often managed as a commodity, its leaders isolated from high-level strategic decision-making. It is viewed as an ancillary service with the primary administrative emphasis on drug cost. But the clinical impact of pharmacy is largely undervalued.

In reality, pharmacy is a departmental outlier. It is part clinical and part business comprising complex operational systems and processes that don’t fit the average department model. It is a critical player in the care delivery process, but it is not typically present at the C-suite. It often gets attention only after critical medication incidents.

Yet there are many reasons pharmacy is essential to the success of a health care organization:

  • Medications are one of the fastest growing expenses for any health care organization and are generally one of the top five sources of revenue.
  • The impact of medication errors can be devastating. Health care organizations annually use millions of doses of medication, making pharmacy second only to the operating room for risk of doing serious harm.
  • The primary treatment modality for more than 80 percent of patients is medication therapy. Pharmacists have the specialized training that makes them medication therapy experts, in partnership with physicians, to produce the best clinical outcomes. The U.S. surgeon general recently released a report advocating increased pharmacist involvement in direct patient care to improve medication therapy outcomes and to help reduce drug costs. In addition, multiple peer-reviewed studies demonstrate the positive clinical impact pharmacists have on medication therapy outcomes.
  • Finally, from a regulatory perspective, medication therapy management is a key element of Joint Commission, state pharmacy boards, Department of Public Health, and Medicare and Medicaid regulatory compliance. It is clear that recognizing the contribution of pharmacy to the business of the hospital is imperative.

Seven Questions to Maximize the Business of Pharmacy

In the pharmacy department, there are numerous opportunities to make financial and clinical improvement. Each organization should be asking itself the following seven questions:

  • Are we buying drugs at the best possible price?
  • Are sound business principles and practices being applied to all elements of the pharmacy enterprise, and is pharmacy viewed as the large business it has become?
  • Are patient billing and revenue processes for pharmacy sound and routinely monitored?
  • Is the organization maximizing all current sources of pharmacy revenue, or are there leaks in the system?
  • Are pharmacy resources — including drugs, supplies and manpower — properly controlled and managed?
  • Are patient outcomes and medication safety concerns appropriately balanced with financial considerations in the pharmacy department?
  • Are all pharmacy entrepreneurial opportunities identified, explored and pursued?

From these questions a definitive business model, strategy and tactics for all phases of the pharmacy business can be created. This is not an easy process, and often organizations are overwhelmed by the project scope; however, the return for the organization can be amazing. External consultants knowledgeable in high-performance pharmacy can be an invaluable resource. Completing this process quickly and accurately has a significant time value for money.

Using Our Wholesaler’s Experience

An example of the potential financial and clinical impact of this process is an initiative we undertook at Indiana University Health. Our pharmacy supply chain initiative created an entirely new business model in our relationship with our drug wholesaler. Over the past 10 years, major drug wholesalers have changed their business profiles through diversification into other health care business units outside of core distribution activities. These new endeavors were presented to hospitals as "one off" choices.

By looking at the entire wholesaler portfolio we wanted to change the traditional vendor-client relationship and apply our wholesaler’s expertise across its entire business portfolio. Instead of the usual price/item transaction-based negotiation, we wanted a true partnership in which both parties’ goals and objectives were aligned and both were at risk. We opened up our operational data to our partner and indicated that everything was fair game. We wanted innovative ideas that would reduce cost, maximize current revenue sources and create new revenue.

We were willing to invest in new business structures to achieve these goals, but our partner had to guarantee a $12 million net margin improvement over the initial 36 months of the new venture. The costs of any investments would be netted against the final figure, and all of the results would be verified by our finance department. We were not interested in cost avoidance, but rather, hard and spendable bottom-line cash improvements.

We identified 32 pharmacy projects that we felt addressed the seven questions. We then developed a detailed statement of work, including goals and metrics for measuring success, for each project. We created a new management infrastructure with our partner so we could expeditiously move and track these initiatives. Also, we were able to front-load our guarantees, providing cash to help fund some of the new personnel for programs designed to improve finances, clinical quality and safety.

As a result of this process, we hired 13 new pharmacists and significantly expanded the scope of our clinical pharmacy activities. We also were able to increase prescription capture in our retail pharmacies, improve quality outcomes associated with a variety of medication therapy initiatives and reduce our cost of goods, improving our margin on pharmaceuticals.

The Gain

The financial result was that we significantly exceeded the original $12 million guarantee. We achieved this net margin enhancement in 24 months. At the completion of the initial 36-month contract term, we have verified $34 million in margin improvement, with all investments in personnel and equipment netted against this total.

By thinking innovatively, we were able to expand patient care services, improve quality and safety outcomes, and contribute to our organization’s operating margin during a time when we were facing some serious economic challenges.

No two organizations or pharmacy departments present exactly the same profile or opportunity. But given the clinical and business combination present in pharmacy, the potential to materially assist senior leaders to address financial and quality issues is definitely available. It is time for organizations to maximize the full potential of pharmacy services to generate the transformational changes needed to survive and thrive in years to come.

James Jorgenson, M.S., R.Ph., F.A.S.H.P., is the vice president and chief pharmacy officer at Indiana University Health in Indianapolis. William Shaw, R.Ph., is the director of Statewide Pharmacy Purchasing & Logistics at Indiana University Health.