Introducing an ROI Model For Pharmacy Services

MANAGED CARE March 2006. ©MediMedia USA

The finance department and pharmacy are not speaking the same language. This model might just bridge that divide.

Martin Sipkoff

The concept is so simple that you wonder why it isn't already common practice. Using a return on investment model — the same kind health systems use to buy equipment — pharmacy departments can establish the value of outpatient drug expenditures. "It simply isn't being done by pharmacy departments and payers don't expect it," says Fred Pane, RPh, senior director of pharmacy affairs at Premier, a group purchasing organization. The pharmacy ROI model is his brainchild, and he has been talking to several health system pharmacies about how to prove that the money they spend reduces overall health care costs.

"They are showing interest," says Pane. "Payers are concerned about controlling rising drug costs and they are under increasing pressure to demonstrate value in what they spend. Pharmacists can move from a compartmentalized budget and expense analysis model to an overall cost-of-care model. The data exist to establish that the work they do generates the best patient outcomes, with a positive effect on overall costs and reimbursements."

Pane's right, of course. There is a growing need for ROI rationalizations in pharmacy just as there is in other areas of health care, say health plan officials. "Pharmacists are increasingly under pressure to explain their role in increasing costs," says Eric Cannon, PharmD, director of pharmacy services and health and wellness for IHC Health Plans in Salt Lake City, Utah. "Any tools that allow them to demonstrate value are more than helpful."

Pane says that today reimbursement is dictating patient treatment environments, and reimbursements are dropping significantly for inpatient services.

"The net effect on system pharmacy departments is that outpatient drug expenses are growing faster than inpatient drug expenses and are becoming a larger part of the total drug budget. More drug options and more expensive drugs are causing some hospital pharmacy departments to exceed their drug budgets by 50 percent or more. But outpatient treatment contributes to decreased inpatient lengths of stay and improved inpatient efficiencies," he says, adding that "it is not necessarily a bad thing if our drug budget goes up. It depends where and why."

From inpatient to outpatient

An example is in cancer treatment. At one time, the large majority of cancer patients were treated almost exclusively as inpatients. In many hospitals today, most cancer patients are treated in ambulatory or outpatient settings.

In addition, the use of glycoprotein IIb/IIIa agents with a stent is replacing many open heart procedures. "Pharmacy may be spending more on drugs per case or drugs per patient day than the department spent for drugs for an inpatient stay for an open heart procedure," says Pane, "but the overall cost to the system is lower than it used to be.

An ROI review demonstrates a drug-shortened length of stay and less fixed cost per case. Relating those numbers into the contribution this is making to overall hospital efficiency demonstrates the value received for pharmacy costs."

Explain budget variances

The most compelling ROI models analyze the cost of drugs per case for each type of procedure, then examine payment for each DRG and determine net revenue, plus or minus, says Pane. "The pharmacy department's job is to explain budget variances," he says. "There are product lines that are, in fact, generating revenue for hospitals, depending on the payer."

Pane calls the ROI rationale a "balanced scorecard" and quickly notes that the idea is in the development stage. But he also points to the fact that ROI models are already commonly applied by hospitals to the acquisition of medical equipment, including the robotic tools found in virtually all health system pharmacies.

Therefore, the model allows for easier dialogue with the people most involved with the bottom line: the acquisition, accounting, and billing departments. "In order to achieve a balanced scorecard, we need to look beyond our departments and not work in silos," says Pane.

Language barrier

Perhaps one reason health system pharmacists don't employ an ROI model is that they don't speak the same language as their financial departments, says Pane. For example, pharmacists must be familiar with payer contracts in order to calculate payment for each dose of a drug. Then pharmacists should gather data necessary to demonstrate the value of a specific drug, including reduced morbidity, decreased lengths of stay, and reduced demand on staff and resources.

And that lack of knowledge and perspective makes budgeting for pharmacy service outpatient treatment somewhat problematic, says Elaine Levy, RPh, system director of pharmacy services for Sharp HealthCare's seven hospitals in the San Diego area. The ROI model can improve communication between the system's pharmacy and financial departments, she says.

"We need to speak the language of our financial people if we are to help them understand the relevance of clinical data. The ROI model is in the infancy stage, but it is a great first step," she says.

In fact, a significant value of an ROI model is that pharmacists are forced to work directly with financial staff, says Pane, beginning with the chief financial officer.

"The first step is to learn how finance departments work, what's important to them, and how they view the concept of value," he says. "Because financial people already understand ROI, it makes sense to use the model to improve these relationships."

ROI models will need to be adjusted for each treatment setting, says Sharp's Levy, but "what is clear is that this simple idea is great for explaining to financial officers that though drug costs are rising, and so are our overall budgets, balanced, effective pharmacy care has a very positive effect on their bottom line."

Contributing Editor Martin Sipkoff is a health care journalist who lives in Gettysburg, Pa.