CPOs: What to do when you’re asked to cut the pharmacy budget by $2 million

If you’re a chief pharmacy officer, chances are you’ve received a budget directive to the effect of “We’re cutting three percent across the board,” or “You need to cut spend by $2 million.” If you haven’t yet, you likely will before long.

And if you’re like most chief pharmacy officers, there was little in your educational or practical training to prepare you for this. You may understand in chilling detail how bad a three-percent or $2 million cut would be for patient outcomes, but unless you can articulate your to decision makers on the executive team in terms they can understand, you likely won’t be able to preserve the funding you need.

That’s the bad news. The good news is that Ernie Anderson has spent his career having exactly these conversations and training pharmacy leaders to have them. For this piece, we spoke with Ernie about how CPOs and other pharmacy leaders can engage with budget conversations to ensure financial priorities don’t inadvertently hurt patient outcomes.

Background: the rise of risk contracts, PMPM, and outpatient care

To confidently negotiate in budget conversations, Ernie argues, CPOs have to understand how pharmacy – and the insurers that pay for it – has evolved in the last few decades. If you weren’t around for it all (Ernie was), here’s a quick summary.

Before the 1990s, health system pharmacy was mostly focused on inpatient care because that was the model that made the most sense, both financially and for patient outcomes. Most health systems had fee-for-service (FFS) contracts with insurance payers, so administrators guided pharmacy leaders (who were mostly called pharmacy directors at the time, not CPOs) to focus on inpatient care.

But in the late 1990s, risk contracts started to become more common. With them came the rise of per-member-per-month (PMPM) payment models. As healthcare systems sought to rein in costs, treatment incentives shifted, pushing providers to figure out which types of care could be more efficiently administered in outpatient settings.

Today, risk contracts and population health goals have become the norm. As health systems have adapted to PMPM payment structures, they face increasing pressure to manage costs, and now typically rely on managed care teams to do so. 

It’s these managed care teams tasked with directives to reduce pharmacy costs by X percent or cut $Y million (directives which themselves originate from executives – CEOs, CFOs, and COOs).

The problem for pharmacy leaders is that pharmacy has a fundamentally different cost structure than every other department in a health system. While the biggest cost in most departments is personnel, the biggest cost in most pharmacy programs is drugs (often at about 75 percent, to 25 percent personnel costs).

This becomes a problem when executive  management suggests slashing spend on drugs to lower the pharmacy budget.

How CPOs can position the pharmacy function within the health system

CPOs know that slashing spend on drugs doesn’t make sense for a lot of reasons. But to make their voices heard, they have to highlight the reasons that will resonate most with executive leadership teams. They can do that by leaning on these four talking points.

1. Pharmacy is different from other departments

You will have to educate health system executives and managed care teams on this: pharmacy expenses don’t break down the way other departments’ do. Medication, not personnel, is the biggest part of pharmacy budgets. (Note that we’re repeating this; Ernie says you’ll have to as well.)

But that doesn’t mean slashing spending on medications will help achieve top-line budget goals. Why? See talking point #2.

2. Pharmacy leaders should be part of drug reimbursement conversations with payers

Pharmacy leaders can make big contributions to balancing the healthcare system budget, both from cutting costs and driving revenue (more on that soon).

To set the stage for effective budget management, pharmacy leaders should be part of the reimbursement conversations that managed care teams have with payers. Managed care teams often don’t have the clinical expertise to understand whether payers’ proposed reimbursement rates make sense. Pharmacy leaders can provide that essential context so that the system as a whole is positioned to thrive and deliver top-tier patient care in the context of PMPM contracts.

3. Pharmacists can drive significant cost savings

What’s more, clinical pharmacists have the expertise necessary to save health systems (and patients) serious money by steering physicians toward the most cost-effective prescription options available.

But to do this at scale, pharmacy leaders have to appreciate the opportunity for savings, advocate for pharmacy input in prescriptions, and create guidelines that practitioners follow.

4. Pharmacy can be a significant revenue driver

In many health systems, the pharmacy function is also significantly underutilized from a revenue-generation perspective, often because…

  • Pharmacy leaders aren’t part of important budgetary conversations; and / or
  • CPOs don’t have the necessary context to recognize and advocate for the pharmacy-driven revenue-generation opportunities many health systems have.

The first of those opportunities lies in drug reimbursement. Most payers offer different reimbursement rates for drugs based on where they’re administered, and many prioritize outpatient administration. Injectable drugs administered at an outpatient oncology clinic, for example, are often reimbursed at a much higher rate than the same drugs given in a hospital setting. (The inpatient reimbursement is contained in a DRG or per-diem rate.)

But oncology drugs are expensive. To an untrained eye, they may look like a great opportunity to trim costs. In reality, an experienced CPO can explain that reimbursements for administering these drugs in outpatient clinics are a meaningful source of revenue for health systems.

Rather than reducing spend on these drugs, health systems should look for ways to increase volume to increase reimbursement.

Pharmacy can also drive net-new revenue by expanding the availability of personnel to provide patient consultations. Ernie mentioned, for example, that systems he’s led have found success embedding pharmacists in a variety of outpatient settings (asthma clinics, medical clinics, oncology clinics, etc.) and having them deliver patient consultations under the auspices of the provider. The facility fee can effectively be billed for each patient seen by the pharmacist, which both generates more revenue for the system and (crucially) leads to better patient outcomes.

Advocating for pharmacy yields better outcomes for everyone

In our conversation, Ernie emphasized two things that really resonated: first, that most pharmacy programs don’t prepare pharmacists to deal with the business side of pharmacy. Unless a pharmacist has a preceptor who offers this guidance or otherwise learns it on the job, it’s likely they’ll never be exposed to the high-level financials of a health system – and how pharmacy fits in.

And second, that many pharmacists are introverts. They enjoy their work because it’s about solving problems based on their expertise – not because it requires the kind of assertive advocacy common among, say, sales professionals.

The result is that many pharmacy leaders are brilliant at their work but woefully unprepared to advocate for their department’s role in the the lingo of the business leaders making decisions. But learning to do this work is critical for success – not just the financial success of a health system and the health outcomes of the people it serves but also for the enjoyment and wellbeing of the pharmacy professionals on the ground every day helping people get and stay healthy.

One thing we’re excited about is the power of RxLive to make that advocacy easier on pharmacy leaders.

Throughout his career, Ernie did manually a lot of the work RxLive automates. With RxLive’s software, it’s much easier for pharmacy leaders to, say, identify the patients in a health system with the most prescriptions and then identify opportunities to deprescribe. Our telehealth network makes it much easier to connect pharmacists to patients in any setting – without the cost of full-time employees. And our data streams can help pharmacists recommend the most cost-effective drug in any situation.For more information on how RxLive can help pharmacy leaders drive health system strategy, get in touch or sign up for our newsletter.

Kristen Engelen, PharmD
Kristen Engelen, PharmD
Kristen Engelen, PharmD, is the chief pharmacy officer of RxLive and a certified consultant pharmacist; she has over a decade of experience in retail pharmacy settings. Kristen became an RxLive co-founder because of her passion for geriatric pharmacy, with a focus on the intersection of pharmacy and aging.