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Shared Savings

Karen Minich-Pourshadi, for HealthLeaders Media, July 13, 2010
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Pharmaceuticals aren’t cheap. In fact, approximately 75% to 85% of a hospital pharmacy department’s expenses are drug costs, and they can make up one of the costliest line items at hospitals. So, for many finance leaders, the pharmacy is considered a cost of doing business. That is not the case for several hospitals that decided to get creative, work collaboratively, and save themselves millions.

In the spring of 2008, 34 hospitals in Colorado, Idaho, Montana, Nebraska, New Mexico, Washington, and Wyoming combined resources and worked with VHA Inc., an Irving, TX-based national healthcare network, to hire a coordinator to help them identify savings opportunities to cut pharmacy costs without compromising patient care.

The idea was simple: By focusing on the top drugs and drug classes that drive annual expenditures that exceed $400 million collectively, the hospitals could identify savings opportunities. They launched an evidence-based approach to establish clinical equivalency, committed to using standardized drug formularies, and were able to identify and save more than $18.7 million from April 2008 through the end of September 2009.

For instance, in the first year of the program, Kalispell Regional Medical Center, a 150-bed facility in the heart of northwestern Montana, used the program to identify nearly $327,000 in savings in its over $5 million pharmacy budget. After the 34 Mountain States hospitals all successfully achieved savings, VHA looked for other facilities that might be interested.

In New England, 11 hospitals in Connecticut and Massachusetts also agreed to coordinate efforts to cut pharmacy costs. Collectively, the New England hospitals purchase more than $50 million in pharmaceuticals annually. They followed the same model-focusing on the top drugs and drug classes-and in just short of a year they were able to achieve more than $1 million in savings.

Peter Scarafile, director of pharmacy services at the 218-staffed-bed community Cape Cod (MA) Hospital says the impetus to participate was to try save money on its $19 million pharmacy budget-most of which goes to outpatient drugs.

“The program was designed to give you a 3-to-1 ratio of saving, so every dollar you invest you get a minimum of $3 back; it’s a pretty good investment,“ he says. “Plus, you confirm the savings as you go, so it was very appealing.”

What’s also appealing is the collaborative nature of the group. Representatives from each facility gather to share ideas and review a variety of drugs to determine which ones would offer the most beneficial savings to the larger group. Now in its second year, Cape Cod Healthcare, which includes Cape Cod Hospital and Falmouth Hospital, identified where the New England hospitals could switch from Lupron Depot, a drug for treating advanced prostate cancer, to a less expensive drug. The change helped all the facilities see greater margin on reimbursements, and Cape Cod Healthcare saved more than $120,000 annually.

Hallmark Health, which includes Melrose-Wakefield and Lawrence Memorial Hospitals, wanted to find a way to save money on its $12 million pharmacy budget while still ensuring high quality. The facility spends $5 million on inpatient drugs and $7 million on outpatient drugs and was hoping to find a way to decrease its outpatient cancer drug costs. Through the program, Hallmark Health found a drug that saved $150,000 in the first year.

“It doesn’t sound like a lot, but in the pharmacy area we do cartwheels and backflips when we can manage to save just $2,000 to $5,000 a year-so for us this is like a windfall,” explains Sean Hand, vice president of ancillary services for Hallmark Health. “Every hospital is different, but in our system it’s getting harder and harder to find those initiatives that save you money without compromising quality, so for us to save $150,000 was tremendous.”

Benefits beyond the bottom line
The fee for participation is fixed for the entire group, although there is an inflation increase that can be imposed up to 5% each year. The only fee that varies is the percentage that each hospital will pay, which is calculated based on its total pharmacy annual spending. That figure is divided by the sum of the entire group’s annual pharmacy spending to calculate the percentage of the fixed fee that is owed. VHA guarantees at least a 3-to-1 return in implemented savings and a hospital’s up-front investment varies from $8,214 to $107,987 based on its annual spending.

Certainly the bottom-line goal for both the Mountain States and the New England collaborative was to reduce drug costs and increase drug reimbursements. But what also evolved from the group gatherings was better best practices that ultimately lead to improved patient care.

“What was interesting is that we all realized that we had common interests and goals, so everyone was fairly reasonable in our discussions,” says Scarafile. “No one felt they were being excluded, and the discussions also helped us share a lot of best practices.”

To allay physician concerns, “you have to explain that the quality is not going to suffer, and learning how to approach this was part of the initiative,” says Scarafile. “Once we discussed how to present the data and learned the best practices that other people were using—most of the physicians got on board with saving money.”

Additionally, as each hospital made its own final decision on which drugs to use-the consultant’s role was to help identify areas of opportunities, present clinical data and cost savings, as well as assist with implementation. These initiatives helped streamline and standardize choices within a drug class with the hopes that the majority of users would prescribe the “formulary” drug of choice.

Restricting nonformulary alternatives was done at the hospital level, but most physicians were still able to get a drug if they had a good enough reason that the alternative wouldn’t work for them. Interestingly, VHA found that for most, the evidence didn’t point toward the alternative being “better,” so having a physician demand the alternative was a rare occurrence.

Information about the changes to drug formulary and new policies was disseminated to the physicians and medical staff at the hospital level, and each facility approached this part of the process as best suited its in-house staff.

Once those initial discussions occurred, best practices were shared with the rest of the hospital at various committee meetings to get approval. In some instances the clinical initiatives involved a change in a drug within a specific drug class while others were asked to implement a different strategy for dosing through policy changes.

Other outcomes the group realized include:

  • Developing new, evidence-based utilization and dosing standards and formulary changes for high-impact drug categories
  • Creating a website for clinical decision-support tools
  • Leveraging analytics, tracking, reporting, and monitoring metrics
  • Maximizing existing drug contracts
  • Negotiating with suppliers as a single entity for drugs


Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media.
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