Managed care puts the squeeze on hospital pharmacy budgets

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Pharmaceutical Representative

Changes in the U.S. hospital landscape are making it increasingly difficult for hospital sales specialists to do their jobs.

Changes in the U.S. hospital landscape are making it increasingly difficult for hospital sales specialists to do their jobs.

That's because reps' hospital customers, particularly pharmacy directors, are being squeezed under cost-cutting initiatives, and their departments' budgets and rosters are hurting.

"Pharmacy was once a profit center," said Frank Palumbo, Ph.D., J.D., professor at the University of Maryland at Baltimore's department of pharmacy, practice and science and associate director of the university's center on drugs and public policy.

"But now that we have managed care, pharmacy is a cost center and there is a tremendous amount of pressure to keep costs low while providing the services that patients need."

Still, managed care doesn't deserve all of the blame for pharmacists' woes. Palumbo cited tremendous competition in the hospital market, mergers, acquisitions and other moves to streamline hospitals.

But it's not just an economic issue. Pharmacies are also under pressure to maintain quality, according to Harold Godwin, R.Ph., chair of pharmacy practice at the University of Kansas School of Pharmacy and director of pharmacy at the University of Kansas Medical Center, Kansas City.

"Managed care organizations, crediting bodies, government agencies and patients all want the highest quality health care," Godwin said. "But paradoxically, we are under more economic scrutiny than ever before."

Most of that scrutiny is focused on the pharmacy department's budget, which is unique in the hospital setting, Godwin said. "While a hospital's overall budget is about 60% to 70% labor costs, the pharmacy budget is only about 14% labor costs. Thus, we cannot cut too many personnel. But we do have to be very focused on appropriate utilization of the drug budget."

That means Godwin's pharmacy department at the 465-bed medical center is no longer only comparing generic vs. brand name drugs. "We are now looking more at one therapeutic class vs. another. This means we may only select the best agent[s] within the class or select a certain agent for a clinical pathway," Godwin said.

"While the rationale is that drug therapy is cost-effective and leads to better outcomes, I have a budget that I try to control by promoting appropriate, cost-effective drug therapies. And managed care just won't reimburse for certain agents."


Managed care is putting pressure on hospitals and caregivers in general to ensure that drug therapy is the most cost-efficient method for treating a patient, said Cheryl Krempa, R.Ph., director of pharmacy at John F. Kennedy Medical Center, Edison, NJ.

"This is not necessarily a bad thing," said Krempa, who is also president of the New Jersey Society of Health System Pharmacists. "However, because managed care is a new modality for reimbursement in New Jersey, a lot of institutions are allowing cost to drive their care. Fortunately, that doesn't happen at the medical center I work at. But that is not the case industry wide."

As a result of these cost pressures, it is getting more difficult for drug companies to keep their drugs on hospital formularies. Storing inventory costs money, so pharmacy departments want to keep as few products on the shelves as possible. Krempa said her department looks at what therapeutic classifications on the formulary aren't being used and then eliminates them.

To deal with these formulary pressures, most pharmaceutical companies are proposing creative contracts with institutions or buying groups that offer cost advantages to the institution. These contracts stipulate that the institution only use the company's product, such as an H2 blocker or a quinolone.

In many cases, these contracts can offer an institution opportunities to save money without compromising patient care. "As long as patients have access to another product if they need it, I don't see a problem with these contracts because they help the institution save money," Krempa said.

While gaining formulary status has been the ultimate goal of hospital salespeople for years, Krempa thinks the industry's focus on formularies is misguided. "Drug companies put too much emphasis on having their reps get drugs on formulary. Just because a product isn't on formulary doesn't mean that patients can't get what they need."

At John F. Kennedy Medical Center, a 525-bed facility, Krempa's pharmacy department can file forms to secure a non-formulary product that a patient may need. "If a drug is not on formulary, it may actually be an advantage to the patient because we closely monitor whether a patient is getting appropriate therapy. However, when a drug is on formulary, we lose some of those mechanisms of control."

One of the key tools in gaining formulary status - pharmacoeconomic data - still hasn't lived up to its expectations, according to many pharmacy directors. "The data is very analytical, and it takes a lot of time to plow through it," Krempa said. "Like any statistical analysis, this kind of data can be manipulated in certain ways to make it seem favorable or unfavorable based on the factors measured."

Krempa offered some suggestions for reps who are interested in working with pharmacy to get their drugs on formulary at her facility:

•Â Respect the hospital pharmacists' time and only show up when you have an appointment.

•Â Keep pharmacy directors in the loop. Let them know who you are calling on and what you are telling physicians and nurses.


•Â Don't deliver a different message to physicians and pharmacists. Pharmacists will find out about it!

•Â Be a resource for problem-solving. Lend your expertise to pharmacists who have questions about particular patients on your product who have adverse reactions or may have special dosing considerations.

Relationship with industry

Hospital pharmacists say they appreciate reps who try to work as partners with their departments. Therefore, more reps are asking the department - or the pharmacy and therapeutics committee at the hospital - how it wants the product used. Then the reps try to include the hospital's objectives in their promotions to doctors and nurses.

That's a big change from a few years ago, when reps would simply promote the drug how it was indicated - not how the hospital chose to use it.

Still, there's a lot of room for improvement, according to Larry McComber, vice president of pharmacy at VHA Inc., an Irving, TX-based national network of 1,400 community health care organizations.

"What has developed in many respects is more of an adversarial relationship than a team relationship between industry and pharmacy," McComber said. "The relationship has been primarily driven by the needs of manufacturers to sell products vs. the needs of an organization to look at the most cost-effective treatments."

A major strain on the relationship is pharmacists' skepticism of the prices drug companies offer, particularly for new products.

"With some companies, we wonder if their new products are being priced to break the bank of hospital pharmacy," said one pharmacist.

If a drug company is promoting its product's outcomes, pharmacists want to see the cost benefits while patients are in the hospital - not later, when the hospital won't reap the benefits.

The bottom line from pharmacists: Companies need to ensure that their pricing is appropriate and that the information they provide on cost-effectiveness is accurate and helpful.


In addition to pharmacists, physicians are important decision-makers in the hospital setting who are also under the cost-cutting microscope. "Managed care is sending a very strong signal to physicians that they have to become more cost-effective without compromising quality for patients and employers who purchase health care," said Jim Roberts, M.D., senior vice president of VHA's clinical leadership team.

For sales representatives to be effective in the hospital setting, they need to be aware of the decision trees that clinicians use to make therapy decisions, Roberts said.

"If pharmaceutical salespeople don't understand these decision trees, they cannot speak objectively about treatment alternatives and they won't be credible," Roberts said.

And if salespeople aren't deemed credible, a health system may decide to step up its "academic detailing" efforts to counteract the "damage" done by reps. In such a situation, pharmacists and reps could send conflicting messages to health care professionals.

But Roberts sees an opportunity for cooperation, rather than counter-offensives. "While academic detailing can be quite effective, wouldn't it be better if we didn't have to develop counter-strategies? Wouldn't it be better if we were all committed to being clear about what we know or don't know about treatment alternatives?"

What drug firms say

While the pharmaceutical industry concedes that cost cutting is a valid concern for pharmacists and physicians, some salespeople suggest that hospital executives don't always take a look at the big picture.

"Some hospital executives look only at budget-cutting, not cost-cutting," said Sharon Deavens, director of program development at NR Communication Resources, a Chicago-based pharmaceutical training development firm. Deavens was formerly a regional business manager in charge of hospital and oncology sales for Zeneca Pharmaceuticals.

In some hospitals, individual departments may be interested in cutting their budgets, but may not be receptive to outcomes that assess the total pharmacoeconomic impact of a product.

Another reason for the strained relationship, pharmaceutical companies contend, is that it is also becoming increasingly difficult to determine who to sell to in integrated health systems. Hospital pharmacists and physicians are no longer the only people who can influence drug utilization.

For example, if a hospital is affiliated with a managed care organization, the sales rep or sales team will need to call on senior management at the organization.

If the hospital is affiliated with a network, it may be appropriate for the representative or sales team to call on the network committee, which may be responsible for managing the purchasing activities of several hospitals.

However, reps still need to sell to the decision-makers in the individual hospitals. (See related story on this page for more details.)

All of these new variables make it a challenging time to be a hospital representative. PR