When Cleveland Clinic launched an initiative to control drug costs, Jeff Rosner, senior director of pharmacy contracting and purchasing, was skeptical. Knowing the pharmaceutical marketplace as he did, he was uncertain whether the academic medical center could significantly reduce its skyrocketing drug costs.

Rosner’s doubts are understandable given that hospitals and health systems have little control over the rising prices of drugs. Hospitals are having trouble absorbing these financial hits, particularly on the inpatient side, where Medicare reimbursement lags far behind actual drug costs. According to a recent survey, inpatient drug expenses increased an average of 23.4 percent per year between fiscal 2013 and 2015.

Trustee talking points

  • Hospitals' inpatient drug spending has been outpacing reimbursement.
  • Hospital pharmacists are working with physicians, nurses and others to lower drug costs without harming patient care.
  • Keeping strict control over their pharmacy formularies and inventories is one way hospitals are lowering drug spending.
  • Armed with data, pharmacists and physicians are making more-informed decisions about drug purchasing and prescribing.

Despite the challenges, Cleveland Clinic has been able to rein in drug spending without harming quality, saving $90 million between 2010 and 2016. “I was wrong,” Rosner gladly admits about the savings potential. About 45 percent of the $90 million was achieved on the inpatient side by reinforcing traditional pharmacy management approaches, such as inventory control, formulary management, procurement and drug-utilization review.

While these strategies are not new, it required an increased focus on applying them to achieve the savings, with a boost from new information technologies that provide needed data about specific drugs and drug categories. 

Strategy 1: Base formulary decisions on evidence

At Cedars-Sinai Medical Center in Los Angeles, physicians and pharmacists regularly meet to discuss what Chief Pharmacy Officer Rita Shane calls the “gray indications” in drug use. “We’re not going to interfere with doing the right thing for patients,” says Shane. “But when there’s a gray area, or questions about whether an expensive drug is indicated or an alternative with equivalent efficacy and safety might be used, we’ll work closely with physicians to identify criteria for use.”

Grading the evidence

During the monthly meetings of Cedars-Sinai’s drug-use policy group, pharmacists weigh the safety, efficacy and cost of specific drugs to determine whether changes should be made to the hospital’s formulary, or preferred drug list and policies. Pharmacists conduct extensive literature searches on the drugs under review and share this information with medical staff for their input, all of which is then brought to the Pharmacy and Therapeutics Committee for review.

Identifying unbiased information on drugs can be difficult, particularly since comparative effectiveness studies of drugs are uncommon. “Most of the data we’re getting on these drugs is produced by companies selling the drugs,” says Len Gray, division vice president of health system clinical services for Comprehensive Pharmacy Services. “When we can get objective, evidence-based information versus marketing-based information, it becomes much clearer which medications are truly best.”

To address this issue, Cedars-Sinai pharmacists grade the available research on drugs, with the highest grades (IA and IB) given to randomized controlled studies and the lowest grade (IV) given to expert committee reports or the experiences of respected authorities. “After we share all this evidence with the committee, decisions are made about how those drugs are going to be used,” Shane said.

For instance, the committee may recommend restrictions on the patients who receive a certain medication, how long the drug should be given, and whether an oral or intravenous formulation should be used. Costly drugs that are neither safer nor more effective than lower-cost alternatives will be left off the formulary with the understanding that physicians can order them on a case-by-case basis for a patient, pending discussions with a pharmacist.

Cleveland Clinic follows a similar drug-utilization review process as Cedars-Sinai. “We drive a lot of our formulary restrictions by adding them to our [electronic health record] system,” says Meghan Lehmann, coordinator of drug information services. “We have screens that pop up as providers are entering orders to ensure that they are aware that a medication they’re prescribing is, for example, restricted to certain patients. We also have alerts that pop up for pharmacists reminding them to verify any restricted drug orders with the prescribing physician.” 

Interpreting price spikes

Another challenge for hospital pharmacies is staying on top of drug price increases, which often occur unexpectedly. Cleveland Clinic built a data analytics tool that alerts pharmacy staff to significant price spikes so they can work with physicians to rapidly identify lower-cost options. “The dashboard can spit out results in 24 to 48 hours,” says Rosner. “Before this, it would have taken weeks of manually going through spreadsheets and databases to get this information.”

The tool sorts through drug catalogs obtained electronically from wholesalers to identify drugs that have gone up in price. It also calculates the financial impact of a price increase based on Cleveland Clinic’s annual usage for a particular drug. For instance, the tool recently informed staff that a price increase on the generic lidocaine 4 percent mucosal solution would cost Cleveland Clinic an additional $250,000 a year if no formulary changes were made.

Strategy 2: Purchase directly from manufacturers

Negotiating volume discounts on drugs is another key cost-saving strategy. First, pharmacists work with physicians to identify a few drugs in each drug class that will be used exclusively by the hospital, a process known as therapeutic interchange. Then, hospitals seek discounts on these first-line drugs, typically through group purchasing organizations that negotiate with drug manufacturers on behalf of their members.

Cleveland Clinic is taking this process one step further by going directly to manufacturers.

“The majority of our contracts are locally negotiated, says Rosner. “Some of the discount offers come from the manufacturers, but a lot of our efforts begin with standardizing the drugs we use. Our clinical pharmacy team works with physicians to clinically validate that drug products in a specific category are equivalent in terms of efficacy and safety, and [then they] come to my purchasing team to ask, ‘What can you do from a sourcing perspective to lower our costs?’ ”

Key to Cleveland Clinic’s negotiating power is the organization’s employed physician model and integrated EHR. “We have a lot of credibility with manufacturers because our employed physicians are part of drug decisions and we build those decisions into our EHR, says Scott Knoer, chief pharmacy officer.

Strategy 3: Reduce unused inventory

After weeding out unused, duplicate and low-use drugs from all medication storage areas, The Ohio State University Wexner Medical Center in Columbus cut its drug inventory by $800,000 in one year. The biggest savings came from maintaining tighter control over automated dispensing cabinets on nursing units. “Hospitals often don’t monitor these cabinets or remove drugs that are no longer used,” says Robert Weber, administrator of pharmacy services.

Managing drug inventories is a constant balancing act, Weber says. “We don’t want too much medication stored on our shelves, but we need enough to meet the needs of our patients.”

Tight inventory control reduces investments in unneeded drugs and reduces the number of unused drugs that expire and have to be tossed. Another strategy, called extended dating, also can help. “We worked with an analytical laboratory to test the stability of some medications and extend the expiration date,” Weber says. OSU Wexner is saving $50,000 a year on two medications — the antibiotic clindamycin and the painkiller remifentanil — due to extended dating.

OSU Wexner also partners with a consignment service to have certain high-cost, low-use drugs delivered as needed instead of storing a supply in-house. One example is treprostinil, a pulmonary hypertension treatment. By ordering treprostinil on consignment, OSU Wexner saves about $140,000 a year.

“These consignment companies take on some of your risk,” explains Marvin Finnefrock, division president of clinical and purchasing services for Comprehensive Pharmacy Services. “They’ll purchase five boxes of a product for you but won’t charge you until you use them.”

Many drug storage cabinets help to automate inventory management. “Some will tell you how many vials of a drug are in your carousel and will send refill orders to your wholesaler once the par level, or reorder trigger, is reached,” says Erin Fox, director of drug information services for University of Utah Health.

Based on Fox’s experience, however, these inventory systems rank low on interoperability. “None of these systems talks to each other very well, which makes it extraordinarily labor-intensive to change a product,” she says. “Last count, we have to make changes to 17 different drug inventory systems whenever we make a product change.”

To help staff stay on top of drug supplies, OSU Wexner will be rolling out an inventory management module in its EHR this fall. “In general, hospitals are still monitoring inventories by running reports off each storage system," Weber says. "This EHR-based system should automatically tell us what medicines have been used across the organization and give us a bottom-line inventory.”

Strategy 4: Inform point-of-care choices

“The point of prescribing is where you can most effectively change physician behavior,” says Weber. Toward this end, OSU Wexner has added a cost transparency tool to its EHR that visually illustrates the cost of different antibiotics. For instance, an antibiotic that costs less than $1 a day has a single cent sign next to it, while antibiotics that cost more than $400 per day have seven dollar signs.

In addition, at OSU Wexner, pharmacists are key members of medical teams, rounding on patients with physicians and nurses. Having pharmacists directly involved in decision-making and drug selection prevents adverse drug events and reduces costs, says Weber.

When University of Utah Health assigns a pharmacist to a care team, the drug savings achieved is typically two to three times the pharmacist’s salary, says Fox. “Pharmacists are exceptionally good at helping physicians find ways to save costs on drugs while meeting the patient’s treatment needs. It might sound expensive to add a pharmacist to a care team, but the return on investment is worth it.”

Maggie Van Dyke is a freelance writer based in the Chicago suburbs.

Looking for a cause

The prices of pharmaceuticals have been rising year over year. But what’s behind it?

“A number of events have converged to cause high drug-price increases,” says Len Gray, division vice president of health system clinical services for Comprehensive Pharmacy Services.

One factor is the consolidation of generic drug manufacturers, which led to hyperinflation of low-cost generics. Another has been a bubble of innovative drugs entering the market. The Food and Drug Administration approved 41 new drugs in 2014 and 45 in 2015. This is about twice as many as the 21 drugs approved in 2010. Among these new innovative drugs are so-called specialty drugs, like Sovaldi, that tend to be high in cost.

Pharmaceutical manufacturers also have been reformulating older brand-name drugs and increasing the price. Before patents expire, the companies incrementally improve drugs by, for example, turning a twice-daily pill into a more convenient once-daily treatment. Alternately, the manufacturers might identify new treatment uses for a drug.

What can hospitals expect in the future? “I think the outrageous price hikes are leveling off, and drug companies are going to be more guarded in how they increase prices,” says Marvin Finnefrock, division president of clinical and purchasing services for Comprehensive Pharmacy Services. “But we still need to be careful. Instead of a one-time 500 percent increase on a generic drug, you might see multiple small increases over the year.” — Maggie Van Dyke

Trustee takeaways: Footing the bill 

Sky-high drug prices have made headlines in recent years, including the 500 percent increase in the price of EpiPens (from $100 to $600 for a two-pack of the allergy medicine) and $84,000 cost of a 12-week regimen of Sovaldi, one of the breakthrough hepatitis C treatments.

Who pays the bill for these price increases? It depends. One factor is whether drugs are given on an inpatient or outpatient basis. Drugs given to outpatients typically are paid on a prescription-by-prescription basis by Medicare and other insurers, with patients responsible for their out-of-pocket share as required by their benefit plan.

But payment works differently for inpatients. Medicare and other insurers tend to pay hospitals a fixed fee for all nonphysician services, including drugs, provided to inpatients. And these bundled payments fall far short of what hospitals are spending on inpatient drugs, according to an October 2016 report, "Trends in Hospital Inpatient Drug Costs: Issues and Challenges," for the American Hospital Association and the Federation of American Hospitals.