Pharmacists Should Care About Inventory Management

By: Beth Richter, Pharmacist Consultant

In a health system, pharmacists are primarily focused on drug therapy decisions. Many hospitals have decentralized pharmacy staff that are on patient floors working directly with patients and other health care providers. While in the central pharmacy, pharmacists are busy deciphering and verifying physician orders, compounding medications and of course checking, checking, checking. When does a pharmacist have time to think about the pharmacy supply chain and inventory management? Why should they?

Enhanced Patient Safety

When pharmacies implement robust perpetual inventory management systems it provides the means to track the movement of medications throughout the health system. Tracking medications requires enhanced barcoding methodologies. These barcodes not only enable inventory management capabilities but also support BCMA initiatives. So which came first, barcoding medications for inventory management or barcoding medications for BCMA? How did the barcodes get there in the first place?

• In the 1970’s The Uniform Grocery Code Council (UGCC) created a way to combine and barcode the UPC code with the NDC code for use in the Chain drug stores for checkout efficiency and inventory control of OTC products.¹
• In 1995 BCMA was first implemented at the Colmery-O’Neil Veteran Medical Center in Topeka, Kansas. It was conceived by a nurse who was inspired by a car rental service using barcodes.²
• It wasn’t until 2004 that “The FDA published a final rule that mandated all drug packages have a linear barcode printed on them starting in 2006. By 2004 roughly 90% of drug packages in the supply chain already had linear barcodes on them voluntarily.”¹

While BCMA certainly contributes to fewer medication errors and has greatly enhanced patient safety; we owe the grocery store and retail industry the kudos for starting the trend in barcoding for its efficiency and inventory control purposes.

Medication Cost Savings Leads to Greater Opportunity for Patient Care

With the cost of pharmacy operations as 10-20% of the overall operating budget for the average U.S. hospital and supplies making up 80% of the overall cost of operating the average hospital pharmacy; what is the financial impact of an incomplete inventory management system? The pharmacy’s enormous impact to the operating cost of a health system is a permanent situation and it is important that all pharmacists consider this cost, not just the Director.

Increasing inventory turns is likely one of the best ways to flatten or even decrease pharmacy drug spend in an era of drug shortages, increasing drug costs (5% to 20% annually) and a drug inflation rate of 7%. Let’s examine how inventory turns impact the pharmacy. Inventory turn rate is a measure of how often an item is re-purchased in one year. The higher the turn rate, the smaller the inventory investment because there is less time spent holding un-used inventory. Best in class pharmacies turn their inventory 10-12 times per year (inventory turn rate of 10-12).  Here’s how this works: If the pharmacy’s annual drug budget is $30M and the last physical inventory count was $3.8M the turn rate would equal 7.9.  (7.9=$3.8M/$30M)

Now here’s where the magic happens: if the turns were increased to 10 (lower end of the national average) the pharmacy will save $800,000 per year in inventory costs! (10=$3.0M/$30M)

This dramatic inventory savings can be compounded by the add-on benefit of decreasing inventory carrying costs. There is a cost of holding inventory versus spending that money elsewhere. The national average cost of capital for hospitals and healthcare facilities is 5.64%.³ Considering an annual savings of $800,000 in inventory, the institution will also save $45,120 in cost of capital.

In addition to the direct impact of decreased inventory on-hand and the associated cost of capital, robust inventory management systems also weave into pharmacy operations with efficiency and productivity considerations. Pharmacy staff spend many hours each day processing, disposing, and returning expired medications.  Technicians and buyers spend countless hours hunting and gathering, borrowing and loaning with other health systems, managing shortages, and managing stock-outs. Robust pharmacy inventory management systems simply eliminate some of these tasks while also providing data and visibility to the pharmacy supply chain in a way that minimizes the work effort associated with many other tasks. Less time spent on these non-value added chores means more staff time available for patient care.

So, what can a pharmacy do with an extra $845,120? One example of investing in patient-focused initiatives is through improving HCAHPS scores. Many health systems have invested in pharmacy expertise to assist in improving their institution’s Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) survey scores. “The more pharmacists talk to patients while they’re inpatients, the more impact they can have on HCAHPS scores,” said Ernest R. Anderson Jr., MS, FASHP, System Vice President of Pharmacy at Steward Health Care, a 10-hospital health system in Massachusetts. Mr. Anderson listed three prime areas covered by the HCAHPS questionnaire where pharmacists can have a “dramatic impact on patient care and patients’ perception of that care: pain management, discharge information and medication information.” ⁴ The savings that can be achieved through good pharmacy inventory management practices and systems can be used to employ pharmacists to talk with patients and improve HCAHPS scores and reimbursement for the Health System.

These inventory and efficiency savings translate into more money and time available to spend on patient-focused care and clinical initiatives and investments. It is important that pharmacists care about pharmacy inventory management. Pharmacists want to make a difference in the lives of their patients. Think about where most of the pharmacy budget is tied up and show me the money! Good inventory management practices will create some breathing room in the pharmacy budget to help fund patient-centric programs.

References:

1. Anatomy of the National Drug Code http://www.rxtrace.com/2012/01/anatomy-of-the-national-drug-code.html/
2. Wideman, M. V., Whittler, M. E., & Anderson, T. M. (n.d.). Barcode medication administration: Lessons learned from an intensive care implementation . Retrieved from Harry S. Truman Memorial Veterans Hospital website: http://www.ahrq.gov/downloads/pub/advances/vol3/Wideman.pdf
3. NYU Stern School of Business; Cost of Capital data published January, 2015. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/wacc.htm
4. Tales of Success in Boosting HCAHPS Scores, Pharmacy Practice News http://www.pharmacypracticenews.com/ViewArticle.aspx?d=Operations%2B%26%2BManagement&d_id=53&i=August+2012&i_id=872&a_id=21375