Dusting Off One’s Cost Center Hat

Blake Powers

I remember the gut punch 15 years ago when we opened the letter from Florida’s top payer. The words were stark: a 50% reduction in reimbursement rates were announced for the following year. Our small, independent home infusion pharmacy had a heavy patient census of these covered lives, and his news not only threatened our financial stability, but our very existence. As the initial shock wore off, reality set in. The cold, hard truth in business is rather simple: Revenue - Expenses = Net Income. For a buy-and-bill pharmacy, slashed reimbursements meant our revenue (and ultimately, bottom line) was about to take a devastating hit.

The first instinct was to appeal the payer cuts, but that went nowhere. Next, we considered increasing our patient base to offset the loss in revenue, but we quickly realized that such strategies merely added to the cost of business without the guarantee of revenue pull-through. Infusion pharmacies can’t simply scale up without a significant influx of physician referrals, just as hospitals can’t magically add beds without major buildouts or M&A. With limited options to guarantee revenue growth, the only viable path left was to focus on controlling expenses.

Fast forward to today, and the landscape for pharmacies remains as challenging as ever. Next year’s reimbursement forecasts predict more turbulence with drivers like: Direct and indirect remuneration (DIR) fees changing, price controls imposed by the Centers for Medicare & Medicaid Services (CMS), and new policies around site neutrality—all lowering pharmacy reimbursement forecasts. Whether you’re running an independent pharmacy or managing one within a health system, these changes threaten to diminish the progress made through recent improvements in revenue cycle management.

Meanwhile, attention on cost containment has strayed over the last three years. According to a focus group of pharmacists, primarily from integrated delivery networks (IDNs), the concerted efforts to take on the new identity as a revenue center has absorbed so much energy it’s almost as if pharmacy has lost sight of its cost center hat. With reimbursements expecting to slide, many pharmacies lament that little can be done to achieve the financial wins that their revenue cycle management programs have provided over the past few years.

But that’s not the whole story.

In the sense that complaining is going to turn the hearts of payer decisions, yes, it’s probably a futile effort to express further dissent.

Yet, there are other moves to make. Savvy procurement professionals are looking to financially counterbalance this expected impact to the pharmacy’s profit and loss by seizing on drug manufacturers’ inclination to shift more of their volumes to direct channels, where the freedom to negotiate is opening doors for newfound cost savings. Most progressive pharmacy teams have rev cycle already tuned up as tight as possible, and they’re facing the reality that there isn’t anything further to be done with the front portion of the equation. Now they’re shifting focus to realize drug acquisition cost savings to offset the downgrade in revenue forecasts. Second to labor costs, drug spend is commonly pharmacy’s largest expense.

It’s remarkable how we now divide so much of life into pre- and post-COVID eras. The pandemic humbled us in ways we couldn’t have predicted. Before, the idea of buying directly from pharmaceutical manufacturers felt overwhelming, with manual price negotiations, tedious contracting stretching into months, and multiple vendor registrations bogging down operations.

Then, the pandemic hit. Drug shortages forced pharmacies to rethink everything, driving them to lean on direct manufacturer relationships out of necessity. In the process, many discovered that purchasing directly from drug companies not only helped procurement teams navigate shortages but also unearthed significant cost savings.

For large institutions with a drug spend in the hundreds of millions, direct purchasing opportunities may seem insignificant. Take a hospital pharmacy with a $500 million drug budget—saving $50,000 by switching one national drug code (NDC) represents only 0.01% in annual savings when looking top-down. But when that same hospital faces year-over-year reimbursement cuts, every dollar saved becomes a counterweight to lost revenue. A more ground-up approach to savings is gaining traction, as pharmacies realize that cutting drug acquisition costs can soften the blow of reduced reimbursements.

Let’s say your payer mix suggests a $5 million reduction in reimbursement for 2025. By creating an initiative to save $5 million for the institution through direct purchasing—just 1% of the overall drug budget—you could theoretically neutralize the impact on net income without jeopardizing rebate structures or cost-minus agreements. Surplus savings could cover annual salaries of pharmacy staff, fund new initiatives like central fill models, or even justify budget requests for continuing education (CE) travel.

Pre-COVID, manufacturer-direct commerce was riddled with friction, but today, advances in decision-support software and marketplace aggregators have made it easier by simplifying vendor setups, improving visibility into stock, streamlining price negotiations, and generating purchase orders in seconds. New technology also provides better optics into comprehensive savings analytics. More manufacturers are opening their portfolios directly to pharmacies to better manage channel fees, prevent product leakage into the grey market, identify prescription trends in real-time, and provide pharmacies with point-of-sale savings to enable cash pricing models whenever insurance coverage is either lacking or the out of pocket is too costly for patients.

Unlike pharmacy school, where 100% earns you an A+, procurement is a different game. While there are concerns about contracted volume obligations and maintaining rebates for better pricing, here’s the reality: if you’re 100% compliant to pre-committed vendor volumes, you exclude yourself from opportunities available on the open market that can make a difference to your budget. It’s not an overhaul of your entire purchasing strategy, but rather a closer focus on how to optimize the delta between committed and non-committed thresholds. Optimizing the 5-20% within your direct purchasing allowance can deliver enough juice in acquisition cost savings to compensate what’ll be missing from your reimbursement cup next year.

It’s easy to have a victim mentality, as I did 15 years ago, when external forces jeopardize your pharmacy’s ability to operate and serve patients. However, it’s the pharmacies who start thinking and surviving like a business who will be in the best position to adapt and thrive in this changing landscape.

About the Author

Blake Powers is the CEO of Medigi, and a member of Pharmaceutical Commerce’s Editorial Advisory Board.