Preferential Pricing for Nonprofit Hospitals: A Review

Joseph L. Fink III
Published Online: Monday, August 4, 2014
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Pharmacy directors should educate hospital administrators about an important case and its implications and limitations on what is permissible and what is impermissible.


Overview
This article will review the federal court case Portland Retail Druggists Ass’n v Abbott Laboratories, dealing with with how nonprofit hospitals purchasing medications at preferential prices may use those items. The case went all the way to the US Supreme Court1 and foreshadowed the changing role of hospitals, eg, providing shorter inpatient stays and shifting much more into serving patients who are ambulatory. The discussion follows the case through the federal court system looking at how the courts at various levels addressed the issues. The article will also address 2 follow-on cases, one addressing applicability of the decision to governmental hospitals and another addressing applicability to drug purchases by nonprofit health maintenance organizations (HMOs).
 
Traditionally, the financial goal of the department of pharmacy has been to maximize the generation of revenue through accurate tracking of charges for medication dispensed. Hospital administrators used this excess of revenue from pharmacy operations to offset shortfalls in other operating subdivisions of the institution. That approach worked fine when institutions were primarily reimbursed for services provided to patients on the basis of the charges incurred while providing needed care. However, Medicare changed the rules of the game when it implemented reimbursement to hospitals based on Diagnosis Related Groups (DRGs).
 
Under the DRG system, a hospital knows when a Medicare beneficiary is admitted and exactly how much the reimbursement will be for the care of that patient. This approach is oftentimes erroneously described as “prospective payment,” a misdesignation because the payment is not made in advance. What occurs in advance is rate setting, not payment. More recently, Medicare has announced that it will not reimburse participating hospitals for expenses associated with treating a list of maladies falling under a higher-paying DRG because they are deemed acquired or caused by the experience of being in the institution for treatment of something else. Given that Medicare is a principal, if not the primary, payer for care in many of the nation’s nonprofit hospitals, the approaches adopted by that federal program are often mirrored by private underwriters.
 
All this puts a highly focused spotlight on the ability of pharmacists to reduce total expenditures through cost avoidance for care of a patient by achieving optimal medication selection (eg, use of a more expensive antibiotic because it likely will clear up the infection more promptly so the patient can be discharged earlier, timely intravenous to oral drug substitution so patient can be discharged earlier, initiating stress ulcer prophylaxis). Another example is the enhanced role of pharmacists in the institution working to avoid the occurrence of “non-reimbursable serious hospital-acquired conditions,” such as manifestations of poor glycemic control or certain surgical site infections, appearing on the list for which Medicare does not provide reimbursement.
 
The November 2011 issue of Hospitals and Health Networks featured an article entitled “In Struggle to Cut Expenses, Hospitals Eye the Pharmacy.”2 Several noteworthy points were emphasized. First, pharmacy costs can “make up 10-20 percent of the average hospital’s operating budget.” Second, “unlike other hospital departments, personnel costs represent only about 20 percent of the average pharmacy budget.” An official from the Healthcare Financial Management Association was quoted about the potential role of pharmacists as being valuable because “they’re also always thinking about the clinical effectiveness of that drug. So they truly are marrying the financial and clinical piece of the drug for the best patient outcome.”
 


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