Beyond Cost Avoidance: Advancing Unit-Level Pharmaceutical Economics in Health Systems

Editorial note: The concepts described herein are intended as strategic frameworks rather than operational blueprints. Reimbursement methodologies, accounting practices, chargemaster structures, and revenue-cycle processes vary significantly among institutions and should be considered when applying any economic framework.

The Limits of Traditional Pharmacy Value Reporting

For many years, pharmacy leaders have been expected to demonstrate value through some variation of savings. In practice, that term often encompasses several different concepts such as cost avoidance, purchasing savings, aggregate expense reduction, budget variance improvement, or contracting benefits. Each metric answers an important question, but the challenge is that different stakeholders frequently assume they are answering the same question.

A cost avoidance calculation may estimate what spending would have been absent an intervention. Expense reduction may measure actual spending in aggregate. Revenue-cycle and finance teams often focus on recognized revenue, realized reimbursement, and operating margin. These perspectives are all related, but they are not equivalent. As pharmaceutical markets become more complex, the gaps between these measures become increasingly visible.

A product conversion strategy may reduce acquisition expense while simultaneously reducing reimbursement. A contracting initiative may improve invoice pricing without improving margin. A favorable purchasing outcome may be overwhelmed by changes in reimbursement methodology or payer mix. The result is often a disconnect between operational success and financial performance.

The Evolution of Pharmaceutical Value Measurement

For many health systems, pharmacy value measurement may be viewed as progressing through 3 distinct stages: cost avoidance, expense reduction, and unit-level economic value.

Stage 1: Cost Avoidance

Cost avoidance has long been a foundational pharmacy metric. These analyses estimate what costs would have been under an alternative scenario, such as continuing to use an originator biologic rather than adopting a biosimilar. Cost avoidance provides useful strategic insight but is inherently dependent upon assumptions. Baseline selection practices, comparator prices, utilization projections, and forecast periods can materially affect reported results. For this reason, finance leaders often regard cost avoidance as informative but not always reflective of realized financial performance.

Stage 2: Expense Reduction

The next evolution focuses on actual spend. Expense reduction is generally viewed as more objective because it measures realized purchasing activity rather than hypothetical alternatives. However, total spending can be influenced by numerous factors unrelated to strategy. Such factors may include patient volume changes, drug inflation, service-line growth, site-of-care migration, market shortages, and changes in treatment patterns. For example, an organization may spend more despite strong purchasing performance simply because utilization has increased. Similarly, a reduction in overall expense does not necessarily indicate improved economics.

Stage 3: Unit-Level Economic Value

One recommended alternative is unit-level analysis. Rather than focusing exclusively on aggregate spending, organizations using this model evaluate cost per unit, revenue per unit, and margin per unit. These values are then compared across time while normalizing for factors such as volume growth and inflation. This approach can provide a clearer understanding of whether financial performance improved because of strategic decisions rather than external market conditions.

How Biosimilars have Highlighted the Problem

Few therapeutic markets have exposed these measurement limitations more clearly than biosimilars. The observed savings have been meaningful and real, but only within the methodology applied. These methodologies, however, often focus primarily on reduced drug spending rather than the broader relationship among acquisition cost, reimbursement, and contribution margin.

This distinction is important because expense and margin are separate financial outcomes. Research examining Medicare Part B biologics has demonstrated that biosimilar competition is associated with declining prices for originator products, while other studies have examined changes in Medicare spending following biosimilar entry.^1,2

For providers, declining market prices can affect both sides of the economic equation. Acquisition cost may decrease, but reimbursement may also decrease. Whether a health system experiences financial improvement depends on the relative movement of cost and revenue rather than expense alone.

Consequently, biosimilar value may appear differently when viewed through the different lenses of drug spend, health-system margin, payer cost, patient affordability, and market sustainability. Each perspective is valid, but no single metric captures the full economic picture.

A New Framework for Reporting Financial Impact

One potential approach to addressing this limitation is reporting financial impact through a framework that evaluates changes in actual cost, revenue, and margin per standardized unit between comparable periods while adjusting for volume and inflation. This reported financial impact (RFI) model can be used as a managerial reporting framework that evaluates economic performance at the unit level. When applied to cost, the framework evaluates changes in acquisition economics. When applied to margin, it evaluates changes in acquisition cost and reimbursement together.

The key distinction is that RFI is intended to measure realized economic performance rather than hypothetical opportunity. This distinction explains why terms such as savings, cost avoidance, and financial impact should not always be used interchangeably.

Did acquisition cost decline? Did reimbursement decline? Did margin improve? Did spending decrease? Did actual economic value increase? For an organization that is evaluating true pharmaceutical financial performance, these questions may all have different answers. The unit-level RFI model attempts to dissect these differing considerations rather than combining them into a single generalized savings figure.

Revenue Matters, Too

A common limitation in pharmaceutical economic discussions is an emphasis on cost without comparable attention to revenue. From a finance perspective, revenue often progresses through several stages including charged revenue, expected revenue, and realized revenue.

Charged Revenue

For many institutions, reimbursement begins with a gross charge generated through chargemaster methodologies which may vary based on different pricing references and organizational approaches. While health systems rarely collect gross charges in full, those charges frequently remain important inputs for forecasting, contracting, revenue-cycle operations, and financial reporting.

Expected Revenue

The next stage is expected reimbursement. Depending on the payer arrangement, reimbursement may be based on a percentage of charge, ASP-based methodologies, AWP-based methodologies, Medicare-derived methodologies, fixed-fee schedules, or other negotiated payment approaches. Expected reimbursement therefore represents a modeled view of the amount the organization anticipates collecting.

Realized Revenue

Actual collections may differ from expectations for various reasons such as denials, underpayments, coding issues, appeals outcomes, write-offs, or unreceivable patient responsibility amounts. When available and sufficiently mature, actual reimbursement provides the most complete picture of realized financial performance, but this is not always readily extractable, especially in many hospital billing models. Accordingly, a practical hierarchy may be to target expected reimbursement for prospective decision-making and actual reimbursement for retrospective evaluation when available. Variance analysis between the 2 may also be used to identify revenue-cycle issues and opportunities.

Margin Should Not Be a Black Box

One of the most important strategies for leaders is to avoid reporting margin as a single unexplained number. In its simplest form, margin can be defined as revenue minus cost. Yet substantial variations can exist within both the cost component and the revenue component.

On the cost side, organizations may examine standard cost, invoice cost, net acquisition cost, 340B acquisition cost, or contracted acquisition cost. On the revenue side, organizations may examine charged amounts, expected reimbursement, or actual reimbursement. A meaningful margin evaluation requires transparency regarding which inputs are being used and why. Without this visibility, organizations risk attributing financial performance to the wrong drivers.

Extending Beyond Biosimilars

Although biosimilars provide a useful illustration, the same principles may apply to other clinically comparable products. Certain products approved through the FDA's 505(b)(2) pathway can create situations in which clinically acceptable alternatives exhibit different acquisition, reimbursement, coverage, or contracting characteristics. FDA guidance distinguishes the 505(b)(2) pathway from the abbreviated new drug application pathway and describes circumstances in which sponsors may seek approval through this mechanism.^3-5

The framework discussed herein should not be interpreted as applying to all 505(b)(2) products. Rather, the model is most relevant when an institution has determined through appropriate clinical governance that multiple therapeutic alternatives are acceptable for a given use case. In those situations, the same questions arise: How does acquisition cost differ? How does reimbursement differ? How does margin differ? What is the total economic impact?

Dynamic Economic Decision Support

Once organizations can measure unit-level economics, the next question becomes whether those insights can improve decisions before therapy is selected. Historically, many institutions have relied on static product-preference models. These strategies provide operational simplicity but may not reflect differences across different geographies, patients, insurance plans, reimbursement structures, or sites of care.

The recommended alternative is patient- and payer-specific economic decision support. Within approved clinical, formulary, and compliance boundaries, systems should consider product coverage, acquisition economics, expected reimbursement, coding and billing requirements, and enterprise strategy. These should collectively inform selection among clinically acceptable products. Importantly, the objective should not be unrestricted margin maximization. Rather, the objective should be informed decision-making in alignment with the organization’s broader strategic framework.

Manufacturer Strategy and Market Dynamics

Dynamic economic frameworks can also transform the relationship between health systems and manufacturers. Historically, organizations often absorbed substantial market complexity through contracting analyses, reimbursement evaluations, meeting frequency, and conversion projects. Alternatively, in a unit-level decision system, manufacturers can increasingly influence market utilization on their own through 3 primary levers: payer access, acquisition economics, reimbursement sustainability.

Regarding payer access, coverage and benefit design directly affect whether a product can compete at the patient level. Regarding acquisition economics, manufacturers may pursue market share through provider-facing price offerings. And regarding reimbursement sustainability, manufacturer-to-payer rebate decisions can influence reimbursement benchmarks and provider economics.

These levers are frequently interrelated, and optimizing one may affect the others. As transparency improves, utilization patterns may increasingly reflect the combined effect of manufacturer coverage, pricing, and contracting strategies rather than simply historical product preferences.

Governance Remains Essential

A key element that must not be overlooked is that unit-level economic visibility should enhance strategy, not replace it. Organizations must continue to prioritize clinical appropriateness, patient safety, access to care, affordability, formulary governance, compliance requirements, enterprise strategy. Economic decision support is most valuable when operating within these guardrails. The goal should not be to optimize individual transactions in isolation. Instead, the goal should be to improve economic stewardship while maintaining quality, access, and sustainability.

Conclusion

Health care finance continues to evolve, yet many pharmaceutical value-reporting methodologies remain rooted in earlier eras of cost avoidance and aggregate spending analysis. As pharmaceutical markets become increasingly dynamic, health systems may benefit from shifting toward unit-level economic frameworks that evaluate both cost and margin performance.

The described RFI model represents one conceptual approach to that evolution. By normalizing for volume and inflation and evaluating cost and revenue together, organizations can gain greater visibility into the true economic effects of pharmaceutical strategy.

For biosimilars, selected clinically comparable 505(b)(2) products, and other therapeutic alternatives, the future of pharmaceutical decision-making may depend less on aggregate savings and more on understanding how economic value is created at the level where decisions actually occur: one patient, one product, and one unit at a time.

REFERENCES

1. Abdelaziz A, Winn AN, Dusetzina SB, Mitchell AP. Biologic drug prices in Medicare Part B after entry of biosimilars to the market. JAMA Netw Open. 2025;8(11):e2542937. doi:10.1001/jamanetworkopen.2025.42937

2. Dean EB, Bond AM. Changes in Medicare Part B Spending for Biologic Drugs After Biosimilar Entry Into the Market. JAMA Health Forum. 2021;2(9):e212634. Published September 17, 2021. doi:10.1001/jamahealthforum.2021.2634

3. Determining whether to submit an ANDA or a 505(b)(2) application: Guidance for industry. US Food and Drug Administration. May 2019. Accessed September 10, 2026. https://www.fda.gov/regulatory-information/search-fda-guidance-documents/determining-whether-submit-anda-or-505b2-application

4. Electronic Code of Federal Regulations. 21 CFR § 314.54. Procedure for submission of a 505(b)(2) application requiring investigations for approval of a new indication for, or other change from, a listed drug. Accessed September 10, 2026. https://www.ecfr.gov/current/title-21/chapter-I/subchapter-D/part-314/subpart-B/section-314.54

5. Wood T. Understanding the 505(b)(2) pathway. Pharmacy Times. July 19, 2024. Accessed September 10, 2026. https://www.pharmacytimes.com/view/understanding-the-505-b-2-pathway