Remember the Bob Dylan song from 1964, “For the times they are a-changin?” No truer statement can be made for healthcare’s supply chain from the 60s to the present. Generic drugs entered the healthcare industry in the mid-1960s. There were only 10 GPOs in 1962 with 40 by 1974. In 1986, the first mega GPO, Amerinet, was formed by the merger of four regional GPOs. In the 70s, as part of distribution management at Schering Laboratories, I witnessed the receipt of wholesaler orders on hard copy purchase orders, some handwritten. Now with electronic data exchanges, orders are communicated via hand held devices, with orders placed and delivered on the same day. Progress has certainly been made with Supply Chain activities in healthcare but we are a long way away from optimal efficiencies that other industries are able to deploy.
Unfortunately, the improvement in healthcare supply chain does not equate to the management of pharmaceuticals. In hospitals, pharmacy buyers still rely on a “sixth sense” or “gut feeling” for determining purchase quantities. The problem of ordering without logic results in the expiry of products, with a high percentage of those returns not qualifying for a manufacturer credit. Below is an analysis of a five hospital health system’s twelve month pharmaceutical returns history. The analysis shows that the health system had a total inventory value of pharmaceutical returns of $1,962,117 with $781,260 of that total not qualifying for manufacturer credits. The analysis also identifies, by manufacturer returns policies, the value of the inventory losses by category. For example, there was an inventory loss of $258,127 for the return of partial units of sale for manufacturers with return’s policies that only credit the return of full units of sale.
Also, the management of pharmaceuticals in remote locations such as emergency carts, heart and stroke kits, contract reaction boxes and many other locations proves challenging with the current method of using “stickers” affixed to carts or containers, indicating the shortest dated product contained within. Monthly canvassing of the hospital by pharmacy personnel and others will identify locations where products need to be removed, as they have reached their expiry, and need to be replaced with good dated products. However, this process is labor intensive and subject to errors and omissions.
How significant is the problem of expired pharmaceuticals and the related lost inventory value for those that fail to qualify for a manufacturer’s credit? Here are some statistics:
- Genco, a FedEx company, states on their website that they “process and properly dispose of over $5 billion of pharmaceuticals every year . . .”
- Inmar, another major pharmaceutical reverse distributor’s website states that by “servicing over 27,000 pharmacies and 80% of US Hospitals and Health Systems, and processing over 95% of the industry’s wholesale returns, Inmar is the leader in pharmaceutical returns.” If they are the leader, we can assume they process more pharmaceutical returns than Genco, with an inventory value in excess of $5 billion.
- Guaranteed Returns states on their website that they process $1 billion of pharmaceutical returns annually, in addition to, numerous mid-sized reverse distributors that process a significant inventory value of expired pharmaceuticals. Thus, we can reasonably estimate that over $10 billion of expired pharmaceuticals are produced annually, with 40% to 50% of those products not qualifying for manufacturer credits, resulting in an industry loss of between $4 and $5 billion annually.
Since there is a robust industry that has been established for the processing of expired pharmaceuticals, why not an equal effort to prevent the expiry of pharmaceuticals and the related losses in inventory value and labor costs?
Here are some challenging questions, recommended solutions and benefits to managing pharmaceuticals, including opioids, in an efficient manner:
PAR Levels
Why aren’t PAR Levels established for a hospital’s pharmaceuticals? They are the second largest expense for a hospital after labor, so isn’t it logical that PAR Levels should be established. (True and accurate PAR Levels are determined by physical inventories, purchase and returns history. Determining PAR Levels based on purchase history does not accurately identify product usage.) This would eliminate the existing method of using an arbitrary quantity during the ordering process. Does establishing PAR Levels actually work in reducing the expiry of pharmaceutical products? Let’s look at an example: A large closed pharmacy organization established PAR Levels for their pharmaceuticals which resulted in an inventory reduction of $20 million and a decline within fifteen months of $3 million in expired products that failed to qualify for manufacturer credits. Of significance is the fact that the reduction in the lost inventory value of non-creditable returns is an annual savings. This comment was made by a member of the company’s board of directors: “This is the easiest $3 million we will ever save.”
PAR Levels should also be established for a hospital’s Automated Dispensing Machines by individual ADM, considering their dispensing history. A priority should be given for determining PAR Levels for opioids, as there is one undeniable fact, nothing good can come from the expiry of an opioid. The points of diversion for expired opioids are numerous, from hospital employees within multiple departments, to the history of diversion by third party reverse distributors. Given the opioid crisis, this fact cannot be stressed strongly enough.
Management of Pharmaceuticals in Remote Locations
Why are products in remote locations managed by “stickers” and “sharpies?” The reality of these products is that although they are needed for a patient crisis, they have little or no expectation of usage. Therefore, the vast majority of these products will remain dormant in their locations until they outdate and require replacement with satisfactory dated product. The reality also includes the fact that most of these product quantities are considered partial units of sale, and thus, based on most of the related manufacturer’s returns policies, will not qualify for credit when they expire.
Whether products in remote locations are managed by “stickers” and “sharpies” or by RFID dependent systems which have not been readily accepted, the following suggested changes in the timing of managing these products will reduce the lost inventory value of non-creditable expired products, and of significant importance will reduce the labor for managing such product:
- Make the replenishment process for expiring products a semi-annual process,
- Remove all products that will expire within the next six months and replace, not with existing product within the pharmacy which may have limited expiry, but rather with product specifically purchased for placement in remote locations. This newly acquired product will have a minimum of two year dating or more, meaning their future replacement will not have to be addressed for at least eighteen months or more,
- Rotate products well before expiry which will allow adequate time for these products to be administered prior to their expiry, converting the lost inventory value to a source of a billable revenue.
Order Cycle
Why does a hospital have to receive a pharmacy order every day? If a pharmacy buyer knows their two or three week PAR Levels, isn’t it reasonable to believe that they could have deliveries only three or four times per week? Consider this, a large pharmaceutical distribution center in northern Iowa services their customers in Omaha, Nebraska. The distance between the distribution center and Omaha is 252 miles or 504 miles round trip, equaling 2,500 miles per week. By reducing the weekly deliveries by just one per week would result in a reduction of 26,208 miles driven annually, and thus, the related transportation and labor costs. A strategy meeting with a hospital’s pharmaceutical wholesaler would seem to be warranted to explore the reduction of daily deliveries, with resulting savings passed to the hospital.
The Environment
An unspoken concern for the $10 billion of expired pharmaceuticals is their disposal through incineration. While the annual tonnage of these pharmaceuticals is unknown, it must be significant. Picture $10 billion of pharmaceuticals. How many rail cars or trailers would be required to transport this quantity of pharmaceuticals for incineration? How much toxic pollutants from burning plastics would $10 billion of pharmaceuticals produce?
Conclusion
The opportunity for improving the management of pharmaceuticals within hospitals and related non acute care facilities abound. Applying logic and existing processes for managing inventory would greatly benefit the hospital industry and the public and patients they serve. Lower costs, improved patient safety, and a more responsible position towards the environment are all good results from managing pharmaceuticals efficiently. If a robot can be programmed to perform surgery, why can’t we manage pharmaceuticals in a manner that does not produce such inventory losses, wasted labor, and negative impact on the environment? Just asking . . . given that times have changed.
To pursue the advantages of managing pharmaceuticals efficiently, you can simply contact us for an open and honest discussion. Our team includes a former Director of Pharmacy Services, executives from a successful pharmaceutical reverse distributor and a former hospital administrator. Our solution to the efficient management of pharmaceuticals is based on years of real life experience in pharmaceutical management, as well as significant success based on simple solutions for complex problems.
We look forward to hearing from you.
Robert (Bob) Miller
Cost Control Solutions, LLC
rmiller@costcontrol-solutions.com
