Is generic drug purchasing part of your cost containment strategy?


Chuck Adcox, RPh

Pharmaceutical Contracting
Innovative Delivery Solutions
Cardinal Health

Virtually every hospital has untapped opportunities to substantially improve efficiencies and reduce costs.

Key to any pharmacy's ability to drive down costs (for the hospital, for patients and for payers, too) is its ability to drive use of generic medications. Here, I'll share five issues and best practices to consider when driving generic drug usage in your hospital or health system.

1) Fewer 'new' generic drug opportunities require more focus

Although it's true that hospital pharmacy expenses have risen consistently over the past few years, the truth is they've risen relatively modestly - by an average of 1-3 percent. It's important to understand that this relatively low growth rate has been fueled by what many call 'the generic cliff,' a period of time between 2010 and 2013 when more than 40 brand-name drugs lost their patent protection, allowing generic manufacturers to make their own lower-priced versions of well-known, frequently prescribed 'blockbuster drugs' like Plavix, Lexapro and Seroquel, just to name a few. Consider the following:

  • During this time period, the healthcare industry also saw a steady increase in high-cost, brand-name specialty medications, which range in cost from hundreds to thousands, sometimes tens of thousands of dollars, per dose.
  • If it weren't for the significant cost savings generated by the many new generic medications made available as a result of the 'generic cliff,' hospitals would have experienced a much sharper increase in medication costs over the past several years.
  • Unfortunately, the list of branded medications that are expected to lose patent protection in the next five years is now much shorter - and the drugs on that list are not as frequently prescribed as the blockbuster drugs named above. At the same time, it's predicted that 7 of the 10 top selling drugs will be specialty medications by 2016.

These trends can obviously have the potential to increase drug costs substantially for hospitals, precisely during a time when it's more important than ever for hospitals to contain costs. Which makes it all the more important that hospitals are ready, and that they have the right processes in place, to take full advantage of financial savings every time a brand name medication goes generic.

2) Keep a lean inventory + keep an eye out for branded drugs ready to move off patent.

To contain costs, a pharmacy first has to determine the current costs of purchasing medications and inventorying them. One key indicator is inventory turns: ideally, you're never sitting on a large inventory of any drug - especially a high-cost branded drug - so that you can almost immediately switch to a less-expensive alternative when it becomes available.

Have someone on your staff stay focused on watching for new generics about to be released. Although there's no single source of such information, the subscription service is helpful. The site tracks some 80,000 patents and provides patent updates daily.

Your distributor or GPO should also send you reports and announcements of new generics. Also, ask your distributor or GPO if they offer reporting tools that proactively let you know when generics or lower-cost alternatives are available for purchase; and when the pharmacy should consider alerting physicians to lower cost alternatives when prescribing medications.

3) Speed Transition to Maximize Savings

You typically realize the most savings when a branded drug first comes off patent and is available from multiple manufacturers in generic form. Why? Because competition from multiple manufacturers drives down costs. Speeding transition once that happens is important, and requires a certain amount of readiness. To maximize savings on "soon-to-market" generics, it's important to begin to decrease your on-hand inventory of the branded product so you can begin to utilize the generic drug as soon as it is available. You'll also want to:

  • Make sure you have access to contract pricing through your GPO as soon as the drug is available.
  • Have internal processes in place to ensure you can start dispensing newly available generics as soon as possible. As new-to-market generic drugs arrive, detailed information must be entered into pharmacy and hospital IT systems. This may include bar codes for smart pumps, Electronic Health Records, the pharmacy drug database, the hospital billing system and the CPOE system.
  • Alert physicians and other care providers when a drug goes generic so that prescribing patterns adapt. The pharmacy staff should assist prescribers and nursing staff by thoroughly informing them about the generic drug.

4) Watch out for "Usage Creep!" And Focus on Utilization

Remember that the cost of any drug includes more than its purchase price. At Cardinal Health, based on our experience in working with hundreds of hospital pharmacies across the country, we use the formula that Cost = Price x Utilization. That means that when estimating your cost savings from converting from a branded medication to a generic, it's critical to factor in its utilization, as well.

For example, if you buy a generic drug that costs half as much of the branded version, but your hospital's utilization of the generic doubles over the branded version, you're not going to realize savings.

Such "usage creep" can occur when the cheaper generic is prescribed more broadly than the branded medication was. When a hospital system deals with an expensive, branded product, the hospital often has a set of very specific guidelines for when that drug can be prescribed, and staff is careful to adhere to those guidelines. However, when a generic replaces the branded product, the guidelines tend to fall away. Pharmacy staff should work with other clinical leadership to develop specific guidelines for the usage of new generics, too, to help avoid usage creep and the increased costs that come with it.

5) Understand the Impact Drug Shortages Can Have on Cost Containment Strategies

Most drug shortages in the U.S. involve generics - and since 2006, shortages in the drug classes that are made up almost entirely of generics, like anesthetics, antibiotics, and some cancer treatments, have tripled.3

Though injectables make up a small percentage of the prescription drug market, they accounted for 74 percent of all shortages in 2010, according to the U.S. Department of Health and Human Services. Many of these are drugs used every day in hospitals: morphine, norepinephrine and electrolytes, for example. They are particularly vulnerable to drug shortages because manufacturing processes are more complicated than making oral tablets and capsules and thus more prone to production problems.

When a generic medication is in short supply, it may force hospitals to turn to brand-name (or more expensive) alternatives - which can in turn drive up pharmacy expenditures. Some ways to mitigate that impact include:

  • Informing your financial, nursing and clinical staff about the shortage and its projected duration, as soon as possible. Provide clinical staff and nursing teams with information about alternative therapies, guidelines and implementation plans.
  • Notifying your finance team if a shortage of a generic medication forces you to utilize a brand-name alternative - this will alert them in advance to potential budget variances that will be caused by the increased medication costs. It will also enable your finance team to improve its financial forecasting going forward.
  • Take advantage of manufacturer Failure to Supply (FTS) claims within purchasing contracts. If you have to purchase a more expensive drug because the manufacturer can't supply the contracted product, the manufacturer is sometimes required to provide refunds, but you must submit the proper paper work and you must continue to try to purchase the lower priced item so there is documentation that you could not receive the product (your GPO or distributor may file the documents for you).

Keeping these key considerations in mind can help hospital pharmacists ensure they're taking the most advantage of potential savings available through generic drug cost-containment.