Being a pharmacist is an interesting job – I’m part retailer, part clinician. I mostly spend my time thinking about the clinician part of the job, but people outside of pharmacy usually think about the retailer part.
The retailer part of my job is where we honestly make our money – for good or ill, the status quo pharmacy business model is to buy pills and sell them for more than you bought them for. Pharmacies are paid by insurance companies an “ingredient cost” and a “dispense fee.” In state Medicaid programs, those terms actually more or less mean what they sound like – they pay an estimated cost of the drug (based on a survey of invoice prices) and a dispense fee based on a cost of dispensing study- so they actually pay for my time to professionally evaluate and dispense the medication. In commercial insurance (employer and ACA exchanges) and Medicare, the dispense fees are ridiculously low – in some cases even nonexistent. That means that the ENTIRE payment is based solely on the medication I dispense; I’m paid for an NDC (national drug code) and the quantity sold. This results in a lottery-like reimbursement system - most NDCs are reimbursed poorly - we sell the drug for a little more or a little less than we bought it for, and a few NDCs are reimbursed exceptionally well - we sell the drug for substantially more than we bought it for. You might be able to tell which I prefer (hint: it’s the Medicaid system).
This status quo where >90% of my prescription revenue is based solely on drug product and not on service delivery means that for our small business to survive I need to act like a savvy retailer. I need to source medication as inexpensively as possible, order only what I need and sell it as quickly as possible.
What this means on a day to day is that right now a fair amount of my time is devoted to optimizing reorder points. About a year ago, we switched from using 4 pieces of software to manage our inventory to just one – our main pharmacy software. Using 4 different systems was… not efficient and led to a lot of annoying inaccuracies where I wouldn’t trust our computer database to have the correct count of the number of pills actually in stock. I eventually discovered the main issue – our wholesaler would tell two separate systems that an order was in transit and then they’d tell each other the same message, making them both think that we had twice as much inventory as we did. Simplifying that insanity to one system has greatly improved my quality of life – I don’t feel the need to go check the shelf before telling a potential client that we have a medication in stock – I just trust the computer.
More recently, I did discover an issue where a secondary supplier for our pharmacy wasn’t sending ANSI .810 files to our pharmacy system for about 5 months, so the ~30 items we ordered from them during that time had incorrect quantities on hand. Thankfully I’ve gotten that issue resolved. (sidebar: I am obsessed with ANSI X.12 transaction types at the moment. I want ALL of our suppliers, not just our pharmaceutical suppliers, but our book suppliers and our supplement companies and our tchotchke suppliers to provide .832 catalog files, .810 invoice files and .855 purchase order acknowledgements, and to support .850 purchase orders from me. Ideally they’d also support .856 advance ship notifications, .865 PO change notice, and .869/.870 order status inquiry/report, If I were a Walmart sized company, ANYONE that wanted to sell ANYTHING to me would have to support those transaction types. Buying stuff over the phone and reviewing price lists sent by fax is incredibly time consuming and annoying. This is also a message to my secondary suppliers - I don’t do over the phone orders and price negotiations. If you have a great price, put it in my daily .832 file. Don’t email me or tell me to go on your website either - I don’t have the time to look at your specials, just put them in the .832 and you’ll get the sale if it’s really a good price).
Anyway, since we switched to just using our software for inventory and ordering, rather than using 4 other vendors’ poorly communicating systems, I feel more confident in the accuracy of our inventory, but I haven’t really spent the time to fine tune the quantities that we keep in stock. The default setting in our software is to reorder when we can’t fulfill an order for a client. Say someone needs Humira, a ~$6000/month item, I don’t really want to shell out $6000 to keep a box in our fridge all month long. I want to order it ideally the day before they need it. In practice this means the client orders it from me the day before they need it and then I order it that night so they get their meds in the morning.
On the other hand, there are some medications that literally cost $0.50 per month to buy. I don’t want to have $200 of those on the shelf, but it’s not going to make us go bankrupt to have 6 months supply ($3) on the shelf either. So I want to set our order point for that item to be 5 boxes vs. negative 1 boxes of Humira. These “order points” tell my computer to suggest that when I hit 5 boxes of the $0.50 medication, it’s time to buy a box, and to tell me to buy a box of Humira when I have at least 1 patient waiting for it, but not to keep any on the shelf.
We’ve got quite a few items right now that the system keeps on the shelf that are more in the Humira category and also quite a few items where we really need to keep more on the shelf because we’re having to disappoint people or do double the work by giving them a few pills today and the rest tomorrow. That’s why this matters – I want to reduce those times where we have to disappoint folks by keeping more inventory, but I want to do so without making our inventory as measured in dollars increase too much. This is easy to do in theory – drop the order point on the high dollar items by 1 box and I can buy 100 boxes of the cheap stuff without making the dollar value increase. In retailing your money is either in the bank or on your shelf, and the staff wants their paycheck in dollars, not in boxes of inhalers.
All of this is pretty old hat to any retailer, though the price differential between the highest and lowest cost item may not be – most department stores don’t have $28,000 tvs next to their $0.50 candy bars. What makes independent pharmacy different from other retailing and interesting to me as a career is the crossover from retailing (managing order points and inventory and sourcing) to clinician (in depth conversations about your diabetes/kidney disease/stroke and which medication would be best) to IT specialist (if the internet goes out or the robot breaks – I’m the guy to fix it) to informaticist/data scientist (I write lots of If/then arguments into our software to trigger a vaccine recommendation or followup on a disease state, and I do a lot of data pulls and analysis from our system too) to salesman to law enforcement (don’t you dare bring a forged prescription to me) to accounting (I make sure we get paid by insurance companies for all the claims we file) to property manager (the building we’re in is ~100 years old) to insurance navigator (your drug is $500 because you have a deductible, Mrs. Jones, or “a prior authorization means…”). It’s honestly pretty exhausting to have to switch between all of these different roles, and I can see the value in having a larger organization like a chain to be able to specialize these roles into their own jobs. On the other hand, I do enjoy the challenge of deciding which thing on my backlog of all of those roles to focus on in any given day, in addition to just managing and carrying out the prescription fulfillment process. I also think that societally we assume that there are more “economies of scale” than there are. I think that there’s not much more efficiency in a 10,000 store chain like CVS or Walgreens in terms of specializing these roles than in a 10 store chain. The really big players DO have substantial contracting leverage to be able to extract better pricing on medications from both their suppliers and from insurance companies, but that doesn’t mean they’re more efficient, just that they are a bigger bully.
Given all of that, you can imagine that my time is precious to me and I have to be deliberate about how to spend it. For the next few days, that marginal time will be mainly focused on optimizing our order points and sourcing. If you have tips on the best ways to do this kind of optimization in the least time possible, I’d love to hear them – drop me a comment on this article or just respond to this email.
I don’t have any tips- because I feel like I change BOH all day long. I try and be anal about them and they still seem to get off pretty consistently... 🤷♂️ I also feel like I can relate to quite a bit of this. Like you said in independent pharmacy you get pulled a million different directions throughout a typical day. If you ever find the perfect system let me know...
Enjoyed the Post! We met at PDS in Orlando last February. I was a consultant with your software vendor at the time and now serve as Director of Process Improvement at a small independent chain. I'm here because Bruce shared your post ;)
Their are a ton technical things you could do to min-max reorder points, I personally enjoy data driven decision making like that!
BUT, the best advice I can give here is spend time developing staff that will be placing the order. Teach a tech, with intimate knowledge of your inventory, the decision making skill. They're then able to accurately adjust reorder points and correct BOH discrepancies when placing the order. It's touched every day already, an extra 3 minutes making the aforementioned adjustments can really make worrying about inventory management a thing of the past.