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    A Closer Look at Distribution in Pharmacy and the Hospital Pharmacy Consolidation Trend

    Posted by: Valerie Bandy | January 18, 2024

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    What’s driving more health systems to centralize drug purchasing and services?

    Many health systems, whether they have a warehouse in place or are simply curious about emerging opportunities for centralization, may not have factored in the concept of a consolidated pharmacy service center (CPSC). What is distribution in pharmacy in the context of a CPSC and why is this business case getting attention?

    The growing trend among U.S. health systems to centralize pharmacy purchasing and services in a single location has been driven by the need to operate more efficiently and cost-effectively, while enhancing quality and safety.

    With ongoing staffing shortages, rising drug prices and a rebound in healthcare merger and acquisition (M&A) activity, health systems are taking a more strategic look at the importance of distribution and services — replenishing, repackaging, distribution and operational services — in pharmacy settings.  

    Let’s explore traditional distribution in pharmacy practices, the opportunities and benefits of consolidation, and why it is appealing to hospital pharmacy, clinical and financial leaders.   

    What is distribution in pharmacy? 

    In the traditional model of distribution in pharmacy, each hospital within a health system purchases its own medications and performs its own services, from sterile and non-sterile medication compounding to managing par levels in automated dispensing machines (ADM).  

    For larger health systems, this duplication of pharmacy labor, equipment, supplies and medications across multiple hospitals — 10, 50, 100 — is expensive, resource intensive and can lead to non-standardized practices that increase compliance and patient safety risks. Furthermore, hospital leaders lack enterprise-wide visibility into their health system’s pharmacy operations and spend.  

    What is a CPSC? 

    The concept of a consolidated service center (CSC) in healthcare has been around for quite some time. It is a way for health systems to centralize supply chain infrastructure, processes and inventory within a warehouse that serves multiple hospitals/facilities.  

    Until now, most health system CSCs have been intended for medical/surgical supplies. But as healthcare leaders, including chief financial officers (CFOs), turn a more critical eye toward rising medication costs and ongoing shortages, more health systems are consolidating medications and supplies into their CSCs or are building separate CPSCs specifically for their pharmaceutical supply chain and services.  

    A CPSC allows a health system to centralize and standardize distribution in pharmacy, purchasing, services and inventory management within a single location. This location then serves individual hospitals and associated outpatient areas, as well as other facilities and functions, such as physician offices, EMS, mail order, specialty pharmacy, oncology, surgery centers and more. 

    Areas for consolidation: 

    • Consolidated purchasing and inventory management: The CPSC model allows for a health system to establish a single team responsible for system-wide medication purchasing and management including regulatory-focused programs and requirements such as Drug Supply Chain Security Act (DSCSA) and 340B. 
    • Consolidated services: The health system can consolidate a wide range of pharmacy services within the CPSC performed centrally by a team of pharmacists. Services can include: 
      • Kit and tray assembly, replenishment and delivery, such as crash cart trays or surgical or emergency kits 
      • Sterile and non-sterile compounding 
      • Medication repackaging 
      • EMS servicing (e.g., replenishing medications for paramedics) 
      • Mail order and specialty pharmacy services 
      • Patient order verification 
      • Nuclear pharmacy 
    • Consolidated distribution in pharmacy: A CPSC helps health systems distribute drug products (individual items or kits and trays) to hospitals and other facilities for use, as well as replenish automated dispensing machines, robotics, carousels and other automation directly from the warehouse.  

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    What are the benefits of the CPSC model?

    The economies of scale, efficiency gains and process standardization enabled by the CPSC model yield tremendous value to health systems. Benefits include: 

    • 340B compliance and pricing: Consolidated drug purchasing across multiple hospitals through a single CPSC team can drive compliance with the CMS 340B Drug Pricing Program and facilitate faster accumulation for specific National Drug Code (NDC) items for greater savings. 
    • Labor utilization: Transitioning from individual hospital pharmacy teams each performing their own tasks (e.g., purchasing, inventory management, pharmacy services) to a single team within the CPSC performing them for all the health system’s hospitals (and other facilities) can reduce the number of staff needed for service or administrative tasks and enable labor redeployment to more clinically focused activities or operational needs. 
    • Inventory optimization: A CPSC equipped with an electronic, end-to-end supply chain management (SCM) solution that tracks drug products from receipt through storage and usage provides the centralized pharmacy team complete visibility over inventory. This enables them to manage inventory more effectively, helping to prevent excessive purchasing and on-hand inventory, avoid shortages and stockouts, prioritize use of drugs near expiration date to minimize waste, and efficiently manage recalls.  
    • Patient quality and safety: Assigning a single team within the CPSC to perform specific tasks in a standardized way to service multiple hospitals and other facilities can reduce variation in medication and patient care quality and safety. Global visibility and control over drug products via the SCM solution also allows the CPSC team to monitor inventory and prevent clinicians from administering expired or recalled products to patients and ensures the right medication is there when needed, avoiding care delays.   
    • Cost savings: Consolidation of pharmacy services within the CPSC eliminates duplication of staff, drug products, and equipment and supplies, as well as the costs associated with these resources. Other savings areas include the ability to purchase and store drugs in bulk, distributor and GPO fee reductions, inventory shrinkage avoidance and avoidance of 340B penalties. 
    • Additional revenue generation: Building, equipping and staffing a CPSC presents opportunities for health systems to expand their pharmacy services. Perhaps they previously lacked the space for a service in an individual hospital or lacked the collective volume to justify one. Now with a dedicated space and team, the health system can offer new services to both its own hospitals/facilities and others in their communities. At a time when healthcare organizations are struggling financially, the resulting system-driven revenue is an enticing proposition for any health system CFO.

    Heightened awareness for healthcare executives and pharmacy leaders is on the rise for the importance of distribution in pharmacy settings. As a result, the trend toward the CPSC model continues to grow, driven by its ability to reduce pharmacy costs, maximize labor resources and better manage drug and supply inventory. These three benefits are critical in today’s healthcare environment of rising medication costs, staff challenges and pharmaceutical shortages. 

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