The Intersection of Drug Channels and Hospital Profitability: Exploring the Impact of Contract Pharmacies and Efficiency in Not-for-Profit Hospitals

Ben H.

Ben H.

Aug 23, 20233 min read

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The Intersection of Drug Channels and Hospital Profitability: Exploring the Impact of Contract Pharmacies and Efficiency in Not-for-Profit Hospitals

Introduction:

The healthcare industry in the United States is a complex and ever-evolving landscape filled with various challenges and opportunities. Two areas of interest that have garnered attention are the use of contract pharmacies by 340B covered entities and the relationship between hospital profitability and efficiency in not-for-profit hospitals. This article seeks to explore the intersection of these two topics, highlighting the growth and problems of contract pharmacies and examining the relationship between hospital profitability and efficiency.

The Growth and Problems of Contract Pharmacies:

The use of external pharmacies by 340B covered entities to dispense 340B drugs to their patients has witnessed significant growth in number and size. However, this expansion has also led to distortions and inefficiencies in the drug market. The "AdamFein-DrugChannels-340B_RFI-28July2023.pdf" report sheds light on this issue and proposes several policy recommendations for improving the program. These recommendations include mandating discounts for needy patients, limiting the number and scope of contract pharmacies, requiring transparency and accountability, and preventing duplicate discounts.

Examining Hospital Profitability and Efficiency:

In the realm of not-for-profit hospitals, the relationship between profitability and efficiency is a crucial aspect to consider. The article titled "Efficiency and profitability in US not-for-profit hospitals - International Journal of Health Economics and Management" presents a comprehensive analysis of this relationship. The study utilized a frontier method, stochastic frontier analysis, to estimate hospital efficiency among a cross-section of 1317 U.S. metropolitan, acute care, not-for-profit hospitals in 2015. The results revealed a positive relationship between profitability and factors such as size, concentration of output, occupancy rate, and membership in a multi-hospital system. Conversely, an inverse relationship was found with academic medical centers, average length of stay, location in a Medicaid expansion state, Medicaid and Medicare share of admissions, and unemployment rate.

Connecting the Dots:

While seemingly distinct, the growth of contract pharmacies and the relationship between hospital profitability and efficiency share commonalities. Both topics highlight the need for transparency, accountability, and improved decision-making within the healthcare system. The expansion of contract pharmacies has created distortions in the drug market, while not-for-profit hospitals can utilize their market power and efficiency gains to increase surplus and pursue their objectives. By addressing the inefficiencies in both areas, the healthcare industry can strive towards improved patient care and sustainable financial models.

Actionable Advice:

  • 1. Enhance transparency and accountability: Both the 340B program and not-for-profit hospitals would benefit from increased transparency and accountability measures. Implementing mechanisms to track and disclose contract pharmacy arrangements, as well as monitoring the usage and impact of discounts, can help mitigate distortions in the drug market. Similarly, not-for-profit hospitals should adopt transparent reporting practices to ensure efficient resource allocation and cost management.
  • 2. Foster collaboration and coordination: In order to optimize the benefits of contract pharmacies, it is important to establish clear guidelines on the number and scope of these arrangements. Collaboration between 340B covered entities and external pharmacies can lead to better patient outcomes and cost-effectiveness. Similarly, not-for-profit hospitals should explore opportunities for collaboration, such as forming multi-hospital systems, to leverage economies of scale and improve profitability.
  • 3. Invest in efficiency improvement initiatives: The positive relationship between profitability and efficiency in not-for-profit hospitals highlights the importance of investing in initiatives that enhance operational effectiveness. By focusing on factors such as size, concentration of output, and occupancy rate, hospitals can not only improve their financial performance but also deliver high-quality care. This may involve streamlining processes, optimizing resource allocation, and adopting innovative technologies.

Conclusion:

The growth of contract pharmacies and the relationship between hospital profitability and efficiency are critical areas within the healthcare industry that require attention. By addressing the distortions and inefficiencies associated with contract pharmacies and leveraging the benefits of improved efficiency in not-for-profit hospitals, stakeholders can work towards a more sustainable and patient-centric healthcare system. Through enhanced transparency, collaboration, and investment in efficiency improvement initiatives, the industry can navigate these challenges and pave the way for better healthcare outcomes.

Resource:

  1. "AdamFein-DrugChannels-340B_RFI-28July2023.pdf", https://drugchannelsinstitute.com/files/AdamFein-DrugChannels-340B_RFI-28July2023.pdf (Glasp)
  2. "Efficiency and profitability in US not-for-profit hospitals - International Journal of Health Economics and Management", https://link.springer.com/article/10.1007/s10754-020-09284-0 (Glasp)

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