Hospital Pharmacy - June 2017 - 422

717379
research-article2017

HPXXXX10.1177/0018578717717379Hospital PharmacyTuringan et al

Article

Financial Effect of a Drug Distribution
Model Change on a Health System

Hospital Pharmacy
2017, Vol. 52(6) 422-427
© The Author(s) 2017
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https://doi.org/10.1177/0018578717717379
DOI: 10.1177/0018578717717379
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Erin M. Turingan1,2, Bijan C. Mekoba1,2, Samuel M. Eberwein1,2,
Patricia A. Roberts1,2, Ashley L. Pappas1,2, Jennifer L. Cruz1,2,
and Lindsey B. Amerine1,2

Abstract
Background: Drug manufacturers change distribution models based on patient safety and product integrity needs. These
model changes can limit health-system access to medications, and the financial impact on health systems can be significant.
Objective: The primary aim of this study was to determine the health-system financial impact of a manufacturer's change
from open to limited distribution for bevacizumab (Avastin), rituximab (Rituxan), and trastuzumab (Herceptin). The secondary
aim was to identify opportunities to shift administration to outpatient settings to support formulary change. Methods: To
assess the financial impact on the health system, the cost minus discount was applied to total drug expenditure during a
1-year period after the distribution model change. The opportunity analysis was conducted for three institutions within
the health system through chart review of each inpatient administration. Opportunity cost was the sum of the inpatient
administration cost and outpatient administration margin. Results: The total drug expenditure for the study period was $26
427 263. By applying the cost minus discount, the financial effect of the distribution model change was $1 393 606. A total
of 387 administrations were determined to be opportunities to be shifted to the outpatient setting. During the study period,
the total opportunity cost was $1 766 049. Conclusion: Drug expenditure increased for the health system due to the drug
distribution model change and loss of cost minus discount. The opportunity cost of shifting inpatient administrations could
offset the increase in expenditure. It is recommended to restrict bevacizumab, rituximab, and trastuzumab through Pharmacy
& Therapeutics Committees to outpatient use where clinically appropriate.
Keywords
hospital formulary, drug formularies, formulary committee, hospital financial management, hospital drug distribution systems,
drug utilization review

Background
Introduction
The pharmacy supply chain is a complex system revolving
around product transition from the manufacturer to the
patient with various discounts, rebates, and fees that flow
between parties. Chargebacks, rebates, and discounts are
pricing incentives between a manufacturer and a wholesaler or direct purchaser. Chargebacks allow wholesalers
to purchase products from manufacturers at wholesale
acquisition cost (WAC). When a hospital or health system
purchases from the wholesaler, the wholesaler is then able
to "charge back" the manufacturer for any difference
between negotiated prices paid by the institution and the
wholesaler's cost of goods. Rebates are a form of retrospective price concession that is based on volume purchased from a manufacturer. Direct discounts mainly
occur between institutions that purchase straight from a
manufacturer.1
When purchasing from a wholesaler, hospitals and
health systems purchase drugs through a group purchasing

organization (GPO) contract, which leverages aggregate
buying power of many institutions to negotiate lower
prices. Drugs are also purchased from a wholesaler without
a GPO contract, which can be utilized when a manufacturer
has the main market share and thus minimal competition to
negotiate GPO contract pricing. Wholesalers earn revenue
from discounts and fees from manufacturers based on services provided. In turn, the wholesaler returns part of their
revenue streams to their purchasers in the form of a "cost
minus" distribution discount which they negotiate for market share. The magnitude of the cost minus discount is typically based on the terms of payment and the volume of
1

University of North Carolina Medical Center, NC, USA
UNC Eshelman School of Pharmacy, NC, USA

Corresponding Author:
Lindsey B. Amerine, Assistant Director of Pharmacy, University of North
Carolina Medical Center, Associate Professor of Clinical Education,
Eshelman School of Pharmacy, University of North Carolina at Chapel
Hill, 101 Manning Dr, CB #7600, Chapel Hill, NC 27514, USA.
Email: Lindsey.Amerine@unchealth.unc.edu

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