Keeping a handle on inventory is essential in pharmacy. Not only does effective inventory management directly impact patient care, ensuring that the right medications are on hand, but it is also key to a healthy cash flow and increased ordering efficiency.
The typical pharmacy has moved well beyond manual inventory management, for example using software systems to set reorder points based on minimum and maximum (min/max) stock levels, using electronic data interchange (EDI) to place orders with suppliers, and scanning barcodes to check in deliveries. Here we’ll take a look at ways pharmacies can raise their game by deploying the latest inventory management best practices and making sure that they are automating as much of the process as possible.
Where to Start with Pharmacy Inventory Management
Even considering labor, inventory is likely a pharmacy’s biggest investment. It’s a major asset, and one you want to focus on managing to ensure the best return, according to Larry Stephenson, VP of strategic sales at Transaction Data Systems. “It’s not always just the cost of goods,” notes Stephenson, “but how you manage the flow of these goods effectively as you stock the pharmacy and dispense medications also has a major impact.”
The first area you want to look at is how to go beyond relatively simple min/max rules, which are often set by intuition or based on a limited set of data. This often leads to either overstocking or understocking medications.
Not to mention that it is next to impossible to keep min/max rules up to date for all drugs a pharmacy dispenses, unless you really let your software drive the process. This allows you to use what Stephenson calls software-driven days’-supply-based inventory, which is the most efficient way to manage ordering that takes historical trends such as seasonality into account.
“You want to allow your pharmacy management system to really calculate for you what your demand is,” says Stephenson. “Our Rx30 pharmacy software can look at historical trends by individual drug or class of drug. It can more quickly recognize when demand is shifting. And you don’t have to sift through reports yourself or rely on your intuition to set minimums and maximums.”
Ryan LaVarnway, R.Ph., offers a real-life example of just how important it is to bring technology to bear on inventory management. He owns three pharmacies in New York: Brooks Pharmacy in Hamburg, Attica Pharmacy in Attica, and Island Prescription Center in Grand Island.
“Inventory is one of our biggest expenses,” says LaVarnway, “and between my three locations I’m managing thousands of different NDCs [National Drug Codes].” Even using the inventory management tools within his pharmacy system was too labor-intensive, so LaVarnway brought Datarithm in to streamline the process.
“We can run nonmovement reports from our DRX pharmacy software that look back 90 days,” says LaVarnway, “But that still means a lot of manual work going through the lists and checking inventory against them.”
The decision to add Datarithm made an immediate impact. “The first thing I did with Datarithm was to run an analysis of historical dispensing data that produced a report that gave suggestions for stock to return to the wholesaler and medications that I could move among my locations to improve turns,” says LaVarnway.
It was difficult for LaVarnway to keep up with maintaining optimized on-hand levels for all of his inventory, considering the large number of NDCs spread across his three locations.
“Especially for a multistore owner,” says LaVarnway, “one of the most valuable things that Datarithm brings is a highly efficient way to stay current on what, at each location, is a return opportunity and what can be moved to a different pharmacy if it’s in higher demand there.” Datarithm identifies drugs for which there is a full package quantity as opportunities for returns to a wholesaler. For drugs that aren’t eligible for a return, LaVarnway gets recommendations for which of his locations can best use the inventory.
“There was a long list of items on this report to begin with,” says LaVarnway, “because our manual process led to a lot of overstock and dead stock.” Now he runs the report once a week. “We’ve found this is the right interval for us,” he says, “and we continue to see a benefit from suggested returns. And there are usually 10 or 20 suggestions for balancing inventory among my three locations.”
Getting these transfers done is easy too, according to LaVarnway. A staff member simply clicks to accept Datarithm’s suggested amounts to transfer, which then automatically decrements that inventory from the pharmacy management system at the originating pharmacy. Then the receiving store checks the medications in to add them to its inventory. “The way that Datarithm and DRx are integrated makes it seamless,” says LaVarnway.
Finally, Datarithm also provides a list of 20 drugs for cycle counting each day, which ensures accurate on-hand quantity data in LaVarnway’s pharmacy system, but without the all-out effort of a full inventory. These cycle counts started out with high-dollar and brand-name drugs, since these offer the best opportunity to reduce cash tied up in inventory.
Just-in-Time Inventory in The Pharmacy
You’ve certainly heard about the concept of just-in-time inventory, and pharmacies — with their typically daily deliveries from wholesalers — are a perfect place for this. “Once you’ve got a data-driven decision process for ordering drugs, the next step is that your technology should really allow you to run justin-time based inventory,” says Larry Stephenson.
This can have the biggest impact in cases such as a branded product that you are dispensing to one patient. “Let’s say that a product like this costs the pharmacy $900,” says Stephenson. “What Transaction Data Systems pharmacy software can do is identify this drug and automatically suggest it for order just ahead of the refill date. So you, as a pharmacist, don’t have to remember to order it, and you are then keeping your cash flow in your pharmacy instead of keeping it in inventory on your shelves.”
LaVarnway, certainly, has found that just-in-time ordering is very important. Rather than have the minimum inventory level in his pharmacy software trigger a reorder immediately after dispensing, he uses order alerts from Datarithm that prompt him to be sure he’s getting drugs delivered just a few days before refills are due.
Not everything benefits from just-in-time ordering, however. You will also want to make sure you can take full advantage of other opportunities to purchase as efficiently as possible.
One way to do this is forward buying. This is when a partner such as a wholesaler or group purchasing organization (GPO) offers bulk advanced purchases at a discount — for example, a big monthly generic special order. “I’ve had many pharmacies tell me that smart forward buying has a big positive impact on their financials,” says Stephenson.
But it can be time-consuming to take full advantage of the opportunity, with a pharmacy owner often spending substantial amounts of time looking through a giant spreadsheet and going through existing inventory to figure out how much he or she really needs from a GPO’s recommended forward buy.
“We can automate that process,” says Stephenson. “We push inventory data from the Rx30 pharmacy software out to the GPO, and then it’s so much more efficient to participate in a forward buy when your partner knows what you can actually use. Pharmacies can optimize their forward buying and get it done in a fraction of the time.”
Being able to buy at the lowest cost is so critical, notes Stephenson, because every extra dollar of margin available to a pharmacy helps to make up for the bad claims and the direct and indirect remuneration (DIR) fee clawbacks.
One wrinkle that’s actually quite important is handling the fact that generics are often sourced from a rotating list of manufacturers. This is particularly the case with bulk buys. Stephenson notes that your software should have tools to maintain a master drug for a group of generics. “This way you are able to continue to see the dispensing trends for that drug,” he says, “even though you may be buying from different manufacturers over time.”
Another way to buy smarter is by taking advantage of class-of-trade discounts, for example, for the long-term care (LTC) market. “So many of our successful community pharmacies work with GeriMed, MHA, and others to be able to buy smart for their LTC dispensing, and really expand their business in this area,” says Stephenson.
If you are going to do this, then it’s critical to be able to maintain virtual inventories. “You use a virtual inventory,” explains Stephenson, “so that you can have separate LTC and retail inventory data without having to keep the drugs physically separate. We’re helping our clients recover every penny possible for serving the LTC market as combo shop pharmacies.”Virtual inventory is important for other areas of pharmacy, such as 340B and, as we’ll see, specialty.
Specialty Pharmacy Inventory Considerations
Specialty pharmacy in particular comes with its own set of inventory considerations, and success will depend heavily on having the right tools in your technology to address them. Karen Silverblatt, VP of business development for pharmacy at Inovalon, which owns the ScriptMed specialty pharmacy management software platform, points to several areas of attention for specialty pharmacy inventory management.
Specialty drugs are expensive. According to the Sept. 28, 2021 AARP Public Policy Institute‘s Rx Price Watch Report, the average annual cost for a specialty prescription drug was $84,442 per year, and has been increasing significantly faster than the overall rate of inflation. These high costs make it absolutely critical that pharmacies use all the tools we’ve talked about so far to ensure that specialty medications are stocked at the right levels and dispensed as efficiently as possible.
“ScriptMed uses historical data to intelligently project demand,” notes Silverblatt. “It’s an intelligent system that can notice changes in trends and use that to adjust reorder points. For example, you may start dispensing more of a product because you brought on a new payer client or a drug picks up additional indication approval,” she says. “You need software that can track velocity and align suggested order levels so that the pharmacy staff can focus on servicing patients.”
Returning to the topic of virtual inventories, another area of specialty inventory that can be tricky without the right technology, according to Silverblatt, is tracking multiple drug inventory types and the associated acquisition costs. A pharmacy dispensing specialty drugs may have to manage inventory acquisition costs for commercial insurance, pharmaceutical manufacturer free programs, 340B, or clinical trials, for example.
“You have to know your acquisition cost for inventory in every category and be able to store and capture receipts at the patient level to be able to accurately apply the right cost and manage margins for the dispense,” says Silverblatt.
The level of inventory detail may go further to aligning specific potency lots to specific patients in the case of some plasma products. “We have the ability in ScriptMed to handle these multiple inventories virtually,” says Silverblatt, “so the pharmacy doesn‘t have to manage multiple physical locations of the same product. The system will do it.”
Specialty Pharmacy and Wholesaler Contract Compliance
The cost of specialty therapy raises an important point for Larry Stephenson. “These specialty products are branded products with very high cost compared to many of the generics,” he says. “So a pharmacy building its specialty pharmacy dispensing needs to work with its wholesaler to understand how this will impact generic compliance and rebates.
If you all of a sudden start introducing very high-cost drugs on the branded side, then it makes it look like you’re not compliant on the generic purchase side, even though you are.” Many pharmacies count on generic compliance rebates, so it’s of the greatest importance to understand your wholesaler contracts and have the right conversations to make sure a valuable new line of business and clinical opportunity is ending up a net positive.
You Will See Results
Getting a handle on your inventory brings results. Ryan LaVarnway reports reducing his inventory costs by six figures, with most of that amount coming from identifying surplus inventory. He’s also increased his turns by four points, which combines with his lower inventory investment to significantly improve cash flow.
Getting started on improved inventory management isn’t hard. When Larry Stephenson talks with Rx30 users, he always suggests that they begin with the fastest-moving drug groups and apply smart reorder functionality. “Move these to the days’-supply-based model,” he says. “You will be able to see that you can trust the technology to successfully predict your demand.”
Another idea is to start tracking the valuation of your inventory on a regular basis so that you know the rate at which your cost of inventory is increasing, a particularly important point when there are strong inflationary pressures. Then you also want to track your increase in turn percentage year over year. “It may be alarming to see a 10% to 15% increase in the valuation of your inventory,” says Stephenson, “unless you can also see that you’re running at a 20% increase in turns from the previous year.
This tells you that you can afford to make the inventory investment because it’s moving quickly.” Stephenson notes that TDS is rolling out a business intelligence tool for its platforms this summer, called RXInsights, that is designed to make it easy for pharmacies to track these two critical metrics of inventory valuation and turn rate growth.
There’s no need to wait, though. It’s always a good time to focus on your inventory, according to Ryan LaVarnway, and there’s technology out there that will help you raise your game. “Pharmacy owners can’t afford to have a bunch of money just sitting on the shelves,” he says. “We got to a point where it was clear that we needed to eliminate manual processes.
You can’t manage inventory efficiently if you are going by feel and your best guesses. Once we brought Datarithm in, we saw immediately how much overstock and dead stock we were carrying. We cleaned all that up for a strong return on our investment right away.”
The right inventory management tools may help you leverage payer and provider relationships to carve out a specialty patient niche. “Even if you are primarily in the retail pharmacy space,” says Karen Silverblatt, “if you have the right technology, there may be opportunities for you to serve some specialty patients if you are positioned to meet payer, pharma, and patient requirements.”
So a strong, technology-driven approach to stocking your shelves brings substantial benefits: It improves your patient service level, it supports participating in a wide array of markets, and it improves the pharmacy’s financial footing. Technology is definitely your best friend when it comes to inventory. CT