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Oh, how the news changes. A year ago, the word COVID-19 was all over the media. Now, COVID-19 has been replaced by inflation. It’s been 40 years since we’ve seen inflation at this level, and it’s driving the politics and policies that may decide the next national election. How should LTC pharmacy respond?

What is Inflation?

Simply put, inflation describes increases in prices over time. It can be caused by several things, including the inability of manufacturers to keep up with the rising demand for their products. In some cases, consumer demand is relatively flat, but manufacturers are limited in their ability to supply products due to supply chain issues or limited access to raw materials. Finally, government actions that increase the circulation of money can result in an oversupply of money chasing the same amount, or fewer, goods and services.

Healthcare Inflation

Prices in the healthcare arena have consistently risen faster than the general inflation rate. One of the most enduring criticisms of the pharmaceutical industry is the steady increase in prices from year to year.

Pharmacy is accustomed to drug price increases and used to profit from the practice by buying ahead of a price increase and gaining a bit of extra margin. Most reimbursement is based on relation to acquisition cost. The exception is drugs subject to some state and federal maximum allowable cost (MAC) limits that are based on a static price. These drugs are mature generics with multiple manufacturers. There are often cases where the pricing authorities create MAC prices that are lower than the acquisition cost.

What’s New About the Current Inflation?

If you ask anyone in the healthcare industry what’s their most pressing concern, the answer is likely to be staffing. Attracting and retaining staff is more difficult and expensive than it has been in decades. Now shortages and price increases in medical supplies, fuel for delivery vehicles, and other ordinary costs of running a business have all taken a bigger chunk of revenue than in the past. At the same time, nursing home occupancy has fallen and only recently begun to inch back to pre-pandemic levels.

How Do We Respond?

Rather than create an inflation response, what if we look at this as a situation where costs are rising and revenue remains stagnant? It may be caused by healthcare inflation but there have been periods when we’ve faced similar circumstances even in the absence of inflation.

Staffing: Staffing costs are up, and it becomes more difficult to retain our current staff. A focus on recruiting and retaining staff would seem to be a good place to start. While it’s true that finding the money to pay more could be a problem – not all employees leave for higher salaries. Can we work harder to invest in our current staff to make them want to stay? How about training opportunities and providing a path for advancement?

We can also look at ways to make our employees more productive. This may involve cross-training and changing our processes to accomplish more with fewer people. The creative use of automation could also be an answer. Are there repetitive tasks that might be accomplished with automation in place of humans?

Supply Chain Management: Most of you are already sharpening your pencils to see how you can stretch your dollars to make them go further through more rational procurement. Look for help from your GPO and from your wholesaler. They may be capable of more than providing standardized services. It’s worth asking to find out.

Substitution: Of course you’re aggressively substituting generics whenever possible. If you’re not equally aggressive in therapeutic substitution, it’s time to put that in play.

Increasing Marketing Efforts: It’s not always about cutting costs; the answer includes getting more customers. How much are you investing in creating a sales pipeline and moving prospects along to becoming paying customers? If you’re not spending at least five percent of your revenue on marketing and business development, you may not be investing enough to keep your pipeline full.

Businesses of all types managed to survive inflation in the 1980s. It wasn’t easy, but it was possible.

X Factors for Surviving Healthcare Inflation

  • Examine all your costs and determine innovative ways to decrease them.
  • Concentrate on giving your staff reasons to stay on your team.
  • Begin filling your sales pipeline by finding your next customer.

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Written by: Paul Baldwin, Baldwin Health Policy Group
Paul’s pharmaceutical industry experience in public and government affairs led to becoming Executive Director of the Long Term Care Pharmacy Alliance, helping lead the industry through the Medicare Modernization Act and creation of the prescription drug benefit. Paul was VP of Public Affairs for Omnicare before founding Baldwin Health Policy Group.
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