Untapped opportunities for health system pharmacies

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Health system pharmacy operations are strained by continually rising drug costs, labor and supply shortages, and intensifying margin pressures. Adding to these challenges, more patients are requiring more medications and complex therapies but often struggle to afford them.1 Even so, pharmacies have remained a critical source of value for health systems, expanding beyond acute care into ambulatory-care settings and enabling commercial strategies such as expansion into specialty and retail pharmacy.

McKinsey’s latest surveys of pharmacy leaders within health systems reveal that organizations’ focus on immediate challenges could be limiting their ability to explore more expansive cost-reduction and growth strategies and to provide cost-effective, accessible care to patients (see sidebar, “Research methodology”). This article explores five top-of-mind considerations for health system pharmacy leaders and identifies potential growth strategies, including establishing alternative patient-engagement channels and forming strategic partnerships.

Cost optimization is a primary goal

Cost optimization is a top focus for health system pharmacy leaders. Most expect spending to continue to increase in the year ahead (Exhibit 1).

Health system pharmacy leaders anticipate greater 12-month inflation in pharmacy costs in 2023 than they did in 2021.

Mounting cost pressures are at the forefront of concerns for health system pharmacy leaders. According to McKinsey analysis, pharmaceuticals currently account for the largest share of health system pharmacy costs, followed by labor. In both 2021 and 2023, the highest percentage of survey respondents expected pharmacy spending to rise by 4 to 6 percent. In 2023, more respondents anticipated higher increases—7 to 9 percent or more—in the next 12 months.2

Respondents reported several approaches to optimizing costs, including expanded use of generics and biosimilars, development and management of drug formularies, and proactive management of drug inventory to reduce waste.

However, respondents also reported challenges gaining adequate buy-in from key stakeholders, such as service-line leaders and physicians, to ensure formulary adherence and compliance. Almost 40 percent of survey respondents reported that their health system’s formulary compliance is less than 90 percent in 2023,3 limiting their ability to enforce cost-effective sourcing or utilization management.

Successful formulary management often depends on instituting a single pharmacy and therapeutics committee that governs pharmaceutical purchase decisions along with subcommittees that validate purchasing decisions and review formulary requests for each service line (pediatrics, oncology, and infectious diseases, for instance). Embedding guidelines into electronic medical records and deploying analytics capabilities can further help to monitor and facilitate compliance. According to McKinsey analysis, good formulary management and compliance (95 percent and above) may help health system pharmacies save 5 to 10 percent on total drug spend, especially in locations with higher acuity, such as Level IV trauma centers.

Supply chain shortages threaten pharmacy operations

Surveyed health system pharmacy leaders consider manufacturing shortages to be the most disruptive threat to the supply chain (Exhibit 2). Specifically, along with expectations of rising inflation, health system pharmacy leaders reported drug shortages or unavailability to be the greatest challenge facing their health systems today.

Health system pharmacy leaders cite manufacturing shortages and a lack of forecasting as the greatest threats to the supply chain.

More than 50 percent of respondents to both surveys considered manufacturing and production shortages to be a substantial threat to their pharmacy organizations over a five-year time frame. Survey respondents also indicated that their health systems typically have limited visibility into potential shortages, and 30 percent consider this lack of visibility to be a significant threat to their organizations in the next five years. Only 4 to 5 percent of respondents indicated their organizations are fully prepared to manage these supply chain disruptions.

To build strong operational fundamentals, health system pharmacy leaders can work to bolster supply chain resilience by improving their sourcing, contracting, and distribution capabilities. To proactively manage shortages, health systems could consider developing internal capabilities—such as a streamlined governance system, a shortage playbook with clear owners, and analytical tools that track historical supply fluctuations—and establishing greater transparency from manufacturers on production and distribution levels through appropriate levels of data sharing. They could also introduce stricter failure-to-supply clauses in contracts with manufacturers and consider alternative suppliers, including independent generic-drug manufacturers.

Staffing shortages are prevalent across all pharmacy roles

Surveyed health system pharmacy leaders reported high levels of understaffing across all roles, driven by challenges in recruiting and retention. Pharmacy technician was the most understaffed role in both acute (inpatient hospital) and retail (commercial dispensing to the public) settings (Exhibit 3).4

Health system pharmacy leaders report that hospital systems are understaffed across all pharmacy roles.

Leadership support is also critical in addressing staffing challenges. For example, health system pharmacy leaders could adjust compensation and ensure that benefits offerings and worklife balance are on par with alternative careers. They could also explore alternative career-development models (partnering with schools in a contemporaneous education and employment model, for example) and clarify career paths with advancement opportunities. They can also address barriers to entry (such as increased licensure requirements) by offering continuous education that supports licensure certification, which is especially relevant for pharmacy techs.

Health system pharmacies present nontraditional growth opportunities

While health system pharmacies have been focused on navigating challenges in their supply chains and staffing, they have made limited progress in building strategic capabilities for emerging service lines. Health systems have untapped opportunities to pursue nontraditional pharmacy–patient engagement channels (Exhibit 4).

80Health system pharmacy leaders report limited progress in organizational capabilities across emerging frontiers since 2021.

Many survey respondents reported that their health system had developed mature capabilities in established trends, such as specialty pharmacy and ambulatory infusion.5

In both surveys, however, respondents reported they have limited capabilities in emerging areas, such as home infusion, retail pharmacy, mail order, patient assistance programs, and pharmacy benefits management.

Shifting care models provide an opportunity for health system pharmacy leaders to reposition pharmacy as a growth center by creating new sources of revenue to supplement acute-care operations and allowing it to serve as a key enabler for improved patient access, outcomes, and care delivery. Diversifying revenue sources also insulates the health system from future market risks, such as declining hospital-based reimbursements, and could enable it to pursue greater risk-sharing and value-based arrangements with payers. Survey respondents in 2023 indicated that they would consider expanding or growing their ambulatory and specialty networks (85 percent), home infusion offerings (about 70 percent), and retail or mail order (about 60 percent).

Investing in innovative partnerships could yield many benefits

Health systems have ample opportunity to pursue partnerships with manufacturers, distributors, and other nontraditional stakeholders that can collaborate with pharmacies. Surveyed health system pharmacy leaders reported having substantial strategic partnerships with manufacturers, other health systems, distributors, and payers in 2021; responses in 2023 indicate that health systems have extended their partnerships with distributors and payers (Exhibit 5).

Organizations have primarily focused on strategic partnerships with manufacturers, other health systems, and distributors.

Respondents also reported that they rely primarily on traditional collaboration models—for example, around the responsibilities clarified in contracting terms—rather than innovative models involving investments, joint ventures, or M&A. This trend suggests health system pharmacy leaders could expand their notion of strategic partnerships, including by collaborating with strategy teams or service-line leaders.

Broader strategic partnerships could unlock innovative, diversified pharmacy strategies—for example, developing new service lines or expanding to new geographies—that could improve patient care and experience, advance clinical innovation by expanding the role and reach of pharmacists, and help insulate organizations from downstream financial risk. Illustrative examples include partnerships with private equity firms to commercialize ambulatory service lines such as specialty pharmacies or medication therapy management clinics; partnerships or coalitions with other health systems to attain economies of scale and address drug shortages; and investments in start-ups focused on emerging pharmacy services, such as ambulatory services and home infusion.

For a few survey respondents, innovative partnerships included jointly building a central distribution warehouse with a manufacturer and collaborating with a payer to fund start-ups. Additionally, several respondents reported that they had joint ventures with payers or other health systems.

Even as challenges continue to mount, pharmacy services are increasingly important at most health systems because of its strong economic fundamentals, broad connection to the core health system’s clinical imperatives, and strategic positioning for new growth opportunities. Health system pharmacy leaders are preoccupied with managing spending increases, expanding pharmacy services across all service lines and care settings, and growing patient and operational complexity. In the process, they could be missing key growth opportunities in emerging frontiers and strategic partnerships with other stakeholders that could enable improved delivery of patient care.

Health systems can aim to close gaps in critical areas while simultaneously investing in new areas to uncover new sources of growth and increase patient access to care. For example, they could enforce formulary compliance to optimize costs, bolster supply chain resilience, and enhance recruitment and retention efforts while investing in alternative patient-engagement channels and strategic partnerships. In the coming years, balancing these investments can help health systems and patients alike.

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