Infusion Master - NHIA
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Infusion Master - NHIA

Continuing EducationGetting the Biggest Bang for Your Buck—Effective Inventory Management Helps Improve CashFlow, Promotes ProfitabilityBy Keyur Mehta, R.Ph., M.B.A.This INFUSION article is co-sponsored by the National Community Pharmacists Association (NCPA),which is accredited by the Accreditation Council for Pharmacy Education (ACPE) as a provider of continuingpharmacy education. NCPA has assigned 1.0 contact hours (0.1 CEUs) of continuing education creditsto this article. Eligibility to receive continuing education credits for this article begins April 7, 2010 andexpires April 7, 2013. The universal activity number for this program is 207-999-10-027-H04-P.This activity has been submitted to the Virginia Nurses Association for approval to award contact hours. TheVirginia Nurses Association is accredited as an approver of continuing nursing education by the AmericanNurses Credentialing Center’s Commission on Accreditation. Please call the National Home Infusion Associationat 703-549-3740, or visit the weblink at the bottom of this page for more information about contact hours.This continuing education article is intended for pharmacists, nurses, and other alternate-site infusion professionals.Continuing Education ObjectivesAfter reading this article, the participant should be able to:1. List six tenets of inventory management in the home infusion pharmacy.2. Describe the considerations when determining an appropriate call level.3. Examine the benefits to creating a formulary of preferred medical supplies.4. Review considerations for easing the impact of product recalls and shortages.About the AuthorKeyur Mehta, R.Ph., M.B.A., has over 15 years of home infusion experience. At InfuScience (a member of theNational Home Infusion Association) where he is currently employed as the Vice President of Operations, his responsibilitiesinclude strategic/ budget planning, purchasing, reimbursement, financial results, and clinical/facility operations.His previous experience included managing a home infusion pharmacy and starting a home infusion pharmacybusiness in which he was directly responsible for all pharmacy and purchasing-related activities. Mr. Mehta holds aBachelor of Arts degree in Biochemistry from New York University (NY) and a Bachelor of Science in Pharmacy fromSt. John’s University (NY). He received a Masters of Business Administration from Virginia Tech in 2005.M A R C H / A P R I L 2 0 1 0Author Disclosure Statement: Keyur Mehta declares no conflicts of interest or financial interest in any product orservice mentioned in this program, including grants, employment, gifts, stock holdings, and honoraria.Continuing education credit is free to NHIA members, and available to non-members for a processing fee. To apply forNursing or Pharmacy Continuing education, go to and follow the online instructions.16

Continuing EducationThere are a variety of operational functions that,when finely tuned, contribute to a solid financialpicture for any organization. Likewise, thesesame functions, when sluggish and inefficient, candeplete an organization of critical resources—fromhuman resources to profit—and eventually erode itsfinancial footing. Wise operations managers know thatfew of these are as important as inventory management.In its Management Planning Series, the U.S. SmallBusiness Administration warns, “Many small businessescannot absorb the types of losses arising from poorinventory management. Unless inventories are controlled,they are unreliable, inefficient, and costly.” 1This is true in alternate-site infusion, where the physicalinventories of drugs and supplies are only a portion ofthe comprehensive services provided to patients. Inpart, it’s the nature of the inventory itself—high-costpharmaceuticals with limited shelf lives—that makeeffective management necessary. In addition, razorthinmargins and prolonged reimbursement cycles commonin our field create an even more urgent need forskilled inventory management.Because inventory is so directly correlated with cashflow, establishing and following best practices can allow aprovider more options for the use of working capital.Failing to do so can tie up precious cash or credit lines—both of which are increasingly more difficult to come by intoday’s economic climate. We all want to use our cash asefficiently as possible, and controlling outlays for pharmaceuticalsand medical supplies is one operational areawhere performance can truly make a difference in thefinancial health of any alternate-site infusion provider. Formore on the benefits of managing other assets, such aselectronic infusion pumps, see Effective AssetManagement: Why Comprehensive Pump Tracking Programsare Essential in the Alternate-Site Infusion Market on p. 23.T o o l s of th e T r ad eEffective inventory management is as challenging as it iscritical. It’s all about striking the right balance. Excess producton the shelves ties up working capital as it ages andexpiration dates draw near. But, having shortages sacrificesyour ability to quickly respond and meet the needs ofyour patients and referral sources. Turning away a referralbecause of a product shortage forfeits a competitiveadvantage. Your sales team can tell you how quickly yourcompetition will accept this patient, and how long it willtake the team to regain the trust of the referral source.Alternate-site infusion providers approach inventoryin a different ways. Variables such as size, patient andtherapy mix, and even seasonality, can affect usage patterns.Similarly, vendor arrangements, information systems,and physical operations influence purchasing anddistribution methods. There are a host of industry-spe-cific curve balls, such as recalls and shortages, whichcan also come into play. Regardless, the key to effectivelymanaging inventory is to have a good handle onyour usage, be able to forecast your needs and planaccordingly, and be resourceful in resolving unexpectedchallenges and taking advantage of opportunities.Fortunately, there are several tools that businessescan use to maximize their ability to do just that.Following are some of the most critical inventory managementtenets in the alternate-site infusion field:1 . S e c u r e t h e B est P o s s i b l eP r i c i n g a n d T e r m sThe best way to save money is to pay the lowest possibleprice in the first place. In health care, drugs are notsubject to standardized pricing—an issue that has longconfounded attempts to control costs and comparemodels. Providers negotiate drug prices, largely basedon volume, which are reflected in vendor contracts. Thesame is basically true for medical supplies, such as needles,tubing, dressings, and so on.A critical first step in inventory management is tomake the most of your purchasing power by securingthe best pricing and contract terms. There are manyoptions for doing this within the pharmaceutical andmedical supply distribution machine; it’s up to eachprovider to explore all the avenues and choose the rightcombination for its individual business. For example,providers of all sizes can tap into large buying poolswhen they become members of group purchasing organizations(GPOs), which negotiate volume discounts fordrugs, supplies, and other services. GPOs act as agentsor intermediaries, directly negotiating a transactionthat occurs between the member (infusion provider)and a wholesale distributor or drug manufacturer. 2On the medical supply side, most providers coordinatetheir purchasing and deliveries through supply distributors.Large providers may contract directly withcertain manufacturers on price but can still rely on supplydistributors for regular deliveries of goods. Thesecompanies can offer volume discounts, and like GPOs,offer other value-added services, such as training andeducation, to their provider customers. GPOs can assistin contract verification and financial analysis of purchasingtrends to ensure providers that they are takingadvantage of the best possible pricing and that they arebeing charged according to their contracts. Supply distributorsoffer a variety of inventory managementtools, such as online ordering and, in some cases, caninterface electronically with a provider’s inventory softwaresystem to automate reordering.While price per unit is important, keep in mind thatsavings can easily disappear if you are subject to othercharges and fees. It’s equally as important to secureM A R C H / A P R I L 2 0 1 017

Continuing Educationfavorable payment and delivery terms in all contracts.Since infusion industry DSOs (days sales outstanding)can average around 80 days or more, the longer thepayment terms, the better. Ideally, you would be ableto use the item and collect reimbursement for yourservice before you were required to pay for it. Sincethat is not usually possible, the next best thing is to“synchronize the clocks” to some degree by orderingas close as possible to the date of use (see #4“increase ordering frequency” below) and havinglonger payment terms in place.Delivery terms are also important. You want the flexibilityof having high-frequency deliveries without beingcharged a premium for this convenience. Providers withmultiple locations can centralize deliveries and thenredistribute drugs and/or supplies internally. Thismodel, sometimes called “depoting,” can allow morecontrol, especially for high-cost pharmaceuticals, andmay result in additional savings—although the practicerequires staff time and oversight, which is not free.E x hi b i t 1Considerations for Determining Call Levels✓ How much of this item have I used in the past?✓ How variable is the usage of this product?✓ How long will it take to obtain more if I run out?✓ Is there an alternate product that I could use if Irun out?✓ Is there an alternate source of the product if I run out?✓ What will be the impact on patient and referralsource if I run out?✓ Must I order a certain preset quantity or dollarvalue (pack of 10 or a $100 minimum order)?✓ Is this product likely to be “shorted” due to manufacturerlimitations?✓ How much will I have to pay for the product thistime from this vendor?Source: Dillon, Petroff, and Riddell. Module 7: Overviewof Financial and Operational Issue in Home InfusionTherapy.2 nd edition. 2007:NHIA. Alexandria, Virginia.M A R C H / A P R I L 2 0 1 02 . E s t ab l is h C a l l L e ve l sA call level is a predetermined supply level that triggers areorder. Call levels usually vary for different productsand are ideally the result of strategic decision makingcoupled with a strong sense of historical usage patterns.As mentioned earlier, some providers use distributorinterfaces that automatically reorder drugs at certainagreed upon call levels while others prefer to leave thedecision making to a person with call levels as guidelines.In establishing call levels, a provider must balance the“holding costs” associated with having excess supply—unavailable capital, warehouse space and personneltime, plus any special storage issues—against the costsof being out of stock or running too low for comfort—rush delivery fees, rerouting/reallocating staff, patientdissatisfaction, and lost referrals, to name a few. It isvital to strike the right balance.Larger providers are able to order higher-cost drugsdaily, primarily because their purchase volume warrantsdaily deliveries from the wholesaler or distributor withoutadditional fees. Others keep about two to five daysof drug on hand and order when they dip below thatpoint. It’s important for providers to have a back-upplan—an organization from which they can borrow oran alternate product they can suggest—in case there isan emergency need, shortage, or some other unusualevent. Putting these measures in place reduces the tendencyto err on the side of caution and needlessly hold“safety stock.”Conversely, it’s not a bad idea to keep safety stock ofmedical supplies in inventory. The value tied up in suchstock is relatively small and the usage of supply itemstends to be somewhat predictable. See Exhibit 1 for alist of considerations when deciding when and howmuch of a particular item to order.3 . E stabl i s h an I n v e n t o r y“ F o rm u l a r y ”For the purposes of inventory management, “formulary”has a slightly different meaning than the traditionallimited set of drugs that a payer will cover without pre-18

Continuing EducationC a l c u l a t i n g I nv e n t o r y T u r n sAnnual COGS ÷ Inventory Value = Inventory turnsnumber of inventory turns goes up, the dollar value ofthe inventory at any given time goes down. 3For example, if a provider has a monthly cost ofgoods of $200,000 ($2.4 million annually) and an inventoryof $250,000, its inventory is turning over 9.6 timesper year. If that same provider increased inventoryturns to 30 per year, it could do the same job by keepingonly $80,000 worth of inventory on the shelves atany time—a difference of $170,000 (see Exhibit 2). Ifthe provider reaches 30 inventory turns by spending the$170,000 that it previously had tied up in inventory, itwill realize a one-time reduction in COGS of $170,000—that’s a savings of seven-percent!In the alternate-site infusion field achieving three ormore inventory turns per month is typically the goal.Optimizing turns is especially important with high-costdrugs, such as specialty drugs and biologicals. In fact, ifyou pay close attention to turns of these more expensiveitems, you can spend less time on the lower costitems such as supplies. Too frequent turns of lowercostitems can quickly tip the cost-benefit scales to the“cost” side of the equation when excessive staff time isused to order, receive, and stock the supply items.Some inventory managers follow the “80-20 rule,”which basically states that 80 percent of any outcomeis attributable to 20 percent of all causes. Inthis case, you can control 80 percent of your inventoapproval.Here it is more of a standardized and limitednumber of drugs, ancillary supplies, and devices aprovider keeps on hand—some organizations prefer tocall these “approved product lists.” Regardless, theidea is to minimize the number of types of an item—andthus the total number—you keep in stock.With the wide variation of products and different clinicalspecialties within alternate-site infusion, it can be achallenge to strictly adhere to internal formularies. Themotivation to create and enforce an approved productslist is higher for ancillary supplies than it is for pharmaceuticals.This can be especially true for providers whocontract with more than one nursing agency—imaginethe size of an inventory that tries to incorporate theindividual preferences of a wide variety of nurses.Distinguishing “preference” from “clinical need”requires collaboration between the pharmacy’s inventorymanagers and clinical personnel to maintain a clinically-appropriate,cost-effective formulary.There are several advantages to implementing a formularyor approved product list. First, and foremost, it’seasier to maintain higher inventory turns with feweritems (see #4 “increase ordering frequency” below formore on why this is desirable). Formularies can alsohelp reduce other overhead expenses, such as warehouse/storagespace and staff time required at allstages of order fulfillment. Formularies can even promotequality practices by reducing the chance of errorsrelated to picking the wrong supplies, promoting stafffamiliarity with products, and eventually leading to consciousselection of the highest quality and most costeffectiveproducts.4. Increase Ordering FrequencyThere are several schools of thought across variousindustries on the best way to optimize inventory management.With names like “lean” or “just-in-time ordering”the central theme is the same—increase orderingfrequency so there is less money tied up in product onthe shelves. Optimizing inventory turns is directly tiedto an organization’s financial health.Commonly used in operational benchmarking andperformance improvement programs, inventory turnscan be calculated by dividing a provider’s annual cost ofgoods sold (COGS) by the dollar value of the actualinventory in the pharmacy (see box, this page). As theE x hi b i t 2How Higher Inventory Turns Reduces Costof GoodsAnnual COGS ÷ Annual inventory turns = InventoryScenario A$2.4 million ($200,000 x 12) ÷ 9.6 = $250,000Scenario B$2.4 million ($200,000 x 12) ÷ 30 = $80,000Savings$250,000 - $80,000 = $170,000 (7% of COGS)Source: Dillon, Petroff, and Riddell. Module 7: Overviewof Financial and Operational Issue in Home InfusionTherapy.2 nd edition. 2007:NHIA. Alexandria, Virginia.M A R C H / A P R I L 2 0 1 019

Continuing EducationM A R C H / A P R I L 2 0 1 0ry value by increasing the turns on the top 20 percentof your inventory. Since the top 20 percent is typicallytherapies for chronic conditions that require refrigeration,many providers look to the refrigerator firstwhen managing inventory. My organization recentlyundertook a similar effort and reduced inventory by$1 million in a single branch, thus adding that amountto our cash reserves where it could be used for furtherinvestment in growth.5 . M o v e E x ce s s P r o d u c tAll the best inventory practices put together cannotprevent the accumulation of certain products. Eventslike changes in patient status or physician preferencescan leave products on the shelves that are not likely tobe used in the near future. These “no movers” willsteadily lose value over time.A good rule of thumb is to dispose of products thathaven’t been used in the past 90 days. Fortunately, the80-20 rule usually applies here as well, meaning 80 percentof the “no mover” value is tied up in only 20 percentof the excess inventory. There are a number oflow-value items that may not be worth the staff timeneeded to redirect them. These supplies should be written-offand properly disposed of.For high-value items, such as pharmaceuticals, the bestpractice is to return or redistribute them. Many wholesalerdistributors accept drug returns within six monthsof their expiration date. While there can be a restockingfee, returning products with a shelf life makes sense.Some even offer “amnesty” returns, usually twice a year.For providers with multiple locations, it may bepossible to redirect certain medications to a differentbranch—internal listings are a good way for branchesto communicate their needs. In many cases aprovider has established relationships with otherlocal providers, hospitals, or physicians that might beable to use the product, although these types ofarrangements work best when they take placeamong trusted colleagues.Keep in mind that a growing number of items canbe donated as gifts in kind to a variety of charities,including clinics, groups that do medical work overseas,and possibly schools of pharmacy and nursing.It may take some legwork to make arrangements thefirst time, but after that, this might be a mutuallybeneficial avenue for the disposition of “nomovers.” There are a number of gifts in kind clearinghouseorganizations that coordinate and redistributedonations in keeping with all federal andstate regulations.6 . H av e C on ti n g e n c y P l a n sf o r R ec a l l s and S ho r t a ge sAnother fact of life that can thwart all the bestattempts at inventory control is the inevitability ofproduct recalls and shortages. They do happen, and thebest way to mange inventory through such a crisis is tobe as prepared as possible.Manufacturers issue recall notices for a variety of reasonsfrom labeling mistakes to suspected tampering.Some notices go to the patient level; others apply onlyto what’s on the warehouse shelf. Regardless, eachprovider needs to have a process in place that allowsfor the swift identification of these items. For patientlevelrecalls, providers must take the additional step of20

Continuing Educationchecking to see if any of the affected products were dispensedto patients. If it hasn’t been used yet, the productshould be retrieved and a replacement delivered.This process isn’t necessarily as challenging as it istedious. Of course, all recalled products should bereturned or disposed of according to the manufacturer’sdirections.Recalls can create shortages as providers throughoutthe industry struggle to rapidly find substitute products.This is especially troublesome when there isn’t anavailable product to use as a substitute. The heparinrecall of 2008 was a perfect example. Since the sourceproduct was the subject of the recall, many brands producedfrom that source were affected—and everyonein the medical community was suddenly dealing withthe same shortage. It’s times like these when solid relationshipswith vendors and other providers in your communitycan pay off.As mentioned earlier, it’s important to establish partnershipsso you have a place to turn to access drugs andsupplies when you are short. Wide-scale shortages andproduct allocations—think IVIG in the late-1990s—areeven more challenging. In addition to good relationships,some ingenuity is required.For example, my organization consists of several locationsin a regional area, each of which is responsible forits own purchasing. When heparin became scarce in2008, we centralized our purchasing so that we werebuying in volume and accessing as much of the rareunaffected product as possible. The heparin we couldacquire was shipped to one location, which acted as adepot and redistributed it to the other locations basedon need.C r a c ki n g th e I n v ent o r y N u tRegardless of the industry, the basic principals remainthe same: know past usage, predict needs accurately,and purchase frequently. And while you could read volumeson the subject, the fascinating fact remains thatinventory management is as much art as it is science.An incredible number of technological advancesallow operations personnel to hone in on the data thatserves as the foundation for the multiple decisions thatcome into play. Barcode readers, radio frequency IDtags, and even GPS-enabled pallets, allow us to trackinventory more accurately and in real time. Automatedreordering systems can take some of the guessworkand staff time out of replenishing supplies. And, softwaresystems can analyze historical data to better predictfuture needs.However, there are still a number of variables thatdemonstrate the need for a skilled inventory manager.In the alternate-site industry, future inventory needscan be influenced by everything from sales efforts targetingareas for strategic growth to seasonality—thinksnowbirds for Southern providers, the end of the calendaryear when insurance deductibles are more likely tobe met, and seasonal illnesses such as Lyme Disease.In addition, there are countless ways infusionproviders can choose to manage their purchasing, storage,and dispensing of goods that will eventually influenceefficiency and profitability. Organizational size,geography, and patient and therapy mix affect everythingfrom purchasing power to whether or not theprocess is centrally managed.Although the perfection of inventory managementremains elusive, there is a valid reason so many professionalstry—the payoff. With COGS being such alarge percentage of business expense, wise and efficientuse of inventory directly impacts the bottom line.In a time where all eyes are on economic indicators,the drive to improve this operational process hasnever been stronger.Keyur Mehta, R.Ph., M.B.A., is the Vice President ofOperations at InfuScience. He can be reached at 703-230-4638or e fe r en ce s1. U.S. Small Business Administration. InventoryManagement. Management and Planning Series, Ed.Jeannette Budding. Available at Muse & Assocs., The Role of Group PurchasingOrganizations in the U.S. Health Care System, introduction,pp. 16-17 (March, 2000).3. Dillon, Petroff, and Riddell. Module 7: Overview ofFinancial and Operational Issue in Home InfusionTherapy.2 nd edition. 2007:NHIA. Alexandria, Virginia.M A R C H / A P R I L 2 0 1 021

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