10 Ways to Reduce Administrative Costs

Operating an independent pharmacy comes with lots of costs, chief among them being inventory and labor. But it’s the smaller, administrative costs that can accumulate and really impact a pharmacy’s bottom line and determine if it is successful or not.

“Every nickel counts,” Jason Montgomery says. “It’s really about defining those other expenses and managing correctly. Sometimes it’s just a matter of awareness and having someone with an outside perspective taking the time to review.” Montgomery is vice president of business coaching at AmerisourceBergen and works with independent community pharmacists across the country to help them optimize their business performance. 

While some administrative costs like legal, accounting, and other professional services are often considered, Montgomery says it’s the non-service related expenses where pharmacies can really save, such as snow removal, security, pest control, office equipment, and insurance. For most of these vendors, these expenses can be reviewed on a quarterly or annual basis.

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“Even though pharmacy falls under a fixed-cost category, there are still things that fluctuate and need to be reviewed,” he says. “Rent, for instance. If you don’t own your property and are leasing, that can change as market conditions change. This can always be revisited with a landlord. It doesn’t need to be an expected fixed cost year after year.”

Nimesh Jhaveri, president of Health Mart and senior vice president of McKesson Corp., which works with its franchise stores to help them identify best practices that will increase their capacity to meet all requirements, calls it a challenge akin to a moving target, and that changes as the industry changes.

“It is okay to reach out to peers and to your franchise and ask for assistance,” he says. “Leverage your support systems to educate, understand market and industry trends, set goals for key performance indicators, and-most importantly-take action utilizing all resources available to you.” 

Avoiding Mistakes

Scott Jensen, MBA, is director of program development at Arete Pharmacy Network, which offers a portfolio of technology-based solutions designed to centralize and reduce the administrative burden of independent pharmacies. With more than 10 years’ experience developing programs and value-added services that reduce administrative burdens for independent pharmacies, he’s observed many things that ultimately help them compete in an increasingly competitive landscape. 

“One of the biggest mistakes is holding on to the mindset that administrative costs are fixed, or that more costs will be incurred with the addition of the services of a third-party vendor,” he says. “If there is no opportunity for savings on staff overhead costs as a result of engaging a third-party vendor, the intent should be to repurpose the previous administrative effort to activities that generate revenue for the pharmacy.”

Jensen says that pharmacies should be thinking about ways in which time can be converted into revenue. He suggests creating an opportunity to retrain staff otherwise dedicated to administrative functions.

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Jhaveri says another big mistake pharmacies make is not knowing where they stand and where the market is set. Pharmacists are often focused on the patient in front of them and giving exceptional care.  “Pharmacists shouldn’t get so busy working ‘in’ the business that they don’t spend time working ‘on’ the business,” he says. 

“Independent pharmacies also typically invest heavily in staffing and customer service. This investment can be a differentiator and important for patient outcomes if all employees are being maximized. Heavy staffing can also be a cash flow killer in a low margin business if not optimized,” he says. One of the benefits of being a franchisee is that you can call on the franchise company to identify how a pharmacy can prepare to take advantage of the changing healthcare landscape. “A pharmacy owner can’t ignore key indicators and expect optimal results,” he says.

Here are some top tips for reducing administrative costs...

Continue reading on page 2...Understand Administrative Costs

Many pharmacy owners do not know how much they pay in administrative costs for daily, monthly, and annual activities. That’s why it’s important to dig into data on these activities to understand that it may be less expensive to pay a third party to provide administrative services, like reconciliation, on their behalf. 

Jensen says when a pharmacy owner or operator seeks to partner with a Pharmacy Services Administration Organization (PSAO), the owner should gain a thorough understanding of all services provided. “Some administrative functions, like appealing underpaid maximum allowable costs (MAC), quality/adherence functions, or reconciliation, which may be dragging the pharmacy down, may be provided by a PSAO either at no extra cost or at a cost less than current staff overhead costs,” he says. 

Benchmark and Measure Key Performance Indicators

Many factors go into administrative costs, and knowing where the competition or market is set helps drive independent pharmacies to hit their goals. 

Jhaveri says that whether it is inventory turns, payroll, or cost to dispense, being well informed will push independent pharmacies toward their end goal and drive the right behaviors in their stores to achieve success. 

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“The key point to remember is pharmacies need to know the data and the numbers and how they compare to the benchmark,” he says. “That knowledge will lead them to drive improvement.”

Know Your Expenses

Make sure you define, in detail, what the administrative expenses are.

Montgomery says pharmacy owners need to first create a budget and know what they need for all miscellaneous expenses, no matter how small or large they may be. He’s surprised at how many independent pharmacies don’t already do this.

“I think independent pharmacy owners need to keep accurate records and review on a consistent basis to see if actual spend is coinciding to the budget and if it’s not on track, make corrections,” he says.

Continue reading on page 3...Leverage Technology

Whether it’s patient engagement, cash-flow management, or script fulfillment, chances are that there are technology solutions you can leverage for increased efficiency. 

“If you are affiliated with a PSAO or buying group, reach out to see if they can make recommendations on specific technology solutions. Typically, a PSAO will have existing relationships with third-party vendors that offer discounted rates to participating pharmacies,” Jensen says.

Susan Maze, COO and CFO of the American Pharmacy Cooperative, Inc., says the organization helps independent pharmacies by bringing in technology affordably. “We offer [a full-time equivalent] predictor that all pharmacies can use to manage staff hours and not overstaff,” she says. “It looks at a pharmacy’s history and forecasts what the needs would be on any given day.”

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Technology is responsible for many advancements in healthcare and allows stakeholders to work more efficiently. 

“A major challenge facing many pharmacies is the lack of time to invest in new services and focus on patient outcomes,” Jhaveri says. “Technology plays a large role in freeing up the necessary resources, as well as providing the platform to further integrate pharmacies into the larger healthcare system.”

Network

When pharmacy owners and operators engage with peers who share similar administrative pressure-points, they are more likely to discover solutions that work. That’s why Jensen recommends building and expanding a peer network.

Vendor contracts and external partner relationships are a huge part of success and can help with keeping costs down, Jhaveri notes. “It is also important to scrutinize expenses, eliminate any nonessential costs, and ensure there are no overlaps in services provided,” he says. “Don’t pay for things that aren’t being utilized. Pharmacists need to complete a yearly review of partnerships and select the ones most advantageous to their practice operations.”

Diversify Services

In an industry of declining profit margins, independent pharmacies need to differentiate themselves amongst the competition by offering services such as immunization, delivery, point-of-care testing, nutrient depletion therapy, and diabetic programs. 

“Diversifying product offerings can increase the top line and help mitigate reimbursement pressures,” Jhaveri says.

Continue reading on page 4...Be Flexible

Don’t ever answer the question “Why are we doing this?” with “Because that’s how we’ve always done it.” When evaluating the “why” be prepared and be willing to make productive change. Change can be a good thing if done the right way. 

Look at the Small Things

Some of the easiest ways to save on administrative costs is to look at simple things, like supplies. For example, pharmacies produce a lot of paper and print material, so use the most cost-effective toner and ink cartridges. 

Use the right size boxes for packaging to reduce postage for shipping and even look at bags, Montgomery says. 

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Many pharmacists are also members of lot of pharmacy organizations and pay membership fees to each. While they may get good information and perks from such associations, they should still make sure they are necessary and useful, and the fees aren’t going to waste.

Emphasize Education

Independent pharmacists must leverage available resources to continually educate themselves as well as to train their technicians to handle all tasks that do not require a pharmacist. 

“For instance, through the Health Mart franchise, we provide tools to help support the technician so the pharmacists can focus on activities at the ‘top of their license.’” Jhaveri says. “Additionally, training and continuing education courses are offered through Health Mart University. Business planning and coaching tools are also offered. All of these resources keep independent pharmacies well-informed.”

Employees Matter  

Sometimes the solution lies in employing the right people. Jensen says when critically analyzing processes, it’s important to include a performance review of the people performing the administrative processes. “You may find that an employee with the right set of skills makes the most impact,” he says.