Smarter WAC Targeting for Hospital Pharmacy Cost Savings

Post by QuicksortRx on February 21, 2023
Smarter WAC Targeting for Hospital Pharmacy Cost Savings

Since formal guidance on the GPO prohibition rule took effect, pharmacy departments have dedicated increasing resources to managing their medication purchasing programs. Despite efforts to improve hospital pharmacy purchasing, health systems still lose millions of dollars annually to inefficiencies. Correcting them requires hours of pharmacy staff time reviewing data across systems.

With thousands of unique NDCs purchased each year, reviewing and troubleshooting every product can be labor-intensive. Below are some common strategies that health systems have used in the past to identify the best areas to focus their limited resources.

For starters, let’s look at a typical distribution of prices for medications at Disproportionate Share Hospitals (DSH) across their 340b, GPO, and WAC accounts: 

340B, GPO, and WAC Price Distribution

Given this distribution, some hospitals presume that WAC purchases - while necessary for compliance - are “overspend” and target their reduction. With limited resources to devote to this, how should teams focus on the best medications to improve? Consider the following example: 

WAC Total Examples

Of the two products listed, Product A has the highest WAC price, the highest WAC frequency as a percentage of purchases, and the highest WAC total dollars spent. Which of these two products would you prioritize for hospital pharmacy cost savings today? 

Hospital Pharmacy Management: Three Views of WAC Pricing

It would be reasonable to assume that in a world of limited resources, Product A would be the item to focus on to reduce costs most efficiently. Below, we will review each of these metrics  and describe the scenarios where they will fail to show real value in driving hospital pharmacy cost savings.

Highest WAC Price

Hospitals prioritizing by WAC price simply focus on products purchased with the highest WAC unit cost. The premise is straightforward enough: By targeting the highest unit price medications, you hope to get the most “bang for your buck” per unit avoided on WAC.

However, in medications with little generic pressure, higher WAC prices do not always correlate with savings potential. Despite Product A’s higher WAC price, its GPO and 340b prices do not present great savings per unit. The financial reward per package has less savings per unit than Product B, as shown below.

Highest WAC Frequency

WAC Frequency can be calculated as (WAC purchases / total packages purchased). So, again, it would be reasonable to assume that focusing on the products purchased on WAC most frequently would drive higher cost savings as it would impact the highest number of purchases.

That said, in medications with insignificant price differences, even WAC purchases in the thousands of units per month may not add up to worthwhile hospital pharmacy cost savings. Meanwhile, for some medications with deep GPO contract discounts, it may only take a handful of purchases to create a significant impact.

Despite being purchased on WAC more frequently, Product A’s opportunity is again limited by the difference between WAC and other prices. Without big savings per package over GPO or 340b, there is less potential to realize for Product A, even at its much higher frequency of purchase.

Highest WAC Total Spend

WAC Total Spend represents the sum of all WAC spend for a product over a given time period. Note that in the original example, the “WAC Total” for Product A is more than triple the WAC Total for Product B. With a higher WAC total, hospital pharmacy management might expect a higher likelihood for improvement in Product A.

In QuicksortRx’s years of experience working with pharmacy supply chain leadership, we’ve heard countless examples of inpatient facilities completing extensive reviews of medications with high WAC totals only to find minimal savings.

Despite the much higher WAC total, splitting Product A’s WAC proportionally to its 340b and GPO accounts would ultimately have less of an impact on spend than Product B. Additionally, as sub-WAC contracts become more common and more competitive, moving some WAC purchases to GPO or 340b may lead to an INCREASE in total spend. 

A Better Approach: Pursuing WAC Premium for Hospital Pharmacy Cost Savings

Health systems have used some or all of these metrics - WAC price, WAC frequency, or total WAC spend - to target costs and measure efficiency for years. At best, these are simply markers of a hospital pharmacy purchasing issue, and reacting to these measurements without the context of realizable potential would be like treating lab results instead of a patient.

As systems mature and markets shift, the rate of false positives in this space has made this work increasingly frustrating. Pharmacy and supply chain time is precious, and focusing where the impact is highest is essential.

To that end, health systems are moving toward targeting “WAC Premium” - calculated as the price difference between WAC and alternative prices multiplied by the volume or purchases. Below, you’ll see WAC Premium in green, representing the portion of WAC spend that could actually be saved. 

Total WAC Spend and Premium

WAC Premium is a more specific measure for realizable potential in WAC spend. It won’t get tripped up by sub-WAC or direct contract items with no potential. It resists the impact of high-frequency WAC purchasing on products that do not offer significant cost reduction. It will ignore the “high dollar figure” WAC Total Spend headliners if there is no room for improvement. WAC Premium is an impact-oriented metric that focuses on the real costs that can be optimized.

Let’s calculate the WAC Premium for our example assuming hospital pharmacy purchasing will be shifted from WAC to GPO: 

WAC Premium Calculation Example

For the same effort, resolving Product B’s WAC purchases will have a 50% higher cost reduction despite not hitting the top WAC frequency, WAC price, or WAC total lists. Scaling that impact across a health system, supply chain teams will reveal a multitude of hospital pharmacy cost savings opportunities that have been flying under the radar.

QuicksortRx sees things differently.

We developed a new way to analyze and improve medication from within our own hospital.

See how QuicksortRx provides the perspective and support to help your pharmacy purchasing team focus on what matters and drive more hospital pharmacy cost savings.

Post by QuicksortRx on February 21, 2023
QuicksortRx provides timely, transparent, and actionable guidance to help health systems make better pharmacy procurement decisions.