Managing the Pharmacy Revenue Cycle

Pharmacy is an increasingly important component of a hospital's revenue cycle. And, the recent media scrutiny of hospital pricing practices frequently focuses on the high patient charges associated with drugs. This scrutiny has heightened the importance for hospitals to implement pricing methodologies for drugs that are defensible, rational and are based on the overall cost to acquire and dispense the drug. Because of complexities surrounding NDC codes, WACs (formerly AWP), HCPCS codes, billing units and complex pricing mechanisms within Pharmacy information systems, there frequently is opportunity for improvement. 

A comprehensive review of the Pharmacy Revenue Cycle from acquisition of the drug to billing and payment can assist an organization with identifying systemic issues and developing plans for improvement with the objective of ensuring complete and accurate patient charging, coding and billing. As an example, a comprehensive review can identify issues and ensure consistency between the Pharmacy information system and the Charge Description Master, resulting in an improvement in the accuracy of Pharmacy pricing and billing.  While the Pharmacy Revenue Cycle is complex, we will discuss a few of the vital components to a comprehensive review of the Pharmacy Revenue Cycle.

Flow-Charting the Process - How do drugs flow through your Hospital?

In the first phase of a comprehensive review, hospitals should assemble a team to analyze the overall revenue cycle process by flowcharting drugs throughout the hospital.  Bear in mind, the Pharmacy dispenses drugs, but the administration of the drug and the associated documentation of patient charges are generated by the clinical areas.  Ensuring the flowchart identifies all aspects of the process is crucial to understanding the Pharmacy's Revenue Cycle.

The team should include individuals from CDM management, Pharmacy operations, Pharmacy management, Pharmacy information systems (individual(s) dedicated to the Pharmacy software), Information Systems, Compliance and Patient Accounting.  The goal is to document the process from acquisition of the drug through to the generation of the claim, including the interfaces between all information systems. 

Drug Pricing - Do you have room for improvement?

Hospitals that employ "best-practices" maintain a process that assigns responsibility for:

  1. Formal mark-up categories (Price Schedules) along with routine maintenance schedules.
  2. Formal definitions for mapping drugs into each Price Schedule.
  3. Comprehensive Pharmacy pricing policy that is defensible and transparent detailing the costing strategies for each Price Schedule (inclusive of administrative costs).
  4. Routine updates to the "Cost Basis" (e.g., WAC, acquisition cost, etc.).
  5. Standards and protocols for non-formulary drugs.
  6. PharmD clinical intervention and Patient Own Medication charge capture.
  7. Chemotherapy drug administration and IV Infusion charge capture.
  8. 340B compliance program.

Understanding the Price Schedules that reside in the Pharmacy information system is the key to un-coding the Drug Master.  The creation of a series of  Price Schedules allows a hospital to consider  the acquisition cost as well as carrying and labor costs attributable to that drug classification during the development of the mark-up formula for each Price Schedule. Due to their importance in establishing patient charges, Pharmacies should implement formal policies detailing the assignment of drug classes into each Price Schedule and manage that assignment to ensure items are consistently mapped according to the policy. 

Next, it is important to review the pricing formulas.  The pricing formulas associated with each Price Schedule allows the Pharmacy to establish patient charges based on varying pricing scenarios.  The patient charge can be based on a range of methodologies and factors, including the straight cost of a drug, a fixed charge amount, a percentage mark-up from acquisition or percentage mark-up from WAC. 

Managing the CDM - Key indicators of revenue opportunities

Many tools are available to help assess your CDM's accuracy and identify CDM opportunities for improvement,  including:

  • Comparison of the order-entry CDMs to the billing CDMs to ensure accuracy, completeness and consistency.
  • Evaluation of specific compliance issues and revenue cycle opportunities including self-administered drugs, compounded drugs, IVIG, newly approved FDA drugs, blood clotting factors and flu vaccines. 
  • Review of claims, including the use of claims editing software that targets charging, coding and drug unit errors to identify potential rebilling opportunities.

The comparative assessment allows a hospital to evaluate the consistency between the CDM and Pharmacy information system including, the drug descriptions, form, route, HCPCS and dosage all of which are necessary for the identification of the correct HCPCS and units.  Since drugs are typically purchased in bulk and dispensed in quantities that do not conform to the HCPCS units, attention must be paid during the review to ensure that the proper units are reported on the patient bill.  As well, ensuring the CDM contains all appropriate HCPCS codes for some dosages of drugs can impact the net revenue. 

Hospitals should also dedicate time to compliance issues.  Take care to adhere to Self-Administered drug regulations, fiscal intermediary Self-Administered drug codes, handling and billing of compounded drugs, pre-administration-related services for IVIG and the newly approved FDA drugs code.  Hospitals on fixed cost contracts should also review third party contracts and ensure high-cost drugs are carved out.

In conclusion, due to many reasons, including the substantial amounts of patient revenue generated by the Pharmacy, the scrutiny on Pharmacy patient charges, the significant complexities in coding and billing of drugs, the necessity of detailed coordination between functions (e.g., Finance and the Pharmacy) and information systems, a comprehensive review of the Pharmacy Revenue Cycle should be an integral part of a hospital's efforts to ensure that the hospital is charging, coding and billing for drugs completely and accurately with the goal of ensuring that the hospital is billing in compliance with rules and regulations and receiving all appropriate payments from all payers.

For more information please contact Vonda Moon at 717-676-6133, or via email at