The pharmaceutical supply chain represents an increasingly complex, multi-billion-dollar industry involving players ranging from pharmaceutical manufacturers to pharmacies and pharmacy benefit managers. Within at least the last six years, growing emphases on specialty Rx and temperature-sensitive biologics have driven supply chain costs higher and higher.
According to Definitive Healthcare data, U.S. hospitals reported a combined total of $44 billion in pharmaceutical supply costs for 2018—the most recent financial data available for all hospitals.
Pharma supply costs increase by 9 percent each year
In 2014, the average annual pharmaceutical supply cost was $10.21 million per hospital. By 2018, that average cost rose to $14.28 million per hospital—an average annual increase of nearly 9 percent.
Because of the rise in pharmaceutical prices, hospitals and other healthcare facilities have also had to increase their total supply expenses in order to accommodate these costs. In the same four-year period, total hospital supply costs increased by approximately 7 percent each year—rising from an average of $33 million in 2014 to $43.5 million in 2018.
Average hospital pharmaceutical supply costs from 2014 - 2018
Fig 1 Based on data from 3,098 U.S. hospitals reporting pharmacy supply costs from 2014-2018. Financial metrics are sourced from the January 2020 Medicare Cost Report Release, and available on the Definitive Healthcare Hospitals & IDNs database. Data accessed February 2020.
Unsurprisingly, the rise in drug prices means that hospitals must allocate more funds to their pharmaceutical supply cost budget and balance supply chain costs in other ways. In 2014, pharma supply costs accounted for 31 percent of total hospital supply chain expenses. Within four years that share increased to 32.9 percent, or one-third, of the total supply cost budget.
Although smaller facilities—particularly those with 25 beds or fewer—spend less overall on pharmaceutical supplies than hospitals with larger patient capacities, it ends up claiming a larger share of their total supply budget.
In 2018, for instance, hospitals with 25 beds or fewer spent an average of $1.56 million on drug supplies while facilities with 250 beds or more spent almost 28 times as much. Despite this, pharmaceutical supply costs accounted for an average of 37.3 percent of total supply costs at smaller hospitals.
This difference of nearly 4 percent in total supply cost budget share could be due to the fact that hospitals with fewer beds take in less revenue while still requiring the same costly pharmaceutical therapies.
Northeastern hospitals report the highest average pharmaceutical supply costs
With a reported pharma supply cost nearly 50 percent greater than the national average, northeastern hospitals spent the most money on prescription drugs and drug supplies across all U.S. facilities. In 2018, northeastern hospitals spent an average of $21.36 million on pharmaceutical supplies, compared to between $12 and $13.5 million across the southeast, southwest, midwest and western regions.
Average pharmacy supply cost by region from 2014 - 2018
Fig 2 Based on data from 3,098 U.S. hospitals reporting pharmacy supply costs from 2014-2018. Financial metrics are sourced from the January 2020 Medicare Cost Report Release, and available on the Definitive Healthcare Hospitals & IDNs database. Data accessed February 2020.
In fact, hospitals in the northeast showed markedly higher pharma supply costs across all four reporting years. Cities in the northeast—like the New York City, Boston, Philadelphia, Washington D.C., and Baltimore metropolitan areas—are home to many high-volume hospitals. With large patient populations to care for, it’s not necessarily surprising that facilities in this region would report higher drug expenses than others.
There might also be a correlation with hospital type. Many of the nation’s top children’s hospitals, cancer research facilities, and academic medical centers are located in the northeast. These facilities are more likely than others to administer high-cost specialty drugs to their patients—causing significant impact on pharmaceutical supply chain expenses.
Cancer centers spend the most money on pharmaceutical supplies
Definitive Healthcare data reveals that cancer centers do, in fact, spend more than other facility types on pharmaceutical supplies. For three years in a row, the same three cancer centers have reported the highest pharma supply costs across all 3,098 hospitals surveyed.
Top 3 hospitals by pharmaceutical supply cost in 2018
Pharmaceutical Supply Cost in 2018
Memorial Sloan Kettering Cancer Center
University of Texas MD Anderson Cancer Center
Dana-Farber Cancer Institute
Fig 3 Hospital financial metrics are sourced from the January 2020 Medicare Cost Report Release, and available on the Definitive Healthcare Hospitals & IDNs database. Data accessed February 2020.
With a reported pharmaceutical supply cost of $968 million in 2018, Memorial Sloan Kettering Cancer Center has the highest prescription drug and drug supply cost of all U.S. hospitals surveyed—an increase of $213 million from 2017.
Given the high cost of chemotherapeutic treatments and oncology medications, it’s not surprising that the top three hospitals by drug supply costs would be cancer treatment centers. Specialty pharmaceuticals, including oncology drugs, can range anywhere from $10,000 to $7 million in annual patient costs.
These prices, however, aren’t exactly what providers pay in drug supply costs. Pharmaceutical manufacturers or wholesalers negotiate discounts and rebates with various stakeholders—including care facility and health system leaders, big box retailers, grocery stores, and pharmacies.
The total pharmaceutical supply cost that a care facility faces is a product of final price negotiations between IDNs, GPOs, suppliers, and payer reimbursement rates.
Interested in learning more about hospital supply costs and rising drug prices? Take a look at our list of the Top 20 Drugs by Total Charges to see which high-cost drugs had the greatest impact on pharmaceutical supply chain expenses in 2019.
Rachel Grande is a communications professional and published author. She holds a master’s degree in Creative Writing from the University of Glasgow, and brings nearly two years of prior experience as ...