(Note: This article first appeared in the Fall 2003 issue of CorrectCare and was reprinted with permission from NCCHC.)

When our small correctional medicine company took over the medical contract for a county jail in 1996, we were amazed at how much the county was paying for medications. The jail housed only 60 inmates but spent, on average, $3.34 per inmate per day on medications-adding up to around $6,000 per month. We believed we could reduce these pharmacy charges without reducing the quality of medical care being provided.

Since then, we have learned a lot about pharmacy charges and strategies to hold down costs. We now generate charges of well under $1 per inmate per day. The monthly bill for our new 300-bed jail is less than we used to pay for our 60 bed jail!

I also strongly believe that the quality of medical care our patients receive has dramatically improved in that time. I am convinced that, like us, most jails can reduce their medication costs without sacrificing quality. In fact, the process of scrutinizing your prescribing practices will almost invariably lead to changing your medical practice for the better.

In this article, I will present six principles for reducing your jail's medication costs.

Principle #1: Find out how much your pharmacy is charging you for medications. Then, negotiate lower prices.

Most jails are paying too much for medications. Often, all you have to do to pay less is to ask. The key, though, is knowing how to ask.

To understand how your charges are generated and how to successfully ask for a price reduction, you need to know a couple of pharmacy terms. The most important is the Average Wholesale Price. The AWP is a price set derived from manufacturers and distributors for every drug on the market.

When you ask your pharmacy how it determines prices, commonly the answer will be, "We charge the Average Wholesale Price for every medication." It sounds like you are getting a great deal-you are only paying wholesale prices!

Despite its name, however, Average Wholesale Price is not wholesale at all. Pharmacies pay much less than AWP for medications. On average, AWP is at least 20% above true wholesale costs, and for some drugs may be inflated as much as 65%. If you pay AWP, the pharmacy makes at least 20% average profit. A good analogy is that AWP is like the sticker price on a new car. Just like the sticker price, if you are paying full AWP, you are paying too much.

A second problem: It is not easy to discover the AWP for a certain drug, so when you go over the charges on your bill, you have no way to know if the AWP is accurate. You can purchase access to AWP prices in books or online, but this is quite expensive.

Finally, Average Wholesale Price is not an average. Each supplier of a particular drug may have a different AWP. Let's say the AWP of company "A" for ranitidine 150 mg is $3.27 a tablet. The AWP set by company "B" for the same tablet is $1.48. Which do you want to pay? Actually, this is a trick question. You want to pay neither. The least expensive price for ranitidine 150 is $0.34 per pill.

Where did $0.34 a pill come from? It is the HCFA price for ranitidine 150. This the price that the federal Health Care Financing Administration has negotiated with the pharmaceutical industry for Medicaid patients. You could also call it the Medicaid price because it is the price Medicaid patients pay. When you renegotiate your contract with your pharmacy, insist that you will pay no more than HCFA prices.

When people hear this they often object, "But inmates are not eligible for Medicaid." This is true! However, asking to pay HCFA prices has nothing to do with the Medicaid program. Under Medicaid, the state reimburses the pharmacy for drugs purchased by Medicaid participants. In your case, the jail will pay for the drugs. You are not asking for the state to purchase the drugs.

What you are asking is to pay the same price for drugs that Medicaid patients pay. It is similar to going to K-Mart and saying, "Wal-Mart sells this item for less than you do. Will you match their price?" In this case, you are saying to your pharmacy, "HCFA prices are much lower than AWP prices. Will you match the HCFA price?" If you look around, you will find a pharmacy willing do that.

Being able to look up the actual price of medications ordered from your pharmacy is essential to monitoring costs, so one big advantage to paying HCFA prices is that that you can find them easily online. HCFA prices have two components. The first is the Federal Upper Limit (FUL), online at http://cms.hhs.gov/medicaid/drugs/drug10.asp. The second is the Maximum Allowable Cost (MAC), a state-by-state addendum to the FUL. This is usually online as well, at your state's Medicaid site.

Unfortunately, not all drugs have HCFA prices. Name brand drugs that have not been released as generics are not on the FUL or MAC. For these you will have to rely on the AWP. Again, though, do not pay full AWP prices. Instead, propose paying AWP less 12%. This still will allow the pharmacy a reasonable profit.

Finally, pharmacies often put certain drugs on sale as an advertising strategy. Sometimes, sale prices are less than the true wholesale cost. You should take advantage of these sales.

The proposal you should present to your pharmacy is as follows: Reimbursement rates for pharmaceuticals shall be the lesser of...
1. State Medicaid price
2. AWP less 12%
3. Store retail price

Again, if you look around, perhaps by putting your jail's pharmacy contract up for formal competitive bids, you can find pharmacies that will agree to your terms.

Principle #2: Reduce how much your jail pays in fill fees.

The "fill fee" is the price a pharmacy charges to fill a prescription. Let's say that your pharmacy charges $5 per prescription. If you order 60 ranitidine tablets at $0.34 per pill, the charge will be the medication price ($0.34 x 60 = $20.40) plus a $5 fill fee for a total price of $25.40.

The fill fee usually remains constant no matter how big the prescription is. If you order one ranitidine tablet, you'd pay $0.34 plus a $5 fill fee for a total of $5.34.

The first way to reduce fill fees is to ask to pay less. Some pharmacies charge an exorbitant $10 or more. Instead, ask to pay the HCFA fill fee rate, which is $4.03.

Also, under Medicaid rules, pharmacies may charge fill fees only once per month for ongoing prescriptions. It works like this. Let's say that a long-term patient is taking fluoxetine (Prozac), and that the pharmacy delivers the jail medications, including the fluoxetine, one week at a time. The pharmacy may be charging a fill fee every week. Find out how often your pharmacy charges fill fees for ongoing prescriptions and insist that your jail will not pay those fees more than once a month.

Your next task is to reduce the number of prescriptions that you write, especially small prescriptions. It always seems that one patient needs one pill of something before they are released in the morning. Even a fill fee of $4.03 is steep if is tacked on to a prescription for, say, one diazide tablet worth 2 cents.

The best strategy for reducing the number of prescriptions is to use a stat box. This is the functional equivalent to the sample medication closet in most doctors' offices. The stat box contains bubble-packed cards of the medications that you prescribe most frequently . If a patient needs one cephalexin table, you take it from the stat box, documenting the time, date, patient, etc., on a tracking sheet. A well-stocked stat box will save you hundreds of dollars in fill fees alone.

An added benefit of using a stat box is eliminating your need for an on-call pharmacist. Most pharmacies charge a hefty fee for after-hours work. If you use a stat box properly, you won't have to pay those fees.

Principle #3: Know the price of all of the medications you order.

It never ceases to amaze me that health care providers will compare prices at the grocery store to save 15 cents a pound on oranges, but never compare prices when they write prescriptions. Until my involvement in correctional health care, I was not well-educated in what my patients paid for their prescriptions. Let's compare prices for two antibiotics. To be fair, we'll make both of the antibiotics oral cephalosporins. The first is cephalexin (Keflex). The second is cefuroxime (Ceftin). One day's therapy with cephalexin costs $1.32. One day's therapy with Ceftin is $8.04. They are identical in efficacy! Which one would you prescribe if you yourself were paying the bill?

Here is an example that could save a lot of money. Prices for the same medication of different strengths vary in surprising ways. Let's say that you have prescribed amitriptylline 150 mg for a patient. One 150 mg tablet costs $0.24. However, the cost of a 75 mg tablet is only $.07. Prescribing two 75 mg tablets rather than one 150 mg tablet will save you 42% of the total prescription price. If you compile a price list of all of the medications that you use, you will find lots of similar ways to save money. At the end of the year, this principle can save you big bucks.

Here is the best example of price shopping. Let's say your patient tests positive for H. pylori. The American College of Gastroenterology recommends treating this ulcer-causing bug with four agents. Since it is hard for practitioners to remember what the four agents are, not to mention the doses and lengths of treatment, the pharmaceutical companies have conveniently packaged H. pylori therapy under the trade names Previpac and Helidac. Previpak costs $272.50. Helidac seems to be a bargain at $156.76, but it is incomplete: You also have to prescribe a gastric acid blocker separately.

However, if you order all of the ingredients in these packs individually, the total price of everything is only $33.60. To help you remember medications and dosages, make an inexpensive stamp that says:
• Ranitidine 300 mg: One po qD for 28 days
• Bismuth subsalicylate 525 mg: One dose po QID for 14 days
• Metronidazole 250 mg: One po QID for 14 days
• Tetracycline 500 mg: One po QID for 14 days

Whenever you have to treat H. pylori, stamp the script, sign it and congratulate yourself for saving $238.10!

Principle #4: Split pills when possible.

Pill splitting is a variation of the cost analysis process. It involves the pharmaceutical marketing concept of flat pricing, which means that prices per pill do not vary much with increasing pill size. For example, the FUL price of a ranitidine 150 mg tablet is $0.34. The 300 mg pill is actually a little cheaper at $0.32. So if you prescribe ranitidine 150 mg BID, don't write "ranitidine 150 mg one po BID," costing $0.68 per day. Instead, write "ranitidine 300 mg 1/2 tablet po BID," for a savings of 53%.

Pill splitting should not be done on extended-release pills and, of course, cannot be done on capsules. Many drugs are not priced appropriately to make pill splitting worthwhile. Very small tablets may be too difficult to split well. However, there is still an amazing array of drugs where pill splitting can save you a lot.

Another example: Dyazide is commonly used for hypertension. The typical dose is 25/37.5 mg of the two active ingredients. The 25/37.5 tablet costs $0.32 while the 50/75 mg tablet costs only $0.04. Cut one in half and you have reduced your daily cost from 32 cents to 2 cents.

One last example is the antidepressant Paxil. The typical dose is 20 mg a day. Paxil comes in a 20 mg tablet, which costs $2.56, and a 40 mg tablet, which costs $2.72. By splitting the 40 mg tablet, you reduce the cost of therapy from $2.56 a day to $1.36 a day.

Principle #5: Use a formulary.

A formulary is a list of drugs approved for use. Most compare prices of equivalent drugs, and then only allow use of the least expensive in the group. Here is a price-per-tablet comparison of second generation cephalosporins. Keep in mind that these drugs are all equivalent in terms of efficacy and side effects:
• cepahalexin (Keflex) 500 mg $0.44
• cefadroxil (Duricef) 500 mg $3.08
• cefaclor (Ceclor) 500 mg $3.50
• cefuroxime (Ceftin) 500 mg $8.04
• loracarbef (Lorabid) 200 mg $4.19

Do the practitioners at your facility prescribe Ceftin or Duricef? They shouldn't! Cephalexin should be substituted automatically for any other second generation cephalosporin, just as would happen at my local hospital. Most hospitals use formularies. Formularies just make good financial sense. You lose nothing in efficacy, and you save a lot of money.

Here is a price-per-tablet comparison for nonsteroidal anti-inflammatory drugs (NSAIDS):
• ibuprofen 600 $0.06
• salisalate (Disalcid) 750 mg $0.10
• naproxyn (Naprosyn) 500 mg $0.18
• etodolac (Lodine) 500 mg $1.00
• ketoprofen (Orudis) 75 mg $0.25

Once again, there is no sound medical or financial reason for any jail to allow the use of Lodine.

Principle #6: Carefully review your pharmacy bill every month.

I guarantee you will find mistakes that will cost your jail money, sometimes a lot of money. The table below shows an actual example from one of my jail's pharmacy bills.

About the author: Jeffrey Keller, MD, is president of Badger Correctional Medicine, Idaho Falls, ID.  He can be reached by e-mail at badgermed@datawav.net.

To access an online version of this article, go to: http://www.ncchc.org/pubs/CC/Rx_costs.html