Article 1

Abstract

  • Objectives:

    • Provide a step-by-step approach for analyzing costs associated with medication therapy management (MTM) services.

    • Describe the use of a free online software application for cost determination in MTM delivery.

  • Practice description:

    • The process outlined applies to community pharmacies and consultant pharmacists operating in non-pharmacy settings.

  • Practice innovation:

    • Introduction of the PharmAccount Service Cost Calculator:

    • An Internet-based application conducting comprehensive cost analysis of specialized pharmacy services.

    • Gathers information through a guided online interview.

    • Allocates both indirect and overhead costs automatically, producing an itemized cost report for service delivery.

  • Results:

    • The calculator can analyze any specialized pharmacy service.

    • Supports sensitivity analysis for evaluating the effect of alternative scenarios on service costs.

    • Useful in designing and planning new pharmacy services.

  • Conclusion:

    • Understanding cost implications is essential for sustainable business models in pharmacy services.

Keywords

  • Medication therapy management, cost analysis, Internet, software.

Learning Objectives

  • At the end of the activity, pharmacists will be able to:

    • Describe major operating costs of delivering MTM services.

    • Classify operating costs as fixed or variable and explain their importance in management decisions.

    • Explain how service volume impacts per-encounter fixed costs in MTM delivery.

    • Accurately calculate the cost of delivering MTM services to patients.

Disclosure

  • PharmAccount is operated by MENTORx in Phoenix, AZ.

  • Dr. Rupp is the creator of PharmAccount and holds a managerial position at MENTORx.

  • No conflicts of interest reported by APhA’s editorial staff regarding products/services mentioned.

Accreditation Information

  • Provider: American Pharmacists Association.

  • Target Audience: Pharmacists.

  • Release Date: April 15, 2011.

  • Expiration Date: April 15, 2012.

  • ACPE Number: 202-000-11-111-H04-P.

  • CPE Credit Hours: 1.0 (0.1 CEUs).

  • ACPE Activity Type: Knowledge-based, Learning Level 1.

Metaphorical Analysis of Pharmacy Practice Evolution

  • Comparison of pharmacy’s transition to clinical services with the biblical journey of the Israelites.

  • Encouragement to establish sustainable business models for MTM services, similar to commandments for guidance.

  • Importance of creating comprehensive business models, including objectives, policies, and billing strategies for MTM services.

Cost Implications of MTM Services

  • Knowledge of service costs is crucial for effective pricing and decision-making.

  • McDonough et al.'s retrospective analysis:

    • Included direct fixed/variable costs, indirect costs, and sensitivity analysis for financial sustainability.

Principles of Service Cost Analysis

  • Cost of MTM service:

    • Defined as the operating costs incurred to deliver one unit to a patient.

    • Calculated as the sum of direct and indirect costs associated with the service.

    • Important costs to account for:

    • Personnel costs: Salary, wages, and benefits.

    • Direct costs: Includes education or training, marketing, materials, and equipment.

    • Overhead costs: Allocated fairly to service delivery.

Nature of Costs

Operating Costs

  • Divided into two major categories:

    • Direct Costs:

    • Costs traceable directly to the service, which would not be incurred if the service were not performed.

    • Subclassified into fixed and variable direct costs.

    • Variable costs vary in proportion to service volume (example: prescription vials).

    • Fixed costs do not change based on service volume (example: personnel costs).

    • Indirect Costs:

    • Costs incurred regardless of whether the service is provided.

    • Allocated based on reasonable criteria such as space occupied or share of total sales.

Importance of Cost Distinction

  • Critical for pricing and management strategies:

    • Understanding direct and indirect costs helps in breakeven and contribution margin analyses.

Breakeven Analysis

  • Evaluates whether a given price covers all costs:

    • Total Cost = Variable Costs + Fixed Costs.

    • Must determine volume to reach profit at specific pricing.

Contribution Margin Concept

  • Calculated as sales revenue minus variable costs.

  • Positive contribution indicates that service can cover fixed costs and potentially generate profit.

Example Analysis: Medi-Max Service

  • Medi-Max program targets medication adherence:

    • Delivery involves a sequence of consultations (average 30 minutes).

  • Personnel analysis in cost calculating was essential:

    • Includes preparation and follow-up time.

    • Calculation of personnel time and cost for ABC Pharmacy:

    • Clerk (5 minutes, $8/hr): $0.67.

    • Technician (10 minutes, $13.50/hr): $2.25.

    • Pharmacist (15 minutes, $65/hr): $16.25.

    • Total personnel costs: $19.17 per encounter.

Material and Supply Costs

  • Identified costs like medication schedulers ($4.50 each).

  • Total materials and supplies for one encounter of Medi-Max: $6.25.

Equipment Costs

  • Laptop costing $1,250 depreciated to calculate per-use cost.

  • Amortization strategies discussed for capital expenses.

  • Total annual depreciation = $200, impacting encounter costs based on service volume.

Additional Direct Fixed Costs

  • Costs such as staff training and promotional activities included.

  • Total nonsalary direct fixed costs calculated at $800 allocated across service encounters yielding additional cost per encounter.

Overhead Costs Allocation

  • Indirect costs allocated based on space used during operations.

  • Total overhead allocation examples included utility and rental costs.

Cost Reporting

  • Analyzed total average cost (including overhead, direct, and personnel costs):

  • For Medi-Max, total of $35.52 per encounter established.

Financial Implications & Pricing Strategy

  • Discussion of the relationship between fixed and variable costs in price setting.

  • Breakeven analysis illustrated pricing opportunities at $50 per encounter indicating 43 encounters required to breakeven.

Conclusion

  • Emphasis on the critical need for accurate cost analysis for developing sustainable MTM services.

  • PharmAccount online tool highlighted as a significant aid in this regard.

References

  • Cited articles, authors, and their respective contributions to the pharmacy practice framework and MTM service viability.