14
American Pharmacy Vol.NS19, No.2, Feb.1979!70
A
ccounting!? What does accounting have to do with pharmacy? And what's a Uniform Cost Accounting System (UCAS)? Shouldn/t a pharmacist be concerned exclusively with pharmaceuticals, prescriptions, patients, and optimizing drug therapy? . Surely these are reasonable questions . Just as surely, such questions reveal the myopia that pervades various sectors of the profession. As an abstraction, pharmacy can be viewed in its pure state. The practice of pharmacy, however, exists within a broader social, economic, and political marketplace. These complex systems exert considerable, and sometimes countervailing, effects on the practice of pharmacy. Those who ignore the determinants of existence within the broad fabric of society are destined for long-term failure. It is this very principle, then, that should encourage pharmacists to pay attention to the accounting needs of the modern pharmacy.
'So, What's a UCAS?' The natural question at this point is: What is UCAS? Simply stated, UCAS represents a systematic means of compiling accounting information in a pharmacy so that measurement will be consistently, comprehensively/ and uniformly accomplished. UCAS is described in a set of user manuals prepared and soon to be published by the American Pharmaceutical Association. The intent of the manuals is to provide pharmacists with the information necessary to organize their accounting system for assuring full and consistent recording of economic events within the pharmacy. Because the manuals are written in a conversational style, there is no need for pharmacists to become expert in accounting matters before attempting UCAS. Successive chapters describe the means for collecting and classifying accoun ting information so that the
Bruce R. Siecker is director of the APh.l l Pharmacy Management Institute.
By BRUCE R. SIECKER receipts, costs of goods, expenses of the prescription department, and other major segments of the pharmacy can be identified separately. The basic assumption of such an effort is that pharmacists have a real and continuing need to know what costs are evident in providing pharmaceutical service to the community. With UCAS, pharmacists are fully capable of identifying pertinent economic data without outside help . But more important, UCAS implies that pharmacists must take command of the accounting function in the pharmacy if they are to have a role in their economic destiny above the passive level of reacting to external queries for information.
'What Will UCAS Do for Me?' At its basic level, UCAS is nothing more than a method of collecting and classifying costs so that pharmacy managers have useful economic information at their disposal. The crucial question, however, is: What will UCAS do for me? Further, why should pharmacists pay attention to this new way of approaching the accounting task when many pharmacies obviously have survived for a long time without it? To address these questions requires a minor departure to examine what exists in the pharmacy marketplace with regard to accounting technology. Previous and continuing efforts by APhA's Pharmacy Management Institute indicate that pharmacists often have very little information available from their accounting systems, other than what is minimally required to comply with various taxing and property laws. Bookkeeping tends to exist as a necessary distraction in the affairs of the pharmacy and is rarely utilized to produce information that would be useful for pricing/ cost containment, and productivity decisions. It is not uncommon for pharmacists to need information that would indicate the cost of dispensing. Vague feelings that pricing deci-
sions may provide inadequate cost recovery are prevalent as costs continue to escalate. The problem, of course, revolves around the fact that most pharmacies are really a composite of two related but distinct economic activities. Of foremost concern to pharmacists is the professional activity of the prescription department. Many pharmacies also undertake major efforts in nonprescription goods and services. Revenues, product costs, and expenses of these pharmacy segments are commingled in the bookkeeping system. What this means is that efforts to reconstruct the cost factors for each pharmacy department must rely largely on in tui tion or mechanis tic formulas which assume that cost behavior is the same for each department. Numerous inquiries have indicated that both solutions are far from ideal and that blind faith in such methods can lead to faulty conclusions about a pharmacy's operating and overhead costs . A common response to the government's need for solid information about dispensing costs in public. third-party programs is to commission "fee surveys." This phenomenon has been especially apparent over the recent past thanks to Medicaid agencies. Several factors must be considered/ however, before the profession places its faith in this approach to cost finding on a longterm basis. First most pharmacists do not have the information on hand to answer the detailed questionnaires that are necessary for these surveys. Second, "guesstimations/' made in an attempt to cooperate, are often worse than no survey because numbers tend to assume their own credibility over time irrespective of their source. Undetected error is just that-undetected. Third/ there are many ways to account for a particular economic event. The options available are all being used, which means that the same bookkeeping "yardstick" is not used in all pharmacies. As every pharmacist surely knows, two pounds and four kilo-
Photo by Mark Farris
.....
American Pharmacy VoI.NS19, No.2, Feb.1979/71
15
grams cannot be added or averaged into any meaningful number without first converting both numbers to a common measurement base. Fee surveys assume the problem away, while holding up the results as valid indica tors. Fee surveys rely on "experts from afar" to collect, analyze, and report dispensing cost information. The pharmacist plays a passive role in the whole process and is rarely even privy to his or her own results. What findings are reported usually describe only the "average cost to dispense" or the "range of dispensing costs" for the sample or some geographic population of pharmacies. The critical question for a particular pharmacist is what costs are evident in his or her own pharmacy. Fee surveys rely on someone else to decide that it is time to conduct a survey, how costs will be measured, and who will see the r'e sults.
Adjusting to the Marketplace There should be little doubt in anyone's mind that pharmacy, like all sectors of the economy, is affected by inflation. Adjusting to a dynamic marketplace requires that a manager decide pricing strategies with great care. Inadequate prices in the face of steady inflation mean that costs are inadequately recovered. Excessive prices relative to the marketplace may produce erosion of the client base as consumers seek out lower-priced alternatives. Pricing decisions must be made with or without adequate information. It is no doubt quite frustrating to judge the adequacy of prices for professional services without having a firm grasp on what it costs to dispense. In the private pay marketplace the problem can be addressed on an incremental basis-raise prices in light of inflation until the required cost recovery and desired return on investment are achieved. The process may be tempered with consumer reaction, but the pharmacist still bases pricing decisions largely on intuition and must wait until the income statement is completed to know whether it paid off.
16
In a marketplace increasingly dominated by predetermined reimbursement for pharmaceutical services-the third-party arena-there is no opportunity, short of withdrawal from participation, to adjust prices to compensate for cost increases. The need to be "right" is critical when a pharmacist accepts or rejects a third-party reimbursement schedule. The need is even greater when reimbursement schedules fail to change frequently. The virtual absence of solid information on pharmacy dispensing costs only heightens the risks pharmacists take when they accept a given level of reimbursement. A Medicaid fee survey might indicate an "average cost to dispense" of $2.95 for the upcoming year against a reimbursement rate of $2.75 during the present year. Such results might help the pharmacist, especially if next "year's reimbursement were actually increased to $2.95 per prescription, but two obvious problems still exist. The cost to dispense implies unit dispensing cost. It does not necessarily take in to accoun t the need for a return on invested capital. The second problem is even more difficult to resolve because fee surveys tend to highlight averages. Without knowing dispensing cost and net income needs relative to the
.GI".~
~\
..... ••••
•••• \,
\
.... , •••• \
investment level in the pharmacy, an individual pharmacy manager is hard pressed to assess the new reimbursement schedule. What a difference it would make if the individual pharmacist knew that his or her cost and return needs for the upcoming year totaled $2.90 per prescription, or alternatively, that $3.35 was the figure for his or her pharmacy. All indications point to accountability as a key word in all third-party programs. Cost containment will continue to dominate the rate-setting process as the American public demands less waste and a check on growth in the public sector. There is little indication that pharmacists can avoid providing evidence to support requests for higher reimbursement levels. Political pressure is not without its supporters, and fee surveys do provide a means of documenting the need for rate adjustments . Questions of reliability, representativeness, and data validity, however, frequently subvert the survey process. When this happens, much effort is wasted and providers often grow discontented. But the question still is: What will UCAS do for me? Simply stated, UCAS will provide each adopting pharmacy with documented proof of dispensing costs. An individual pharmacist can consider UCAS results-a consistent and comprehensive measure of dispensing costs and actual net income or loss associated with the prescription department-in several ways. First, cost data are useful in assessing possible price levels against expected costs and desired net income . levels. Second, a pharmacist might employ dispensing cost data as a foundation for entry into the political arena to argue for increased reimbursemen t levels in public third-party programs. It should be obvious that third-party cost documentation would pose no special problem for UCAS, since the data would be readily and uniformly retrievable from the accounting records of all participating pharmacies . Because of the wealth of economic
American Pharmacy VoI.NS19, No.2, Feb.1979/72
data generated by UCAS, pharmacy managers would have a much firmer economic grasp on the pharmacy and its component departments. Two Facts of Life Why do we need UCAS now after all these years? The answer has to do with two facts of life. First, thirdparty programs are not going to go away. Reimbursement rates will be determined and adjusted on the basis of marketplace conditions in private third-party programs and documented need ' in Medicaid and other public programs. Third-party programs will account for still higher portions of the total pharmaceutical dollar. Adequate reimbursement schedules will be more critical as fewer opportunities exist to recoup economic shortfalls in the private sector. UCAS will provide the kind of uniform, comprehensive, and accurate data that are essential if pharmacy is to make the case necessary to insure economic viability. The second fact of life is what UCAS is and does in relation to alternative cost-finding strategies. Many pharmacists decide price rather subjectively-by "gut feeling." Supplemental efforts, which occur sporadically as determined by Medicaid administrators, usually take the form of fee surveys. As can be seen in Table I, neither gut feelings nor ( fee surveys fare too well when comr pared to UCAS. Good management and equitable reimbursement imply good data. Past efforts, relying on subjective decisions, complaints, political pressure, and fee surveys, have produced positive outcomes some of the time. UCAS will augment management and reimbursement decisions by producing the pertinent data while minimizing both the burden of Medicaid on pharmacy and the impact of pharmacy on society's private and public drug bill. It makes little sense to cast pharmacy's economic fate to the wind simply because the economy is inflating and third parties play an ever increasing role in the marketplace.
What is needed is pharmacists who are unwilling to remain passive, who are not afraid of change, and who recognize that good data are essential to good decision making. Toward Full Benefits The basic UCAS model uses advance planning and ingenuity to produce an economic summary that highlights the costs and incomes from each major department in the pharmacy. To a pharmacist, of course, the costs that are evident in the prescription department are of paramount interest. It is here that the pharmacist must recoup the overall economic cost of providing
pharmaceutical service to society or lose the chance to be of service. The astute pharmacy manager knows that some costs are unresponsive to overt control while others may be quite manageable. The crux of the matter is knowing what costs are associated with particular activities and what the magnitudes of such costs are. UCAS records costs in the traditional income statement way except that revenues, costs of goods sold, and gross margins are divided in to prescription and nonprescription activities for recording purposes. Further, operating expenses are separated into their component parts on the basis of being either direct or indirect costs.
Cost of Goods Th e INTER_D kinds of tr EPARTMENTAL ansac tions With littl TRANSFER SHEET . The shee t m' h e work. wdl handle both Ig t look like this'
[~OTE: It may be use
. ze, and quant't ful to have a h Was recorded ;/- of the item whe not er column to in I these records j IS is a procedura7ever only the retail c ude t~e name, OPtion to improve /// seiling. price . e precISion of
UCAS-07:15 PHARMACIST'S NOTES
INTER-DEPARTMENTAL SHEET
r
l
(
American Pharmacy VoI.NS19, No.2, Feb.1979/73
-
$7.08
As shown th
TRANSFEiRS ere were foul' cases d . transactions Were necessary be unng May (in this . cause of INTER example) wh Items received -DEPARTMENT:~ colum as DTC th h dl ns, marked "A " 'I en sold as l~ an ed at the right'. tems received ,are handled in th f , 10 the column aks l~ , then sold e ar left Whenever an INTER mar ed "B." as DTC, are mUst be made i . -DEPARTMEN n ellher column A o;~L tranSaction occur As mentioned. ' as appropriate s, an entry transfer of COst prevIOusly, the pUr . be en tered d' . So, Whenever Pose of the for . Irectly in either c a cost IS immediatet IS to handle the The sellin ' ost column. y eVIdent, it should at the tim~ ~?ce should be enter COst. No u the transaction ed Whenever the . p rpose IS served by e~;e;: IS not conveni~~~ttIS not evident At period e n d . ng both Cost and l' a. look up the h etall each time. transfer. All coi the Information cost , the cost c~mns are totaled J:t ered is used to m k umns need no ~d' cause the purpOse' a e a formal However th . Justment. IS to accumulate estimatin' a e retail prices have g related cost. Thr bee,n.~:c?rded to provirl
The interdepartmental transfer is a sometimes tricky business in determining cost of goods sold. UCAS makes it all very simple.
17
Table 1.
Alternatives to Identifying Cost Alternative Approaches
Factor Relies on others to decide when costs will be measured Requires outside help to determine cost Pharmacist has a passive role Assumes pertinent cost data are available Subject to the frailties of sampling design Requires that data be reported to an outside party Uniform measurement of cost Uses comprehensive measurement of economic costs Informs pharmacist of his/her costs Provides management information Produces custom information for management Can be trusted to produce valid, reliable results
A direct cost, such as labor expense for a pharmacy intern, is assigned to the prescription and nonprescription departments as indicated by the employee's work pattern. Indirect costs, such as interest expense on a pharmacy's indebtedness, are recorded under headings known as cost centers. A pharmacy using UCAS will have two or three cost center designations. All adopting pharmacies will use an occupancy cos t center to record the indirect costs of being physically located in the space known as the pharmacy, and a general and administrative cost center to record overhead expenses. A third cost center, the delivery cost center, is used only if the pharmacy offers a delivery service. Throughout the year all economic activity is recorded and assigned in to one to five columns-as direct costs under the prescription and nonprescription headings or as indirect costs under the three cost center designations. At the end of the period the cost center columns are totaled and then allocated to the departmental columns to produce a truly comprehensive picture of revenues, gross margins, costs, and income for each department. The full benefits of UCAS are not the accounting mechanics, but rather the uses that can be made of the
18
"Gut Feeling"
Fee Surveys
UCAS
No No No No No No No No Debatable No No Debatable
Yes Yes Yes Yes Yes Yes No No Rarely No No Maybe
No No No No No No Yes Yes Yes Yes Yes Yes
varied results. Table 2 highlights some of the more obvious measures that UCAS places at the manager's disposal. With such information the manager is equipped to examine costs from numerous perspectives, to study cost patterns over time, and to measure accurately the results of decisions relating to asset deployment, pricing, and buying strategies. A manager might discover that total dispensing costs in his or her
•••• •••• ..... ..... ..... •••• ~
\ ~\
\, ~
\
pharmacy are inflating at a rate in excess of the general economy. Through successively finer UCAS measures, it would be possible to detect the exact cost factors producing the increases. Once these factors are identified, it would be up to the manager to take action, recognize that the cost was beyond control in a direct sense, or adjust prices to recover the increases in cost over the near-term. Several Options A manager who detected a fouryear trend in delivery expense per prescription of 19.5 cents, 27 .7 cents, 39.1 cents, and 61.7 cents, might consider several options to accommodate the situation. Obviously, prices could be adjusted. The service could be dropped altogether, or possibly the manager might seek out alternative means for delivering essential prescriptions. Further study might identify wasted motions, careless treatment of delivery vehicles, or excessive delivery of minor nonprescription needs as sources of the rapidly escalating cost. No matter what the source of the trend or management's consideration and eventual decision regarding it, UCAS plays a critical role in highlighting costs. Without a sophisticated cost-finding system such as
American Pharmacy VoI.NS19, No.2 , Feb.1979!74
Table 2. Illustrative UCAS Measures
Indicator
By Per Depart- Dispensed ment Prescription
Net revenue Cost of goods Gross margin Total expenses Net income/loss Direct expenses Expenses Indirect Occupancy Delivery Overhead Direct labor Direct other Occupancy labor Delivery labor Overhead labor Employee benefits Supplies Bad debt
Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes Yes Yes Yes
Yes Yes Yes
Yes Yes Yes
This table illustrates 36 common measures that UCAS generates . For individual pharmacies it is estimated that UCAS provides the information to produce more than 1,000 different economic indicators by department and per dispensed prescription .
UCAS, most managers would be unaware of short-term changes in costs. If these costs are left unattended, the rapid escalation in delivery costs might quickly threaten the pharmacy's economic health and even its overall solvency. The role UCAS plays in a pharmacy is much like a nervous system. A pharmacy is a complex and dynamic environment that defies easy description. Like a nervous system, UCAS monitors and detects changes in economic status. It also acts as an early warning device to alert management to negative trends long before conventional pharmacy accoun ting methods would respond. UCAS makes no
American Pharmacy VoI.NS19 , No.2, Feb.1979/75
judgments and cannot manage a pharmacy. It will not guarantee profit, adequate reimbursement, or continued growth in a pharmacy. U CAS should not be viewed as a quick fix" for an ailing pharmacy. In fact, UCAS cannot be recommended to pharmacies on the brink of economic catastrophe. UCAS provides the pharmacy manager more time to pursue other activities in a pharmacy because, once installed, it actually reduces the time and effort spent in bookkeeping. It provides information that is invaluable to management. But people will still have to make judgments regarding prudent action. UCAS is diagnostic in that it mirrors economic reality. It plays no therapeutic role in the well-managed pharmacy, but should be viewed as an adjunct for improving economic precision and overall productivity in the pharmacy. II
Smoothing the Way APhA has developed a full set of UCAS user manuals for interested pharmacists and is considering the organization of a consultation network which would be available to aid adopting pharmacies in installing, operating, and taking full ad-
.GI.·~
........ ..... ...... ••••
• ••• \'
\
~\
~
\
vantage of UCAS. The system will also come with a monthly newsletter illustrating questions and answers from adopters' special si tua tions. The en tire package is strictly voluntary. Efforts are already under way to provide automated recording systems for pharmacists who wish to use electronic data processing. Additional investigations are planned to research and develop the means to measure the marginal costs of specific activities within the prescription department. It will soon be possible to refine UCAS to detect cost differences between new and refill prescriptions, private pay versus third-party transactions, and even the marginal costs of various third-party programs. To minimize the effort required to adopt UCAS, pharmacists should obtain the user manuals with the thought of studying them for at least two months. Careful thought should be given to UCAS as it relates to the capabilities of the pharmacy's present bookkeeping methods. An intensive program for those who wish to hear Inore about UCAS will be presented at the April 1979 APhA Annual Meeting in Anaheim, California. Interested pharmacists should seek-and insist on-the cooperation of the pharmacy's accountant, since there is sufficient evidence to suggest that many pharmacies are paying high fees for very little in the way of bookkeeping services (let alone consultation or overall economic planning aid). The user manuals are specific for all aspects of UCAS. Adopting pharmacists will find not only a description of accounting needs, but also the rationale behind each measurement and numerous examples of how to record the necessary information. As explained in the manuals, it is possible to adopt UCAS in stages. Each successive step can be employed until the pharmacy reaches complete adoption and begins to reap the full benefits of knowing its own cost. In this way a pharmacy can take several years to move to-
19
American Pharmacy Vol.NS19, No.2, Feb.1979!70
A
ccounting!? What does accounting have to do with pharmacy? And what's a Uniform Cost Accounting System (UCAS)? Shouldn/t a pharmacist be concerned exclusively with pharmaceuticals, prescriptions, patients, and optimizing drug therapy? . Surely these are reasonable questions . Just as surely, such questions reveal the myopia that pervades various sectors of the profession. As an abstraction, pharmacy can be viewed in its pure state. The practice of pharmacy, however, exists within a broader social, economic, and political marketplace. These complex systems exert considerable, and sometimes countervailing, effects on the practice of pharmacy. Those who ignore the determinants of existence within the broad fabric of society are destined for long-term failure. It is this very principle, then, that should encourage pharmacists to pay attention to the accounting needs of the modern pharmacy.
'So, What's a UCAS?' The natural question at this point is: What is UCAS? Simply stated, UCAS represents a systematic means of compiling accounting information in a pharmacy so that measurement will be consistently, comprehensively/ and uniformly accomplished. UCAS is described in a set of user manuals prepared and soon to be published by the American Pharmaceutical Association. The intent of the manuals is to provide pharmacists with the information necessary to organize their accounting system for assuring full and consistent recording of economic events within the pharmacy. Because the manuals are written in a conversational style, there is no need for pharmacists to become expert in accounting matters before attempting UCAS. Successive chapters describe the means for collecting and classifying accoun ting information so that the
Bruce R. Siecker is director of the APh.l l Pharmacy Management Institute.
By BRUCE R. SIECKER receipts, costs of goods, expenses of the prescription department, and other major segments of the pharmacy can be identified separately. The basic assumption of such an effort is that pharmacists have a real and continuing need to know what costs are evident in providing pharmaceutical service to the community. With UCAS, pharmacists are fully capable of identifying pertinent economic data without outside help . But more important, UCAS implies that pharmacists must take command of the accounting function in the pharmacy if they are to have a role in their economic destiny above the passive level of reacting to external queries for information.
'What Will UCAS Do for Me?' At its basic level, UCAS is nothing more than a method of collecting and classifying costs so that pharmacy managers have useful economic information at their disposal. The crucial question, however, is: What will UCAS do for me? Further, why should pharmacists pay attention to this new way of approaching the accounting task when many pharmacies obviously have survived for a long time without it? To address these questions requires a minor departure to examine what exists in the pharmacy marketplace with regard to accounting technology. Previous and continuing efforts by APhA's Pharmacy Management Institute indicate that pharmacists often have very little information available from their accounting systems, other than what is minimally required to comply with various taxing and property laws. Bookkeeping tends to exist as a necessary distraction in the affairs of the pharmacy and is rarely utilized to produce information that would be useful for pricing/ cost containment, and productivity decisions. It is not uncommon for pharmacists to need information that would indicate the cost of dispensing. Vague feelings that pricing deci-
sions may provide inadequate cost recovery are prevalent as costs continue to escalate. The problem, of course, revolves around the fact that most pharmacies are really a composite of two related but distinct economic activities. Of foremost concern to pharmacists is the professional activity of the prescription department. Many pharmacies also undertake major efforts in nonprescription goods and services. Revenues, product costs, and expenses of these pharmacy segments are commingled in the bookkeeping system. What this means is that efforts to reconstruct the cost factors for each pharmacy department must rely largely on in tui tion or mechanis tic formulas which assume that cost behavior is the same for each department. Numerous inquiries have indicated that both solutions are far from ideal and that blind faith in such methods can lead to faulty conclusions about a pharmacy's operating and overhead costs . A common response to the government's need for solid information about dispensing costs in public. third-party programs is to commission "fee surveys." This phenomenon has been especially apparent over the recent past thanks to Medicaid agencies. Several factors must be considered/ however, before the profession places its faith in this approach to cost finding on a longterm basis. First most pharmacists do not have the information on hand to answer the detailed questionnaires that are necessary for these surveys. Second, "guesstimations/' made in an attempt to cooperate, are often worse than no survey because numbers tend to assume their own credibility over time irrespective of their source. Undetected error is just that-undetected. Third/ there are many ways to account for a particular economic event. The options available are all being used, which means that the same bookkeeping "yardstick" is not used in all pharmacies. As every pharmacist surely knows, two pounds and four kilo-
Photo by Mark Farris
.....
American Pharmacy VoI.NS19, No.2, Feb.1979/71
15
grams cannot be added or averaged into any meaningful number without first converting both numbers to a common measurement base. Fee surveys assume the problem away, while holding up the results as valid indica tors. Fee surveys rely on "experts from afar" to collect, analyze, and report dispensing cost information. The pharmacist plays a passive role in the whole process and is rarely even privy to his or her own results. What findings are reported usually describe only the "average cost to dispense" or the "range of dispensing costs" for the sample or some geographic population of pharmacies. The critical question for a particular pharmacist is what costs are evident in his or her own pharmacy. Fee surveys rely on someone else to decide that it is time to conduct a survey, how costs will be measured, and who will see the r'e sults.
Adjusting to the Marketplace There should be little doubt in anyone's mind that pharmacy, like all sectors of the economy, is affected by inflation. Adjusting to a dynamic marketplace requires that a manager decide pricing strategies with great care. Inadequate prices in the face of steady inflation mean that costs are inadequately recovered. Excessive prices relative to the marketplace may produce erosion of the client base as consumers seek out lower-priced alternatives. Pricing decisions must be made with or without adequate information. It is no doubt quite frustrating to judge the adequacy of prices for professional services without having a firm grasp on what it costs to dispense. In the private pay marketplace the problem can be addressed on an incremental basis-raise prices in light of inflation until the required cost recovery and desired return on investment are achieved. The process may be tempered with consumer reaction, but the pharmacist still bases pricing decisions largely on intuition and must wait until the income statement is completed to know whether it paid off.
16
In a marketplace increasingly dominated by predetermined reimbursement for pharmaceutical services-the third-party arena-there is no opportunity, short of withdrawal from participation, to adjust prices to compensate for cost increases. The need to be "right" is critical when a pharmacist accepts or rejects a third-party reimbursement schedule. The need is even greater when reimbursement schedules fail to change frequently. The virtual absence of solid information on pharmacy dispensing costs only heightens the risks pharmacists take when they accept a given level of reimbursement. A Medicaid fee survey might indicate an "average cost to dispense" of $2.95 for the upcoming year against a reimbursement rate of $2.75 during the present year. Such results might help the pharmacist, especially if next "year's reimbursement were actually increased to $2.95 per prescription, but two obvious problems still exist. The cost to dispense implies unit dispensing cost. It does not necessarily take in to accoun t the need for a return on invested capital. The second problem is even more difficult to resolve because fee surveys tend to highlight averages. Without knowing dispensing cost and net income needs relative to the
.GI".~
~\
..... ••••
•••• \,
\
.... , •••• \
investment level in the pharmacy, an individual pharmacy manager is hard pressed to assess the new reimbursement schedule. What a difference it would make if the individual pharmacist knew that his or her cost and return needs for the upcoming year totaled $2.90 per prescription, or alternatively, that $3.35 was the figure for his or her pharmacy. All indications point to accountability as a key word in all third-party programs. Cost containment will continue to dominate the rate-setting process as the American public demands less waste and a check on growth in the public sector. There is little indication that pharmacists can avoid providing evidence to support requests for higher reimbursement levels. Political pressure is not without its supporters, and fee surveys do provide a means of documenting the need for rate adjustments . Questions of reliability, representativeness, and data validity, however, frequently subvert the survey process. When this happens, much effort is wasted and providers often grow discontented. But the question still is: What will UCAS do for me? Simply stated, UCAS will provide each adopting pharmacy with documented proof of dispensing costs. An individual pharmacist can consider UCAS results-a consistent and comprehensive measure of dispensing costs and actual net income or loss associated with the prescription department-in several ways. First, cost data are useful in assessing possible price levels against expected costs and desired net income . levels. Second, a pharmacist might employ dispensing cost data as a foundation for entry into the political arena to argue for increased reimbursemen t levels in public third-party programs. It should be obvious that third-party cost documentation would pose no special problem for UCAS, since the data would be readily and uniformly retrievable from the accounting records of all participating pharmacies . Because of the wealth of economic
American Pharmacy VoI.NS19, No.2, Feb.1979/72
data generated by UCAS, pharmacy managers would have a much firmer economic grasp on the pharmacy and its component departments. Two Facts of Life Why do we need UCAS now after all these years? The answer has to do with two facts of life. First, thirdparty programs are not going to go away. Reimbursement rates will be determined and adjusted on the basis of marketplace conditions in private third-party programs and documented need ' in Medicaid and other public programs. Third-party programs will account for still higher portions of the total pharmaceutical dollar. Adequate reimbursement schedules will be more critical as fewer opportunities exist to recoup economic shortfalls in the private sector. UCAS will provide the kind of uniform, comprehensive, and accurate data that are essential if pharmacy is to make the case necessary to insure economic viability. The second fact of life is what UCAS is and does in relation to alternative cost-finding strategies. Many pharmacists decide price rather subjectively-by "gut feeling." Supplemental efforts, which occur sporadically as determined by Medicaid administrators, usually take the form of fee surveys. As can be seen in Table I, neither gut feelings nor ( fee surveys fare too well when comr pared to UCAS. Good management and equitable reimbursement imply good data. Past efforts, relying on subjective decisions, complaints, political pressure, and fee surveys, have produced positive outcomes some of the time. UCAS will augment management and reimbursement decisions by producing the pertinent data while minimizing both the burden of Medicaid on pharmacy and the impact of pharmacy on society's private and public drug bill. It makes little sense to cast pharmacy's economic fate to the wind simply because the economy is inflating and third parties play an ever increasing role in the marketplace.
What is needed is pharmacists who are unwilling to remain passive, who are not afraid of change, and who recognize that good data are essential to good decision making. Toward Full Benefits The basic UCAS model uses advance planning and ingenuity to produce an economic summary that highlights the costs and incomes from each major department in the pharmacy. To a pharmacist, of course, the costs that are evident in the prescription department are of paramount interest. It is here that the pharmacist must recoup the overall economic cost of providing
pharmaceutical service to society or lose the chance to be of service. The astute pharmacy manager knows that some costs are unresponsive to overt control while others may be quite manageable. The crux of the matter is knowing what costs are associated with particular activities and what the magnitudes of such costs are. UCAS records costs in the traditional income statement way except that revenues, costs of goods sold, and gross margins are divided in to prescription and nonprescription activities for recording purposes. Further, operating expenses are separated into their component parts on the basis of being either direct or indirect costs.
Cost of Goods Th e INTER_D kinds of tr EPARTMENTAL ansac tions With littl TRANSFER SHEET . The shee t m' h e work. wdl handle both Ig t look like this'
[~OTE: It may be use
. ze, and quant't ful to have a h Was recorded ;/- of the item whe not er column to in I these records j IS is a procedura7ever only the retail c ude t~e name, OPtion to improve /// seiling. price . e precISion of
UCAS-07:15 PHARMACIST'S NOTES
INTER-DEPARTMENTAL SHEET
r
l
(
American Pharmacy VoI.NS19, No.2, Feb.1979/73
-
$7.08
As shown th
TRANSFEiRS ere were foul' cases d . transactions Were necessary be unng May (in this . cause of INTER example) wh Items received -DEPARTMENT:~ colum as DTC th h dl ns, marked "A " 'I en sold as l~ an ed at the right'. tems received ,are handled in th f , 10 the column aks l~ , then sold e ar left Whenever an INTER mar ed "B." as DTC, are mUst be made i . -DEPARTMEN n ellher column A o;~L tranSaction occur As mentioned. ' as appropriate s, an entry transfer of COst prevIOusly, the pUr . be en tered d' . So, Whenever Pose of the for . Irectly in either c a cost IS immediatet IS to handle the The sellin ' ost column. y eVIdent, it should at the tim~ ~?ce should be enter COst. No u the transaction ed Whenever the . p rpose IS served by e~;e;: IS not conveni~~~ttIS not evident At period e n d . ng both Cost and l' a. look up the h etall each time. transfer. All coi the Information cost , the cost c~mns are totaled J:t ered is used to m k umns need no ~d' cause the purpOse' a e a formal However th . Justment. IS to accumulate estimatin' a e retail prices have g related cost. Thr bee,n.~:c?rded to provirl
The interdepartmental transfer is a sometimes tricky business in determining cost of goods sold. UCAS makes it all very simple.
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Table 1.
Alternatives to Identifying Cost Alternative Approaches
Factor Relies on others to decide when costs will be measured Requires outside help to determine cost Pharmacist has a passive role Assumes pertinent cost data are available Subject to the frailties of sampling design Requires that data be reported to an outside party Uniform measurement of cost Uses comprehensive measurement of economic costs Informs pharmacist of his/her costs Provides management information Produces custom information for management Can be trusted to produce valid, reliable results
A direct cost, such as labor expense for a pharmacy intern, is assigned to the prescription and nonprescription departments as indicated by the employee's work pattern. Indirect costs, such as interest expense on a pharmacy's indebtedness, are recorded under headings known as cost centers. A pharmacy using UCAS will have two or three cost center designations. All adopting pharmacies will use an occupancy cos t center to record the indirect costs of being physically located in the space known as the pharmacy, and a general and administrative cost center to record overhead expenses. A third cost center, the delivery cost center, is used only if the pharmacy offers a delivery service. Throughout the year all economic activity is recorded and assigned in to one to five columns-as direct costs under the prescription and nonprescription headings or as indirect costs under the three cost center designations. At the end of the period the cost center columns are totaled and then allocated to the departmental columns to produce a truly comprehensive picture of revenues, gross margins, costs, and income for each department. The full benefits of UCAS are not the accounting mechanics, but rather the uses that can be made of the
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"Gut Feeling"
Fee Surveys
UCAS
No No No No No No No No Debatable No No Debatable
Yes Yes Yes Yes Yes Yes No No Rarely No No Maybe
No No No No No No Yes Yes Yes Yes Yes Yes
varied results. Table 2 highlights some of the more obvious measures that UCAS places at the manager's disposal. With such information the manager is equipped to examine costs from numerous perspectives, to study cost patterns over time, and to measure accurately the results of decisions relating to asset deployment, pricing, and buying strategies. A manager might discover that total dispensing costs in his or her
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pharmacy are inflating at a rate in excess of the general economy. Through successively finer UCAS measures, it would be possible to detect the exact cost factors producing the increases. Once these factors are identified, it would be up to the manager to take action, recognize that the cost was beyond control in a direct sense, or adjust prices to recover the increases in cost over the near-term. Several Options A manager who detected a fouryear trend in delivery expense per prescription of 19.5 cents, 27 .7 cents, 39.1 cents, and 61.7 cents, might consider several options to accommodate the situation. Obviously, prices could be adjusted. The service could be dropped altogether, or possibly the manager might seek out alternative means for delivering essential prescriptions. Further study might identify wasted motions, careless treatment of delivery vehicles, or excessive delivery of minor nonprescription needs as sources of the rapidly escalating cost. No matter what the source of the trend or management's consideration and eventual decision regarding it, UCAS plays a critical role in highlighting costs. Without a sophisticated cost-finding system such as
American Pharmacy VoI.NS19, No.2 , Feb.1979!74
Table 2. Illustrative UCAS Measures
Indicator
By Per Depart- Dispensed ment Prescription
Net revenue Cost of goods Gross margin Total expenses Net income/loss Direct expenses Expenses Indirect Occupancy Delivery Overhead Direct labor Direct other Occupancy labor Delivery labor Overhead labor Employee benefits Supplies Bad debt
Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes Yes Yes Yes
Yes Yes Yes
Yes Yes Yes
This table illustrates 36 common measures that UCAS generates . For individual pharmacies it is estimated that UCAS provides the information to produce more than 1,000 different economic indicators by department and per dispensed prescription .
UCAS, most managers would be unaware of short-term changes in costs. If these costs are left unattended, the rapid escalation in delivery costs might quickly threaten the pharmacy's economic health and even its overall solvency. The role UCAS plays in a pharmacy is much like a nervous system. A pharmacy is a complex and dynamic environment that defies easy description. Like a nervous system, UCAS monitors and detects changes in economic status. It also acts as an early warning device to alert management to negative trends long before conventional pharmacy accoun ting methods would respond. UCAS makes no
American Pharmacy VoI.NS19 , No.2, Feb.1979/75
judgments and cannot manage a pharmacy. It will not guarantee profit, adequate reimbursement, or continued growth in a pharmacy. U CAS should not be viewed as a quick fix" for an ailing pharmacy. In fact, UCAS cannot be recommended to pharmacies on the brink of economic catastrophe. UCAS provides the pharmacy manager more time to pursue other activities in a pharmacy because, once installed, it actually reduces the time and effort spent in bookkeeping. It provides information that is invaluable to management. But people will still have to make judgments regarding prudent action. UCAS is diagnostic in that it mirrors economic reality. It plays no therapeutic role in the well-managed pharmacy, but should be viewed as an adjunct for improving economic precision and overall productivity in the pharmacy. II
Smoothing the Way APhA has developed a full set of UCAS user manuals for interested pharmacists and is considering the organization of a consultation network which would be available to aid adopting pharmacies in installing, operating, and taking full ad-
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vantage of UCAS. The system will also come with a monthly newsletter illustrating questions and answers from adopters' special si tua tions. The en tire package is strictly voluntary. Efforts are already under way to provide automated recording systems for pharmacists who wish to use electronic data processing. Additional investigations are planned to research and develop the means to measure the marginal costs of specific activities within the prescription department. It will soon be possible to refine UCAS to detect cost differences between new and refill prescriptions, private pay versus third-party transactions, and even the marginal costs of various third-party programs. To minimize the effort required to adopt UCAS, pharmacists should obtain the user manuals with the thought of studying them for at least two months. Careful thought should be given to UCAS as it relates to the capabilities of the pharmacy's present bookkeeping methods. An intensive program for those who wish to hear Inore about UCAS will be presented at the April 1979 APhA Annual Meeting in Anaheim, California. Interested pharmacists should seek-and insist on-the cooperation of the pharmacy's accountant, since there is sufficient evidence to suggest that many pharmacies are paying high fees for very little in the way of bookkeeping services (let alone consultation or overall economic planning aid). The user manuals are specific for all aspects of UCAS. Adopting pharmacists will find not only a description of accounting needs, but also the rationale behind each measurement and numerous examples of how to record the necessary information. As explained in the manuals, it is possible to adopt UCAS in stages. Each successive step can be employed until the pharmacy reaches complete adoption and begins to reap the full benefits of knowing its own cost. In this way a pharmacy can take several years to move to-
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