Douglas E. Miller
Kristin Fox-Smith

Hospitals should be aware of the extent that seemingly small errors in pharmacy revenue cycle processes can cause them to lose substantial dollars from their bottom lines.

At a Glance 

  • An end-to-end pharmacy revenue cycle analysis, led by a multidisciplinary team with broad expertise, can enable a hospital to identify unsuspected errors and oversights that could be causing the organization to lose millions of dollars in revenue annually that it is entitled to receive.
  • If the analysis finds that considerable revenue is being lost, the next step for the team should be to develop a remediation plan to identify the exact cause of each issue and correct it.
  • Following completion of the initial analysis, the hospital should assign permanent accountability and ownership to the team to ensuring the ongoing integrity and accuracy of the pharmacy revenue cycle.

How often does your organization conduct financial audits of its various revenue centers looking for opportunities to increase revenue and decrease expense? Typically, the answer to this question will be “Often,” because such audits tend to be routine for healthcare organizations. All too often, however, these audits focus too little attention on pharmacy revenue, leaving finance leaders—particularly in hospitals, health systems, and freestanding specialty care facilities—unaware of potential problems in this important revenue center.

The fact is, seemingly small systems errors and oversights in this area can cause large amounts of pharmacy revenue to leak out of the system and away from the bottom line. Left unchecked, such problems can translate into the loss of millions of dollars of revenue to which the organization is entitled, with only a dim hope of its being recovered. A healthcare organization can best avoid such circumstances by performing an end-to-end pharmacy revenue cycle review and analysis.

Such an undertaking involves more than simply a financial audit of purchasing, pricing, billing, and payment. It also should be focused on detecting hidden errors in coding, pricing, and payment. For this reason, the effort requires a broad range of expertise, with pharmacy, finance, and regulatory compliance staff and insurance/payment specialists working together as a multidisciplinary team.

Common Sources of Pharmacy Revenue Leakage

Pharmacy revenue losses are usually due to incorrect pricing, product underbilling or overbilling, erroneous coding, or improper charge description master (CDM) mapping. Significant revenue leakage occurs most often as a result of incorrect pricing of specialty drugs and errors in outpatient pharmacy billing, so a review that begins in these areas will tend to provide the biggest return for the least amount of effort. However, additional revenue can be gained from careful assessment of the entire revenue cycle, whatever the particulars of contractual arrangements or payer sources.

An added potential benefit of a detailed pharmacy revenue cycle analysis is the possibility of uncovering regulatory compliance issues, such as consistently incorrect billings to government or other third-party payers. The analysis therefore also can help an organization create an audit-ready and compliant environment, which is critical for preserving institutional accreditation, licensure, and full participation with government and commercial payers.

A further benefit is that careful scrutiny of all the pharmacy department’s current services can disclose opportunities for achieving greater operational efficiencies and the potential for expansion of services. For example, discharge medication reconciliation, ambulatory clinical pharmacy services, and specialty pharmacy opportunities are often overlooked. Moreover, if significant revenue capture is achieved, these improvements may even become self-funded.

A Need for the Right Expertise— and Commitment

The likelihood of inconsistencies and handoff errors occurring in the financial processes for pharmaceutical transactions are amplified by the intricacies of today’s payment systems. Errors can enter the system, unbeknownst to pharmacy or financial analysts, from the time a drug is purchased to the time a charge is placed on a patient’s bill to the point of payment and posting. It is for this reason a multidisciplinary team is required to undertake the pharmacy revenue analysis if the analysis is to be conducted in-house, with limited or no assistance from an outside pharmacy assessment specialist.

Finance leaders may well understand the individual pieces of the process, but they may have trouble seeing how each area fits into the overall operation. For example, hospital pharmacy data are often submitted to at least four software files that must successfully link with three handoffs for the process to work properly. At the beginning of the process, a biller/coder is responsible for deciphering an encounter form, which is subsequently translated or keyed into the hospital or health systems billing system. The billing system typically is overlapped by a claims scrubber, an essential tool for improving hospitals’ and health systems’ professional, financial, and compliance operations. After payment is received from the appropriate payer, dollars and claims detail must be overlaid to patient accounts to determine the remaining balance and unpaid or underpaid claims for follow-up. With each disparate system comes a separate group of staff and a separate group of skill sets. Many organizations simply lack the level of vigilance and proper maintenance of the pharmacy revenue cycle that will ensure this process is error-free.

End-to-End Pharmacy Revenue Analysis

The pharmacy revenue cycle analysis should begin with a review of purchase data, dispensing transactions, and billing of pharmaceuticals. In most hospital settings, the analysis should focus on four primary data files:

  • The pharmacy purchasing file
  • The pharmacy CDM
  • The pharmacy charge transactions file
  • Patient billing information

Successful matching of each step of the process requires that ensuring that the pharmacy billing and transactions files provide the correct information to the hospital CDM and/or the hospital billing system, and that the correct billing data are submitted to payers on the UB92 (UB04).

Ultimately, the team’s objective should be to identify incorrect or inconsistent pricing, evidence of numerous denials for payment, and excessive contractual adjustments that can result in significant underpayment for transactions. These inconsistencies may result from mapping issues such as discrepancies between the Healthcare Common Procedure Coding System (HCPCS) codes in the pharmacy drug master (PDM) and the CDM, or situations where the appropriate HCPCS codes are missing or incorrect in the hospital CDM.

By making such comparisons between the PDM and CDM, the team can ascertain whether the correct charges are being properly generated, correctly transferred to the hospital billing system, and then correctly passed on to the patient’s bill. Comparison of records in the pharmacy formulary file with those in the CDM can also disclose whether a drug dispensed by the pharmacy was incorrectly charged as a different drug by the billing system.

Other indicators of problems are high numbers of denials and/or corrected claims for payment. Such a finding may warrant adding a payment specialist to the pharmacy team who is able to verify patient eligibility for various drug benefits.

A finding of CDM mapping errors will require a full review and clean up. Although this effort can be labor-intensive, it should also prove cost-effective when the returns gained through correct payment are considered.

An effective way to perform such a review is to begin with what was billed to the patient and then track the process backwards. Another approach is to, again, match the PDM against the CDM—this time at a level of greater detail—looking for inconsistencies. A variance between these files could result in a difference between the drug billed and the drug actually dispensed. With today’s high-tech, high-cost drugs, such discrepancies could easily amount to significant lost revenue.

There may be additional “scrubber” processes involved to correct these data that could be simplified or eliminated with regular reviews and updates of HCPCS J-codes, which are used to report injectable drugs as well as many cancer and immunosuppressant drugs and inhalation solutions. With continual changes in HCPCS assignment and associated coverage and payment rates, maintaining claims scrubbers to identify all necessary edits is difficult. There is a need to keep up with local coverage determinations (LCDs) and national coverage determinations (NCDs) as they are released, and to ensure that important changes in coding and payment are identified and incorporated into the claims scrubber. The same holds true for quarterly HCPCS updates released by the Centers for Medicare & Medicaid Services (CMS), as these documents contain revisions, additions, and deletions that must be addressed expeditiously. The organization also could lose revenue in situations where pharmacy charges have no matching billing transactions, or vice versa.

Perhaps the most vulnerable area requiring such reviews is specialty pharmacy services—in institutions providing care for cancer patients, for example. The number of oncology and other high-cost biological drugs continues to grow, with no end in sight. These drugs often are approved and made available for use more quickly than codes are established for them. Meanwhile, the pharmacies supporting these specialty hospitals and clinics struggle to update their systems as the new codes are established.

CMS also releases updated payment limits and fee schedules quarterly, which must be added regularly to the system fee schedule in the PDM and CDM. Ideally, pharmacies should also be reviewing and updating codes quarterly to manage these changes in their systems.

One quick way to check coding accuracy is to review the 50 most-expensive and high-tech drugs, which are typically the HCPCS J-codes. If any of these J-code billing units are incorrect in either the PDM or hospital CDM, the hospital could be losing significant revenue and should perform a more detailed analysis.

When managing unspecified HCPCS codes for the PDM and CDM to ensure appropriate payment, it is important to verify payer coverage. To determine whether a new medication is covered and whether a “miscellaneous” code is appropriate, the pharmacy audit team should check Medicare carriers’ local medical review policies (LMRPs), LCDs, and NCDs. If the miscellaneous code is covered, it should be supported by appropriate documentation.

Case Studies

These points can be exemplified with three case examples of institutions that undertook pharmacy revenue cycle analyses. The findings disclosed that all three institutions were losing significant pharmacy revenues but, interestingly, for different reasons.

Facility A is a medium-size pediatric specialty hospital. Significant errors were found in its CDM resulting in Drug Y being billed each time Drug X was dispensed and administered. Although the total number of errors discovered was not large, those that were identified involved high-tech, high-cost drugs, resulting in a significant financial impact. This review identified one single drug coding error that accounted for a loss of $1.2 million per year, nearly half of the $2.5 million per year in revenue leakage identified.

Facility B is a larger, university-affiliated hospital. The review discovered HCPCS J-codes in the PDM that had a significant impact on billing and collections operations. In this instance, several invalid HCPCS J-codes were being assigned to oncology and transplant-related drugs. Lost revenue from these coding errors was estimated at $10.5 million, but because of the large number of outpatient visits, the overall financial impact may have been much larger.

Facility C is chiefly an outpatient oncology facility that uses mostly high-tech, high-cost drugs. When the PDM and CDM were linked, several coding errors were discovered in which the billing units were incorrectly entered into the CDM. These errors account for most of an estimated $5.6 million per year in revenue leakage. The review also disclosed that prior authorizations were being poorly handled, resulting in a high volume of denied claims that should have been reworked. The addition of a payment/eligibility specialist to the pharmacy team solved much of that problem.

The findings of these analyses are summarized in the exhibit below.



Only the Beginning

Conducting a pharmacy revenue cycle analysis is only the first step in addressing the problem of lost pharmacy revenue. If the analysis finds that considerable revenue is being lost, the organization may have multiple problems to address, requiring multiple fixes. The next step should be to create and implement a remediation plan to identify the exact cause of each issue and correct it. Policies and procedures may need to be updated to codify these changes, and additional staff time may be required to establish the fixes and to ensure systems are current. For example, if the PDM and CDM are not accurate, the organization will require a process for making timely updates and cross-referencing.

To conclude this effort, systems need to be retested to validate that all issues have been corrected. But even at this point, organizations should not regard the issue as closed.

Given the nature of the pharmacy’s business model, a single overall review and system correction is rarely sufficient to address all potential problems. The drugs maintained by the pharmacy and their corresponding prices change at a phenomenal pace. Therefore, the specialists on the multidisciplinary review team, and ultimately the chief pharmacy executive, should maintain constant vigilance over these systems by performing ongoing maintenance and conducting at least one overall review annually.

In short, permanent accountability and ownership should be assigned to a multidisciplinary team led by pharmacy and including patient billing and financial services, as well as computer support, to manage the four areas of pharmacy revenue cycle activity:

  • Maintaining and updating the drug billing system, including the PDM, CDM, and the outpatient billing and coding processes, with the goals of increasing potential for improved revenues, reducing potential for billing discrepancies, and avoiding billing and fraud liability
  • Developing pharmacy expertise and efficient billing processes for ambulatory drug billing
  • Developing liaisons and lasting communication channels with the billing and finance departments
  • Continuing established methods and processes for ensuring clean and accurate billing, regular internal audits, and fiscal reviews of all pharmacy billing

A Critical Concern

Conducting a pharmacy revenue cycle analysis is critical to closing gaps or inconsistencies in a hospital’s interdependent pharmacy data systems. Hospitals should not discount the need for such an analysis, because such problems can all too easily result in pharmacy revenue leakage that drains millions of dollars annually from a hospital’s bottom line. Preventing such leakage can bring extra dollars into pharmacy operations that can be translated into improvements in patient care and safety while providing opportunities to expand overall pharmacy services.

Douglas E. Miller, Pharm D, is senior director, hospital and health system pharmacy services, Visante, Minneapolis (

Kristin Fox-Smith is senior director, billing and reimbursement, Visante, Minneapolis (

The authors would like to acknowledge William Kelly, PharmD, Lynnae Mahaney, RPh, FASHP, and Lisa MacBain for their contributions to this article.

Publication Date: Monday, October 01, 2012

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