Health_Financial_Effects

Health Financial Effects and Constraints Lamont Hunter OPS/HC 571 February- 28, 2011 Christopher Kelley Health Financial Effects and Constraints Hospitals are constantly faced with significant financial challenges to efficiently convert resources into outputs and simultaneously maximize quality of care in a cost-effective way. This paper will discuss the challenges of financial effects and constraints faced by hospitals, specifically regarding cost issues of the pharmacy on operations management. Additionally, the description of costs associated with inventory control, staffing, financial constraints, and proper financial reporting. Pharmacy Effects on Operations Management Hospital operations managers are facing increased demands to improve outcome values and the quality of patient care with controlled costs of various departments. Specifically, pharmacy costs can easily exceed 10 percent of a hospitals total cost (Health Care Financial Management, 2010). Understanding the challenges pharmacies face is essential for optimized clinical functions of an operations manager.  With the rising costs of prescription drugs, operations managers must find cost-effective ways to ensure quality and safety of care.  Pharmacies represent multiple operations management challenges including: inventory, personnel management, technology and automation, management controls, location analysis and selection, procurement, and network distribution (Langabeer, 2008). Additional challenges are medication safety and supply utilization.  Operation managers must possess the ability to comprehend and adapt to changes that many pharmacies face daily as well as knowledge of how the effectiveness of the supply chain will enhance operations and the bottom line profits.  Understanding pharmacies challenges of growth of mail-order medications, technology, increased demands of aging population, and even the stress of attracting/ retaining employees greatly affect the success of the hospital.  Hospital pharmacies typically have more complex clinical medication management issues rather than customer relations and business. Poor pharmacy performance can affect profits if the product demands exceed the medicinal supply, along with negative effects on patients’ health and safety. Inventory Control The goal of operation management is to sustain, protect, and project the operational side of things. Ensuring that the hospital has the most efficient information and tracking systems so that all medications and products are accounted for in inventory and pharmacy supply meets patients’ demand. The movement of medication is one of the most difficult tasks of operations management and largest expenses of hospital pharmacies (Langabeer, 2008). The lack of inventory control has led to the inappropriate prescriptions and loss of drugs resulting in lost profits. A clear understanding of how medications are ordered, stored, and distributed would greatly decrease issues with workflow processes. The constant rise of new and more expensive medications further indicates the need for cost saving initiatives. From an operations management perspective, location optimization is essential to have the necessary medications within close proximity of patients for quick access. Hospital pharmacies typically provide medications to various departments of the hospital, so the need to know most commonly used medications and inventory levels as well as the procedures for distributing medications to comply with regulatory agencies. There has been research that promotes incorporating standardization processes could achieve significant cost effectiveness (Kwon, 2008). Operations management must take the necessary steps using strategic planning to control inventory, integrate systems, monitor the daily expenses of supply chain management to reduce the risk of errors and reduce costs. Staffing Nationwide, hospitals are facing labor shortages attributed in part to an aging population and the increased demand of services (Levenson, 2000). Operations managers must be fully engaged to properly staff hospital pharmacies that compete with higher paying retail chains. Continuous and scheduled training and discussion about issues that confront staff with the work flow process could help improve efficiency. Along with research that shows that containing costs can be accomplished by aligning staffing patterns with work fluctuations, drive process improvements incorporating Lean Six Sigma, and automation in areas when feasible. Automation would allow the pharmacists and staff more time for needed consults. Revenue Constraints and Financial Factors Even in a large hospital, the pharmacy is often one of the largest and most profitable departments (Langabeer, 2008). Uninformed operation management or lack of understanding the constraints of hospital pharmacies could result in inappropriate and costly decision-making. Complex operations in hospital pharmacies are sometimes unavoidable because managing inventory control with life-saving medications is non-negotiable. Operations management must also ensure the pharmacy department complies with all related regulatory laws by the Drug Enforcement Agency, Food & Drug Administration and the National Association of State Boards of Pharmacy. These agencies provide approvals of safe products and the lack of monitoring compliance can lead to lawsuits and additional cost. Financial Reporting in Pharmacies Understanding finance in any organization is vital to the success of the hospital.  Finance is the lifeline of an organization and is essentially what keeps it from closing.  It is involved with nearly every decision made from start to finish including advertising, product selection, staff employment, and short/long term planning.  Among other things, financial understanding is essential for controlling the bottom line as well as the performance of the organization.    The operations manager must utilize the and fully understand the financial effects of the income statement, the balance sheet, and the cash-flow statement.  Income statements are the hospitals’ bottom line, the difference between net revenues and expenses will result in profit or net loss.  The balance sheet also known as the statement of financial condition is total assets comprised of liabilities and capital; this illustrates the financial position of the hospital at a specific point in time.  The cash flow statement shows all the sources and uses of moneys during an accounting period.  Cash flow can be an early indication if the hospital or a specific department is generating cash-flow problems. Conclusion Health care operations management involves various activities that include: administrative, financial, legal, and quality improvements. Careful analysis of hospital pharmacies will require strategic planning and implementation of guidelines to meet compliance standards.  Operations management must coordinate cost-management, and forecasting analysis to optimize the efficiency of hospital pharmacies inventory control, staffing, and finances. A nine step process developed by Lee Vermeulen consisting of collecting data, review financial history, build drug budget, build new-product budget, build non-formulary drug, build low-priority drug, establish drug cost-containment plan, finalize and present total drug budget, and monitoring has proven to be cost effective in managing pharmacy costs (Serb, 2005). References Driving Value and Containing Costs in Pharmacy Operations. (2010, February). Healthcare Financial Management, 64(2), S1-S4.  Kwon, S.. (2008). Does the Standardization Process Matter' A Study of Cost Effectiveness in Hospital Drug Formularies. Management Science, 54(6), 1065-1079. Langabeer, J. (2008). Health Care Operations Management: A Quantitative Approach to Business and Logistics. Sudbury: Jones and Bartlett Publishers, Inc. Levenson, D. (2000). Hospitals struggling to fill pharmacy, radiological technology staff positions. AHA News, 36(13), 1. Serb, C. (2005). BUSINESS ISSUES IN THE PHARMACY. H&HN: Hospitals & Health Networks, 79(5), 57.