Untapped Opportunities For Health System Pharmacies - McKinsey

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Healthcare
Untapped opportunities for

health system pharmacies
November 7, 2023 | Article
Two McKinsey surveys of health system

pharmacy leaders reveal that pharmacies
could do more to manage margins, improve
patient access, and position themselves as
strategic sources of growth.
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H
ealth system pharmacy operations are strained
by continually rising drug costs, labor and supply
shortages, and intensifying margin pressures. Adding to
https://www.mckinsey.com/industries/healthcare/our-insights/untapped-opportunities-for-health-system-pharmacies 11/11/23, 12 32
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these challenges, more patients are requiring more
medications and complex therapies but often struggle to
a!ord them.[ 1 ] Even so, pharmacies have remained a
critical source of value for health systems, expanding
beyond acute care into ambulatory-care settings and
enabling commercial strategies such as expansion into
specialty and retail pharmacy.
McKinsey’s latest surveys of pharmacy leaders within

health systems reveal that organizations’ focus on
immediate challenges could be limiting their ability to
explore more expansive cost-reduction and growth
strategies and to provide cost-e!ective, accessible care
to patients (see sidebar, “Research methodology”). This
article explores "ve top-of-mind considerations for
health system pharmacy leaders and identi"es potential
growth strategies, including establishing alternative
patient-engagement channels and forming strategic
partnerships.
Cost optimization is a
primary goal
Cost optimization is a top focus for health system
pharmacy leaders. Most expect spending to continue to
increase in the year ahead (Exhibit 1).
Exhibit 1
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Exhibit 1
Mounting cost pressures are at the forefront of concerns

for health system pharmacy leaders. According to
McKinsey analysis, pharmaceuticals currently account for
the largest share of health system pharmacy costs,
followed by labor. In both 2021 and 2023, the highest
percentage of survey respondents expected pharmacy
spending to rise by 4 to 6 percent. In 2023, more
respondents anticipated higher increases—7 to 9
percent or more—in the next 12 months.[ 2 ]
Respondents reported several approaches to optimizing

costs, including expanded use of generics and
biosimilars, development and management of drug
formularies, and proactive management of drug
inventory to reduce waste.
However, respondents also reported challenges gaining

adequate buy-in from key stakeholders, such as service-
line leaders and physicians, to ensure formulary
adherence and compliance. Almost 40 percent of survey
respondents reported that their health system’s
formulary compliance is less than 90 percent in 2023,[ 3 ]
limiting their ability to enforce cost-e!ective sourcing or
utilization management.
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Successful formulary management often depends on
instituting a single pharmacy and therapeutics
committee that governs pharmaceutical purchase
decisions along with subcommittees that validate
purchasing decisions and review formulary requests for
each service line (pediatrics, oncology, and infectious
diseases, for instance). Embedding guidelines into
electronic medical records and deploying analytics
capabilities can further help to monitor and facilitate
compliance. According to McKinsey analysis, good
formulary management and compliance (95 percent and
above) may help health system pharmacies save 5 to 10
percent on total drug spend, especially in locations with
higher acuity, such as Level IV trauma centers.
Supply chain shortages

threaten pharmacy
operations
Surveyed health system pharmacy leaders consider
manufacturing shortages to be the most disruptive
threat to the supply chain (Exhibit 2). Speci"cally, along
with expectations of rising in#ation, health system
pharmacy leaders reported drug shortages or
unavailability to be the greatest challenge facing their
health systems today.
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Exhibit 2
More than 50 percent of respondents to both surveys

considered manufacturing and production shortages to
be a substantial threat to their pharmacy organizations
over a "ve-year time frame. Survey respondents also
indicated that their health systems typically have limited
visibility into potential shortages, and 30 percent
consider this lack of visibility to be a signi"cant threat to
their organizations in the next "ve years. Only 4 to 5
percent of respondents indicated their organizations are
fully prepared to manage these supply chain disruptions.
To build strong operational fundamentals, health system

pharmacy leaders can work to bolster supply chain
resilience by improving their sourcing, contracting, and
distribution capabilities. To proactively manage
shortages, health systems could consider developing
internal capabilities—such as a streamlined governance
system, a shortage playbook with clear owners, and
analytical tools that track historical supply #uctuations—
and establishing greater transparency from
manufacturers on production and distribution levels
through appropriate levels of data sharing. They could
also introduce stricter failure-to-supply clauses in
contracts with manufacturers and consider alternative
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suppliers, including independent generic-drug
manufacturers.
Staffing shortages are

prevalent across all
pharmacy roles
Surveyed health system pharmacy leaders reported high
levels of understa$ng across all roles, driven by
challenges in recruiting and retention. Pharmacy
technician was the most understa!ed role in both acute
(inpatient hospital) and retail (commercial dispensing to
the public) settings (Exhibit 3).[ 4 ]
Exhibit 3
Leadership support is also critical in addressing sta$ng

challenges. For example, health system pharmacy
leaders could adjust compensation and ensure that
bene"ts o!erings and worklife balance are on par with
alternative careers. They could also explore alternative
career-development models (partnering with schools in a
contemporaneous education and employment model, for
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example) and clarify career paths with advancement
opportunities. They can also address barriers to entry
(such as increased licensure requirements) by o!ering
continuous education that supports licensure
certi"cation, which is especially relevant for pharmacy
techs.
Health system pharmacies

present nontraditional
growth opportunities
While health system pharmacies have been focused on
navigating challenges in their supply chains and sta$ng,
they have made limited progress in building strategic
capabilities for emerging service lines. Health systems
have untapped opportunities to pursue nontraditional
pharmacy–patient engagement channels (Exhibit 4).
Exhibit 4
Many survey respondents reported that their health

system had developed mature capabilities in established
trends, such as specialty pharmacy and ambulatory
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infusion.[ 5 ]
In both surveys, however, respondents reported they

have limited capabilities in emerging areas, such as
home infusion, retail pharmacy, mail order, patient
assistance programs, and pharmacy bene"ts
management.
Shifting care models provide an opportunity for health

system pharmacy leaders to reposition pharmacy as a
growth center by creating new sources of revenue to
supplement acute-care operations and allowing it to
serve as a key enabler for improved patient access,
outcomes, and care delivery. Diversifying revenue
sources also insulates the health system from future
market risks, such as declining hospital-based
reimbursements, and could enable it to pursue greater
risk-sharing and value-based arrangements with payers.
Survey respondents in 2023 indicated that they would
consider expanding or growing their ambulatory and
specialty networks (85 percent), home infusion o!erings
(about 70 percent), and retail or mail order (about 60
percent).
Investing in innovative
partnerships could yield
many benefits
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Health systems have ample opportunity to pursue
partnerships with manufacturers, distributors, and other
nontraditional stakeholders that can collaborate with
pharmacies. Surveyed health system pharmacy leaders
reported having substantial strategic partnerships with
manufacturers, other health systems, distributors, and
payers in 2021; responses in 2023 indicate that health
systems have extended their partnerships with
distributors and payers (Exhibit 5).
Exhibit 5
Respondents also reported that they rely primarily on

traditional collaboration models—for example, around
the responsibilities clari"ed in contracting terms—rather
than innovative models involving investments, joint
ventures, or M&A. This trend suggests health system
pharmacy leaders could expand their notion of strategic
partnerships, including by collaborating with strategy
teams or service-line leaders.
Broader strategic partnerships could unlock innovative,

diversi"ed pharmacy strategies—for example, developing
new service lines or expanding to new geographies—that
could improve patient care and experience, advance
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clinical innovation by expanding the role and reach of
pharmacists, and help insulate organizations from
downstream "nancial risk. Illustrative examples include
partnerships with private equity "rms to commercialize
ambulatory service lines such as specialty pharmacies or
medication therapy management clinics; partnerships or
coalitions with other health systems to attain economies
of scale and address drug shortages; and investments in
start-ups focused on emerging pharmacy services, such
as ambulatory services and home infusion.
For a few survey respondents, innovative partnerships

included jointly building a central distribution warehouse
with a manufacturer and collaborating with a payer to
fund start-ups. Additionally, several respondents
reported that they had joint ventures with payers or other
health systems.
Even as challenges continue to mount, pharmacy

services are increasingly important at most health
systems because of its strong economic fundamentals,
broad connection to the core health system’s clinical
imperatives, and strategic positioning for new growth
opportunities. Health system pharmacy leaders are
preoccupied with managing spending increases,
expanding pharmacy services across all service lines and
care settings, and growing patient and operational
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complexity. In the process, they could be missing key
growth opportunities in emerging frontiers and strategic
partnerships with other stakeholders that could enable
improved delivery of patient care.
Health systems can aim to close gaps in critical areas

while simultaneously investing in new areas to uncover
new sources of growth and increase patient access to
care. For example, they could enforce formulary
compliance to optimize costs, bolster supply chain
resilience, and enhance recruitment and retention e!orts
while investing in alternative patient-engagement
channels and strategic partnerships. In the coming years,
balancing these investments can help health systems
and patients alike.
1. In August 2022, the American Hospital Association (AHA) published a

report "nding that patients tend to be sicker and require more intensive
treatments than before the COVID-19 pandemic. See “Report: Rising
patient acuity driving up hospital costs as payments fall,” AHA, August
15, 2022.
2. Past 12 months pharmacy spending increase was identi"ed based on a
separate question: How much has pharmacy spending increased in the
past 12 months at your organization? Options: less than 1 percent, 1–3
percent, 4–6 percent, 7–9 percent, 10 percent or more, and unsure or
don’t know.
3. “340B Drug Pricing Program,” Health Resources & Services
Administration, last reviewed October 2023.
4. Formulary compliance was identi"ed in the survey based on a separate
question: What is your organization’s approximate formulary
compliance?
5. Recruitment and retention challenges were separately identi"ed in the
survey, based on responses to this question: For each of the following
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service lines, please indicate those for which either recruitment and/or
retention of employees has posed a recent challenge.
6. For more, see “340B Drug Pricing Program,” Health Resources &
Services Administration, last reviewed October 2023.
ABOUT THE AUTHOR(S)
Brianne Bowen is an associate partner in McKinsey’s

Seattle o$ce, Abhisek Ghosh is an engagement
manager in the New York o$ce, and Anthony Lesser is
an associate partner in the Chicago o$ce, where Amy
Tien is a solution manager and Will Weinstein is a
partner.
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Untapped opportunities for

Two McKinsey surveys of health system

McKinsey’s latest surveys of pharmacy leaders within

Mounting cost pressures are at the forefront of concerns

Respondents reported several approaches to optimizing

However, respondents also reported challenges gaining

Supply chain shortages

More than 50 percent of respondents to both surveys

To build strong operational fundamentals, health system

Staffing shortages are

Leadership support is also critical in addressing sta$ng

Health system pharmacies

Many survey respondents reported that their health

In both surveys, however, respondents reported they

Shifting care models provide an opportunity for health

Respondents also reported that they rely primarily on

Broader strategic partnerships could unlock innovative,

For a few survey respondents, innovative partnerships

Even as challenges continue to mount, pharmacy

Health systems can aim to close gaps in critical areas

1. In August 2022, the American Hospital Association (AHA) published a

ABOUT THE AUTHOR(S)

Brianne Bowen is an associate partner in McKinsey’s

EXPLORE A CAREER WITH US

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