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Budgeting for Oncology Drug Costs and Supplies

Andrea Ledford, PharmD BCOP
Oncology Pharmacy
Orlando Health UF Health Cancer Center
Orlando, FL

In 2010, the National Cancer Institute projected that cancer treatment costs would escalate from $124 billion to $206 billion by 2020. This model included the expected increase in the number of cancer diagnoses and the costs incurred per patient throughout the phases of cancer care.1 These increased expenditures are influenced by several factors. Over the past several years, many new drug approvals or expanded indications for existing drugs have occurred in the oncology arena. In addition, the implementation of U.S. Pharmacopeia (USP) Chapter 800 may increase the costs associated with the maintenance of hazardous drug facilities.

With constantly rising costs, one of the most challenging tasks that a pharmacy manager faces is developing an oncology pharmacy budget. With newly approved drugs, the choice of treatment is often contingent upon biomarkers and disease pathology. Consequently, traditional cost-reduction strategies used in general hospital pharmacy practice are not applicable.

In some cases, executive hospital leaders may mistakenly blame rising oncology drug costs on the inability of the pharmacy leadership to control costs, when several factors actually escalate oncology drug spending. This trend is more apparent in a health system that has multiple hospitals offering minimal oncology services and a separate cancer center facility.2 Other factors that can influence a pharmacy budget include the patient diagnosis case mix, prescribing shifts occurring because of new publications or new indications, and the entrance of recently approved new drugs to the market.3

New biologics and antineoplastic agents are often expensive. They fall into one of three budgetary categories: low-, moderate-, or high-impact. Moderate- or high-impact drugs represent uncontrolled costs. Controlled drug costs are associated with medications used for symptom management, such as the bisphosphates and anti-emetics. These low-impact costs can be reduced through the use of traditional cost-containment strategies, such as therapeutic interchanges, preferred agent choices, and contract negotiations with drug wholesalers.4 In contrast, uncontrolled drug costs cannot be contained by cost-minimization strategies or by manager influence because they are driven by tumor pathology.

Budgeting for Oncology Drugs

It is advisable to separate the oncology drug budget from the traditional inpatient pharmacy budget, including gross revenue, supply costs, and salary costs. This separation will help with the trending and identification of internal health-system factors that could negatively affect the financial performance of the pharmacy.

In addition, it is important for the pharmacy leader to ensure that the gross revenue for the oncology drugs is accurately reflected in the budget. Drug billing codes are most often set as increments of a package size, and this is a source of charging errors due to system interface and programming issues. The pharmacy leader should confirm that the charge for a new drug is proportional to the cost. This will help prevent the drug charge to the patient from accidentally being set below the actual cost of the drug. Other sources of revenue errors include improper configuration in the order set and drug build, interface issues between systems, human factors (e.g., manipulation of the claims by nonpharmacy personnel), and the billing of drug waste.

Effective budget planning can improve the financial performance of the department. It is preferable to subdivide the oncologic drugs from other, general drugs and into different categories, such as therapeutic class. This method allows for ease of analysis and identification of short-term and long-term trends. Because of the differences between an oncology pharmacy department and a traditional inpatient hospital pharmacy, budget projections prepared by the finance department may not take adequate account of the adoption of new drugs or prescribing shifts. Using this specific information, pharmacy leaders can validate the budget projections using their own models. The model below can be adapted by pharmacy leaders to create budget projections.

Example of a Budget Model

Keeping a monthly oncology drug inventory is advantageous for budgeting purposes. In this example of a budget model (Table 1 - see PDF), a physical inventory is performed on the last day of the month. The monthly inventory can be used to adjust monthly drug spending to realize the actual drug expense in a calendar month. The total drug expense is obtained by totaling the drug invoices on the last business day of the month. When this is completed, the total can be compared with the previous month’s inventory. If the inventory is less than the previous month’s, the difference is added to the drug spending. If the inventory is more than the previous month’s, the difference is subtracted from the drug spending. This inventory adjustment method provides a more accurate drug expense total for the month.

A financial ratio is created by dividing the total drug expense by the total drug revenue. Each month, this financial ratio is calculated and compared to the one from the previous month. The financial ratio will vary by location in the same health system, depending on the disease states, prescribing variances, and patient case mix.5 A financial ratio can change over time because of charge master changes or cost variances. This financial ratio model will reflect charge master issues such as an improper revenue threshold or an explosion code loaded for a new drug.6

To model the drug gross revenue and the drug cost for a cost center, take the following steps:

  1. Sum the revenue and expenses of the previous 3 months if this is an established oncology infusion area. This will be the quarterly total.
  2. Next, determine the average daily gross revenue and average daily drug expense by dividing the quarterly totals by the number of business days for the quarter.
  3. The average daily revenue and average daily expense can then be annualized using the total number of business days for the next year.
  4. Consulting the finance department to correctly model the anticipated percent change in the growth of the cancer program is recommended. It is important to evaluate revenue integrity to determine whether the current fiscal year’s charge master will be modified in the next fiscal year, because this information will also change projected revenues.
  5. Then adjust the projected annualized numbers, incorporating the anticipated revenue changes and the volume adjustment. Consider adding between 1% and 2% to the annualized drug cost projections to allow for the costs of new drugs or expanded indications.
  6. >Spread the gross revenue and drug cost over the months, according to the number of business days each month.
  7. Use the calculated ratio to predict drug spending and expected revenue throughout the year.


Accounting for Future Expenses

With the approaching deadline of USP <800>, it is important to budget for additional expenses required for guideline compliance. With the new requirements, costs for the monitoring of buffer areas and anterooms may increase. The average cost of buffer area and anteroom USP <797> certification is $2,500, and an additional $2,000 is needed for the viable testing. This testing is required every 6 months.7 If the sterile compounding spaces are more than 5 years old, the maintenance cost of the rooms increases. It would be beneficial to add $2,000 to the budget projection to allow for repairs.

Expenses for personal protective equipment (PPE) and closed-system transfer devices (CSTDs) can also have an impact on the budget if the pharmacy staff is not currently using these products in accordance with USP <800>.8 The cost of PPE and CSTDs can be analyzed, and a financial ratio established for the cost centers. This ratio can be used to monitor the financial impact of practice changes.6 These costs can be further subdivided for additional analysis. The Orlando Health model estimates the CSTD, PPE, cleaning, and supply costs at 13% of drug costs (Table 2 - see PDF).


The rapid pace of change in the oncology arena complicates the management of an oncology pharmacy budget. The increasing number of new oncology drugs entering the market, combined with the expanding indications for existing oncology drugs, requires the development of budget strategies. Additionally, the implementation of USP <800> may increase the costs associated with the maintenance of hazardous drug facilities. Close monitoring and the adoption of a financial analysis ratio system will position pharmacy leaders for budgetary success. 


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  6. Karthick M, Karthikeyan S, Pravin MC. A model for managing and controlling the inventory of stores items based on ABC analysis. Global J Res Eng. 2014;14(2):version 1.
  7. United States Pharmacopeial Convention, Inc. <797> Pharmacy Compounding-Sterile Preparations. United States Pharmacopeia 39–National Formulary 34. Rockville, MD: US Pharmacopeial Convention, Inc., 2016.
  8. United States Pharmacopeial Convention, Inc. <800> Hazardous Drugs Handling in Healthcare Settings. United States Pharmacopeia 39–National Formulary 34. Rockville, MD: US Pharmacopeial Convention, Inc., 2016.