Skip to main content Back to Top


Negotiation Helps Hospital Recover Drug Costs

Donna Young

In response to rising pharmaceutical costs, O’Connor Hospital of San Jose, Calif., has negotiated with its managed care companies to have contracts that allow payments for high-cost prescription drug products to be separate from per-diem payments.

Nicholas E. Kostek, M.S., O’Connor’s pharmacy director, said the strategy, known as pharmacy carve-outs, has helped the hospital recover more of its costs for pharmaceuticals through reimbursements.

"Managed care companies, in most cases, don’t realize what drugs cost," Kostek said. "If they were paying the hospital $1,000 per diem, but the drugs were going to cost us $2,000, we were being underpaid—and that wasn’t fair."

Kostek said the hospital reviewed its contracts with managed care companies and compared reimbursement amounts with hospital expenses.

"Educating the managed care companies and explaining to them about why hospitals use high-cost pharmaceuticals is important for the strategy to be successful," he said.

O’Connor first used pharmacy carve-outs about four years ago. And because of its success, Kostek said, O’Connor’s parent company, Catholic Healthcare West of San Francisco, now uses the strategy in seven hospitals throughout the Northern California Bay Area.

Kostek said hospitals need to be flexible with their contract language when negotiating.

In some of O’Connor’s managed care contracts, drugs that cost $150 or more are to be reimbursed separately from the basic payment to the hospital. But, Kostek said, "For some managed care companies, that was too cumbersome" of an arrangement.

So, to simplify negotiations for some managed care companies, Kostek’s hospital identified a "top 29 list" of widely used high-cost drugs. Payments for drugs on that list, according to the contract, are to be made separately from other per-diem fees.

Teamwork among various hospital departments and personnel is the key to making the strategy work, Kostek said.

"None of us could have done it alone," he said. "We had to work with patient financial services, billing, and the managed care coordinator to make it work."