McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Math for the Pharmacy Technician: Concepts and Calculations Chapter 11: Operational Calculations Egler Booth

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Operational Calculations

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved 11-3 Learning Objectives  Calculate overhead costs  Calculate profits  Calculate discount amounts When you have successfully completed Chapter 11, you will have mastered skills to be able to:

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved 11-4 Learning Objectives (con’t)  Calculate average wholesale price (AWP)  Calculate inventory turnover rate  Calculate depreciation  Demonstrate understanding of capitation fee and AWP plus fee

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved 11-5 Introduction  As a pharmacy technician you need to be familiar with the aspects of the day-to-day operations of the pharmacy.  The costs involved in running the pharmacy are many.  While providing a service to the patient is important, the pharmacy must also make money in order to stay in business.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved 11-6 General Business Considerations  All businesses have costs associated with day-to-day operations.  The pharmacy’s income earned from sales must be higher than the operational costs in order for the pharmacy to be profitable.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved 11-7 General Business Considerations (cont.)  Multiple operational calculations are used to run a profitable pharmacy.  You will learn how to calculate the following: Overhead costs Profits Gross profits Net profits Discounts

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved 11-8 Overhead  The pharmacy’s overhead is all costs associated with the pharmacy’s business operations. These costs include: Employee salaries Rent Utility bills Insurance premiums Inventory/Supplies Discounts Sale items

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved 11-9 Overhead (con’t)  The total cost of the overhead is used to calculate the pharmacy’s profit. Example: Annual Overhead Costs Employee salaries$125, Rent $24, Utilities $12, Insurance $6, Inventory/supplies +$732, Annual overhead total $899,000.00

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Profits A profit is the difference between overhead expenses and income earned from sales. To calculate a profit you subtract the pharmacy’s overhead costs from the income earned from sales.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Review and Practice Profits Annual sales$1,548, Annual overhead costs– $899, Annual profit $649,370.00

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Gross Profit  Gross Profit is the difference of the purchase price the pharmacy paid for products, for example medication, and markup price, which is the selling price.  To calculate the gross profit you subtract the pharmacy’s purchase price from the selling price.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Review and Practice Gross Profit (con’t) Azithromycin 250 mg 6 tablets (Z-pak) Selling price$13.99 Purchase price –$4.57 Gross profit $9.42

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Net Profit  Net Profit is the difference of the selling price, and the purchase price plus a dispensing fee, which is used to offset the overhead costs used to fill prescriptions.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Net Profit (con’t)  The dispensing fee per prescription is determined by each pharmacy on the basis of the company’s profit needs. It can be a set fee or a percentage.  To determine the net profit, you subtract the purchase price and the dispensing fee from the selling price.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Review and Practice Net Profit (con’t) Azithromycin 250 mg 6 tablets (Z-pak) Selling price$13.99 Purchase price–$4.57 Dispensing fee –$4.00 Net profit $5.42

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Discount  A discount is a reduced price from the normal selling price.  Drug manufacturers may offer the pharmacy a discount for purchasing large quantities of certain medications.  The pharmacy may also offer discounts to its customers.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Discount (con’t)  To determine a discounted price, you multiply the selling price by the discount percentage, which will give you discount amount, then you subtract the discount amount from the selling price.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Review and Practice Discount (con’t) The selling price for 1 bottle of 1000 tablets of medication is $ For orders of 5 bottles or more the manufacturer offers a 10 percent discount. What is the discounted price for 1 bottle? Solution: 1. Multiply the selling price by the discount percentage. 2. Subtract the discount amount from the selling price. $50.00 –$5.00 $45.00 The discounted price is $45.00

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Inventory  A detailed list of all items for sale and their cost is called an inventory.  The pharmacy must maintain an accurate inventory list.  It is extremely important to maintain adequate amounts of medications and supplies such as pill bottles, labels, and prescription leaflets.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Inventory (con’t)  Keeping the inventory at optimal levels helps to ensure prescriptions are filled and that medications move off the shelf quickly.  To maintain a balanced profitable inventory, the value of inventory on hand should not exceed the cost of items sold during a specified time frame.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Turnover  Turnover is the number of times an item is sold from inventory. When a pharmacy opens, there is an initial cost to stock it, and then there is a cost to maintain the stock based on the pharmacy’s sales.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Turnover (con’t) To determine the turnover rate you simply divide the annual inventory purchases by the average inventory value.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Review and Practice Turnover (con’t) If the pharmacy’s average current stock on hand is worth $200,000.00, that is the average inventory value. Determine the turnover rate.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Depreciation  Depreciation is a decrease in the value of an asset based on the age of the asset in relation to its estimated life. The depreciation value is calculated by using the value of the item when it is no longer usable or when it is considered disposable.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Depreciation (con’t) A car that is 20 years old and is no longer drivable, but it has some value based on parts that could still possibly be used elsewhere, or sold for scrap. EXAMPLE

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Depreciation (con’t)  There are two types of assets: current assets and long-term assets. Any asset that will be converted into cash or consumed within one year is considered a current asset. Items that are not able to be converted into cash or consumed within a year, such as equipment and store buildings, are considered to be long-term assets.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Depreciation (con’t)  Over time, long-term assets lose their value from repeated use and basic age of the item.  To determine the depreciation value of any given property, use the following formula:

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Review and Practice Depreciation (con’t) The pharmacy purchases a refrigerator to store medication for $ The estimated life of the refrigerator is 8 years and the disposal value is $ Determine the annual depreciation value. Annual depreciation value = Annual depreciation value = $75.00

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Reimbursement Considerations  Pharmacies are often reimbursed for prescriptions by insurance companies.  The pharmacy signs a contract with the insurance company and the reimbursement amounts are predetermined.  The reimbursement amount may be based on a set price for specific medications, on the actual cost of a medication, or the average wholesale price of a medication.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Reimbursement Considerations (con’t)  The pharmacy must submit a claim to the insurance company for reimbursement.  Most claims are filed electronically by using an ICD-9 code (International Classification of Diseases) and the amount of reimbursement is paid per prescription according to the agreed upon contract.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Average Wholesale Price (AWP)  The average wholesale price (AWP) is the average price that pharmacies pay for medications purchased from a wholesaler, based on national averages.  The AWP is often used by insurance companies to calculate the amount a pharmacy is reimbursed for a prescription.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Average Wholesale Price (AWP) (con’t)  Pharmacies often purchase larger quantities of fast selling drugs from wholesalers to get a discount, bringing the cost of the medication below the AWP, in turn giving the pharmacy a higher net profit.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Review and Practice Average Wholesale Price (AWP) (cont.) The AWP is $75.00 per 100 capsules. The insurance company will pay AWP per capsules and a $2.00 dispensing fee. What is the AWP for 30 capsules? 1. Determine the AWP per capsule. AWP per capsules = 75 cents AWP for 30 capsules = $ Determine the AWP for 30 capsules.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Capitation Fee  A capitation fee is a set amount of money that is paid monthly to the pharmacy for a patient by an insurance company, regardless of whether the patient receives zero prescriptions or multiple prescriptions during the month.  The pharmacy must fill all of the patient’s prescriptions, even if the cost exceeds the monthly fee.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Capitation Fee (con’t) The pharmacy agrees to a monthly capitation fee of $ for a patient. The patient fills two prescriptions this month. One costs $ and the other costs $ Determine if the pharmacy made a profit. 1. Add the total costs of the prescriptions. $ $82.50 $207.50

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Capitation Fee (con’t) The pharmacy agrees to a monthly capitation fee of $ for a patient. The patient fills two prescriptions this month. One costs $ and the other costs $ Determine if the pharmacy made a profit. 2. Subtract the total cost of the prescriptions from the monthly fee received by the pharmacy. Fee paid to pharmacy $ Total cost of prescriptions –$ Profit to pharmacy $92.50

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Calculating Correct Costs and Correct Change  In retail pharmacies it is the pharmacy technicians’ responsibility to collect payment for prescriptions.  Basic math skills are used in manually calculating correct costs and correct change.  Calculate the cents first, up to the next dollar, and then calculate the dollars to the amount that patient gave you.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Calculating Correct Costs and Correct Change (con’t) The total cost of a single prescription is $3.95. The patient gives you $5.00, you need to give 5 cents (a nickel) to equal the next dollar amount of $4.00 and $1.00 (1 dollar bill) to equal the total amount the patient gave you of $5.00.

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Calculating Correct Costs and Correct Change (con’t) Example: Determine the total correct cost of the prescription(s) and the correct change to be given. 1. Add the total costs of the prescription(s). $ $82.50 $ Subtract the total cost of the prescriptions from the amount given to you from the patient. Patient gives $ Total cost of prescriptions –$207.50

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Calculating Correct Costs and Correct Change (con’t) Determine the total correct cost of the prescription(s) and the correct change to be given. 1.Calculate the cents due to the patient. 2.Calculate the dollars due to the patient. 3.Add the dollar and cents amounts. Patient gives $ Total cost of prescriptions –$ Change due to patient: $2.50

McGraw-Hill ©2010 by the McGraw-Hill Companies, Inc All Rights Reserved Operational Calculations THE END As a pharmacy technician you need to be familiar with the aspects of the day-to-day operations of the pharmacy. While providing a service to patients is important, the pharmacy must also make money in order to stay in business.