Expired Medication Inventory Within a Pharmacy Costs Money

Are Pharmacy Leaders Aware of How Much Revenue is Lost With Expired Pharmacy Inventory?

Expired pharmacy inventory is a surprisingly complicated sequence of financial transactions that is rarely discussed, and, therefore, is not well managed in many pharmacies.  The importance of handling this correctly has an impact on the balance sheet, the revenue and expense report, as well as taxes paid. If taxes are paid on profits, make sure to ask more questions regarding the processes for handling inventory.

Pharmacy Inventory Are Assets

Medication and prescription inventory within a pharmacy is considered an asset. This aspect of the pharmacy’s inventory is not considered an expense until it is sold, or otherwise disposed of. Medication assets do not affect the revenue and expense report. For example, a business can “trade” its cash, an asset, for inventory, another type of asset, without making a sale; thus, not incurring an expense.

When a Drug Expires, a financial transaction needs to occur to turn the drug inventory from an asset to an expense. Many companies will use an account associated with inventory shrinkage. Based on the cost of drugs, Indispensable Health recommends our clients create a sub-account of their expired inventory to track over time.

The process of tracking expired inventory does not stop with simply tracking it. Within a pharmacy, when a pharmacy staff member spots an expired drug, they will take and place it in a designated area labeled for “expired” inventory.  Considering the pharmacy environment, and the possibility of credit, the expired inventory gets sent to or picked up by a “Reverse Distributor” also referred to as a Returns Company.

Following the reverse distributor taking possession of the expired medications, they sift through them to determine if any of the medications can be returned to the manufacturer for credit and then dispose of the drugs that cannot be returned. Typically, reverse distributors will charge a disposal fee by the pound of the disposed inventory they process, as well as, a processing fee for sorting out the expired drugs and garbage. Additionally, the reverse distributor determines what credits will be sent from the manufacturer to the pharmacy for the returnable inventory.  This is great service, especially when factoring in the value of the disposal and tracing paperwork for controlled substances. When the process is complete the reverse distributor sends the pharmacy a document that is partially a bill and partially a credit notification. Regarding the manufacturers, each has different policies about issuing credit. Some may send the pharmacy a check, others issue a check to the pharmacy’s wholesaler, so the pharmacy can be given credit that way. Considering those two examples tracking an ultimate credit becomes complex.

Hypothetical Expired Drug Inventory Example

  • A pharmacy staff sends $1,000 worth of expired drugs to the reverse distributor. As a result, there is a $100 credit issued for the return from the manufacturer and a $50 processing fee. Within this example pharmacy management would need to follow these steps:
    • Decrease Inventory by $1,000
    • Increase Inventory Shrinkage Account (also known as expired drugs subaccount) by $1,000
    • Reduce Cost of Goods Sold (COGS) by $100 and Reduce the Inventory Shrinkage Account to Reflect It.
    • Invoice of $50 from the Reverse Distributor for Contractual Services, or as a Similar Type of Expense Account.

Sample Journal Entry:

  • Pharmacy Drug Inventory Asset: (+) $1,000
    • Reduce Inventory, Inventory Shrinkage: (-) $1,000
    *Recognize Expired Inventory ValueAttribute Credit Earned to Sales From the Period
  • Inventory Shrinkage: (+) $100, (COGS: +$100)
  • Reduce the Shrinkage Account Based on Credit: -$1,000 + $100 = -$900
  • Contractual Service Fee: $50 (The Service of The Reverse Distributor)
  • Accounts Payable: $50Send Funds to The Reverse DistributorWith This Expired Drug Example Alone, The Pharmacy’s Revenue is Negatively Impacted.
    This Sample Results in a Loss of $950

This sample journal entry was simplified compared to how many pharmacies and organizations would handle the bills and checks. The actual movement of the transactions is more detailed and routine as a bill is entered then later paid, or cash or credit is received, then later deposited or applied to an account.

Original article is taken from Indispensable Health here.

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