August 1, 2025
Hospital pharmacy leaders know that a single high-cost specialty drug can make or break a budget. In U.S. hospitals, specialty medications account for roughly 50% of drug spending even though they treat only 1–2% of patients. With rising drug prices outpacing reimbursement, every new formulary addition must be scrutinized for its financial impact. This is where a budget impact analysis (BIA) comes in.
A BIA is an evidence-based tool to estimate how adopting a new drug will alter a healthcare budget over time. Unlike cost-effectiveness analysis (which asks if a drug is worth its price), a BIA asks if the drug is affordable for your organization. Many U.S. payers and hospital P&T committees now expect budget impact estimates as part of formulary reviews (the AMCP Formulary Submission guidelines even include a BIA section).
In fact, the American Society of Health-System Pharmacists (ASHP) recommends proactively identifying upcoming high-cost drugs and building their projected budget impact into annual pharmacy plans.For pharmacy directors, formulary managers, and financial stakeholders, conducting a BIA for each new specialty drug is a critical step. It enables data-driven decisions on whether (and how) to adopt the therapy, negotiate pricing, or adjust budgets.
The following checklist provides a step-by-step guide to performing a robust budget-impact analysis in a hospital pharmacy setting. Each step is informed by best practices from pharmacoeconomics guidelines and real-world hospital experience. Use this high-value micro-checklist to ensure no key factor is overlooked when evaluating the budget impact of new specialty drugs.
Budget-Impact Analysis Checklist
Define the Target Patient Population: Identify the patient population in your hospital or health system that would be eligible for the new drug. Estimate how many patients per year might receive the therapy. This often involves reviewing incidence and prevalence of the relevant condition in your patient population (or using national epidemiology and scaling to your institution). Be as specific as possible. Consider disease stage or subgroups if the drug is indicated for a particular severity or line of therapy. This step sets the foundation for the analysis, as all cost projections will scale with the number of patients treated. (Tip: Use your hospital’s historical data and clinical team input to refine these numbers, rather than generic national estimates, for greater accuracy.)
Set the Time Horizon for Analysis: Decide over what period you will evaluate the budget impact. A BIA typically projects costs for 1 to 5 years into the future. Choose a timeframe that aligns with your budgeting or formulary review cycle. Many hospital budgets focus on the next 1–3 years. Within this horizon, break down results by year (year 1, year 2, etc.) because the financial impact often changes over time. For instance, uptake might be lower in year 1 and increase in later years. Each year’s incremental cost should be reported so that budget holders can plan year-by-year. Also, keep the horizon realistic; most BIAs avoid very long horizons since organizational budgets don’t plan a decade out. (Note: No discounting of costs is usually needed for a ≤5-year horizon in a BIA.)
Identify Current Treatment Mix and Alternatives: Determine how the new drug will fit into or disrupt the current treatment landscape for the targeted patients. Are patients currently on another formulary drug that this new therapy would replace, or is this drug entirely new (an add-on therapy or for a disease with no current treatment)? Inventory the therapeutic alternatives available: both on-formulary and non-formulary treatments, or even non-drug interventions, that the new medication might supplant. This step requires collaboration with clinicians and reviewing protocols. Decide on a reasonable uptake rate for the new drug each year. For example, you might assume 20% of eligible patients use the new drug in year 1, 40% in year 2, etc., depending on how quickly it might be adopted. If the drug will replace an older therapy, factor in the cost savings from reduced use of the old drug. If it will be used alongside existing treatments, account for those combination costs as well. The goal is to model two scenarios: with vs. without the new drug, clarifying what changes (which drug costs go down or disappear, and which new costs appear). (For example, introducing a new biologic might reduce the use of an older biologic or curb downstream costs like fewer surgical procedures. Include any such shifts in resource use.)
Estimate All Relevant Costs (and Savings): This is the core of the budget impact calculation. First, determine the drug acquisition cost for the new therapy: typically the unit price (per dose or per course) multiplied by the number of doses/patients. Use your institution’s actual pricing when possible – for example, wholesale acquisition cost (WAC) minus any discounts your hospital gets, 340B pricing if applicable, and expected manufacturer rebates. (Many BIAs start with WAC but then apply a discount or input a contract price to reflect real-world costs.) Next, calculate the cost of the current standard of care for those patients, and subtract any costs that will be avoided. Consider ancillary costs too: Does the new drug require additional clinic visits, infusion supplies, genetic testing, or monitoring labs? Include those in the “with new drug” scenario. Likewise, capture cost offsets: will the new drug likely prevent expensive complications or hospitalizations? For instance, if a new heart failure drug prevents readmissions, the hospital might save those inpatient costs (depending on whether the hospital bears those costs under bundled payments or value-based arrangements). Budget impact guidelines emphasize including all costs and savings relevant to the budget-holder’s perspective. For a hospital pharmacy, that usually means drug acquisition and pharmacy-administered costs; for a broader hospital perspective, it could include medical costs like admissions avoided. Be clear about perspective: you may primarily focus on the pharmacy budget impact, but note if there are significant downstream medical cost changes. Finally, don’t forget adverse event costs if the new drug is expected to significantly change the cost of managing side effects (e.g. less toxicity than alternatives, or unique monitoring costs). Summing up, you'll obtain the net incremental cost of adopting the new drug = (Cost of new drug + ancillary costs ± other medical cost changes) - (Cost of regimen(s) replaced or avoided). This net figure can be a positive (budget increase) or negative (cost saving).
Consider Reimbursements or Revenue Implications: (This step is specific to hospitals where drug costs may be offset by reimbursement, such as outpatient infused drugs billed to payers.) If your hospital will get reimbursed for the new drug (e.g. through Medicare, Medicaid, or private payers for outpatient administration), include these inflows to determine the net budget impact more accurately. For example, in oncology, hospitals often receive reimbursement at a certain percentage above the drug’s cost (e.g. Medicare reimburses at WAC + 4.3% for Part B drugs). A budget impact model can thus project not just costs, but also revenues, yielding an estimate of the margin or deficit. If the drug is used in an inpatient setting under a fixed DRG payment, adding a costly drug could mean the hospital absorbs the cost (negative margin). If it’s outpatient with fee-for-service, much of the cost might be passed to payers (neutral or positive margin after rebate). In your analysis, note how much of the drug cost is uncompensated vs. reimbursed. For instance, one hospital budget impact analysis for a new oncology drug estimated an annual drug cost of ~$699,000 for treating 20 patients, but also about ~$729,000 in additional reimbursement, resulting in a net +$30,000 margin for the pharmacy. Not all cases will yield a surplus, but including this data is crucial for a realistic budget picture.
Perform Sensitivity and Scenario Analyses: There is uncertainty in any forecast, so stress-test your assumptions. Identify the variables that most affect the budget impact. Common ones are number of patients, uptake rate, drug price (or rebate level), and clinical outcomes that drive cost offsets. Perform a sensitivity analysis by varying one input at a time to see how the result changes (for example, what if 30 patients need the drug instead of 20? What if the drug’s price comes down 10% due to negotiations? etc.). This can be presented as a range or a tornado diagram highlighting which factors swing the budget impact most. It’s also wise to run scenario analyses: e.g., a best-case scenario (high patient response, so maybe shorter treatment duration, and low price) vs. worst-case (more patients than expected, needing full doses, and higher costs). Scenario planning helps decision-makers prepare for different possibilities. Document these alternative scenarios alongside the base-case BIA. If there’s potential off-label use of the drug or expanded indications, you might include a scenario for that as well (though the base-case should stick to on-label use). The end result is a more robust analysis that doesn’t give a false sense of precision but rather a range of potential budget outcomes.
Communicate the Results Clearly: Finally, prepare to present the BIA findings to your P&T committee, C-suite, or other stakeholders in a clear, digestible format. Summarize the projected annual budget impact of adopting the new specialty drug, highlighting the first year and cumulative multi-year impact. Break down the components of the cost: for example, “Drug X will cost an additional $500,000 in medication spend in Year 1, offset by $200,000 saved from reduced use of Drug Y, for a net +$300,000 impact on the pharmacy budget.” If applicable, note the effect on other departments (e.g. “may save ~$100,000 in ER visit costs”). It’s often helpful to present results visually (e.g. a bar chart of total costs with vs. without the new drug). Also report key metrics like cost per patient or per admission, or per member per month (PMPM) if you’re in a capitated context. Ensure that the results are disaggregated by year and by cost component, so decision-makers see if, say, drug acquisition cost is partly offset by fewer hospitalization costs, etc. Include a brief narrative of assumptions and acknowledge limitations (for instance, if you assumed 100% adherence or if real-world utilization might differ). This transparency builds confidence in the analysis. In summary, the stakeholders should come away understanding how much the new drug will cost (or save), when those impacts hit, and why. Equipped with that knowledge, they can make an informed decision on formulary placement, funding allocation, or contracting needs.
Figure: Annual cost of adding ramucirumab plus docetaxel to the formulary for non-small cell lung cancer. Example output of a budget impact analysis for a new oncology drug. In this case study, the hospital analyzed the cost of adding a new regimen (ramucirumab + docetaxel, “Ram+Doc”) for non-small cell lung cancer.
The bar chart shows annual costs of treatment before and after adding the new drug. Each gray bar represents the baseline cost for a treatment option without Ram+Doc, and each dark bar shows the cost with Ram+Doc in use. The “Total” on the far right illustrates the overall pharmacy spending on the patient cohort rising from about $554,000 to $699,000 after introducing the new drug.
This increase reflects the higher cost of the new therapy (Ram+Doc) partially offset by reduced use of some other drugs (like less of the older regimens). The BIA also calculated that the added cost was accompanied by additional reimbursement, resulting in a small positive margin, but the graph shown focuses on gross costs. This visual format helps pharmacy and finance teams quickly grasp the budget implications of the formulary change and is a useful component of the BIA presentation.
Conclusion
Performing a budget-impact analysis for new specialty drugs empowers hospital pharmacy leaders to balance innovation with fiscal responsibility. By following this checklist (from defining the patient pool and time horizon through modeling costs, reimbursements, and sensitivities) you can forecast the true financial impact of a new therapy on your institution’s budget. In turn, this analysis informs smarter decision-making: whether negotiating better pricing (or rebates), adjusting treatment protocols, or even delaying adoption until financial alignment is achieved.
The BIA process also enhances transparency during P&T committee deliberations, as it grounds debates in concrete numbers rather than anecdotes. Ultimately, in an era when specialty drugs are both life-changing and budget-busting, a thorough budget-impact analysis is the hospital pharmacist’s best ally. It ensures that clinical advances are adopted in a sustainable way, aligning patient care benefits with the hospital’s financial health.
By anticipating the budgetary effects of new drugs, pharmacy directors and CFOs can proactively plan — preserving quality of care and keeping the pharmacy budget on track. In the long run, this level of financial due diligence helps hospitals embrace cutting-edge therapies for patients who need them, while maintaining operational viability. And that is the ultimate win-win for any healthcare organization.
References
Curcio J., & Patel P. (2022). A Primer for Medical Specialty Drug Utilization Management Strategies. Pharmacy Times, 28(8). Retrieved from Pharmacy Times website
American Hospital Association, NORC at Univ. of Chicago (2019). Recent Trends in Hospital Drug Spending and Manufacturer Shortages. AHA Report. Key findings on inpatient/outpatient drug spending growth.
Office for Health Improvement & Disparities (2021). Budget Impact Analysis: Health Economic Studies (Guidance). UK Gov. Definition and steps for conducting a BIA.
Academy of Managed Care Pharmacy (AMCP). AMCP Format for Formulary Submissions Version 4.0 (Section 4.3: Budget Impact Model). Guidance on BIA purpose and components.
Fox, E.R. et al. (2015). Medication Cost-Management Strategies for Hospitals and Health Systems. ASHP Guidelines. Recommendations include budgeting for new high-cost agents.
Sullivan S.D. et al. (2014). Principles of Good Practice for Budget Impact Analysis I. ISPOR Task Force Report (Value in Health). Emphasizes perspective-specific data and scenario analyses.
Hess L.M. et al. (2016). Enhancing the Budget Impact Model for Institutional Use: Hospital Oncology Pharmacy. Hosp Pharm, 51(6):452-460. Case study of adding ramucirumab: costs vs reimbursement.
Myshko D. (2022). Budget Impact Analysis Shows Zegalogue Could Cut Costs for Severe Hypoglycemia. Managed Healthcare Executive, Apr 7, 2022. Example of BIA savings for a new therapy.