Old software and poor data quality cause both revenue losses and extra expense to reconcile claims. Will serialized packages provide an eventual cure?
When a dollar’s worth of pharma product goes out into distribution channels, it is rare for a dollar in revenue to come back. The biopharma industry engages (voluntarily or involuntarily) with rebates to government entities, and incentives to certain retailers at certain times. Chargebacks—the difference between the price at which product is sold to wholesalers, and the sometimes lower price negotiated with end customers like PBMs or GPOs, must be reconciled with the wholesaler. Then comes a trickle of product returns (overstocks, expired product or other unsold inventory) whose cost must be verified.
All these claims, discounting or inventory reconciliation represent potential revenue losses for the manufacturer. When the major wholesalers went to fee-for-service agreements starting in the middle of the past decade, one outcome was supposed to be easier tracking of inventory and therefore easier reconciliation of these claims.
But the fact of the matter is that lost revenue—“leakage”—still amounts to 4.4% of industry revenue, according to a new survey from IDC Health Industry Insights (Framingham, MA), about the same as it was in 2006 when IDC first did its survey. That percentage can amount to $11 billion annually—“equivalent to total revenue for a top 20 pharma simply disappearing each year,” as Eric Newmark, research manager, puts it.
In these days of straitened finances for the biopharma industry, that waste hurts. One change from the previous survey, Newmark says, is that top management is now paying closer attention to the problem. In 2006, 51% of industry managers thought that chargebacks reconciliation was a medium- to large-scale problem; today, that figure is 63%. (And a surprising number still don’t get it—while 22% were “unsure due to lack of evidence” in 2006, 16% feel the same way now—which still represents one out of seven companies.)
The IT tools to better manage this claims processing are available, but applying them is not a slam dunk. Most companies rely on the claims-processing modules of their ERP systems, and most of those are six years old, on average. Some companies have invested in revenue management systems, and Newmark says that there is a “significant uptick in upgrades and rip-and-replace activity, which should continue through 2011.”
The 2009 survey is based on responses from 117 manufacturers and seven wholesalers, and follow-up interviews with 27. Some independent validation of these results come from the annual Factbook survey of HDMA (Pharmaceutical Commerce, October, p. 8), which found that 2.0% of chargebacks were not resolved on first submission (chargebacks but one of several leakage points).
Plug the holes
If the pipes are leaking, it’s time to call the plumber. According to IDC, there are six main leakage points (see figure);
- Chargeback discrepancies – While 12% of chargebacks are flagged, of which one-third are resolved without resubmission. Of the remaining 8%, half are resolved upon resubmission. Of the 4% not resolved, a fraction gets written off, and the remainder split between the wholesaler and the manufacturer, resulting in a 2.2% loss.
- Duplicate chargebacks, involving product returned to the wholesaler, then resold, with chargebacks being generated each time.
- Omitted reverse chargebacks, caused when a product is sold sold, a chargeback filed, and then the product is returned, which should generate a refund of the chargeback.
- Rebate errors, mostly due to a lack of standardization, or improper use of standardized codes, between manufacturers and managed-care organizations.
Returns discrepancies, caused by full credit being sought for the return of only part of an order.
- Concealed shortages, caused by customers claiming that orders were only partially filled, then seeking to make only a partial payment for the order.
A key data stream that impacts all these transactions is EDI 867 or 852 data, which usually comes from the wholesaler to the manufacturer. Manufacturers employ both IT systems and staff to “scrub” the data so that discrepancies can be revealed, but the task is difficult. Some manufacturers have outsourced their data-scrubbing to specialized services, like IHS or Data Niche (both now subsidiaries of IMS Health), Activus Solutions, or the IT consulting firm CSC.
The most often cited IT systems used by manufacturers handling their own scrubbing and reconciliation include I-Many, Model N, SAP customizations (or the recent acquisition by SAP of Vistex), IContracts, and Ross Systems (however, IDC cautions that this is not a formal totaling of the market for IT systems).
Hire a (data) housecleaner?
Newmark says that manufacturers are often “dumbfounded” at the volume and complexity of 867 data, which begs the question, why aren’t the sources of these data (wholesalers, and to some extent, PBMs) offering to cleanse the data as a value-added service? Lurking around the periphery of this question is the supposition (believed to be true by survey respondents, but hard to pin down objectively) that discrepancies usually “fall toward” the pharmaceutical buyer, and away from the manufacturer, implying that it’s to the advantage of the buyer not to provide crystal clear, easily reconciled data. But Newmark notes that doing the data cleansing is a “wide open niche begging for vendor entry,” and that “pharmas would open their wallets” for such a service.
The ultimate solution, though, is the adoption of item-level serialization, which would reconcile shortages, double chargebacks and the like even during distribution—the highly vaunted, but seldom acted-on, “business value” that e-pedigree and track-and-trace vendors have been promoting for years.
The IDC report, #HI220793, is available for purchase from the company; tel: 508 935 4445. PC
