Understanding Class of Trade Concepts

‘Class of Trade’ is a murky element of contracts and channel analytics that can have important legal implications


Class of Trade (COT) is simple to identify in a general way, but complicated in its use in contracts, marketing programs and—most significantly—how pricing data are reported to the federal government. The simple sense is the various channels by which pharmaceuticals and other healthcare products flow into the market: retail pharmacies, hospitals, clinics, mail order and the like. In their contracts, some pharma companies have a handful or so of definitions; others have dozens or more.

In a legal sense, COT is a “term of art”—a phrase used in legal documents that has a defined meaning; outside of contracts, everyday people don’t usually walk around talking about COTs. But when contracts are written—and when data-collection systems are set up—COT becomes an important factor. This is especially true for Government Pricing (GP) systems. A critical point consistently raised is the utilization of COT to determine which transactions will be included and/or excluded in the GP calculations to support government reporting requirements.

Expanding the discussion to include stakeholder perspectives and distribution channels provides additional insight into the complexities. It helps understand the impacts, appreciate the complexities, and expand the COT discussion.

Class of Trade Terms graphicInternal and external stakeholders to consider beyond Government Pricing (GP) are Managed Markets (MM), Contract Management (CM), Legal, GPOs and Data Management companies (Table 1). The interests of the various areas may be different, but the alignment of the definitions, needs and understanding COT is extremely important.
Stakeholders’ interest is driven by stakeholder needs and their working knowledge of COT. The primary stakeholder challenges are a lack of clear definition of COT by customer; customers can potentially appear to operate in multiple COTS; and that customers are evolving as their business models change.

A stakeholder interest grid (Table 2) has been developed to illustrate the related but differing interests in COT. A category has been added to help define the stakeholder. The grid is not intended to be comprehensive, but touches on some of the points to illustrate varied stakeholder COT interests.

Approaches to defining COT
There are various approaches to define COT. Unfortunately all the approaches have one thing in common—the lack of COT clarity by customer business descriptions. It is further complicated when trying to apply a definitive COT to the different types of customers and the evolving channels of distribution evolving how the customers are defining themselves. This is particularly prevalent where customers and channels are changing in response to the explosive growth in the specialty drug pipeline. Customers are modifying their business models, which in term may influence and/or change their COT definition.

Stakeholder COT Interest Grid

COT information utilization varies by function, and may not necessarily align with GP reporting requirements. The good news is that evolving CMS rulings, GP issues and reimbursement challenges are continually elevating COT awareness; the bad news is that many organizations are not organized to leverage the increased information in a multidisciplinary way. This is a critical point of importance that plagues many manufacturers due to the ramifications of reporting incorrect information. More easily said then able to effectively be addressed.

Approaches to COT Definition graphic

A number of approaches are indicated in Table 3. The list is a sampling of various approaches, and is not intended to be comprehensive because of the many potential combinations of activities. It offers insight into how information is combined to develop a COT definition.

Illustrative examples
To help connect the various issues and points raised in the article, here are a pair of examples:

Example #1 – Retail and Specialty Pharmacies
DEA Perspective: Specialty and retail pharmacies from a BAC code perspective are both categorized as “A” with a BASC code of most likely “0.”

GPO Perspective: Retail and Specialty pharmacies are generally considered separate COT based on the type of setting, services provided, and manufacturers’ channel perspectives.

Manufacturer Perspective: The COT definition is a function of the manufacturer’s familiarity with specialty pharmacies and the channel, the product/therapeutic area and any distribution requirements/challenges.

Data Vendors: It is mixed how specialty pharmacy is categorized. The more forward thinking and customer focused vendors have created a specialty pharmacy COT designation in response to emerging needs.

Comment: The increasing volume of specialty products and the unique services provided by the SP channel has heightened the industry interest in providing a separate COT designation for Specialty Pharmacy. It still remains a manufacturer by manufacturer decision on how they may decide to address COT.

Example #2 – Hospitals and Clinics
DEA Perspective: Hospital and Clinic from a BAC code perspective are both categorized as “B” with a BASC code of “0.”

GPO Perspective: Hospitals and Clinics are generally considered separate COTs based on the product administration, utilization settings and manufacturer’s product strategy.
Manufacturer Perspective: The COT definition is a function of the product administration, utilization settings and manufacturer’s product strategy.

Data Vendors: The hospitals and clinics are generally considered separate COTs to support the manufacturer’s reporting requirements.

Comment: Hospitals and clinics though are a good example why BAC codes are not suitable for COT designations. It helps for macro distinctions but not for more granular distinctions like in-patient and outpatient settings.

Summary
COT is a complex issue with many moving parts. The complexities transcend multiple stakeholders. It requires multi-disciplinary coordination to understand and account for the intricacies, and design the most appropriate COT scheme. The complete COT solution works for the overall good, and can more fully support Government Reporting requirements.

The distillation of stakeholder needs, product requirements, legal and regulatory compliance and a complete awareness of GP requirements is the best approach to defining the most appropriate COT. An integrated stakeholder approach to COT has the potential to deliver the highest organizational value proposition, be in regulatory and legal compliance while delivering high utilitarian value to the Government Pricing requirements.

It is a task easier said than done base on the organization’s willingness and ability to work towards the common good. What may appear as a daunting to task to some organizations, can provide comprehensive benefits that can be realized across the organization in compliance, clarity and business efficiencies. PC

ABOUT THE AUTHOR
Stephen Lagano, healthcare business professional, photoStephen Lagano, MS, PE, is a healthcare business professional with over 20 years of diverse experience in the pharmaceutical and biotech industries. He is the founder of Altometrixs LLC (www.altometrixs.com) and has extensive expertise in trade and specialty channel management, business and operational planning, and customer operations amd supply chain optimization. Previous employment includes Roche, and he has just completed his graduate certificate in pharmaceutical & medical device law and compliance from the Seton Hall University Law School. He is a licensed professional engineer and his professional affiliations include HDMA, IAPP, APICS and the Council of Logistics Management.