Industry Revenue Management Practices Are Showing Gradual Improvement

A majority of branded, specialty and generics drug manufacturers polled by Model N and Accenture in an online study say their organizations are experiencing rising sales, contract volumes and pricing complexity in every major domestic market. The impacts are felt most by brand, field sales and finance departments in key customer segments that include managed care and Medicare as well as a host of highly regulated federal and state programs such as Medicaid.

Respondents to the 2010 Pharmaceutical Revenue Management Excellence Survey and Study (2010 Survey) say that managed care and retail sales as a share of overall revenues account for some 42% of their annual US revenues while government programs including Medicaid account for approximately 16% of domestic sales. This increasing velocity in key markets coupled with the significant, ongoing uncertainty imposed by the Patient Protection and Affordable Care Act of 2010 on pharmaceutical pricing and rebating requirements is driving these companies to evaluate and address misalignments between internal organizations, financially critical data and processes, as well as systematic capability for sales forecasting, pre-deal and post-deal insights for sales teams.

Fifty-three manufacturers participated in the 2010 Survey. Now in its 7th year, the study seeks to facilitate a comprehensive peer assessment of industry trends and impact on revenue-critical processes. Key areas of investigation include the effectiveness of organizations and processes managing drug pricing, deal and contracting profitability, customer and channel incentives and the regulatory compliance processes of government price reporting and rebate claims settlement. The industry-specific nature of the survey allows individual pharmaceutical and biologics companies to compare their own Revenue Management processes and systems against aggregate industry-benchmark data as well as industry, competitor and peer best practices.

The 2010 Survey was answered by respondents in a range of roles and functions including government affairs, IT, corporate accounts, trade management, managed markets, pricing & sales/contract operations and finance. Questions were categorized to provide insights in the following areas:

• Contracting Complexity and Volume Trends — assessment of allocated headcount and experience in pharmaceutical and biotech companies, executive ownership and implementation of automated processes, systems and tools to address the complex markets and channels manufacturers say they are facing.
• Sales and Contracting Effectiveness — assessment of pre-deal processes and promotional tools, measurement and follow-up of contract and business measurement as well as timely access for management and customer-facing roles to planning and analysis.
• Operational Metrics - cycle time, volume and processing metrics relating to pricing and contracting processes including offer to contract, accrual to payment and forecast to adjust.
• Revenue Leakage — revenue loss metrics including processing error, non-compliance and write-off rates in pricing, chargebacks, customer and channel incentives and contract commitment capture.
• Systems Upgrade Drivers and Investment Cycle - including upgrades to existing systems as well as the evaluation or adoption of managed or software as a service (SaaS) solutions.

FIG. 1. BECAUSE CONTRACTING COMPLEXITY IS INCREASING (TOP), SOME COMPANIES WILL BE UPGRADING IT SYSTEMS (BOTTOM). credit: Model N

Taking action

Some familiar challenges ahead, but companies are moving to address them. Balancing complexity and volume with experienced resources, executive ownership and automation are a significant takeaway from this year’s survey responses. Over 75% of respondents expect commercial and government programs such as Medicare Part D to grow substantially in the coming years, yet many key calculation and analyses remain caught up in manual spreadsheets and processes. This is a challenge as companies must manage multiple pricing and incentive programs that are reported to have as many as 20 different variations on managed care rebate contracts or prescriber incentives programs, often requiring checking for government best price and commercial ASP (average sales price) impact.

On the positive side, the vast majority of respondents feel their organizations can adequately or more than adequately comply with government programs mandates, including the ability to respond to an audit.

Sales and contracting effectiveness is a significant area of concern for companies. A quarter of respondents state that they do not have field-based tools to assess deal profitability while 48% said their sales people must rely on spreadsheets and 11% use home grown tools while responding to RFPs or creating customer proposals. The results of these approaches is reflected in critical pre-deal and post-deal metrics as nearly half the companies say at least 10% of sales operations or contracts operations bandwidth is spent doing price research or processing pricing requests from sales, while nearly a fifth spends up to 25% of bandwidth in this type of activity. Up to 40% of companies in the $500M-1B range say that they regularly provide customers with expired pricing while over a third of companies greater than $1BB in size say they cannot be sure that they are or are not doing this.

FIG. 2. DOES SALES HAVE ACCESS TO TOOLS TO EVALUATE DEAL VIABILITY AND DEAL PROFITABILITY?

The negative implications are easy to follow. On almost every critical subjective assessment of business ability, at least half of the companies, and in some cases as high as 75%, say that their representatives are less competitive, face obstacles in ensuring fast quotes or turnarounds to RFPs or tenders, and are unable to keep pricing within guidelines or boundaries and hence ensure consistent profitable contracts. This can unfortunately drive all kinds of unintended consequences well outside the immediate RFP response, quote or contract creating price erosion, virtual price ceilings and high deductions and cash impact.

FIG. 3. % OF TIME SALES OPS/CUSTOMER SERVICE SPENDS ON PRICE REQUESTS OR RESEARCH FOR SALES

One of the issues most frustrating to sales people, contract managers and VPs of corporate accounts alike is the inability to predictably monitor and measure contract compliance for contracts large and small. Often price tiers are tied to revenue or market share conditions while others may be volume-based. In this scenario, contract compliance is a short hop over from pricing inaccuracy as both are significant source of revenue erosion and operational frustration. While nearly half of all companies say they actively track contracts for expected revenue, metrics on the percentage of contracts actually checked for compliance and measured noncompliance rates are quite sobering as the graphs show. More than half of companies cannot calculate compliance levels, which in some ways may be worse when committed revenues range in the 100s of millions of dollars each year or even quarter.

Revenue Leakage numbers resulting from manual accruals management, processing of rebates, fees and key channel settlements also show a lot of room for improvement as channel and customer incentives settlements and payments continue to be plagued by common errors. Chief amongst these are pricing errors, late submissions of incremental data by wholesaler or PBM, incomplete sales or chargebacks files from wholesaler or utilization data from PBM, contract eligibility errors, plan membership or formulary information, operator (internal) error and identifiers for product or customers that don’t match. As many of 65% of companies reported EDI loading errors while 48% of companies noting manual resubmission errors as driving as much as 9% error rates while processing and paying on these programs. Chargebacks error rates alone for all companies range as high as 3.4% with deduction rates estimated at over 3% and write-off rates at just over 2% on average. Coupled with the fact that some 50% of companies say they process chargebacks on up to 90% of their sales with spreadsheets the reality of accruals serving as a safety net and drain on working capital becomes very tangible.

In conclusion

While IT systems are not a panacea, survey responses show that there is a broadbased drive toward improving revenue management and contract analytics processes via automation. More than three quarters of respondents indicate their business or division has requested system upgrades over the next 12 to 18 months; and 57% of respondents say that their organizations are evaluating or have already deployed a SaaS (software as a service) solution in the enterprise reflecting the need to move away from monolithic, legacy implementations of software. The most prioritized areas of IT investment are driven by needed platform upgrades, new market access or competitive strategy, product launches and healthcare reform compliance requirements.

Many companies are also moving to address silos of departmental processes by moving ownership of key processes into a single organization. While the finance function is critical to downstream processes, respondents to the survey identified the finance organization as the single-most critical ownership function for nearly every process area besides trade and channel management. This was true of companies irrespective of revenue size or product portfolio.

Overall, the survey highlights several critical challenges and opportunities and also heightened company awareness. Companies are focusing on making sure processes and systems are oriented around acquiring competitive advantage and mitigating risks built into contracts and relationships without simply replicating existing processes or data silos. The focus on analytics seems to also indicate that companies increasingly realize that they need to build and realize a blueprint to align people with processes. On this journey technology is only an enabler, but insights and information are the powerful drivers for change. In this respect the 2010 Survey can be a valuable starting point for pharmaceutical and biotech companies because they must first baseline, then measure, assess and plan. Only then can they implement successfully. PC

ABOUT THE AUTHOR

Gopkiran Rao is Senior Director, Marketing at Model N Inc. (Redwood Shores, CA; www.modeln.com). In his current role, he is responsible for corporate and vertical go-to-market programs in Model N’s life sciences and high tech verticals. He has previously held senior positions in technology consulting and publishing.