Revenue leakage in biopharma distribution channels is $11 billion annually, says IDC Health Insights

Based on a survey of 151 leading pharma companies, Health Industry Insights (Framingham, MA) estimates that 4.4% of industry revenue, or $11 billion, is lost each year through channel and distribution inefficiencies—“equivalent to total revenue for a top 20 pharma simply disappearing each year,” as Eric Newmark, research manager, puts it.

The leakpoints are: chargeback discrepancies, rebate errors, return discrepancies, and concealed shortages (short deliveries). On average, manufacturers overpay managed care rebates by 5.5% and Medicaid rebates by 4.5%. For some companies, these overpayments slip into double-digit range. A typical chargeback scenario: a chargeback (coming from a wholesaler) is flagged for errors and is resubmitted, but only about half of the resubmissions are successfully resolved. Ultimately, the manufacturer and wholesaler choose to split the discrepancy 50:50, resulting in a revenue writeoff for the manufacturer.

In 2006, when IDC Health Insights first performed this survey, fee-for-service agreements with wholesalers were just coming into force; one element of these agreements is generation of EDI data such as 867 or 852 forms. Those data were supposed to make reconciliation of chargebacks easier to handle, but according to Newmark, companies are “often dumbfounded by 867 data due to its enormous volume and the related challenge of configuring it to suit several differing needs across the company.”

Newmark says that corporate CFOs are loosening the pursestrings to acquire IT systems from companies like Model N, I-Many or SAP customizations to manage the data reconciliation, but he wonders why IT vendors aren’t offering to scrub the data themselves or—more to the point—“why wholesalers themselves have not begun offering enhanced data services to make [EDI] data more useful.”

The report, "Revenue Leakage--Pharma's $11-Billion Problem," H1220793, is available for purchase at www.healthindustryinsights.com.