Stop the Bleeding

A prescription for rebate validations
Sep 30, 2008
By Pharmaceutical Executive

In today's competitive business environment, the pressure to reduce operational costs while simultaneously maximizing revenue and shareholder value is a challenge for executives in every industry. In the pharmaceutical industry, one area of significant loss—and opportunity—is managed care rebate programs.

Drug Expenditures and Percent of Healthcare Cost
The rise in participation in managed care programs in the US is staggering—from 40 percent in 1990, the rate has skyrocketed to 90 percent today. Much of this growth can be attributed to the government's use of managed care programs through Medicare Part D. In addition, since 1990, consistent fiscal pressures have increased the role of PBMs and other managed care organizations as principal negotiators with pharmaceutical manufacturers for complex rebate agreements.

Because pharmacy benefit managers (PBMs) oversee formulary development, managed care rebates have become the essential tool for pharmaceutical manufacturers to influence market share. Yet because most manufacturers don't have the necessary data on rebates, they lose billions of dollars each year in overpayments to trading partners.

Part D on the Rise
Fortunately, manufacturers can adopt a series of "best practices" in this area, which will mitigate revenue leakage. By gaining access to granular, prescription-level sales data, manufacturers can identify the discrepancies that are responsible for rebate overpayments, address the issues with their trading partners, reclaim lost revenue, and, eventually, stop the bleeding.

Flying Blind

The Shift in PBMs
Manufacturers enter into contractual relationships with PBMs, who in turn sell prescription medications to their constituents. Because patients pay different rates for a prescription based on their program's negotiated price, the actual price of the prescription isn't known until the drugs are distributed. This situation has resulted in a highly complicated rebate process in which PBMs submit invoices to manufacturers for rebate payments based on criteria such as sales volume or market share. These invoices typically include a summary of sales data representing what the PBM believes has been sold. Typically, the manufacturers review the summaries and pay the invoices.

A Proof of Value
This use of summarized data was sufficient when the volume of prescriptions paid through the rebate process was relatively low in comparison to the total number of prescriptions. But with more and more prescriptions being purchased via managed care plans, submission errors have increased exponentially—and most of those errors don't save money. Most manufacturers don't even realize that summarized sales data masks a variety of errors and discrepancies. For example, members often switch between prescription drug plans within a program. As a result, two PBMs might submit rebates for the same individual, charging the manufacturer twice for the same drugs. Another source of overpayment is mathematical mistakes, such as decimal point errors in units of measure, which can dramatically skew rebate claims.

Because pharmaceutical manufacturers only have access to high-level summaries from PBMs, they have no way of analyzing the underlying data to identify the source of errors. They are, in fact, flying blind. According to several internal audits, manufacturers overpay millions of dollars in rebates each year with no clear understanding of why, and no documentation to support potential disputes.

And it's a very big deal. Collectively, these discrepancies result in billions of dollars in lost revenue for the pharma industry. Based on today's prescription drug expenditures, an error rate of only 1 percent would result in industry-wide revenue leakage of more than $2 billion. And that's a conservative estimate when you take into account that the average error rate is more like 3 to 5 percent.